Apps Rocket Toward $25 Billion in Sales; Players in Quickly Growing Business Scramble to Figure Out Best Ways to Attract Users and Turn a Profit

Updated March 3, 2013, 8:37 p.m. ET

Apps Rocket Toward $25 Billion in Sales

Players in Quickly Growing Business Scramble to Figure Out Best Ways to Attract Users and Turn a Profit

By JESSICA E. LESSIN and SPENCER E. ANTE

How big of a money maker are apps? What country’s GDP is the size of the global app economy? How does app use compare to TV in terms of time spent per day? WSJ’s Jason Bellini has answers.

Nearly five years after Apple Inc. AAPL -2.48% kicked off the mobile-apps craze, the industry is booming.

App stores run by Apple and Google Inc. GOOG +0.62% now offer more than 700,000 apps each. With so many apps to choose from, consumers are estimated to spend on average about two hours a day with apps. Global revenue from app stores is expected to rise 62% this year to $25 billion, according to Gartner Inc. IT +0.14%

The apps industry has matured in some respects. Some of the Wild West tactics of five years ago—like scams to accrue more downloads—have given way to more order as Apple and others tighten their rules. App developers are more methodical about marketing their apps and focusing on the few apps that work best.For every Instagram, the wildly popular photo sharing app that Facebook Inc.FB +1.94% bought for $1 billion last year, there are hundreds of thousands of apps that don’t catch on.

As the battlefield shifts to new geographies, new categories and new devices, developers are still trying to figure out which business models are the most profitable.

The apps industry “is like cars at the turn of the last century,” said Simon Khalaf, chief executive of mobile analytics firm Flurry Inc. “You see the growth of roads and know they’re going to be big. But it is still early days.”

TinyCo Inc., a San Francisco-based game maker that released its first mobile game in 2010, is experiencing both the promise and the perils of the apps industry. Today it has 13 mobile games and revenue is doubling. But every day is a battle to acquire users, said Michael Sandwick, manager of strategic partnerships.

The cost of acquiring users through advertising continues to rise by double digits year-over-year, he said, sometimes more sharply when bigger companies seek to introduce a new game. That has forced the startup to better tune its spending based on data about how people are discovering their games.

“There’s an incredible amount of saturation,” said Mr. Sandwick.

Store had a commanding lead with around 140,000 apps for phones. The market was heavily focused on the U.S.

Apple and Google Inc.’s Play store are today neck-in-neck in terms of smartphone apps catalogs and usage, said analysts. Apple still dominates in terms of money made by more than three to one, according to App Annie.

And there are others also offering app stores—to different degrees of success—including Microsoft Corp., MSFT +0.54% BlackBerry BB.T -2.50% -maker Research In Motion Ltd., and Amazon.com Inc. AMZN +0.56%

The app boom has spread to markets such as China, Japan and South Korea. That has led to some apps like social-networking service NHN Corp.’s Line leapfrogging U.S. app-makers in revenue by selling virtual items like stickers.

And apps are expanding their reach on devices. They’re no longer just for phones, but tablets and televisions too. The apps are taking advantage of hardware improvements like sensors that can tell an app how fast a person is moving.

In the past two years, consumers have doubled the time spent with apps to about two hours a day, according to Flurry. Yet people churn through apps fairly frequently, making it hard for developers to retain users.

About 63% of the apps used daily now differ from those used daily a year ago. Moreover, consumers focus on a handful—roughly eight apps—at a time.

Michael Duda, a New York-based marketing consultant and investor, said he regularly uses about 12 of the 70 or so apps on his Android smartphone that make his life easier, including Twitter, LinkedIn, Sonos, AmericanExpress and J.P. Morgan Chase JPM -0.02% .

“A bunch of the apps I downloaded sounded cool,” but he said but most don’t add “utility to my day-to-day life.”

App makers can have a difficult time breaking into a business dominated by incumbents.

Only 2% of the top 250 publishers in Apple’s App Store are “newcomers,” versus 3% in Google’s Play store for Android apps, according to research firm Distimo.

“The bar is so high to build something that is special and valuable and easy to use,” said Jake Mintz, co-founder Bump Technologies Inc., a four-year-old app that lets people share media across phones by touching them. To be more useful, the Mountain View, Calif., company has branched out to share media across laptops too, he said.

The mobile apps industry is booming, with Google and Apple now offering more than 700,000 applications each in their respective stores. But for every Instagram, there are thousands of duds. The WSJ’s Jessica Lessin tells us what makes an app successful in today’s competitive market.

Others app makers are coping with the shifting landscape by being more selective about what they build and how they promote their apps.

Michael Bayle, senior vice president and general manager of mobile at Walt Disney Co.’s DIS +1.36% ESPN, said the company recently decommissioned 23 of its 30 Apple apps it had been maintaining, and kept alive its most popular ones.

ESPN dropped an app for Los Angeles sports but kept its popular ScoreCenter app that publishes scores, news and standings from sports leagues, teams and players world-wide.

“It’s easy to make an app but the real expense is in maintaining it,” Mr. Bayle said.

Some app companies are scrambling for new revenue streams and expanding beyond the current leading money pots: ads and in-app purchases.

When music-discovery app Shazam Entertainment Ltd, introduced its first cellphone app about seven years ago, its main revenue came from deals with mobile operators and licensing its audio-recognition technology.

Today it has five revenue streams, including selling ads in apps, a paid premium version of its app and charging television advertisers to integrate Shazam campaigns.

“We have seen revenue drivers change over the years,” said chief revenue officer Doug Garland, declining to comment on its results. “We are figuring out where the best opportunities are and doubling down.”

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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