In response to my HTML5 apps argument a few people came back to how the payment thingy is missing from my idea, and how it will (apparently) be worthless because of that. I’ve been thinking about that a lot in the past few days, and I’m increasingly of the opinion that the payment argument is nonsense.

Sure, everybody who does iPhone apps, or who’s glancing cursorily at the mobile market without trying to gain in-depth knowledge, currently believes that the App Store concept is going to be a huge success because of the opportunity for developers to earn some money. But they’re just wrong.

I did some back-of-napkin calculations and found that, macro-economically speaking, iPhone app development costs money right now. And yes, an individual developer can strike it rich, but that’s getting rarer and rarer. I do not want to build a new app ecosystem based on arguments from developers who just want to take a gamble in the App Store roulette. Gamblers’ arguments are not real arguments.

Deconstructing payments

How do you, as a developer, get paid for your work on an iPhone app? (Or an Android, Symbian, Windows Mobile, BlackBerry or whatever app; there’s no fundamental difference between the various platforms.)

The first and most obvious way is just getting paid by a client for creating the app. Now that’s a payment model I can believe in, because creating apps for others is what developers do for a living.

Secondly, developers can create an app just for the heck of it; because they have a good idea they’re itching to try out, or just to gain some experience in building apps. Although a developer may put a € 0.79 price tag on the app, the point here is not making money, but developing for the sake of developing. No payment model here, but this, too, is something that’s not going to go away any time soon. Developers want to develop, after all.

Calculation

It’s the third model, developers creating an app and expecting to get rich from the proceeds, that garners the most interest right now. And it’s here that the fallacy of the argument lies.

Recently Tomi Ahonen published an interesting calculation. He estimates the development costs of an app at $30,000 (6 weeks of work at $125 per hour) and multiplies that by the number of apps in the app store: 150,000. That gives a total development price of $4.5 billon for all the iPhone apps that have currently been written.

Now one could object to those numbers. Should we say that a developer who develops an app hoping to get rich “pays” $30,000 for his app? Let’s say he doesn’t, and let’s furthermore estimate that 50% of the apps fall in this category. (I’m making up these figures, but I want to significantly downsize Tomi’s numbers before proceeding with the argument.)

Besides, 6 weeks of work might be a bit much for an average app. For your first app, sure. For a high-quality graphical app, sure. But not for the average app. So let’s say that developing an average app costs not $30,000 but $20,000.

So after significant downsizing we arrive at a total iPhone app store value of 20,000 x 75,000 = $1,5 billion.

Now the total revenue of the iPhone app store in 2009 is $780 million. 30% of this goes to Apple, so the worldwide app owners have earned $550 million, or slightly above one third of what they’ve invested.

Does that point to an economically viable app store ecosystem?

Sure, the $780 million is per year, and might conceivably grow, while the apps that have been written for $1.5 billion will remain available year after year.

So let’s say the app store as a whole breaks even after three years. Breaks even! No profits yet. And the calculation already includes all apps that have been written basically for free in the hope of future wealth.

Does that point to an economically viable app store ecosystem?

Then there’s the problem of updates. Updates also cost money, so there will be maintenance payments if you want to keep your app in the store year after year. How much? Shall we say 20% per year? (I expect it to be higher, given OS updates and such that have to be accomodated, but let’s again give app developers the benefit of the doubt.)

So in order to keep the 75,000 apps that people pay for in the store for three years, the cost per app is not $20,000 but $28,000. 28,000 x 75,000 = $2.1 billion, against an income of $1.5 billion. In three years, your average app will win back about 70% of its development cost. Not exactly a get-rich-quick scheme.

Does that point to an economically viable app store ecosystem?

Striking it rich

Still, until now we’ve taken the macro view. The point is that individual developers are not necessarily bound by macro-economic rules. If a developer spends two months of his time on an app that ends up in the top 25 and sells millions of times, yes, then he has definitely made a healthy profit.

But how often does this happen? In the early days of the app store it did, but what are the chances right now?

All the stories I hear are about how hard it is to attract attention to your app without being a well-known brand, hooking up with a well-known brand (which graciously allows you to work for free in exchange for you hooking up to its brand value), a huge marketing campaign (which presupposes a large company with a well-known brand), or an outrageous amount of luck.

Yes, you can get lucky. But right now the reasoning of developers who want to get rich by developing apps mostly resembles the reasoning of the inveterate gambler who goes to Vegas one more time because he can feel that this time it’s really really going to work.

HTML5 apps vs. app store apps

So let’s review the argument so far:

I said that HTML5 apps, which are web-based and far more interoperable already than any native apps, will oust native apps in the long run.

The counter-argument is that the HTML5 app route doesn’t allow developers to get paid. That’s true — for now. (I expect the mobile operators to start offering a payment system in the next two to three years.)

Because developers aren’t getting paid, the argument continues, they won’t want to develop HTML5 apps.

But wait a minute here. What kind of developers are we talking about?

Not the run-of-the-mill developers who just develop what they’re paid to develop. If a client wants an HTML5 app they’ll build an HTML5 app.

Not the developers who develop just for the sheer joy of developing. They’ll take a decision based on technical arguments; mainly superior UX vs. superior interoperability.

The argument applies only to the gold-seekers that develop apps in the hope of striking it rich. Yes, the HTML5 app ecosystem doesn’t offer something they consider vital and that means they’re less likely to switch to it.

But what percentage of developers are we talking about here? 30%? 20%? 10%? Frankly I feel that even 10% is a rather high estimate.

Besides, the number of strike-it-rich developers will only decrease with time because they’ll find out that striking it rich is more tricky than they think, and they’ll run out of money and become a for-hire developer who now and then develop something for the heck of developing.

The payment argument applies only to a small and shriking minority of mobile app developers, and it’s exactly that minority that has a gambling attitude. And I’m not really interested in arguments coming from gamblers, because they believe whatever they need to believe in order to satisfy their craving.

The payment argument does not say anything about the big and not-so-big brands who want a mobile presence (regardless of profit) and are willing to pay developers for building an app.

The payment argument, in other words, is nonsense that only appeals to gamblers. I’m going to ignore it.

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