App army promises new tech revolution

A decade ago, San Francisco’s trendy South of Market district was the birthplace of hundreds of web design firms that have since gone under or been swallowed by rivals.

Now it is the turn of the “app army”, the scores of companies devoted to churning out the small applications that run on Apple’s iPhone and rival devices, as well as on regular computers for users of Facebook and similar websites.

App sales are booming at a time when corporations are cutting tech spending and consumers are pinching pennies.

Indeed, veteran industry executives, investors and analysts are calling the shift to internet-capable devices and the apps that run on them a once-a-decade leap in technology, on a par with the great personal computing boom of the 1980s and the debut of the world wide web in the 1990s.

“The ramp [growth rate] of the iPhone and iPod Touch in the first eight or nine quarters is more than five times the ramp for the internet,” says Kathryn Huberty, Morgan Stanley tech analyst. These devices, and faster wireless networks, are both now reaching about a fifth of the global population, she estimates, which will drive much more rapid development: “Globally,” she says, “2010 is the tipping point.”

No company is more central to the shift towards the mobile internet than Apple, which enjoys a wide lead in distributing applications. More than 100,000 apps are available on its App Store and there have been more than 2bn app downloads in less than a year and a half.

To keep that gusher flowing, Apple has sought to inspire more outsider developers with the rare rags-to-riches stories such as that of Steve Demeter, a bank programmer who earned $250,000 in two months of 2008 after launching a simple game called Trism.

But just as many from the frontlines of the dot-com revolution were left on the battlefield, not all of those writing for the tiny screen will make it big.

“It’s just getting ridiculously overwhelmed right now because of all these stories about people getting rich. It’s few and far between,” says solo developer Barry Egerter of Ontario, who hit the number-one spot on the best-selling paid app chart last Thursday.

Even though Mr Egerter made it to the top, it took a year’s work. He has quit his day job, and earned perhaps $200,000 before taxes with Live Cams, a 99-cent app that allows users to look through the lenses of internet-controlled security cameras. Mr Egerter expects his ride at the top to be like that of most who make it there: exciting and brief. “If things don’t work out, I may just find another desk job,” he says.

Rather than the small individual developers, it is the biggest companies that are faring the best. Electronic Arts, which has been one of the largest-grossing games sellers for a decade, had four of 2009’s top-five selling App Store games.

EA, which has expanded both organically and through acquisition, in 2005 made its largest bet until then by buying early phone gaming company Jamdat for $680m. And last month it bought London-based Playfish, one of the three revenue-leading specialists in social games – and one developing a bigger iPhone presence – for about $300m.

Zynga, the biggest social gaming company by revenue with FarmVille and Mafia Wars, has stripped-down versions of some games on the iPhone.

The advantages the bigger companies have over the smaller developers – scale, expertise and marketing know-how – mean there may not be any “app millionaires” in the years ahead, says Matt Murphy of venture capital firm Kleiner Perkins Caufield & Byers, who runs a fund devoted to backing iPhone developers.

But small groups that have multiple successes will be pursued by bigger companies. “There will be teams of people who get a hit franchise acquired for north of $1m,” Mr Murphy says.

The business models are changing so rapidly, though, that it is hard to make firm predictions.

Advertising money adds to the income from direct app sales, and ads inside games helped the three biggest mobile advertising networks globally, AdMob, Quattro Wireless and Millennial Media, to double revenues in the past year.

Through trial and error, apps developers have discovered that having a free version of a program would help them market a fuller, paid version – the “freemium” model.

And just months after it started allowing supplemental purchases within paid applications, Apple agreed in October to allow purchases within free apps, creating a new path to profit.

Ideally, some of the most sophisticated apps makers would like to become services themselves, so that they have the same sort of ongoing relationship with customers that Apple does.

But if they do that, it is unclear how vital Apple will be to the equation.

Tomorrow: apps beyond Apple

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