What does the App Store mean to Apple's bottom line?

Although worldwide mobile phone sales [1] dropped 8.6 percent year-over-year in the first quarter, totalling 269.1 million units according to Gartner, smartphone sales increased to 36.4 million units, a 12.7 percent leap from the same period last year. The big winner was Apple, which increased its share of the smartphone market 109 percent over Q1 2008--with consumers purchasing 3.9 million iPhones in the first quarter, Apple now accounts for 10.8 percent of global smartphone sales. A separate study [2] issued this week by Strategy Analytics indicates that Apple's App Store captured a 12 percent volume share of the mobile applications market in 2008, even though the virtual storefront didn't open until July 11 of last year. But Strategy Analytics contends that the App Store's surging growth poses significant revenue challenges for developers: "The downside to this popularity is that with so many developers rushing on board, competition has become fierce and the majority of applications are downloaded for free, or at a very low cost," says David MacQueen, author of the Strategy Analytics report "How Apple Changed the Market for Mobile Applications."

How much money has the App Store generated for Apple? That's a good question--and because Apple isn't telling, educated guesses abound. When the App Store first launched, Apple publicly stated its goal was to break even on the effort, but Lightspeed Venture Partners' Jeremy Liew speculates [3] after more than a billion iPhone and iPod touch application downloads [4], Apple has now cleared somewhere between $20 million and $45 million. Based on discussions with industry experts, Liew estimates the ratio of premium App Store apps to free apps is somewhere in the 1:15 to 1:40 range, translating to anywhere from 25 million to 60 million paid apps sold to date. With a recent O'Reilly survey suggesting the mean price for iPhone apps is $2.65, the overall App Store revenue is likely somewhere in the ballpark of $70 million to $160 million, of which Apple claims 30 percent. "Given that Apple sold 13.7 million iPhones in 2008, the App Store is not a meaningful direct contributor to their overall revenue," Liew concludes. "Much like iTunes, Apple is using the App Store to drive demand for their hardware."

Fortune's Apple 2.0 blog adds [5] that Apple also collects revenue from sales of iPhone developer licenses, noting that as of March 17, more than 50,000 individual and corporate developers had signed up to program for the device. While individuals pay $99 for an iPhone license, enterprise memberships cost $299--operating under the assumption that the vast majority of those 50,000 licenses are sold to independent developers, that's another $5 million in revenue so far. However, it's even more difficult to calculate the overall costs associated with operating the App Store, as well as the expenses associated with developing and updating the iPhone OS SDK and maintaining a free library of guides, references, how-tos and sample code. The overall conclusion is nevertheless the same: From Apple's perspective, the App Store revenue numbers don't matter. The store exists as a promotional tool to foster consumer demand for iPhone and iPod touch devices, where the revenue numbers do matter. And with nearly 4 million iPhones sold in the first three months of 2009 alone, it's doing a fantastic job so far. -Jason [6]

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