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Economic Analysis & The App Store

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I read two articles – the app bubble and bad news about iphone economics – which surprised me a bit.

Their analysis, which doesn’t account for gain in human capital and the value of lock-in (or alternatively the cost of switching), seems to posit that the App Store is bad for everyone. I could be completely misevaluating the arguments presented, but I believe that if you dig into the arguments presented significant benefits are not being accounted for.

Apple is Paid to Advertise

Apps aren’t very profitable for Apple either. According to Apple Insider, “Apple has long maintained that the App Store isn’t meant to be a profit generator, as much as a means of attracting customers to the iPhone and iPod touch.” The App Store’s gross profits amount to just 1 percent of Apple’s total gross profits.

If something is a ‘means of attracting customers’ then it is a valuable asset, a marketing tool. Even if Apple were losing money running the App Store they would still continue to operate the store because it is incredible marketing tool. The fact is that Apple is being paid to advertise the iOS platform. There is alot of time and money being pumped into advertising individual iOS applications and the more those applications are being designed and developed vendor lock-in takes place which is extremely valuable (vendor lock-in is what makes Microsoft so valuable, valuable enough that Intel just bet 7.68 billion on a more-or-less Microsoft specific technology). Many smaller companies have to choose between the iOS platform and the Android phone (it really isn’t a platform… yet) and most – in my opinion – are choosing the iPhone. Every application that is released on the App Store increases the marketing value of the App Store.

iOS Apps Keep Customers Happy

The decision to adopt a technology sometimes depends on whether or not your current hardware will support it. This is why Square Space developed an iOS app – it keeps customers happy and helps future customers more easily make the choice to using Square Space. Additionally, developing an App Store application to tie in with your product prevents a second-mover from jumping into the uncaptured market and pulling customers into a separate service which integrates with your free / paid iOS application (ex: some sort of Square Space competitor).

Experience is Valuable

Developers don’t develop open source applications such as Seashore, Sequel Pro, and Adium for profit. Open source applications are developed for the experience and for the gratification that comes with knowing you are the master of something (this video has some thought provoking ideas about the reason people spend time on tasks which do not result in a direct monetary gain). Developers are more valuable when they can bring an idea from conception to release and when they can prove their ability to quickly master new technologies. Having an iOS application published on the App Store gives concrete evidence to an employer that an employee has those skills – it is a screening device. Yes, an individual developer may not make a profit on an app they developed, but if it allows them to earn 20% over the next 5 years then there is most definitely a net gain.