Smartphones have created a multi-billion dollar software industry in apps. These standalone applications made specifically for mobile devices can generate substantial profits for developers and the companies behind them. There are presently over a million apps in dozens of categories available for download via Apple’s (AAPL) App Store, the Google (GOOG) Play store, and Amazon's (AMZN) Appstore marketplace.
A Big Industry – For a Small Few
A January 8 press release issued by Apple reported that App Store developers earned over $25 billion to date; billions more have been earned through Android stores. The competition to develop a successful app is intense, with hundreds of thousands of developers working to create the next hit. Yet while some apps have turned their creators into millionaires, the vast majority of app developers won’t strike it rich. The chances of making it big are depressingly small: less than one hundredth of one percent of the millions of available apps will see real financial success.
The most popular apps rated by unique visitors per month are owned and operated by large technology firms. The number one app in 2014 was the Facebook (FB) app. Of the 10 most popular apps, six are Google properties—YouTube, Google +, Google Play, Google Search, Google Maps, and Gmail. Recently, these larger companies have snatched up smaller apps for huge sums of money, for example when Facebook bought Instagram, Onavo and WhatsApp.
While some valuations and sales numbers may seem encouraging, beware: most app developers aren’t likely to score a big payday. According to Forbes, the typical app developer produces three to five apps with average revenue of $1,125 and $4,000 apiece from Google Play and Apple’s App Store, respectively. A hard-working app maker with five apps can gross around $20,000 a year before taxes—not accounting for the money, time and effort invested in creating those products.
App Companies – The Rise & Fall
Several companies have been founded with the sole purpose of creating and marketing apps.
Zynga (ZNGA), maker of socially-networked games and puzzles, brought in over $870 million in revenue in 2013. Storm8 reported more than 600 million unique downloads last year. In Japan, COLOPL reported more than $300 million in sales in 2013 and sales of $237 million in the first quarter of 2014 alone. Kabam, Paris-based Gameloft, and Japan's GREE each raked in more than $300 million in revenue in 2013. During that same period, Finland’s Supercell, creator of the wildly popular game “Clash of Clans” reported almost $900 million in revenue, and King (KING), the company behind the addictive and ubiquitous “Candy Crash Saga” game, generated nearly $2 billion..
Productivity app Evernote is worth about $1 billion. Square, which allows people to accept credit card payments via a smartphone or tablet app, is valued at $3.3 billion. Snapchat, the app that allows users to send photos and videos that vanish after seconds, is now valued at roughly $10 billion.
Uber and Lyft—the largest among a growing number of ride sharing and car livery service apps—are valued at $40 billion and $2 billion, respectively. AirBnB, which has both an app and a website that allow people to rent out their homes and apartments, is worth over $13 billion.
Success for app companies may be short-lived. King and Zynga have seen their stock prices suffer since their IPOs. Rovio, the maker of Angry Birds was estimated to be worth $6 to $8 billion by analysts in 2012, but its current valuation is less than half of that figure. Many other app companies have seen their valuations fall due to users' short attention spans and increasing access to a slew of new offerings. A 2013 study by Techcrunch found that anywhere from 80 to 90 percent of all downloaded apps are used just once and then eventually deleted by users.
The Bottom Line
It is not surprising that the top app companies are also some of the top technology firms, including Google and Facebook. The largest app-specific players are facing increased competition and the prevalence of free apps that users can choose to download instead. While apps such as Uber and AirBnB command sky-high valuations, recent history tells us that such success within the app economy can be fleeting.