The people who build the phones, the people who run the networks, or the people who make mobile interesting by writing the great apps?
Sidebar: Asymco · The numbers I’m talking about are mostly from Horace Dediu’s wonderful asymco.com site. If you want laboriously-gathered, elegantly-presented facts about what’s going on around here, Horace has ’em.
$350 for Apple · They’re obviously the best at turning a profit on selling phones. As Asymco reports, Apple gets about $650 per iPhone, has a margin around 55%, and thus makes a gross profit of $350 or so apiece.
$590 for AT&T · I went and dug through their 2011 Q3 numbers: They claimed a smartphone ARPU (dollars per customer per month) of $83.46 and reported a 29.6% gross margin; which over two years (a reasonable lifetime for a phone), by my math comes to just under $600.
(Dear businesspeople: I know the difference between “gross profit” and real money, and there are probably lots of places in the preceding two paragraphs where you might want to quibble with the accounting. But stay with me a minute.)
$12 for App Writers · Back to Asymco; Horace calculated the total amount that the average user spends for apps on the average iOS device. Everyone thinks that iOS is the place to go to monetize apps. Yep, twelve bucks per device.
Aaaaaaaaargh! · As a computer programmer, I find these numbers painful. A river of gold for the people who build good phones. Another river for the people who run the networks. And for the developers, crumbs. Scraps that fall off the edge of the table. Rounding error.
Modern Internet-connected phones exist mostly to run apps. I think some of the wrong people are getting rewarded. Feaugh.
Contributions
Comment feed for ongoing:
From: Blair S (Mar 05 2012, at 10:57)
Developers get crumbs but look at the capital structure differences. Building a phone takes a large amount of R&D investment and manufacturing investment - yes, even if you outsource manufacturing. A network takes billions of dollars to buy sites, add towers, add wireless networking, and add back-haul infrastructure. Developing an app requires a small store/developer fee and coding time, plus some cloud services if it's a networked app.
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From: Bill Seitz (Mar 05 2012, at 11:11)
How about the websites the user visits? (And Google, who sells most of those ads....)
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From: yannick (Mar 05 2012, at 11:27)
but directionally the story is a bit different:
- apple's take is constant since launching the iphone. pretty amazing considering that as time has passed the value of owning an ios device increases immensely.
- the mobile operators are progressively making less as time goes on and their 'service', basically bandwidth, gets fully commoditized.
- the developers used to make *zero* off of anything mobile. their share is increasing over time, which is encouraging for future prospects.
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From: Paul Clapham (Mar 05 2012, at 11:33)
Well, sure, you didn't pay anything for your "Nearest Tim Hortons Location" app, but that doesn't mean that its developer is going broke. For Tim's it's an advertising tool, and they did pay somebody to write it. Like a lot of things on the web these days, advertising makes the world go round.
Now I have no idea what proportion of the apps on the typical smartphone are this sort of app -- that might be interesting information.
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From: Dave Wright (Mar 05 2012, at 11:41)
Not an accountant, but wondering if the ~$592 "profit" to AT&T is accurate. Somehow the subsidy of the handset cost has to be factored in. Your broader point remains true regardless.
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From: Patrick Taylor (Mar 05 2012, at 11:42)
You seem to be in a position to find out, how much mobile ad revenue goes to developers? Is it more or less than $12 per device?
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From: Scott Dunn (Mar 05 2012, at 11:42)
Thanks for clearing that up, Tim. I never knew it was so lopsided.
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From: Matt Ginzton (Mar 05 2012, at 12:27)
The impact of the subsidized-device-under-contract model (common in the US, not sure how common it is in the rest of the world) is interesting here.
I don't think Apple's margins are nearly as high on devices they have to sell directly to customers at a visible up-front cost (for example, iPod Touch or iPad). I don't think they'd be as successful extracting $650 per phone if that were the visible up-front cost.
They could still turn a nice profit per phone, but it would probably be more like 30%, not 55%. That $350 they're able to keep per phone right now is a cute artifact of the subsidy model -- people are evidently happy enough to pay $85/month for what a smartphone brings them, which over 2 years is over $2000, and that's a lot of wealth to redistribute.
(It would be nice to see more of the money going to app developers, and it irks me to see $2 apps get whiny reviews complaining about the price and saying they'd give it more stars if it was cheaper -- but, on the other hand, I'm glad the going rate for mobile phone software isn't generally $100s per app the way it was on the desktop.)
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From: Dirk de Kok (Mar 05 2012, at 12:28)
And even worse: out of the 130,000 publishers only the very few ones that are consistently in Top 25's get a big chunk of revenue. That $12 is on average, my gut feeling is that the top 5 % takes 90 % of the revenue
BTW 29 % gross margin for AT& T is a lot, everything you read is that they have huge trouble getting a profit out of all those iPhones they bought for $400 from Apple to give to their premium users: http://articles.latimes.com/2012/feb/10/business/la-fi-iphone-blues-20120211
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From: Scott Steinman (Mar 05 2012, at 12:47)
The problem is that people expect to pay extremely little for an app. If your application isn't going to have a million downloads, this translates to very little money for the developer. The bang for the buck for a solo developer is pretty minimal.
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From: SamF (Mar 05 2012, at 13:05)
Thank you, I guess, for your proposed outraged for me, the empoverish developer.
Odd, because I feel like Apple is currently the *only* company that's doing anything to make a channel for me, the developer, to particpate in a healthy market.
Google wants me to monetize with ads and impressions even in aps. Barf, no thanks.
On the PC side, MS has already sucked all the oxygen out of the room with Windows, Office & their absurdly expensive developer toolchain. I wonder what slice of an average PC's total cost would be distributed to devs? Pennies, I'm guessing.
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From: Jose (Mar 05 2012, at 14:02)
So you acknowledge that Apple is putting 45% of billions up front, like the telcos, right?
When we are able to design and create mobile phones and cars by our own(we will) your whining will be justified. Until that time we should sh*t up and work harder.
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From: Michael (Mar 05 2012, at 15:11)
I understand where you are coming from, but this only makes sense if you count the programmers who work for Apple or on free apps as making zero dollars. That river gold doesn't take into account any of Apple's software costs including the development of iOS (or the costs of running iCloud).
Besides, you're looking at this from the wrong angle. Ask Omni or another longtime Mac developer how they're doing with iOS. I don't think you're going to hear "Aaaaaaaaargh!" I'm guessing it will be closer to "Yeeeeeeeeeha!"
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From: Robi Ganguly (Mar 05 2012, at 17:09)
Tim, this is a good breakdown and I think the important thing to note about all of this is the fact that it's state of the world today. The consumer app economy is in its infancy and while comparing the $$ for app developers to that of the carriers and manufacturers can be frustrating (although you did pick the manufacturer making the most profit), it's certainly not going to be the case for the long-term. The reason is simple: over an extended period of time, creators tend to become more rational. So, if the majority of app developers aren't making enough to sustain themselves, they'll drop out of the system.
However, I feel like the opposite is likely to be true: over time the prices will go up, consumer willingness to pay will go up and the other revenue streams for developers will grow. This will enable more developers to be making significant profit, driving your $12 number today into the hundreds. We believe this to be true for the same reason that it's worked on the web: with a large and growing consumer audience there is always a steady improvement in monetization opportunities because consumer attention is so valuable. In fact, your company really exemplifies this natural evolution.
We're seeing really encouraging trends at Apptentive (http://apptentive.com), where developers are investing in long-term relationships with their customers. Apps with loyal and loving audiences are doing very well already because they benefit from the natural actions of engaged people: to repeatedly use the app and to share it with their friends. The reality is that a large majority of the apps out there aren't focused on this loyalty and retention problem today, so as that behavior matures, the revenues will grow as well.
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From: Bud Gibson (Mar 05 2012, at 18:07)
I haven't seen this point mentioned. There are a lot of free apps that are built much like websites are built. Someone contracts with a developer to create the app so that they can have a "storefront" on the platform. Look at the G+ app, the facebook app, the amazon app, the xanedu app, etc. Those are all free apps that are monetized with either ecommerce, ads, or subscriptions and where the the developers are paid on a contract basis.
So, the point is that a lot of apps are sponsored, and we shouldn't ignore that aspect of it.
However, I think your larger point is that the room for someone truly independent is limited, and that point is well taken.
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From: Clive (Mar 05 2012, at 21:31)
"A river of gold for the people who build good phones."
I'd dispute that the people who build the phones are getting a river of gold... at least not the real people actually working in the factories in China.
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From: Andy Law (Mar 06 2012, at 04:13)
Build me something thats worth more than $12 to me and I'll buy it.
Capitalism in action?
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From: len (Mar 06 2012, at 05:59)
If the composers were getting that for their music, it would be a good day and they do have higher infrastructure costs. Then there are the movie makers. Still happy about Megauploads (yes, it is piracy but it depends on who's ship got torpedoed in these discussions)?
Software follows the music industry structurally and entertainment in general. Always has. Some number of those apps are simply 45s du jour.
And now the same folks who bled the art community discover they are being used. Oh the pain, the pain.
Get used to it and expect it to get worse. Information wants to be free. So do apps. As the twig is bent...
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From: Joe Hill (Mar 06 2012, at 06:38)
"I think some of the wrong people are getting rewarded."
That's the nature of capitalism.
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From: James (Mar 06 2012, at 11:00)
To add to what Dirk de Kok says about the top publishers taking all the profits in the app market, I estimate 75% of all app revenues are in-game purchases.
No one is buying apps. The people making money on apps are giving away games then charging people for upgrades and in-game crack.
This is likely contributing to why the Android Market has been renamed Google Play.
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From: Jon Bennett (Mar 06 2012, at 11:59)
Then build your own smart phone + ecosystem or cell network if that's so much more profitable than writing apps. Those tasks are also considerably more difficult than building an app.
You also didn't calculate all of the free apps that are monetized through advertisements or other means. Look at Zynga, they make lots of money from their free apps, but wouldn't count in your $12/device calculation.
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From: Joe Hill (Mar 06 2012, at 18:19)
Another thing to consider is that Apple and AT&T are large organizations with many ways to exert influence on the market using the power of the organization as a whole.
"Developers" is a very loosely-affiliated set of individuals, and those individuals tend to exert whatever influence they have *as* individuals. If we were to organize ourselves, share knowledge, demand a better deal from the other players, maybe the situation could change.
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From: Steve Kusmer (Mar 07 2012, at 10:39)
Thanks for the data, it is very eye-opening. However, I disagree with the implied conclusion that Apple is feeding crumbs to developers.
Apple created a marketplace for apps. The developer chooses the price for their application. The users decide if they want to purchase the applications at that price, and can choose between competing applications. Developers can choose whether or not to build a business based on the economics.
This is a free market, and Apple created a marketplace which didn't exist before 2009 that has how paid $4B to developers. $4B is a feast, not crumbs.
Also, based on empirical data from other developers, I'd estimate that the average Android phone leads to $1 to $2 for application revenue, far lower than the Apple ecosystem. That's a lot closer to crumbs.
Steve Kusmer
Abvio
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From: Mark Holder (Mar 10 2012, at 11:19)
"Modern Internet-connected phones exist mostly to run apps."
Seriously? I thought they were for making phone calls mostly, and responding to urgent emails and texts, plus some web surfing. The usage trend may be away from calls per se, but people *need* (and pay for) mobile phones to communicate with people.
Apps are like remoras on a shark. They get the leftovers because that's their niche. The app inventory may influence which phone to buy, but generally not whether to buy an internet phone and the expensive data plan it requires.
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