How the little guys got squeezed out of the apps market

The world of mobile apps is changing.

The multi-billion dollar industry that barely existed three years ago is in the middle of transforming from a cottage industry made up of small publishing studios and one-man bands into a sector dominated by multi-million dollar publishers and entertainment studios.

Smaller app developers are being forced to respond to this by adopting a traditional business model of throwing significant amounts of capital at marketing, advertising and distribution – and they’re barely keeping up.

While these developers were once content in simply throwing an app on iTunes and letting consumers do the rest, it is now harder than ever to have a runaway hit without some financial clout behind them.

Consider the numbers – the App Store now has over 350,000 apps, has recorded over 10 billion downloads and Apple recently revealed that is has handed out over $US2 billion to developers in payments.

Any chance smaller developers have of snagging a runaway hit grows smaller every day – and the giants recognise this too.

Robert Murray, chief executive of Melbourne-based iOS studio Firemint, which rocketed to success after creating the multi-million dollar hit Flight Control, says the market is definitely changing in favour of higher quality content.

“For games, there’s definitely a stronger demand for more content, deeper gameplay and richer experiences. Apps are getting bigger, they are taking more time to make and the feature expectations of consumers are growing.”

Alphonso Labs co-chief Akshay Kothari – half of the team behind the award-winning and Apple-endorsed Pulse RSS reader – says the scope of the market has changed so much that entire careers are now being built out of the industry.

“It was really only two or three years ago, but it’s a lifetime when you’re talking about technology. Just look at what has happened in the past three years – everyone has moved into mobile.”

The App Store holds the majority of the market, but there are new rivals causing Apple headaches – mainly the Android market, which has recorded over one billion downloads.

But as the market develops, it also produces new opportunities for software makers finding it hard to compete.

The way it used to be

Three years ago the App Store was an individual’s game. It wasn’t multi-million dollar studios that first saw the potential of the iOS platform, but programmers in day jobs who spied a good opportunity to make some extra cash.

Within the first few months of the App Store’s launch, there were already success stories: American Steve Demeter earned thousands from his geometry-based game Trism and Australian developer Graham Dawson had a runaway hit with OzWeather, which remains popular to this day.

Another Australian, Andrew Lacy, started Tapulous and had a massive hit with his popular rhythm games, Tap Tap Revenge.

It was easy to gain publicity. There were only a few thousand apps and even fewer of actual quality, so a well-constructed program would be sure to get some attention on blogs and in tech publications.

Travis Yates, a Queensland-based app developer, earned thousands from his card counting app after it was featured on CNN for being banned by the Nevada Gaming Commission – a little publicity went a long way.

“I earned about $23,000 from that app, and the majority of that revenue came during the week I was on CNN,” he says.

Then it slowly began to change.

Bigger studios started weighing in. Some failed, but many had significant budgets behind them and brought the missing element of branding.

Businesses like Domino’s, Qantas, Pizza Hut and Lasoo also flogged their apps to users, offering well-polished programs with useful features. Publishing companies snapped up individual developers who had already made a name for themselves, and started developing apps for corporates.

Keith Ahern, chief executive of app studio MoGeneration, says the market saw fewer individual developers and more corporates working on apps.

“As agencies came on, people started realising you could have a great brand experience. And now there are companies doing it in-house themselves,” he says.

Daniel Kagan, co-founder of iPhone app studio Lookout Mobile, creator of the Aussie Rules Live and Melbourne Comedy Festival apps, says the market has changed “significantly… It’s now become a legitimate business”.

“The app is being integrated into budgets,” Kagan says. “You have your TV ads, your radio ads, and your iPhone app. We’ve seen corporate briefs actually saying that, and these companies were saying six months ago they wouldn’t necessarily do it.”

Where is the market now?

So where does this leave the app market now?

Of the hundreds of thousands of apps, all that really matters are those in the top 400 – these best sellers take the majority of business.

The top of the tree is dominated by major studios. Huge software companies, publishers and game designers are abundant in the top 100. This is where major hits like Angry Birds, Fruit Ninja and Flight Control become household names.

Marc Edwards, chief executive of app studio Bjango, says the store has a balance now between the individual developers and huge publishing groups.

“Initially it was just 100% indie developers, everyone was small.”

“Now you have major studios like EA and Activision, and other large companies, releasing a number of large titles like Infinity Blade and so on, triple-A titles and such.”

The inclusion of these studios in the App Store marks a change in their initial approach to the market.

Just as the profile of these developers has changed, so have the apps themselves.

Smartphone users expect their apps to last. Edwards says they are now long-term projects that must be given a full lifespan through regular updates – many developers now call their first app “version one”.

“It used to be that the mainstays in software, namely Adobe and Microsoft, wouldn’t release feature updates, but rather updates to fix problems,” Kagan says.

“Now, everyone expects feature updates that allow the app to actually do different things.”

The iOS game Angry Birds is perhaps the best example. While the app itself only costs just over a dollar, Finnish developer Rovio Mobile has made a deliberate effort to constantly update the game with new levels and features – the app experience lasts for months after you buy it, and that’s kept it at the top of charts.

But part of that success is also due to the introduction of in-app purchases. This feature – which was met with thunderous applause when Apple launched it – allows developers to earn more revenue from their work.

While the Angry Birds app itself costs barely anything, users can access the “Bad Piggy Bank” within the app itself, allowing them to buy items and other features with the touch of a button.

“We saw on the iPhone that paid content works,” creator Peter Vesterbacka recently told Wired.

Not only has Angry Birds been downloaded over two million times, but its in-app purchases, combined with other merchandise, has earned it over $50 million.

There are entire games now, like StarFront, that publicise themselves on the fact you download the initial app for free, and then choose if you want to continue by making more in-app purchases.

Camera app Hipstamatic allows users to buy different types of film and lenses for use within the app itself – the default choices are fine, but aren’t great, so users are pressured to buy more.

Apple is pushing this method hard as it gets a 30% cut of all in-app purchases. Even in the App Store, a list of “most popular in-app purchases” is visible against other profile information.

This is the future of apps – publishers will build a piece of software, sell it for a slightly discounted price and then continue to update it and add new features, either for free or using the in-app system.

Either way, app makers will be forced into supporting their programs for years.

“I think maintaining the app and using in-app purchases is a big part of the Apple software platform. There’s definitely a bigger shift towards those types of services,” Edwards says.

The challenges of quality and capital

However refreshing they may be for users, new features like in-app purchases and subscriptions aren’t enough to ensure everyone is successful.

In fact, individual developers are losing their power by the day simply because the sheer quality of apps has raised consumers’ expectations extraordinarily high.

“The art and craft has changed,” Kagan says. “You look at Twitter apps, and so on, and the detail and design is immaculate. People are putting so much more effort into their apps, and it really shows.”

Firemint’s Robert Murray says while the minimum costs to get started are still low, consumer expectations are rising and the cost of development subsequently rises as well.

“Creating new, original games is always difficult when you are up against established brands.”

Buyers don’t want to throw away a dollar or 10 away on an app that won’t give them a long-term experience. The sheer number of app review and blog sites like AppAdvice is a testament to this. Just as a customer would research a television, or a couch, they are now researching apps before they make a commitment to buy.

But this new fixation on quality creates two problems smaller developers – they’re often short of the cash and time required to get themselves at the top of the store.

“The focus is on having such a high quality product so you won’t just get noticed by casual users – the expectations are much higher there,” Edwards says.

Not only do users expect that level of quality – Apple expects it as well. The tech giant updated its app policy last year, promising developers that it wouldn’t be tolerating the same type of low-quality programs that it had in the past.

“If your app looks like it was cobbled together in a few days, or you’re trying to get your ?rst practice app into the store to impress your friends, please brace yourself for rejection,” the company said.

It subsequently banned hundreds of apps – many of them from the same developer – and started categorising apps and showing them off. Even today, if you visit the App Store you’ll see apps showed off in bundles like “Best For Business” or even some niche categories like “Apps For Learning Maths”.

The marketing challenge

With higher quality and the growing number of apps in the store has come a bigger responsibility to market apps properly.

Publishers and developers now require marketing budgets to get their apps off the ground – particularly if they’re unknown.

“Marketing for apps has now become part of the business plan. You just can’t shove anything out there these days, because it just isn’t going to be found,” Kagan says.

“Firemint is a good example of this. Now they have PR people helping them out whenever they launch a game and they’re not just a backyard name getting lucky. You have to be either really lucky, or producing the most amazing applications to get noticed without marketing.”

But that success is a bit of a mixed bag, Murray says. While he admits that more capital “certainty increases your chances of success”, he admits this “doesn’t make things any easier because our games now take longer to make”.

‘However, it does position us as one of very few developers who have the capital and the will to spend it on big games like Real Racing 2, which cost us over $2 million to make.”

Marc Edwards says this creates an environment where apps start competing with each other.

“We’re not finding it too bad because we have a good user base, but marketing is never easy – especially if you compare it to when the store first opened and there were barely any apps.”

Murray says back then developers just tended to release a lot of simple titles and hope that one stuck.

“Now developers have a better understanding of expectations in terms of production values, pricing and timing, there’s been a shift towards deeper, more engaging titles.”

“Dedicated advertising and marketing is increasingly becoming essential,” Murray says.

Travis Yates says he’s been forced into using thousands of dollars for advertising since his Card Counting app exploded – something he never had to do before.

“I’ve spent about $4,000-$5,000 on advertising just to give them a chance. “It’s really gotten to the point now where if you don’t have a bit of money behind you, there’s really no point in making anything.”

New opportunities emerge

But despite the challenges, there are still individuals finding success. Apps like Instapaper and Reeder have been made by developers on their own time, and are some of the most popular apps available.

Alphonso Labs co-chief Akshay Kothari insists the company hasn’t spent a cent on marketing.

“I think that’s the beauty of the App Store. It doesn’t matter who’s building it, because people are always going to discover really good apps.”

“There are companies that can spend as much money on PR as they want, but in the end, it’s the really good quality apps that will get noticed above anything else.”

Even Murray agrees, saying companies like Firemint have to focus on the content first, and then establish a marketing process as a secondary priority.

“I think word-of-mouth will still be the most important form of marketing, and titles that don’t meet the consumers’ quality expectations will fail regardless of how much marketing and advertising is spent on them.”

“I don’t think it is getting any harder or easier for individual developers because of the presence of big brands. We think the platform is still a fantastic place to launch something original.”

One thing is for sure – the market isn’t going to slowdown.

Recent figures from one research firm suggest the App market will become a $US25 billion business by 2015. And as it grows, the quality will continue to grow – and so will the pressure on smaller developers.

While small developers will find cheap ways to push their product – companies like HalfBrick are creating viral YouTube trailers to drum up support for their programs, and others are using social media to get the word out – meeting the ever-rising expectations of consumers will be a challenge.