With mobile and web converging faster than ever, it’s becoming increasingly difficult to tell the difference between PCs, tablets and mobile phones.  As convergence progresses, mobile OEMs and Operators are looking for new forms of revenue and savvy mobile developers are having to re-evaluate there business models and decide if/when it is appropriate to pay for placement and/or share new forms of revenue (including advertising) with their partners. In this article, I provide a high-level history of business models in mobile apps, and explore if/when/how developers should charge for apps and share revenue with partners.

The relationships between the players in the mobile ecosystem and mobile business models are evolving.  In some cases, OEMs and Operators are taking a page out of the PC world – asking developers to pay a per-unit cost for preferred app placement, URL pre-loading, etc..  In other cases, they’re asking developers to share a percentage of the advertising revenue generated inside of a mobile app in exchange for preferred placement.  For developers, it’s difficult to know whether it’s worth it to share revenue or pay for improved placement.

In the PC world, where the advertising ecosystem is mature, it is common for websites to pay a device manufacturer a per-unit fee (often $.20-.30) to bookmark their URL inside the browser on a PC.  Websites that heavily rely on web traffic to generate advertising revenue (particularly CPM) are often willing to pay for placement that drives traffic because that traffic can significantly increase revenue.  However, in the mobile world, the advertising ecosystem and mobile web are still (despite progress) in their infancy.  Most mobile developers have a fragmented mobile presence.  With so many OSes to choose from and limited capabilities on the mobile web, it is more difficult for mobile developers to monetize through advertising than it is for traditional PC-based web developers. As a result, paying a per-unit fee for placement in the mobile world (i.e. paying for a bookmarked mobile URL) doesn’t often make good business sense.

In the early days of smartphone apps, before mobile advertising was viable, mobile OEMs often paid the “hottest” developers with the “coolest” apps a licensing fee to pre-load apps on phones.  OEMs felt that pre-loading cool apps on their devices would give them a competitive advantage, and developers were happy to oblige because doing so gave them more distribution and revenue than they could get on early app stores. Today, paid pre-load opportunities are few and far between.

These days, distribution on mobile app stores like Apple’s App Store and Android Market present a much better opportunity for mobile app distribution than the smartphone app stores of yesterday, and paid mobile pre-loads aren’t as common as they once were.  Mobile OEMs aren’t willing to pay developers for something that the consumer can easily get on an app store, and developers, are reluctant to offer long exclusives on their content because doing so can inhibit virality and stifle revenue.

Despite the improved app store opportunity on many smartphone platforms, there’s an overabundance of mobile apps in popular categories on mobile app stores, and it’s easy to get lost in the crowd.  Just last week, the Wall Street Journal recently published an article about how some of the most well-distributed mobile photo sharing apps aren’t making money and are struggling to find a suitable business model.  Thomas McLeod, president of app maker Imaginary Feet LLC, is quoted as saying:

“It’s hard to monetize the apps right now because there are so many especially in the photography space… It’s hard not to get lost in the over-saturation of the other apps.”

McLeod is right, and it’s not just photography apps… It’s about many of the apps in the most popular categories on the App Store and Android Market.  While much has changed in mobile since the article I wrote about mobile developers’ financial struggles in June 2009, one thing that hasn’t changed is that some of the coolest mobile apps still aren’t turning a profit.

A large number developers are opting for a free, ad supported model, even when they don’t have the kind of app that will generate a ton of page views and therefore ad revenue.  Why?  Consumers often overlook paid apps in crowded categories where there are decent free alternatives.  It’s easy to see why a developer whose paid app has been overlooked, might want to switch to a free model in the hopes of increasing downloads.  In addition, plenty of mobile app developers aren’t in it for the money. Hobbyist developers are making apps in their spare time for the fun of it – often without a sound business model.  This ethos puts pressure on career app developers who would normally charge for their products, to compete with “free,” even when that’s not the best move for revenue generation.

A free, ad-based model isn’t right for every app.  Just because an app is ‘sexy’ / ‘cool’ doesn’t mean that it will generate a lot of revenue through advertising.  Gaining distribution is only half of the revenue battle for free, ad-supported apps.  The other half of the revenue battle is keeping customers coming back regularly to increase ad impressions and therefore revenue. That can be even more difficult than getting distribution.  Developers can pay OEMs and Operators for distribution, but they can’t pay to ensure ongoing app engagement and usage, which is what generates ad revenue.  OEMs and Operators often ask for upwards of 30% of ad revenue in exchange for distribution/placement, and unless an app generates a ton of impressions, there may not be enough revenue that developers can afford to share and still keep the lights on.

If you talk to major mobile OEMs, they’ll tell you that some of their biggest revenue generators through ad rev sharing arrangements are with what I would call ‘un-sexy’ weather apps, because users engage with these apps regularly – often multiple times a day and therefore impression-based ad revenue is strong. When creating a business model, it’s important for developers to remember that mobile apps that are only used periodically don’t generate as much advertising revenue as apps that are used multiple times a day.  Unfortunately, even if an app is amazing, if it’s not used regularly, an advertising-only model does not often make good business sense. Despite the pressure to provide a ‘free,’ ad-supported service, not all developers can afford it.

Another way to generate revenue inside free apps, besides advertising is offering a “freemium” service.  With a freemium model, developers provide a basic app for free and up-sell users on new features, content, and/or goods.  Developers can also incorporate virtual goods/ virtual currency into their apps to generate increased revenue.  Introducing gaming mechanics into an app that leverages virtual goods/ currencies can also fuel virality and therefore revenue.  Companies like gWallet and OpenFeint offer services that help developers (particularly games developers) expedite creation of freemium apps.  Other mobile app developers including Flirtomatic, Booyah, etc. implement their own platform for virtual goods inside their freemium apps.

One of the companies featured in the Wall Street Journal article that successfully launched a paid-app business model that also up-sells users within their app is Synthetic Corp., developer of photo sharing app, Hipstamatic. According to the article, “Since Hipstamatic’s launch in December 2009, the $1.99 app has been downloaded more than 1.7 million times. The app allows users to choose different lenses, films and flashes. The firm charges 99 cents for a package of add-ons such as infrared.”

Hipstamatic has generated over $3.3 Million dollars on downloads alone, and presumably, the 99 cent add-ons also represent a sizable source of revenue.  This is a good example of a developer that is making money in a crowded category without in-app advertising. They’ve built a useful, sticky, sexy product that is inherently viral, and people are willing to pay for it.  Hipstamatic’s success goes to prove that developers don’t need to force “free” if they’ve got a stellar, viral product.

If you are a mobile developer, here are a few key tips for creating a mobile app revenue model that works:

• When deciding between a ‘free’ ad-supported business model and a “paid” app business model, crunch the numbers first.
  • Model the revenue you think you can get per user on a free vs. paid model and the number of users you think you can realistically get with each.
    • Be conservative when you estimate the number of impressions you’ll get per day/week per user for your ad model
    • Make sure that your model includes a reasonable growth rate. Remember, growth is usually organic. You won’t start with millions of users overnight.
  • If you’re leaning towards a free, ad-supported model, make sure it’s scalable (i.e. that your margins are significant enough that you can afford to share revenue with partners in exchange for distribution ~30% and that you can afford to pay for good marketing and business development to expand your reach.)
  • If you want to have a free, ad-supported model but you can’t afford it, consider whether a”freemium” model would work for you. Again, you’ll want to make sure you’ve got enough margin built in to share revenue with partners that help you with distribution (+/- ~30%).
    • Apple asks for 30% on in-app purchases for apps distributed through the App Store, and OEMs and Operators typically want around the same percentage of revenue in exchange for pre-loading or providing premium placement on their app stores.
  • Don’t be afraid to charge for your app if it is better than other apps out there and is inherently viral. Know that you may need to try a bit harder to get downloads.  Be prepared to invest in marketing to rise above the ‘free’ competition.
• Make your mobile app inherently viral.  For more specific hints and tips, check out my post about virality in mobile and my how-to slideshow on fueling virality.
• If you want to make money on your app, invest in good social media marketing and business development.  Having the right placement online and in an app store is critical to success. To make both happen, it helps to work directly with influencers and decision makers at the app store, OEM, and operator levels.
  • Be willing to pay for good advice.
  • If you need help with your business model or creating executing your business development or marketing strategy, I can help. Contact me if you’d like to discuss a project.