The film industry realized earlier this year, to some degree of horror, that the apps economy is bigger than Hollywood.
While this comes as a surprise to many people, those that follow technology just nod and say, “of course.” The technology sector is the fastest growing and one of the biggest in the world, completely outclassing traditionally rich verticals like sports and entertainment. For all its prowess, the NFL is only a $12 billion a year industry. That’s a bad quarter for Google.
As for the apps economy specifically, technology by itself is no longer the story. Apps are mainstream, talked about by everybody all the time. New means of conducting business and human behavior are created almost daily, built on the software and services that comprise the apps economy.
Since the inception of the App Store in 2007, the app development industry has come a long way. Where does the app developer industry stand in 2015 and what are the opportunities and concerns for the next five years?
Every company needs an app. At least, that is what they tell themselves. The explosion of smartphone apps over the last four years has been an incredible development, shifting the paradigm of how companies do business and humans behave.
The demand for apps has led to the creation of a cottage industry designed to support the need of enterprises, startups and small businesses that need an app but have little to no time or technical acumen. App studios have done very well in the last several years, building apps for the masses from games for media organizations to internal accounting apps for the largest enterprises. It’s been a good time to be an app developer.
The industry is now eight years into the Mobile Revolution and seven years since the dawn of the apps economy. It’s a good time to pontificate on the future of app developers and studios and how they mature in the next five-to-10 years.
Key features that will affect app studios in the next five years:
- Globalization: American app studios will see increased competition from international studios building for localized markets at lower per hour rates, according to a study from ContractIQ.
- Cross-Device Development: The smartphone is no longer the de facto app engine as apps for cars, televisions and homes increase in popularity.
- Developer Tools: The prevalence of free application programming interfaces and software developer kits will make it easier to stitch top-end app functionality together.
- Supply & Demand: The demand for apps by startups and enterprises will not abate, but studios will be pressed by both the international and independent markets as profit margins decrease.
- Monetization: The viability of paid app downloads will be mitigated by different business models, including in-app purchases and subscription services.
Let’s take a look at each category to see how app development has evolved in the last five years and how that will affect developer decisions in the years to come.
Globalization Of App Developer Opportunities
According to a survey of app studios by ContractIQ (a firm that sources development talent to companies in need of apps), firms in the United States charge the highest rates for high-end iOS and Android development. The per hour rate for U.S. app studios is $150 for iOS and $168 for Android. Australia is the only other country in the survey that breaks the into the $100 realm ($110 median for iOS and Android).
In contrast, Singapore has a $63 media for iOS development and Indonesia goes as low as $11. The United Kingdom has a media of $70 for iOS development and India ranks at $30.
ContractIQ founder Ashwin Ramasamy notes in a guest article on TechCrunch that the growth of app studios in Singapore and Indonesia is tied to smartphone adoption in those countries, where demand is still booming in the large population countries.
Indonesia’s local mobile market is robust and growing. While U.S. smartphone usage is peaking (reaching 75 percent in the next two years), Indonesians are not stopping till the next 50 percent of its population gets hooked. It has about a 100 million users to try, fail, learn and provide a better mobile experience. They have to think mobile-first and they already are. Their adjacent geographic markets are leaders in mobile in Japan, Korea, China and Singapore. You just have to travel in their trains to realize what ‘mobile’ means to them.
Ramasamy says that U.S. firms will have to protect themselves by both expanding internationally and becoming full service stacks providing customer service and consulting instead of just being programmers for hire.
Cross-Device Development Is The New Black
The connected world is coming sooner than you might think. Smart app studios and mobile service providers are already thinking about how to take advantage of the new era of connected cars, intelligent refrigerators and televisions that act as hubs of entire smart homes.
The notion of cross-device development can loosely fit into the notion of “Internet of Things.” The moniker IoT has become a generic catchall for any connected device that is not a computer, smartphone or tablet. A more appropriate description for the Internet of Things may be to classify specific industry categories instead of dumping them into one bucket.
In this case, we find several on-the-cusp sub-industries that app studios will have the potential to exploit. This includes wearables, smart home, connected televisions, ecommerce and retail, intelligent infrastructure (“smart cities”), health and fitness and industrial/agricultural equipment (think of the general idea of “additive manufacturing”).
A Developer Economics survey from Vision Mobile noted that 53% of developers are working on at least one IoT project (in any one of the categories above). Smart home was the most popular category among developers with a 37% interest rate while 35% of developers had interest in wearables. Only 20% of developers were interested in retail, a surprise considering that ecommerce is the biggest revenue generator for developers (see below).
The opportunity for app studios is to be seen as an expert in any one of the connected world categories, such as home, infrastructure or retail. Being known as the de facto studio for medical app and device development, for instance, is a long term bet but sets the studio up with a future while it makes money day-to-day with smartphone apps.
Developer Tools Lower Bar To Building Quality Apps
According to ContractIQ, 25% of apps build by developer studios have no third party SDKs while 50% of apps from studios have between one and five SDKs. In the same survey, ContractIQ notes that only 10% of the studios customers know which SDKs are actually in their apps.
The studios’ customers should probably be paying better attention to the actual building blocks of the apps they are contracting. The Developer Economics survey gives us a good idea of what is being used.
User analytics is the top third party tool category with 47% of apps scanned by Vision Mobile employing some type of analytics tools like Google Analytics or Flurry. Ad networks were second with 31% of usage followed by cross-platform tools (like Xamarin, Appcelerator or PhoneGap) at 30%.
The maturation of the mobile developer market over the last five years has led to a plethora of (relatively) easy-to-implement tools that significantly lower the bar to create sophisticated apps that provide apps added functionality and measure performance and user behavior. The result are app developers that know their users and can make better development and business decisions.
Supply And Demand: Strong But Intemperate
The growth phase for mobile apps shows no signs of abating. Especially when you consider the multiplier effect of connected world apps from wearables, cars, homes and so forth.
For the app stores themselves, research from AppFigures shows that Google Play almost doubled its volume of apps in 2014 from below 750,000 to nearly 1.43 million. The Apple App Store grew from a little above 750,000 to 1.21 million apps. As globalization of the apps economy continues in 2015 and beyond, the multiplier effect for app demand will remain healthy for developers and studios for the short-term future.
The question for developers is where to focus their attention. Vision Mobile believes the growth sector for app developers will be in the enterprise space as only 20% of developers in its survey are focused on enterprises (versus 64% on consumer apps). ContractIQ notes that the pipeline of business is coming from companies ranging the economic ladder with 23% of demand from enterprises, 30% from small businesses and 37% from startups.
The startup space is particularly interesting as venture capital money continues a healthy flow into startups that lack technical founders and app development expertise. Startup development contracts may not be as lucrative as those to enterprises, but they are more numerous and the request for proposal process tends to be less onerous and faster than for larger companies.
Monetization Centered On Ecommerce
Where is the money in the apps economy?
Vision Mobile’s research says, overwhelmingly, that it is in ecommerce. The Developer Economics survey notes that the mobile ecommerce market will generate $300 billion in revenue in 2015, more than every other source of developer revenue combined.
The dominance of ecommerce makes sense. Commerce is inherently built on a transactional structure where people pay for physical or digital goods and services. Uber would fit into the ecommerce category of app revenue, for instance. Profit margins for commerce apps tend to be lower than purely digital goods, but revenue in any sum is the grease that powers the machine of industry.
App store sales (in-app purchases and paid downloads) make up the second highest slice with a $40.5 billion projection in 2014. The total would be more than twice what Apple and Google reported for developers in 2014 (around $17 billion with $10 billion of that going to iOS developers). The distribution of that wealth will remain skewed towards iOS but expect both stores to significantly increase developer revenue in 2015.
Advertising is a tricky source of revenue for app publishers. The paradox is that mobile advertising is a growing field—$34 billion for app developers in 2015—but one where only the very top app (like Facebook) will significantly benefit from. Just like the Web, scale is all that really matters when it comes to sustainability via advertising.
For app studios, contract work estimates to be an $18.5 billion business in 2015. Good work if you can get it, but be wary of the notes above on supply and demand and the globalization of the developer economy. Subscriptions, particularly for news, entertainment, music and video content, will grow to about $9 billion this year. Software-as-a-service types of apps (like accounting apps Concur or Expensify) make up the core of the subscription revenue for developers but entertainment (Spotify or MLB At Bat) are finding ways to make money as well.
Opportunity: Consolidation And New Frontiers
After seven years of growth in the apps economy, we will continue to see consolidation of developer services, tools and revenue opportunities. The barrier to entry for quality apps is as low as it as every been, but the barrier to success is higher as companies with lots of resources trap users with marketing and advertising campaigns. The small developer studio, always a struggling profession, will have to either look towards opportunities in the connected world space or look towards contract work. The Developer Economics Survey wraps it up nicely:
The open nature of the app stores and the size of the addressable market made it seem as if anyone who could create a decent app could make their fortune, or at least a decent living writing their own apps. As the market has matured, it has become painfully difficult for a small developer to be noticed. Also, the quality and functionality bars have gone up to the point where it’s hard for a solo developer or very small team to compete in the consumer app market.
The good news is that there is enough money and opportunity within the apps economy that astute developers and app studios can build sustainable businesses by navigating the seams of the industry. By employing third party developer tools to keep costs down and quality high, hitting the right market at the right time and diversifying client portfolio between startups and enterprises, there is plenty of room for growth for clever developers.
This article originally appeared at ARC—The Application Resource Center from Applause.
