These days, for every inspiring story that I hear about a mobile independent software vendor (ISV) / developer that’s “raking in loads of cash” through Apples’ App store, I hear a handful of stories from mobile ISVs that are trying to dig themselves out of the red.  While the press is focused on the “iPhone Gold Rush,” I’m hearing of a disturbing number of mobile ISVs that are struggling…badly.  Over the last couple of months, I’ve had conversations with an increased number of mobile start-up execs who by day are attempting to dig their ISV out financial crisis and by night are pinging their social networks, quietly looking for a new job and complaining that the mobile industry is “broken”.

The stories of many of these ailing mobile development companies often go like this, “We wanted to attract lots of users, and we figured we’d worry about the business model later,” or “We planned on an ad-supported model, and mobile advertising just isn’t there yet.”  In the overwhelming majority of cases, the faltering ISV bet its future on the success of a free, ad-supported model and is isn’t making enough money to survive.  For whatever reason, it wasn’t (or isn’t) willing (or able) to successfully switch to a paid pricing model.  The sad thing is that many of these mobile ISVs are making great mobile applications.  They’re just having difficultly finding a sustainable business model. Mobile advertising revenues aren’t bearing enough fruit yet… From what I can tell, the “Google model” (i.e. ad supported free app) only works for huge Internet properties that have large amounts of WAP traffic (i.e. tens of millions of page views).  At a certain size, mobile ISVs can make an ad model work, but very few are big enough, and they need to find alternate sources of revenue.  Smart ISVs are recognizing this and adopting new revenue models. Those that don’t are struggling.

The other recent stories I’ve heard from struggling ISVs are from those that make entertainment apps or games. Many of these developers have historically relied on OEM and/or Operator pre-load deals. Several of them have said that the number of pre-load opportunities for stand alone mobile apps seems to be on the decline.  This isn’t surprising when you consider the bad economy in combination with the number of OEMs and operators that now have app stores… Why would a mobile company want to add to the cost of their products by pre-loading a non-essential app when they could just direct customers to their app store and/or offer them a credit for a free app of their choice?  Where pre-load opportunities are still viable,  it’s reportedly taking longer to execute agreements and custom feature requests are increasing, while pre-load budgets are decreasing.  According to the July 2009 newsletter from Caroline Lewko at Wireless Internet Partnerships, who travels the world meeting developers at the popular WIPJAM developer events, the length of payment terms for big OEMs and Operators is also increasing:

“It seems like the larger companies are pushing out their payment dates from 30 – 45 days, to 45-90 days or longer.  In fact, some developers have stated that they have not seen payments from app/operator store sales for even 6-12 months!  With staff turnover/layoffs high, there is also the ‘missing invoice’ phenomena…..  Most folks in the big companies don’t really understand that $10k-$100k may be chump change for them; but for a small company it means a lot”

In the the second quarter of 2009 VC funding decreased 82%, and investors are clearly being more careful about where they place their bets.  Mobile ISVs that want to attract VC funding at this stage should have a great product and a sound business plan and straightforward way to make money.  So how are the successful mobile ISVs out there monetizing?  They’re either incredibly lucky (the minority), or they have a great app and a strong business model – not just a user generation model.  Successful app companies I’ve seen typically do at least one of the following things:

• Charge for their app and find a way to sell tons of units on an app store that offers favorable commercial terms.
  • At this point, the only two stores I’m confident can yield revenue for developers are Apple’s iTunes App Store and  Blackberry App World – and in that order.   The only app store I’m aware of that has the magical combination of a great store experience, lots of users and favorable terms for developers is Apple’s iTunes App Store.  Blackberry App World also has favorable terms and is becoming a solid sales channel for some of the developers I know.  However, only being paid via Paypal and the store experience still leaves something to be desired.  To date, I’ve not heard from anyone that is make money on Nokia’s Ovi store.  I’ve heard of plenty of customer service nightmares and of developers who are encountering technical difficulties getting their apps listed and more (read the comments on this Ovi Blog post).  Fingers crossed, Nokia will work out the Ovi Store kinks in time.
  • Developers who have success in one of these app store channels often do one or more of the following:
    • Invest in viral marketing to get the word out about their app. They know how to create a funnel and optimize viral marketing. They use social media channels to their advantage.
    • Actively seek and get press exposure. To do this, they either hire a PR firm (which can be expensive), know journalists from their previously successful projects and know generate press interest, participate (i.e. as a speaker or panelist) in enough press-filled events that that they’re able to get coverage of their product without a PR firm (with one article leading to another and another and another…), or were one of the early entrants into Apple’s App store and became part of its success story.
    • Get exemplary reviews from consumers, which move their apps up the popularity rankings on the app stores.
    • Invest in SEO, partner marketing, and other mechanisms to make it easy for consumers to find and download their app.
    • Invest in marketing and revenue generation partnerships. These companies find ways to generate revenue and buzz through partnerships.  They bundle their app with partner apps, execute joint marketing campaigns with partners, and more to push their bundled solution.
• Sell their app outside of the app stores (i.e. on their website and/or by combining it with a premium web service on a subscription basis) OR…  Give away their mobile app for free to promote their lucrative, web-based service which benefits from the increased traffic their mobile app brings (think big media companies and social networks that generate a lot of advertising revenue or subscriptions for photo/video storage, cloud computing, etc.).
• Find and fill an ongoing market need for their app. They make a catchy, unique app, that fixes a specific problem or need.  They don’t get caught in the crowds of apps that are doing the same thing.  They innovate regularly to stay ahead of their competition.
• Sell core technologies that fill major OEM product gaps (codecs, integral features, etc.). The successful companies in this space make things that OEMs and operators can’t live without and technologies that are too expensive for them to build in-house.

Two areas where I see a growing opportunity for mobile app innovation and revenue generation in the next couple of years are:

• Apps that target business users: Businesses can afford to pay for mobile apps – especially if the positively impact productivity or profitability. Targeting profitable companies and professions (Doctors, lawyers, real estate agents, construction, etc.) that are often on the go presents a strong opportunity for mobile innovation and revenue generation.
• Apps and mobile platforms that facilitate lucrative micro-transactions and subscription services.

While the mobile still ecosystem isn’t easy and revenue channels are changing, there are ways for small ISVs to make money.  However it is not as easy as many of the recent ‘app store boom’ articles out there would have you believe… In most cases, ISVs need to do more to make money than throw their app on the iTunes app store and/or insert ads in their app and wait to see what happens.  These days, making money in the mobile ecosystem requires a great product, a sound monetization strategy that addresses the short and long term, a smart user acquisition strategy and a strong team to make the ‘magic’ happen.