Why aren’t App Stores designed to maximize revenue?

In the early days of app stores, before Apple launched its ‘App Store’ on iTunes, and before other OEMs jumped on the gravy train of content distribution, there were many independent websites selling content for mobile devices. First for Palm, then for other smartphones such as BlackBerry (bplay.com, handango.com, etc.) and Windows Mobile (handango.com, etc.). Carriers launched storefronts for their customers to purchase games, apps and ringtones from, and while it was complicated to distribute to the breadth of the market, one thing each store had in common was their ultimate goal: profitability (and the higher the better!).It was a system in which no store wanted to be too aggressive on pricing for fear of starting a price war that would kill the average price point for content and destroy profit margins for all. This was good for the stores, the content providers and, believe it or not, the customers. For sure, there was lots of overpriced content (somethings never change!) but the revenues generated provided good incentive for content publishers and developers to spend money on their content production as they knew that there was a viable means of recouping their costs — and a fairly reliable means as well.

The stores all used similar tactics to drive traffic and customer loyalty and there was many different options for getting your content promoted, seen and sold. Everyone made good money and customers (believe it or not) were generally quite happy paying $3-$5 for games on their smartphones.

Then the OEMs (namely Apple) launched their stores. Ultimately one could argue that the success and $2+ billion in revenue Apple is making from the App Store is proof that they are doing everything right — and to a degree they are. But the App Store is not designed to maximize profit on the content sold through the App Store. The App Store is an additional revenue stream that, while profitable, supports the main revenue stream (i.e. hardware sales) for Apple. The same applies to other OEMs however Apple’s sizable lead results in everyone else pretty much following what they do on their store.

Why do I say that Apple’s App Store is not setup to maximize revenue? Look at the games and apps that you see when you load up the store on your mobile device. The vast majority are on the low-end of the price scale (usually free, $0.99 or $1.99) and rankings are generally based on volume (excepting the Top Grossing list). Lower prices basically guarantee higher volumes … but not necessarily higher overall sales. Is the visibility advantage of the low-end price points causing people who would pay more for good content, to not even see that the good content exists?

To maximize revenues, and allow for some higher priced premium content to stand out, store should be adding a “Top Premium” (or equivalently named) tab to their interfaces to expose some of the great content that is created and sold above the lower price points. Will the volumes be lower on these titles? Of course. But with proper positioning and marketing, these higher priced titles could actually generate more revenue overall for the storefront.

The addition of Top Grossing was a significant positive change for Apple to make, but it’s just a first step. Now that the App Store is entrenched in people’s minds as the place to go for content, quality content at a premium price point needs to get better visibility and the average price of the content need to start going up again, or some of the amazing technology demos you see on mobile will never make it into commercial products due to the high cost of development. Let’s start putting more pressure on the market leading mobile stores to help the content providers who are adding the value to the OEM’s offerings. After all, a great device only gets you so far, it’s what you can do with it that really counts.

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