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Rise of the App Stores

December 6th, 2009 Leave a comment Go to comments
Apple iPhone App Store

Apple iPhone App Store

It is axiomatic that we in the venture world tend to overestimate the amount of change that is possible in one or two years, and dramatically underestimate the change that is possible in five years.  And yet, it was only July of last year that Apple launched the iPhone App Store, which has changed the mobile landscape more than anyone could have predicted, and likely, more than most are anticipating even today.  We have Steve Jobs to thank for changing the basis of competition in the mobile ecosystem to the apps and services layer.  The end users are voting with their pocketbooks that they desire something other than the quality of the network (sorry Verizon), or the attractiveness of their spokeswoman (sorry T-Mobile USA), or the earnestness of their CEO (sorry Sprint).
Now, everyone wants an app store.  There are a bunch of released, or announced, app stores out there: iPhone, Android, BlackBerry, Palm, Verizon, Samsung, Vodafone, Nokia, Microsoft, GetJar, Handango (of course, those last two predate the iPhone App Store).  But, this seems like a market that will support significantly fewer real players than even this initial list.  I think the ultimate winners are likely to be Android, followed by iPhone.  But, these early messy days are great fun and a time of incredible innovation and opportunity.
It is hard to overstate the importance of the app store concept.  They represent an almost completely open distribution channel for the developers of mobile applications.  It is healthy to have vocal minority of developers complaining about the lack of openness in the iPhone app approval process.  And, compared to deploying something on the Internet, there is noticeably more overhead.  But, when compared with the joy of deploying an app through a mobile operator, there is literally between one and two orders of magnitude less overhead in going through the iPhone app approval process than the mobile operator courting, selection, vetting, integration, IOT, and deployment process.  I would argue that on both a relative and absolute basis, this is mobile distribution channel nirvana.
Of course, distribution channel nirvana is only a necessary, but not sufficient condition to success for a young mobile applications company.  Other key required parts of business model are:
  • Awareness/traffic.
    • Just like the Internet, simply being out there does not mean that people will magically gravitate to your brain child.
    • App store SEO is its own art/science that requires careful attention.
    • Good old fashion guerrilla techniques, and the occasional partner deal will help.
    • Focusing on driving downloads on that first day that your app is made available–to try to make it into the Top Downloads, which has its own inertia effect.
    • Virality.  If your users can effectively recruit other users through their natural use of your offering (a “tell your friends” button rarely works), this drives users, AND creates its own inherent barrier to entry.
    • Barriers to entry.
  • A monetization capability.  This may or may not be turned on on day one, but it should at least be consistent with your unique selling proposition and source of barriers to entry.
99+% of applications on the app stores don’t really have a sustainable business model.  Some industry observers complain that mobile app developers are laboring away without getting any reward, because people don’t buy enough apps.  No offense, but if one’s business model is “build an app that lots of people should want, and charge $2 per copy for it”, why would one expect that to work any more than you would expect “build a website that lots of people should want to use, and charge $2 up front to use it” to work?  Another compelling rejoinder to the complaints about the lack of compensation in mobile apps is to look at the nine-figure payday that Omar Hamoui reached with selling AdMob to Google, less than four years after founding the company, due in significant part to ads served in iPhone apps.
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