A billion can be such a small number

Apple's App Store has captured the attention of the world's technology media and for some has set the ideal template for the way in which wireless applications and content should be offered. A multitude of network operators, mobile operating system developers and handset vendors have now launched or have announced the imminent launch of mobile app stores. Plus app store content has even been suggested by some as being the revenue-generating "saviour" of the mobile value-added services market.

Apple's particular app store model is disruptive for the mobile communications value-added services market. This is because the business model behind it completely excludes the network operator, which traditionally has been the gatekeeper for authorizing third-party access to their wireless subscribers.

With the App Store end-users set up a direct billing relationship with Apple and can make purchases from the store over-the-air, by Wi-Fi or by side-loading from a desktop computer. The revenue generated is split with 70% going to the developer and 30% going to Apple.

The network operator receives nothing. Instead they must be content with the talk-plan and data-plan revenue that their iPhone users provide them with.

It took the App Store's predecessor the iTunes store 14 months to achieve 100 million downloads. The App Store reached the 100-million threshold in just two months. A crucial difference, however, is that every one of the 100 million iTunes sales generated revenue, compared to only a small portion of the App Store downloads because most are free.

There is plenty of speculation about how profitable applications stores may be. Back when the App Store hit one-billion downloads, Informa Telecoms and Media estimated total revenue on paid downloads of between $260 million and $325 million.

The upper estimate was calculated using the average price per paid-for app in the App Store globally while the lower number was based on the average price for the top 148 paid-for apps sold in the US App Store. Apple's 30% cut generated an estimated $79 million to $98 million. With a user base of some 20 million, we estimate that the average iPhone user, who downloaded three paid-for apps, generated between $8.40 and $10.40 each in revenue.

It is quite a leap to go from a figure as impressive as one billion downloads to one as pedestrian as three paid-for apps per user. But it does help to apply some context to the whole App Store phenomenon. It also draws into question the reality of whether app stores really are a brave new world of revenue generation for mobile content. Was the App Store just a clever brand reinforcement exercise aimed at boosting iPhone sales and other Apple products? iPhones, it's worth noting, accounted for just over 20% of Apple products shipped and generated just under 20% of its revenues in Q1.

It is likely that the overnight financial success that some developers have experienced with the Apple has over-inflated expectations about the revenue-generating potential of app stores. As has the frequent mention of hundreds of millions - and most critically the landmark number of a billion - downloads. Taken out of context, these numbers make app stores sound like a very big deal indeed. But what most people are less aware of is that the non-voice segment of the mobile communications market was worth $183 billion last year. The top-end estimate of $325 million being generated by the first billion App Store downloads becomes rather insignificant by comparison.

The real lesson is not about how important it is for operators or handset manufacturers to have an app store. Nor is it that app stores are the inexorable future of mobile content and services. The real lesson is how companies can enable others to build a market for them - one with a level of richness and diversity that they could never have created by themselves - by proactively providing them with all the tools that they need to do the job. This allows end-users to vote with their feet to decide what services, applications and content do and do not become successful.

Jamie Moss is a senior research analyst with Informa Telecoms and Media