The limited opportunity for app install ads

Today, Twitter formally introduced its new mobile app install ads product, joining Facebook and Google in what is becoming a crowded space, with Yahoo apparently waiting in the wings too. I had a quick look at this space in the context of Facebook’s Q1 earnings a few weeks ago, but wanted to drill down deeper, especially now that we know more about app revenue through Google Play. The upshot of all of this is that the opportunity for mobile app install advertising, though growing rapidly, is not big enough to provide a significant revenue stream for all these companies. In other words, there’s gold in them there hills, but not enough to justify the gold rush we’re seeing into this space.

First, a quick primer on mobile app economics. Some of the major app companies are public, and report data themselves, while several third parties also report data on the topic regularly, allowing us to draw a few conclusions:

  • Revenue from advertising is a factor for some apps, but the vast majority of revenue today (likely between 80% and 90%) comes from pay-per-download and in-app purchases. As such, the revenue numbers for the two major stores – Apple’s App Store and Google Play – likely account for a significant proportion of total revenues from apps 1.
  • Developers pay Google, Apple or other stores 30% of their gross revenues from these stores, keeping 70% for themselves. Thus, if they’re to make a living, it will be by keeping their other costs contained within that net revenue figure. That needs to cover development costs, ongoing operating costs (salaries, hosting, care, etc.), and costs to promote apps.
  • Sales and marketing costs for most successful app makers sit between 10% and 20% of gross revenues. App install advertising will come out of this budget, and may indeed make up most of it. This percentage may be significantly higher for apps early in their lifecycle and therefore promoting themselves heavily without yet seeing significant revenue, but it will tend to return to that average over time.
  • Thus, anywhere between 40% and 50% of a typical app developer’s gross revenue may go to the store commission plus sales and marketing, leaving about half for all the other costs of running the business.

Given these facts, let’s look at total gross revenue opportunity from the two major app stores. I’ve added 15% to my estimated gross revenue from the two stores to account for the advertising opportunity.

Total app store revenues from Google Play and App StoreNow, let’s think about the size of the market for mobile app install ads, which as we’ve already said will have to come out of that sales and marketing budget. To put it in context, we’ll compare it to Facebook’s mobile advertising revenues, since Facebook is the largest player in this market today and a substantial proportion of this revenue comes from app-install ads today. In the chart below, I’ve plotted Facebook’s mobile ad revenues against two views of the app install ad opportunity – one a bull case and one a bear case. The bull case assumes that the app install opportunity is 25% of total gross revenues, and adds 15% to store revenues to account for ad revenues. The bear case assumes that the app install opportunity is 15% of gross revenues, and adds a smaller 10% to store revenues to account for ad revenues. My own view is that the bear case is likely closer to reality. Continue reading


  1. For simplicity’s sake, I’m excluding the revenue opportunity through other stores, because they account for a tiny proportion of overall revenues. Adding them in would not significantly affect the numbers.

On the replicability of the iPhone

A couple of my tweets from a few days ago were retweeted first by Ben Thompson and then by John Gruber, and as a result I got a slew of replies on Twitter from people, many of whom misunderstood the fundamental point I was making, and the context in which I was making it. In the interest of making my intentions clearer than 140 (or even 280) characters allowed me to be, I thought I’d write a quick post on my reasoning.

First, the context for my tweets, which were arguably subtweets directed at this paragraph from a recent post by Jean-Louis Gassée:

The most ambitious rumors project 50 million iWatches sold in the first 12 months. I think that’s an unrealistic estimate, but if a $300 iWatch can sell at these numbers, that’s $15B for the year. This seems like a huge number until you compare it to a conservative estimate for the iPhone: 50 million iPhones at $650 generates $32B per quarter.

Here are the original two tweets:

The fundamental point I was making is this: as long as our bar for whether Apple should do something, or whether that thing should be considered a success for Apple, is how it compares to the success of the iPhone, everything will come up short. The iPhone has been such an enormous success for Apple that it is arguably unparalleled in the history both of Apple and of the industry as a whole. If that’s our bar for success now, we’re fooling ourselves, and if Apple were to take that approach, it would likely never launch another product again. This post explores that central context in more detail.

Measuring the iPhone’s success

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What we learned at I/O about Google’s app revenue

With both Apple and Google’s developer events behind us now, we have some useful new numbers to play with, specifically on the amount both companies have disbursed to developers. In today’s Google I/O keynote, Google announced that it had paid developers $5 billion over the past year, and that this was 2.5 times what it had paid developers in the previous twelve-month period. This gives us some really good numbers to start plotting overall Google Play developer payments for the first time. The Wall Street Journal also reported today that Google is now retaining almost all of its 30% cut, as does Apple, rather than giving the majority to carriers as it once did. This, in turn, allows us to calculate Google’s revenues from Google Play as well.

Google is catching up quickly in payments to developers

First, a comparison of quarterly developer payments on both platforms. I’ve filled in the blanks with a nice smooth curve on the Google Play numbers, and although my fairly accurate estimates on the iOS side are pretty lumpy too I’ve smoothed that curve as well to make them easier to compare. (The reality is developer payments go up and down because app spending goes up and down as new devices ship and are sold in large numbers around major launches and the holiday period, for example.)

So here’s a chart comparing developer payments from the two companies since the inception of their respective paid app stores:

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Three questions for Google at I/O

On Wednesday this week, Google kicks of its developer event, Google I/O, completing the trifecta of major developer events with Microsoft’s Build and Apple’s WWDC. These events set the stage for at least the next year for these companies, and in some cases far more. And though they’re targeted at developers, they often tell us a great deal about the companies’ outlook and strategy beyond just those who write for their various platforms. As such, I thought it would be useful to outline three big questions for Google to answer at I/O later this week, and what the answers might mean. I’ll be at I/O for the keynote Wednesday morning at least, and I’ll be sharing my thoughts during the event on Twitter, and afterwards here and at Techpinions.

Which way will the pendulum swing between open and controlled?

Android has famously been described since its release at Google as an open operating system, and is literally an open source operating system at least as far as the AOSP version is concerned. But Google has been steadily chipping away at this openness, by preventing licensees of the Google Mobile Services package from also selling forked versions of Android, by allegedly putting pressure on Samsung to tone down its UI customizations, and by abstracting more of the core features of Android into standalone apps. At the same time, it’s acquired Nest (which is itself now acquiring Dropcam), has developed Google Glass and self-driving cars and released the Chromecast dongle for TVs. All of these products combined Google-owned hardware with Google-owned software, a departure from the platform approach it has taken with Android. Is this new, more controlled approach the shape of things to come, and the way we should think about Google’s approach to the markets it will enter in the coming years, or are they anomalous? Will Google the platform and software company become Google the hardware company, even as it rids itself of by far its biggest hardware unit in the form of Motorola?

How does Google think about integration between its platforms?

Both Microsoft and Apple showcased their approaches to cross-device and cross-platform integration at their respective developer events, and they’re quite different, as I’ve talked about here previously. Both of those companies have two separate operating systems, and they’ve talked about how they bring those together for end users. Microsoft has focused more on a common user interface at the end user layer, and a common kernel and tools at the developer layer, while Apple has focused on a common and integrated user experience and now a common language. With two operating systems of its own in the form of Chrome OS and Android, Google needs to tell the story of how these come together for both users and developers. So far, Google’s integration has been largely focused on its services, which operate not just on any of Google’s platforms but on third-party platforms such as iOS and Windows as well. But as its two major competitors focus on deeper integration between their platforms, Google’s two platforms feel as far apart as they ever have. Will putting them both under one leader in the form of Sundar Pichai change things? What will we see at I/O that demonstrates that Google understands the need to rationalize these two operating systems in some form?

How will Google respond to the privacy gauntlet thrown down by Apple?

At WWDC, Apple focused more than it ever has on its approach to security and privacy, with several explicit digs at Google in the process. HealthKit, HomeKit, iOS and its sandboxing approach, preserved even as Apple adds Extensibility – in all these announcements, Apple reiterated its commitment to securing its users’ data and protecting them from intrusions from both malicious actors and over-zealous marketers. Google has always pushed the boundaries in terms of privacy and security, both policing Android less than Apple polices iOS from an apps perspective and itself intruding ever more on users’ privacy. With the Nest acquisition (and now the Dropcam acquisition) Google has been forced to make clear statements about the separation between these units and Google itself from a data perspective. DuckDuckGo continues to grow rapidly if at a very small scale as an alternative to Google in the search engine world. Reverberations from the Snowden revelations continue to be felt. Samsung continues to build its own enterprise security and device management capabilities on top of Android. How will Google respond to all this? How will it demonstrate that it is creating not only secure platforms but platforms and services which respect user privacy?

Beyond product and feature announcements

I think we’ll see explicit or implicit answers to all these questions at I/O, and those answers will signal broader strategic shifts from Google which will be felt for years to come. Yes, it will make individual product and feature announcements including – in all likelihood – a new version of Android, the first Android Wear products and others. But it’s these big strategic choices that will have far more impact over the long term.

Apple is doubling down on mature markets

As we gear up for Google I/O next week, and imagine what we might see from Google there, I wanted to have one last look at Apple’s WWDC, from a slight different perspective. One of the thoughts about WWDC that’s taken a while to percolate for me is that WWDC was a good sign that, from a product perspective at least, Apple is doubling down on mature, developed markets, rather than joining the land rush in emerging markets.

HomeKit and HealthKit are about solving first-world problems

I wrote about HealthKit and HomeKit in a couple of previous pieces here and on Techpinions. I think they’re both much-needed solutions to real problems in the health and fitness and home automation categories. But these are in some ways the very definition of first world problems. Trying to get your smart lock, your smart lightbulb and your smart thermostat to talk to each other is a challenge experienced only by people who can afford to buy the overpriced products on offer in these markets.

HealthKit also comes into its own in part when tying together several different fitness tracking devices, which is another first-world phenomenon. There is, though, another element to HealthKit, which is about access to medical data from various healthcare providers. But again, this is something of a mature-market issue. A recent data set from Opera Mediaworks highlighted the disconnect between mature and emerging markets when it comes to searching for health related information on mobile devices:

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New podcasts

I’ve done two podcasts in the past week:

  • The Beehive Startups / Startup Daily podcast, which I occasionally guest on. This episode was recorded shortly after Apple’s WWDC, so we talked a lot about what Apple announced there, including HealthKit, HomeKit and Swift. We also talked a bit about Google’s self-driving cars.
  • The Techpinions podcast, where I’m a regular contributor (I also write a weekly column on the Techpinions site). We talked about E3 and consoles, PCs, and wearables. Some of the thoughts on smartwatches I’d previously shared in this post about the potential for an iWatch.

Happy listening!

Why an Amazon smartphone makes sense

It seems highly likely that Amazon will finally announce its long-rumored smartphone next week at a special event. From what I’ve seen on Twitter and elsewhere, there’s a lot of skepticism about Amazon’s entry into this market, so I thought I’d review some of the reasons why I think it makes sense for Amazon to make a smartphone.

Amazon needs a storefront on mobile

Amazon is becoming an increasingly diversified company, with offerings across many parts of e-commerce, an increasingly strong digital content business, local grocery deliveries, a range of enterprise cloud services, and many others. On the desktop, is where these things come together – a unified storefront for all the things Amazon wants to sell you, carefully curated and personalized to combine what Amazon particularly wants to sell today with what it thinks you may be particularly interested in buying today. This allows Amazon to promote its Fire TV product, its Kindle Fire tablets, Prime shipping and Instant Video and various other products prominently, and thus cross-sell and up-sell to the hundreds of millions of people using on a regular basis.

But Amazon lacks such a storefront on mobile. Yes, it has a variety of standalone apps on mobile devices, including an commerce app, Instant Video, Kindle and Amazon MP3 apps. But they’re not interconnected the way the experience is, and there’s little push from one to another. In addition, though there was a time when a number of Android smartphones came with the Amazon MP3 app pre-installed, those days are now passed. Though Amazon still manages to do deals with Android OEMs and carriers from time to time to get some of its apps pre-installed, they’re often buried in a folder, and there’s little push for the user to use them. Meanwhile, the OEM, carrier or OS vendor’s own competing apps are often put front and center for the user.

Amazon therefore needs to create a mobile storefront equivalent to what it has on the desktop with, and to do that it needs to create an Amazon-centric experience on the most ubiquitous device, the smartphone.

The growing role of m-commerce

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What “winning” means for Apple

I posted a tweet yesterday that seemed to hit a nerve with people, and so I thought I’d expand on my thinking a bit here. What I actually posted was two related tweets, though it was the second that seemed to resonate – the first was merely context:

There were at least two articles that prompted my tweet, but the main one was this one from Ellis Hamburger at the Verge. Both took a tack that I felt fundamentally misunderstood what Apple does and how it does it, but there was one particular section of piece on the Verge that sums up the mentality here very well, so I’ll use that as the jumping off point:

But today, communications are a commodity, and it’s hard (if not impossible) to survive in the long-run as an app that only works on one platform. A dozen messaging apps are sweeping the globe, and all of them work whether you have an iPhone, Android, Mac, or PC. Apple’s Messages app, and the iMessage platform therein, only work if your friends and family use Apple products. In the United States, where iPhone market share is highest of almost any country, iMessage’s thin ice is harder to perceive. The United States is one of the only countries where no one messaging app reigns king, but elsewhere markets are dominated by one messaging app or another, all of which have similar features and work on all platforms.

A single-platform messaging app cannot win. Despite its tasteful new feature additions, however derivative they may be, Apple is playing on borrowed time. If Apple is determined to stay single-platform, it’s going to take more than new features to save its messaging ambitions.

To suggest that Apple is trying to “win” in the messaging wars is equivalent to suggesting that iTunes was an attempt to “win” in the music-playing software wars. Neither is the case. The first thing to understand about Apple is that it’s motivated first and foremost by creating the best possible experience on Apple devices. This imperative drove Steve Jobs to the extent that he made poor business decisions early on in his time at Apple, ultimately leading to his ouster. He was so fixated with this objective that he lost sight of others and ultimately of what it would take to keep Apple in business as a public company, a lesson he learned the hard way and ultimately brought back to Apple when he returned. But that has always been the fundamental motivation for Apple’s senior leaders above all else.

That motivation leads to one of the other defining characteristics of Apple as a company: the tight integration of hardware, software and services. Apple has never been about creating cross-platform services. To those of you who may wish to point out that Apple has long had iTunes on Windows, I direct you to this quote from Walter Isaacson’s 2011 book on Steve Jobs:

We put iTunes on Windows in order to sell more iPods. But I don’t see an advantage of putting our music app on Android, except to make Android users happy. And I don’t want to make Android users happy.

Apple’s only significant cross-platform move was still a move to make Apple devices more compelling – the simple fact is that an iPod was not a standalone device, and it needed iTunes to be at all useful. Given the Mac’s very low share of the global PC market, releasing iTunes for Windows was an obvious strategic imperative. But it was done with one objective in mind – making the iPod a compelling device for a larger number of users, and yes, selling more iPods as a result.

What both the pieces I linked to above ignore is that everything Apple does is part of an ecosystem, and that’s exactly why people buy its products. Ever since the iPod and iTunes launched, Apple has been in the business of connecting its devices together in a way that adds value to each of them. The iPod added value to the Mac by providing a portable music player for your iTunes music, and iTunes on the Mac added value to the iPod by providing the conduit through which you obtained music to put on your device. When Apple released iTunes, it wasn’t competing in the music-playing software market anymore than iMessage is Apple’s attempt to compete in the messaging market. Both products were software Apple developed to add more value to its hardware products, and should not be seen as products in their own right.

When the whole rationale for Apple’s software is to add value to its hardware products, the idea of providing cross-platform software or services becomes inimical. To the extent that Apple software or services are available on non-Apple devices, they cease to provide meaningful differentiation for Apple products. By contrast, making Apple-exclusive software and services available on various different Apple hardware products adds significant value, and providing tighter integration between those devices through software and services adds even more. Hence the focus on these things at WWDC on Monday. To suggest that Apple needs to make its Messages product (or any other product) cross-platform in order to succeed is to get things exactly backwards – Apple doesn’t make hardware to be successful in messaging; it makes a messaging product to be successful in hardware.

This makes its Beats acquisition particularly interesting, since the Beats music streaming service is cross-platform today. But I suspect that the product we eventually see from Apple which integrates Beats’ streaming and curation technology will go back to being Apple-only. If there’s any strategic rationale to Apple spending so much money to stay at the forefront of the music business, it’s to make the iPhone the best device for music, and not to create a broad-based music subscription service.

All of this is part of a broader trend in the consumer technology space, which is that the most successful companies are competing in a different way, by combining hardware, software, content, communications (and in some cases connectivity) in integrated ways which create compelling end-to-end experiences for consumers. I see the same flawed logic among people criticizing Amazon’s entry to the smartphone market on the basis that no-one makes money in smartphones. If Amazon is entering the smartphone market, it’s not to make money on smartphones, but to drive buyers to spend more money with Amazon as a whole, across digital content and e-commerce. Amazon and Apple each have a core business that makes the bulk of their money, and their entry into adjacent spaces is intended to reinforce the core business, often at break-even or even negative margins. Google is the archetype of this model, providing many services for free, all of them funded by advertising and especially search advertising. It provides those services not out of the kindness of its heart but in order to increase the appeal of the Google ecosystem and to gather data that helps with its other businesses.

Apple isn’t fighting the messaging war. To the extent it’s fighting a war at all, it’s fighting an ecosystem war, and so far it’s winning. Is Apple’s tightly-integrated model the only way to be successful in the consumer technology market? Not at all, though it certainly seems to be the way to generate the best margins. There’s always going to be room and demand for other models too, and both Microsoft and Google have benefited greatly in market share terms from taking a less integrated approach. But to imply that Apple’s approach is ultimately doomed is to ignore what’s made it so successful over the past several decades, and the model it needs to continue to pursue to remain successful.

Apple resurgent – thoughts on WWDC

Today’s WWDC keynote was a sign of a renewed swagger on the part of Apple, whose executives seemed to relish the deluge of new product announcements they unleashed on developers and on their customers. In the process Apple established or strengthened its competitive positioning against two major foes – Microsoft and Google – while opening itself up in unparalleled ways to developers. Today’s announcements may come to be seen in the same way as Steve Jobs’ original launch of Mac OS X, in that it lays the groundwork in several areas for years of future Apple products.

The demotion of Google continues

Two years ago at WWDC, Apple removed erstwhile close partner Google from the iPhone in two significant areas: as the backend provider for the Maps app, and in the form of the pre-installed YouTube app. But Google’s last major bastion on iOS is its position as the default search engine in Safari, and it’s much harder to remove there. In the sense of typing a query into a search box or address bar in a browser, hitting enter and being presented with a screen of blue links, Google is unrivaled, and Apple knows that. But it has slowly been inserting itself between the user and that search box over the last couple of years, and today’s keynote provided further evidence of Apple’s pre-empting of the Google search on both iOS and OS X devices.

Apple’s more subtle disruption of the user-Google relationship began with the launch of Siri, which began to address some users’ queries without an explicit search, and which uses Wikipedia, Wolfram Alpha and Bing, but not Google, as underlying search providers. And it has continued since then, as more third party services have been layered into Siri, pre-empting the Google search for movie listings, restaurant reservations and sports scores. Today’s keynote added Spotlight search to the list of places where users will now find answers to their queries without the classic search box experience, thus further inserting Apple between users and Google.

This is potentially significant for Google, for which the US continues to be easily its single biggest and most lucrative market, and for which mobile is increasingly important. To the extent that iPhone users, which make over 40% of US smartphone users, start using Apple and its tightly integrated third party services instead of Google, for search, that’s pretty bad news. That isn’t, of course, why Apple is taking these steps, but it’s an unpleasant side effect for Google. And a great way for Apple to participate in the search business without having to match Google in the page-of-blue-links business.

A device for every need, not one device for every need

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