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App Stores Must Go

By - January 11, 2015

appstores2014 was the year the industry woke up to the power of mobile app installs, and the advertising platforms that drive them. Facebook’s impressive mobile revenue numbers – 66% of its Q3 2014 revenue and growing  – are a proxy for the mobile economy at large, and while the company doesn’t divulge what percentage of that revenue is app install advertising, estimates range from a third to a half – which means that Facebook made anywhere from $700 million to more than a billion dollars in one quarter on app install advertising. That’s potentially $4 billion+ a year of app installs, just on Facebook. Yow. That kind of growth is reminiscent of search revenues a decade ago.

But as I’ve written before, app installs are only the beginning of an ongoing marketing relationship that an app publisher must have with its consumer. It’s one thing to get your app installed, but quite another to get people to keep opening it, using it, and ultimately, doing things that create revenue for you. The next step after app install revenue is “app re-engagement,” and the battle to win this emerging category is already underway, with all the major platforms (Twitter, Yahoo, Google, Facebook) rolling out products, and a slew of startups vying for share (and M&A glory, I’d wager).

Over time, app install revenue is bound to wane, and app re-engagement revenue will wax, to the point where the latter is inevitably larger than the former. Neither will disappear entirely, of course, but as the mobile model matures, it’s likely they will take new form. But the following three steps will remain constant – they were true before apps (when we called Internet services “websites”), and they were true before the Internet itself:

  1. Get people to notice your product or service, and engage with it for the first time. 
  2. Get people to come back, and keep sampling your product or service. 
  3. Get people to regularly give you their money for your product or service.

We’ve now got a reliable model for #1: It’s the combination of the app store platform and app install advertising. #2 is coming along as well, as I mentioned above.

But what of #3? It’s one thing to get someone to give you a few bucks for your app, but how can you keep them giving you money (or doing things that make you money, like ordering on GrubHub)? If app makers are spending an unhealthy percentage of their capital on advertising, innovation in product will suffer, and we won’t get apps that people are willing to continually pay for. It strikes me, after any number of conversations I’ve had around the state of mobile, that mobile markets in the US will slowly but surely evolve toward the norms currently in place in Asia, where advertising is a minority of mobile revenues, and in-app commerce of all kinds is the standard. After all, that’s how it is for business in general – advertising is a small but significant percentage of overall revenues.

But for this to occur, our process of app discovery and engagement has to rationalize – it’s simply too expensive to build a loyal audience in mobile, and the top 1-2% of apps can afford to price the rest of the market out. This is the great failure – or cynical intention – of Apple and Google’s hobbled app store strategy. There simply should not be one app store per platform – they’re what Steve Jobs would call “orifices” – monopolistic constructs created to consolidate control. App stores stifle innovation – they are damage, and the Internet will eventually route around them. 2015 should be the year that becomes evident.

My other recent musings on mobile can be found here.  

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One thought on “App Stores Must Go

  1. Rohan says:

    Hi John,

    Nice one! We are seeing some other models evolve in India, where mobile handset makers like Xiaomi are selling handsets on razor thin margins to aim to make money via digital content and probably app installs.

    Very interesting to see how a subscription service app like say, antivirus, strikes a relationship directly with the handset maker to drive the last 2 steps as mentioned by you. ( the first one is covered as the app comes embedded onto the phone)