Marshall McLuhan popularized the idea of the “global village” in the 1960s through his books The Gutenberg Galaxy: The Making of the Typographic Man and Understanding Media. McLuhan, who is credited with predicting the concept of the Internet decades before it actually existed, described the instantaneous movement of information from every quarter to every point at the same time, enabled by electric technology. The result is that the globe contracts into a village.
Post-Internet, the explosive adoption of iOS and Android smart devices best extends his theory. Enabled by this new computer-mediated platform is the distribution of apps, from every quarter to every point, at the same time. Consider that in the United States today, right now, teams from Finland, Japan, Israel and the UK share top grossing positions alongside U.S. teams in the iTunes App Store and Google Play. Today, in the top Chinese app stores, one can find American, French and Japanese companies alongside Chinese companies for a top share of revenue. And in the top UK app stores, companies from Serbia, Finland, Japan, China and the U.S. are counted among local UK companies as top revenue generators.
Welcome to the new global village built on a foundation, per Flurry’s count, of three quarters of a billion active iOS and Android smart devices, simultaneously running across more than 220 countries and territories that will generate revenue approaching $10 billion in 2012. This report focuses on the further shrinking of the global village, driven by the prolific spread of global smart devices over the last 12 months. We show which countries have the largest active smart device installed bases, are experiencing the fastest growth and how the distribution of app usage is shifting to become increasingly international. For its analysis, Flurry uses data from more than 250,000 applications that it tracks, running on more than 750 million devices worldwide. With its application coverage, Flurry estimates that it can reliably detect over 90% of all iOS and Android devices active in the world during a given month.
Let’s start by looking at which countries make up the world’s largest app markets.
The chart above shows the top markets by their active iOS and Android user bases during October 2012. The US and China tower over the next group of top markets by at least five times. And while the U.S. has added a whopping 55 million net active devices since October 2011, China has added a dizzying 125 million, a figure that totals the sum of the UK, Japan and South Korea’s combined, current active user base. Flurry predicts that China will surpass the U.S. in total installed base by the end of Q1 2013, delayed only by the upcoming massive holiday season that will spike the U.S. installed base.
The chart above shows the growth in active devices per country between October 2011 and October 2012. China leads the world with an impressive 293% year-over-year growth rate, spurred by the potent combination of its vast population and rapidly growing middle class. For this chart, Flurry selected countries that had a minimum of a half a million active devices as of October 2011. Compared to prior Flurry international growth studies, we note that a new set of fast-growers has now entered the top 10 including Colombia, Ukraine, Venezuela and the Philippines, further demonstrating the shrinking global village.
Lastly, we look at the volume of application usage across the globe tracked by Flurry, which we estimate comprise of approximately one fifth of all worldwide app sessions on iOS and Android, the world’s largest cross-platform sample. Year-over-year app sessions in the U.S. declined as a proportion of WW sessions between October 2011 and October 2012, from 48% to 29%. The balance of the top 10 (ranks 2 -9) grew from 27% in October 2011 to 39% in October 2012. The rest of the world also made gains from 25% in October 2011 to 32% in October 2012. In total, 71% of all app sessions now take place outside the U.S.
Over the last century, the distribution of the world’s information has migrated from print (e.g., books and newspapers) to mass media (e.g., radio and television) to computer-mediated media (i.e., the Internet). Over just the last five years, however, we’ve taken the most significant step forward in the evolution of media distribution with the unprecedented adoption of smartphones and tablets: portable, broadband-connected super computers connected to The Cloud. Applying McLuhan’s point of view that “the message is the media,” apps are the new message.
The iTunes App Store and Google Play now offer more than 600,000 apps each. And Apple’s most recent earnings call revealed that the company has paid out more than $5.5 billion to developers since the launch of the App Store. With unprecedented consumer adoption of iOS and Android devices, low barriers to entry for developers and throngs of paying customers, Apple and Google have created massive economic opportunities for developers.
In particular, iOS and Android have made it possible for independent developers and mobile app start-ups to thrive. As industries mature, however, we expect established players and brands to invade from other platforms, depressing opportunities for many early entrants. Along with this, we expect to see market revenue concentrate among fewer larger players. For this report, with these typical patterns in mind, Flurry modeled worldwide mobile app revenue, revenue sources and revenue concentration among top-ranked mobile apps on iOS and Android. For this report, we used data from over 200,000 mobile applications in the Flurry Analytics data set. Let’s start with market growth.
The chart above compares worldwide revenue generated by iOS and Android apps in 2011 vs. 2012. For 2012, we modeled the first half of the year based on actual data, and then applied growth rates to estimate the rest of the year based on the proportion of revenue observed in 2011 between the first and second half of that year. In 2011, Flurry calculates that iOS and Android applications generated a total of $5.4 billion across premium, in-app purchase and advertising revenue. Advertising made up 18% of the revenue. In 2012, Flurry forecasts that revenue will grow by 60% over the previous year, reaching $8.7 billion. Advertising is the fastest growing revenue category with growth forecasted at more than 100%, from $980 million in 2011 to $2 billion in 2012, delivering 23% of 2012 total revenue. Likewise, premium and in-app purchase revenue is also increasing at a rate of 50%, from $4.5 billion in 2011 to $6.7 billion in 2012.
Next, we look at the concentration of revenue among top ranked apps from 2010 to 2012. Please note that for this analysis, we focus on premium and in-app revenue only, excluding ad revenue. Comparing these two years shows how dramatically the distribution of revenue is shifting across the long tail. Starting on the left, in 2010, the green part of the column shows that 28% of revenue was generated by the Top 25 ranked titles on iOS and Android. In 2012, we estimate that the Top 25 will drop to commanding about half of total revenue, or 15%. Likewise, comparing the grey sections of each column, the rest of the Top 100 apps will drop from earning 27% of revenue in 2010 to 17% of revenue in 2012. Conversely, revenue generated by the long tail significantly grows from 2010 to 2012. Comparing the blue sections, any apps ranked beyond the top 100, we observe that long tail revenue explodes from earning under half of all premium and in-app purchase revenue in 2010 to over two-thirds in 2012.
Finally, we rank the revenue generated by each of the top 100 positions across the iTunes App Store and Google Play. For each year, we set the revenue generated by the top spot at 100%. Then, relative to the top spot, we take the percent each position generates from the 2nd rank all the way through the 100th. By normalizing each curve in this way, we can compare the relative revenue generated per ranked position in the top 100 per year. For example, we can see whether ranking number 50 generates more relative revenue in 2012 versus 2010. Most interestingly, this kind of analysis shows whether the developer “middle class” is better off today than its “parents’” generation.
Now that we have relative earning power mapped per ranked position, we can study the heights and shapes of the curves. Comparing 2010, the green curve, to 2012, the blue curve, we notice that two things are happening simultaneously. First, each position in the top 100 is more valuable now, which makes sense because the market has grown overall. Second, the blue 2012 curve is flatter. Unlike the green 2010 curve, which steeply drops during the top 10 ranked positions, indicating the wealth is more concentrated at the top, the blue 2012 curve stabilizes shortly after the top 5 positions and then maintains a high, gently sloping plateau all the way through the 80th position, where it then settles just above the green curve, ostensibly continuing to “fly” at an altitude higher than that of the green curve out across the long tail. In short, this means that the middle class has more earning power, taking a substantial share of total wealth in the economy.
With the app economy booming, companies like Facebook, Twitter and Zynga are under tremendous pressure from investors to seize the opportunity presented by this new platform. However, with software delivered in the form of downloadable applications, unguaranteed network connectivity, different consumer behavior and control exerted by platform providers such as Apple and Google, the mobile app landscape creates different, meaningful challenges for companies attempting to enter the app space from other platforms. Combined with a marketplace that reduces the power of brand recognition (e.g., apps are free for consumers to try risk free), market wealth unexpectedly continues to shift to the long tail, funding continued R&D, advertising budgets and other activities that increase their competitive strength. The age of middle-class app developer has arrived. In this economy not only are the rich getting richer, but so too are the poor, and gaining on the rich.
The economic boom created by Apple and Google through their iOS and Android platforms has precipitated a renaissance among entrepreneurial developers. With some of the lowest barriers to entry in the history of software development and distribution, apps are getting built and downloaded at breakneck speeds. Earlier this month, Apple crossed a record 25 billion downloads from more than 550,000 available apps. Google announced in December 2011 that it had crossed 10 billion downloads from 400,000 available apps.
As markets mature, rational economic behavior emerges. Even the most passionate, idealistic software start-ups focus increasingly on markets where revenue generation is highest. In this report, Flurry compares the ability for app developers to generate revenue per user across the major app stores. We examine a basket of top-ranked apps that have similar presence across iOS, Amazon and Android. Their primary business models are in-app purchase, which is the revenue type we compare for this analysis. Additionally, earlier research by Flurry found that the in-app purchase revenue model generates the majority of revenue for apps. Combined, these apps average 11 million daily active users (DAUs). We measured their revenue per user over a 45-day period, from mid-January through the end of February 2012.
The chart above compares revenue generated per user across iOS, Amazon and Android app stores. We start by taking the revenue generated per user in the iTunes App Store and setting it to 100%. We then compare the relative revenue generated per active user from Amazon and Google to the amount of revenue per active user generated by the iTunes App Store. Doing so, we find that Amazon Appstore revenue per active user is 89% of iTunes App Store revenue, and Google Play revenue per active is 23% of iTunes App Store revenue. Another way to interpret the results is that, for the same number of users per platform, every $1.00 generated in the iTunes App Store, will also fetch $0.89 in the Amazon Appstore and $0.23 in Google Play. These results mirror those of a similar analysis conducted by Flurry last December, where we found for every $1.00 generated per user in the iTunes App Store, developers generated $0.24 per user in the Android Market.
Amazon's bet to fork Android in order to put consumers into their own shopping experience on Kindle Fire appears to be paying off. Showing its commerce strength, Amazon already delivers more than three times the revenue per user in its app store compared to what Google generates for developers.
For some possible insight, let's consider the DNA of each company. Apple runs the highest revenue-per-square foot generating retail store on the planet as well as the successful iTunes store. Amazon, who invented the one-click purchase, perfected online shopping with data, efficiency and customer service. Google’s strength is in scalable online search engine and advertising technology. Running a store, retail or digital, has not been Google's traditional core competency.
As developers make decisions to support different platforms, the ability to generate revenue per user will always be a key factor. Based on revenue potential, we expect to see an increasing number of developers support Amazon. We also believe that companies such as Samsung, the leading Android-supporting OEM, could also consider emulating Amazon’s move to fork Android. Google, who recently saw the departure of Eric Chu, the most public-facing proponent of Android Market improvement, will need to reduce commerce friction to maintain strong developer support. From an ecoystem perspective, the emergence of Amazon as an additional distribution channel appears to be a boon for developers.
[UPDATE: For clarity, I went back through this post and specified, where appropriate, including in the title of the chart, that the revenue comparison in this analysis was per user, not total revenue generated. Peter]
Apple and Google have ushered in a new era of mobile computing whose consumer adoption is rivaled only by the PC revolution of the 1980s and the Internet boom of the 1990s. Since 2007, more than 440 million iOS and Android devices have been activated, with 1 million additional devices across both platforms now activated each day.
On top of this massive and rapidly expanding platform, a software battle is raging. With very low barriers to entry, and friction-free digital distribution, companies have been feverishly building, shipping and updating applications, intent on capturing and monetizing consumer audiences. To illustrate this growth, let’s look at the number of available apps in the App Store vs. the Android Market.
This chart is comprised of publicly available data. Where data wasn’t available for the same month in both markets, we estimated the number of available apps based on interpolation (e.g., approximating a point between two existing data points), or by looking at the growth rate leading up to a specific month. The number of apps is growing significantly in both markets. And while the App Store has attracted more apps to date, the Android Market is closing the gap. Now, let’s turn our attention to total app downloads.
The chart above sums Android Market and App Store downloads per month. Starting on the left, with January 2010, we show downloads per month every three months, until we reach October 2011. In October 2011, we estimate over 2.6 billion apps were downloaded. The number of apps now downloaded is four times greater than this time last year, in October 2010. With the holiday season under two months away, the 3 billion-mark download per month mark surely will be shattered this December. Month-over-month, app downloads have been growing at an astounding rate 11.4%. With app downloads growing swiftly, even faster than the number of apps being made available, let’s now look at app retention.
This chart shows the percent of consumers that continue using an app, since their first use, over 12 months. At the far left, marked as month “0,” 100% of a consumer cohort begins using an app. After three months, 24% of them continue using. After 6 months, this percent shrinks to 14%, and, by 12 months, only 4% are left. For this analysis, we compiled data from 25 apps downloaded a cumulative 550 million times.
With app downloads increasing month-over-month and app usage not only climbing, but also surpassing web usage, we know that consumers are both discovering and using apps more than ever. And while the industry often talks about discovery as a problem, we think the real problem is traffic acquisition. To understand this, we turn to the web.
Online, website marketers don’t stop marketing after they get a consumer to visit the site only for the first time. They can get in front of the consumer in various ways again, and spur a return visit by having the consumer click on a link. Typically, online, a visit starts from an organic search result, but search doesn’t exist for apps the same way, and consumers seem to browse more, especially given touch interfaces. The closest thing to search in the app world is a consumer browsing the top ranking lists, which represents “popularity” in a similar way to top ranking organic search results. However, in the app world, top rank lists are more like “paid search” since heavy advertising is what typically launches an app to rank high, at least for a while.
Further, always trying to rank high, as a tactic, is not only untargeted and expensive, but also suffers from diminishing returns. First, the bar required to make the top 25 keeps rising, as the installed base of consumers grows and more apps compete for a fixed number of top spots. Regarding diminishing returns, an app can only appeal to first-time-users each time it ranks. It’s a pure first-time acquisition tool. App users don’t re-launch apps when seeing them in the top rankings. They need to go to their app icon and launch from there. So as an app’s installed based grows over months, even years, the relative number of incremental users that can be added from ranking in the charts continues becomes relatively smaller. In other words, over time, an app is better off targeting its much larger installed base of users to increase usage. This is the equivalent of traffic acquisition.
The key challenge is that developers lack the tools to bring traffic back to their app, post-download. And, therefore, the industry has a traffic acquisition problem, not a discovery problem. Only when compelling ways of connecting with existing app users are established, that allow the easy re-launch of an app, can app makers address retention through marketing, and fully control their own traffic acquisition.
In this new age of mobile computing, the long-term success of Apple and Google depends largely on their ability to amass third-party developer support. Developer innovation improves the way consumers connect with others, entertain themselves, work, and more, all through apps. The more a platform provider can attract unique and superior content, the more appealing the hardware device appears to consumers prior to purchase and the more loyal they become afterwards.
Last week, Apple reported that it had sold a cumulative 200 million iOS devices. Currently the App Store contains more than 425,000 apps, with total downloads surpassing 15 billion. From the developer’s point of view, the most attractive aspect of the iOS consumer audience is that they all have credit cards on file with iTunes. This means 100% of them can seamlessly pay for apps and in-app purchases. All told, the App Store offers a powerful business opportunity to developers and has attracted leading mobile developer support.
At the same time, Google’s more open Android OS distribution strategy has garnered the support of numerous notable OEMs, spawning a rapidly growing installed base of Android devices that is gunning to overtake the iOS installed base. With broader distribution across more carriers, Android device activations surpassed 500,000 per day tweeted Andy Rubin last month. This growth is up from 300,000 activations per day reported just last December. In terms of apps, the Android Market has 200,000, and Google said it crossed the 4.5 billion downloaded application mark in May.
At Flurry, we regularly track developer support across the various platforms that compete for their allegiance. When companies create new projects in Flurry Analytics, they download platform-specific SDKs for their apps. Since resources are limited, the choices developers make in building for different platforms strongly signal their confidence in those platforms. They are literally investing their R&D budgets in the hopes of generating future revenue. In total, over 45,000 companies use Flurry Analytics across more than 90,000 applications. For this report, we compare Q1 to Q2 new project starts.
Studying the numbers, it’s readily apparent that Android has lost developer support to iOS. Specifically, Android new project starts have dropped from 36% in Q1 to 28% in Q2. Overall, total Flurry iOS and Android new project starts grew from 9,100 in Q1 to 10,200 in Q2. Of note, this drop in Android developer support represents the second quarter-over-quarter slide, which follows a year of significant, steady growth for the Google-built OS. Over the course of 2010, Android developer support had steadily climbed each quarter, peaking at 39% in Q4 2010.
Considering the events that could have precipitated this shift in developer support, Flurry has identified two probable causes:
1. iPhone Launch on Verizon: With iPhone’s arrival on Verizon in February 2011, three and half years after launching on AT&T, Apple closed the most significant vulnerability gap in its U.S. distribution, and likely worldwide. In fact, with its lengthy exclusive distribution agreement of iPhone on AT&T, it could be argued that Apple itself gave Android the opportunity to reach critical mass on other carriers, most notably Verizon. In that time, Google, Verizon and a host of OEMs worked hard and fast to push Android devices as an alternative to AT&T’s iPhone juggernaut. With Verizon’s launch of the iPhone, the pendulum appears to have swung back in favor of iPhone over Android development.
2. iPad 2 Launch: Establishing an installed base of more than 20 million tablet devices in less than one year, the iPad success story has been compared to taking a buzz-saw to the PC industry. Apple’s iPad shipments, from its last disclosed quarter, were higher than the initial first two quarters of iPad availability. Apple has additionally claimed that it is seeing the “mother of all backlogs.” Building efforts lag behind consumer demand for the device. We believe that wholesale consumer acceptance and adoption of tablets, which just a year ago was questionable within the industry, is further luring developers to build for iPad instead of Android.
While Android’s device installed base continues to surge, ongoing work to improve the Android Market layout and to push forward the adoption of Google Checkout are critical to its success. PayPal’s recent acquisition of mobile payment player, Zong, demonstrates that Google may not be enabling consumer payment quickly or well enough, which is inviting 3rd party competition and creating billing fragmentation. Furthermore, the development community is concerned about the rising cost of deploying across the Android installed base, due to the double whammy of OS and storefront fragmentation. With developers pinched on both sides of the revenue and cost equation, Google must tack aggressively at this stage of the race to ensure that Apple doesn’t continue to take its developer-support wind.
To free, or not to free
Among the most common questions we get from game developers is whether the free-to-play (a.k.a. freemium) model makes sense for their next game. For teams that have always charged players up-front with a premium pricing model, the thought of distributing games for free makes them very uncomfortable. I made the switch myself when I joined a free-to-play social games startup as a Studio Director in 2009, so I’m well aware of both the anxiety and the opportunity.
To best answer this question, I decided we should do it the Flurry way: with hard data. To do so, we compared the revenue generated by pricing model, freemium vs. premium, among the top 100 grossing games in January and June of this year. Premium simply means charging for the download (e.g., $0.99). Freemium describes the free-to-play model, where the game is given away for free, and then the consumer can purchase virtual currency and/or virtual goods through in-app-purchases. Tracking over 90,000 apps with its analytics service, Flurry can measure the amount of revenue generated per ranked position in the App Store top grossing category. The chart below compares the proportion of revenue generated by each model.
Inspecting the chart, we see that free games already represented 39% of the games revenue generated by Apple’s App Store in January, but that number has since risen to 65% last month. The traction of the freemium business model is undeniable and growing fast. In fact, with games often occupying more than 75% of all top 100 grossing apps in the app store, it’s the single most dominating business model in the mobile apps industry today.
Unleashing the beast
In the old paid world of video games, success was measured by multiplying the number of units sold by the unit price, the traditional retail model. In the new world of digital games distribution, it’s all about how many players you can keep engaged with your free game, followed by how many compelling spending opportunities you can provide them.
When you make your game free and add in-app purchases, two powerful things can happen: first, more people will likely try your game since you’ve made the “ante” zero; and second, you will likely take more total money, since different players can now spend different amounts depending on their engagement and preferences. It’s not unheard of for individual players to spend into the tens of thousands in a game they like.
Flurry data shows that the number of people who spend money in a free game ranges from 0.5% to 6% depending on the quality of the game and its core mechanics. Although this means that more than 90% of players will not spend a single penny, it also means that players who love your game spend much more than the $0.99 you were considering charging for the app. And since you gave away the game for free, your “heavy spender” group can be sizable.
Free-to-play is here to stay. If you’re a game studio, you simply need to understand how to take advantage of this game-changing opportunity. In future posts, I’ll cover strategies and tactics you can employ to make this powerful model work best for you.
In the United States, Thanksgiving weekend sales are closely studied to predict consumer spending for the upcoming holiday season. This year, NPD Group reported that the share of shoppers for brick-and-mortar increased by about 6 percent while online shoppers' share grew by 44 percent. Further, according to IBM’s Coremetrics, Cyber Monday online sales already exceeded this year's Black Friday by 31%.
Similarly, over the Thanksgiving weekend, Flurry measured strong growth for new smartphone devices and application downloads. Note that because the mobile device and application download markets continue to grow at accelerating rates, we used a week-over-week vs. year-over-year comparison.
The chart below shows the number of new devices detected by more than 55,000 applications in the market which include Flurry Analytics. The bulk of growth is driven by Apple iOS devices and a number of recent break-out Android devices, including the Samsung Galaxy S, Motorola Droid 2 and LG Optimus S. Flurry detects a new, unique device the first time an application which includes Flurry Analytics is launched on that device.
Reviewing the chart above, new devices detected on Black Friday jumped by 57% over the previous week's Friday. Total new device growth for the holiday weekend, compared to the same four-day period from the prior week, was 31%. Interestingly, this surge demonstrates that consumers appear to be buying and activating smartphones early in the season for personal use. This early indicator suggests that strong spending on smartphones as gifts throughout the season should continue.
App consumption over Thanksgiving weekend also showed solid growth. However, as the chart below shows, downloads on Thanksgiving Day led all days of the holiday weekend with 54%, versus new handset growth which led on Black Friday. At 39% growth, Black Friday applications were also strong. Total week-over-week download growth was 25%.
Christmas is historically the strongest season of app downloads to mobile phones. As consumers receive new handsets, they immediately personalize their handsets with new content. With early growth indicators for both handset and download growth, Flurry predicts Holiday 2010 will deliver another record-breaking season for application consumption and mobile device sales.
Mass market consumer adoption of Apple iOS and Google Android mobile devices has attracted an unprecedented volume of content, delivered through applications. Because the majority of these applications downloaded are also free, many ecosystem players have assumed that advertising revenue models will dominate how these apps are monetized.
However, new analysis by Flurry reveals that the sale of virtual goods is overtaking advertising in top categories on the iOS platform. Note that because Google’s Android Market does not yet support in-app purchases (micro-transactions), this model is not yet viable for Android apps. This study was conducted using data collected from a sample of leading iOS social networking and social gaming applications, with a combined reach of 2.2 million daily active users.
Reviewing the chart above, the majority of revenue generated from advertising occurs during the 2009 holiday period. During 2010, however, revenue increasingly shifts from advertising to virtual goods sales until reaching a proportion of more than 80% from virtual goods. Admittedly, the idea that consumers acquiring virtual swords, gold coins and respect points can outperform advertising seems counter-intuitive; however, this phenomenon is neither new nor unique to the iOS platform.
In fact, virtual goods sales already represent the primary source of revenue for social gaming on Facebook. Michael Pachter, Wedbush Morgan Securities video game analyst, reports that social gaming has grown from approximately $600 million in 2008 to $1 billion in 2009. Further, he forecasts that social gaming will generate nearly $1.6 billion this year, and grow to more than $4 billion by 2013.
One factor responsible for low advertising levels may be advertising agencies’ slow acceptance of mobile as a media platform, with skepticism about the viability of social games and social mobile media as a channel for advertisement. With these agencies representing and guiding the biggest brands, they appear to be missing a meaningful opportunity to reach a mass market of consumers who have adopted new platforms and forms of content.
As social games continue to expand their consumer reach, demonstrating their ability to attract an audience beyond teenagers using iPod touches, their relevance will increase. In fact, with mobile social game critical mass now rivaling TV prime time viewership, Flurry anticipates a stronger ad revenue generation through mobile social networking and games in 2011. Over the next 18 to 24 months, Flurry predicts strong revenue growth from both virtual goods and advertising revenue from social gaming. We say play on!
More than 30,000 games have been released in the iPhone App Store since its launch in July 2008. With titles that consistently dominate the Top Paid and Top Grossing lists, there is no question that the games category is the most lucrative category in the App Store. This report focuses on how Apple has affected the market share of U.S. video game and portable game revenue since the introduction of games sold through the App Store for iPhone and iPod touch.
Using publicly available market data, provided by NPD (mostly through Gamasutra's Behind the Numbers series), Flurry calculated U.S. console and portable game software sales for 2008 and 2009. We also estimated Nintendo DS and Sony PlayStation Portable game software sales, which make up the significant majority of the portable category, in order to compare these to iPhone game sales. We estimate iPhone game sales using a combination of data made available by Apple and using ratios and calculations from an aggregated set of data that we track through our analytics service.
We begin with a look at the U.S. gaming market, which NPD defines primarily as console and handheld. PC gaming, which has been declining over the last decade, and is currently approximately 5% of the total U.S. market, is not included. Also, for this analysis, we ignore online gaming revenue (e.g., virtual goods and subscription fees from social networking games and massively multi-player online games).
Below is our estimation of market share by platform among console, portable and iPhone platforms for 2008 and 2009.
NPD Group shows that combined U.S. console and portable software revenue was approximately $11 billion and $9.9 billion in 2008 and 2009, respectively. After estimating portable sales, we were able to back into console revenues. We then added our own estimates for iPhone game revenue, which total $115 million and $500 million for 2008 and 2009, respectively.
With these figures, our main finding is that iPhone (and iPod touch) is a gaming platform to be reckoned with. Controlling 5% revenue of a $10 billion industry in just a year and a half is significant. From a market share perspective, console games lost ground to portable platforms and iPhone. While the downturn in the economy may have dampened sales of the more expensive console games category, there is no denying that iPhone has generated substantial revenue and entered strongly into a mature industry.
More interesting to us than iPhone's impact on U.S. gaming was its impact on the portable category, which we estimate totaled $2.25 billion and $2.55 billion in 2008 and 2009, respectively. Michael Pachter, managing director at Wedbush Morgan Securities and a prominent video game analyst, suggests "iPod touch is the most dangerous thing that ever happened" to game publishers. As prices come down for the iPod Touch, and games sold through the App Store continue to have lower price points, more of the young gaming generation may switch to Apple devices over Sony PSP and Nintendo DS for gaming. Further, Apple has squarely positioned the iPod Touch as a gaming machine. Check out a TV spot here to get an idea.
From what we calculate, consumers are downloading iPhone games in droves. Comparing iPhone against Sony and Nintendo games sales shows that Apple has taken nearly one fifth of the portable market in 2009, largely at the expense of Sony PSP. With Sony PSP Go, Sony's latest effort to revive its portable sales, having fallen short of expectations, Sony finds itself now challenged by two competitors in this segment.
Looking forward, with the iPad set for an April release, the traditional gaming giants may yet again be disrupted by Apple. With companies like Electronic Arts and Gameloft joining Apple on stage during its January unveiling of the iPad, the tablet device will enjoy elite game publisher support on day one. Further considering data that Flurry released in its latest Smartphone Industry Pulse report, where we determined that more than one third of iPhone game developers come from the traditional gaming industry, Apple has already established broad third-party game publisher support. With the iPad featuring a larger screen and more processing power, games on the tablet take a step closer to PC and console gaming. Unless the other major video game platform providers (i.e., Sony, Nintendo and Microsoft) respond accordingly, Apple could continue to roll up video game market share.
Each month, Flurry leverages its data set collected from iPhone, Android, BlackBerry and J2ME applications to identify, study and share industry trends. Flurry tracks over 20,000 live applications and over 2 billion user sessions each month. Applications that include Flurry Analytics have been downloaded to more than 80% of all iPhone, iPod Touch and Android devices. Additionally, each day, approximately one of out every five downloaded applications from the App Store and Android Market include Flurry Analytics. The Pulse report is generated in the first half of each month, looking back at data up through the previous month. Different than other reports that provide updates to the same set of statistics each month, Flurry explores different business themes and topical issues relevant to mobile developers and other industry players.
I. Money Talks: App Store vs. Facebook Platform
Since the App Store launched in July 2008, 35,000 unique companies have released applications, which translates to 58 new companies launching apps each day. This appears to be the largest amassing of 3rd party developer support by any development platform in such a compressed timeframe. For example, comparing the number of applications created for the Facebook platform to the App Store over their respective first 9 months, Apple boasted 25,000 apps to Facebook's 14,000. Comparing respective growth in apps after 14 months, Apple had widened its gap to 85,000 apps over Facebook's 33,000. At the App Store's 18 month mark, reached this January, the number of iPhone apps was reported to have exceeded 140,000 compared to the 60,000 we estimate Facebook had reached over its first 18 months. We believe the difference in growth rates can be attributed to the App Store providing better monetization possibilities for application developers than Facebook did through its first 18 months. Developers, like all rational companies, pursue markets where the path to revenue generation is clear.
II. iPhone Developer DNA: O Brother, Where Art Thou (from)
Thinking about the sheer number of developers with applications in the App Store, we had the practical question: where'd they all come from? It's as if they've appeared over night. Has Apple created a magical new economy for application development start-ups, attracted existing content creators and brands from other platforms, or both? In this report, Flurry examines the genealogy of iPhone application content; that is, their platforms of origin. This sheds light on the mix of skills, motivations and frames of reference different content providers bring to the App Store economy, and which are winning.
To generate a sample that allowed us to compare across categories and pricing models (paid, ad supported, micro-transactions, etc.), Flurry created an index that took into account application rankings across both top 100 paid and top 100 free categories, additionally adjusting for frequency of use and user retention over time. Doing so enabled us to evaluate a free application's ability to retain a user base, important for generating advertising revenue past the download. Based on this index, we generated a list of 200 applications and identified six distinct "heritage" categories:
1. Native iPhone: Companies founded to create applications for iPhone (e.g., ngmoco, PageOnce)
2. Traditional Media: Companies established on Film, TV, Print and Radio (e.g., Disney, TBS, NYT)
3. Mobile: Companies having started on J2ME, BREW, BlackBerry, etc. (e.g., Digital Chocolate, eBuddy)
4. Retail & CPG: Brick-and-mortar companies or ones that manufacture goods (e.g., The Gap, DKNY, Kraft)
5. Online: Companies who began on the web including e-Commerce, social networks, online gaming, streaming music, etc. (e.g., Google, eBay, Facebook, Pandora, PopCap, Zynga)
6. Traditional Gaming: Video game companies from console, portable or PC (e.g., EA, Activision).
The pie chart below shows a breakdown of developers making top applications based on their heritage:
On any new media platform (or channel), entrepreneurial companies enter early in an attempt to establish themselves before a wave of large brands enters the space. At the same time, bigger companies typically take a wait-and-see approach when evaluating new channels and only invest after the ROI for the channel is proven. This combination of small and big company behavior, when evaluating new platforms/channels, creates the window for entrepreneurs to enter early and potentially disrupt big companies before they arrive. The iPhone platform is no exception.
Despite the fact that the App Store is now maturing, reaching its two year anniversary this summer, we are encouraged that native iPhone application developers are still relevant, representing 20% of the heritage pie, the second largest category. This means that the barrier to entry is still low enough for start-ups to enter and innovation to flourish. However, those days may be numbered as "discoverability" has become a significant issue, and now "marketing muscle" is starting to count more in the App Store. This favors brands and larger companies with resources to spend their way in. We are seeing signs that big brands are becoming more active, now perceiving that the iPhone has reached critical mass. With iPhone and iPod Touch now exceeding 70 million units world-wide, we expect 2010 to be the year of brands entering the iPhone. Going forward, we will especially see more movement by established brands from media, retail and CPG. In particular, traditional media (News, Books, TV, Film, Music, etc.) growth will accelerate aggressively with the introduction of the iPad.
The first and third largest heritage categories, Online and Traditional gaming, will likely see little change, or perhaps even a decline in "heritage share," since they were early iPhone entrants and their properties have largely already discovered.
Taking a deeper look at gaming, the iPhone's largest revenue generating category, shows the following distribution of developers based on heritage:
Given the specialized skill-set required to build a compelling game, it's no surprise that traditional game companies lead this category, including companies such as Electronic Arts and Activision. At the same time, native iPhone developers (i.e., brand new gaming start-ups) command the second largest category. The success of new iPhone game developers makes sense given the fact that the traditional gaming industry has long had pent up demand from garage and independent developers looking for new platforms where development and distribution costs allow them to compete. We've seen innovation from companies such as Tapulous, Backflip Studios, ngmoco and others. Online, the third largest segment, includes companies such as PopCap, Playfish and Zynga who have naturally expanded distribution to iPhone given its similar characteristics of being "casual gaming" friendly. Tied for third with Online, Traditional Media (e.g., licensed properties like SpongeBob and Disney Fairies) have long held a place in gaming since brands seek to use the gaming channel to promote their core properties (e.g., upcoming movies) and earn incremental revenue. The most surprising category is mobile gaming which only commands a 12% share. However, investigating more deeply reveals that most successful companies on mobile, prior to the iPhone, did not originally start on mobile. Rather they came from traditional gaming, online and traditional media platforms. Simply put, few pure-play mobile gaming start-ups exist. Some exceptions include Gameloft, Glu Mobile and Digital Chocolate.
Finally, we examine the News Category more closely:
Like gaming, the creation of compelling content in News is a specialized and costly operation. To source and report quality news, companies often have to span various media such as TV broadcast, radio and print, which further increases cost. It's therefore no surprise that Traditional Media dominates the News category, controlling nearly two thirds. For traditional media (e.g., New York Times, ABC News, NPR, etc.), the iPhone represents a large channel through which to distribute their existing content. The small incremental cost of expanding the distribution of Traditional Media's core content, and the attractiveness of reaching an educated, affluent and tech-savvy audience, makes iPhone the perfect platform through which to serve news. Looking forward, the iPad creates an even greater opportunity to increase reach because its larger screen size works better works for newspaper and magazine layouts, as well as TV broadcast.
Native applications represent the second largest category, due to innovation from native iPhone applications that allow personalized filtering, automatically work around gaps in connectivity to pull new content more seamlessly or aggregate and optimize new reading on the iPhone (e.g., Stitcher Radio, Byline, Conserva, etc.). Online, which represents a large share of news consumption in its own right, makes up the third largest category of news on the iPhone.
Finally, while Online is currently in 3rd, we believe the iPad's form factor will deliver a more familiar browsing experience. With ever-increasing wifi coverage, online media players will continue to increase their share just as the Internet cannibalized Print media in the 1990's and 2000's.
III. iPad Anticipation Continues to Stoke Developer Activity
After measuring that developers integrating Flurry analytics into iPhone OS applications in January increased by nearly three times over December, we were eager to follow up on this trend after February data rolled in. The January spike represented the single largest spike in Flurry history. Since iPad runs on a version of iPhone OS, Flurry automatically supports iPad applications (and we've done further testing on the SDK to verify this). This is also how Flurry was able to see application activity on the iPad since last October.
Now, over six weeks since Apple announced the iPad, Flurry continues to measure a significant increase in iPhone OS new application starts within its system. To measure, we took a "before vs. after" snapshot of monthly iPhone OS project starts in our system (iPad runs on iPhone OS 3.2). For the "before" we averaged August - December, 2009 monthly new iPhone app starts within Flurry, and for the "after" we did the same for January - February, 2010.
Historically, we've seen development spikes around new hardware announcements and releases including Motorola Droid for Android development and iPhone 3GS for iPhone OS development. iPad appears to be having a similar, albeit amplified effect, which we attribute to the excitement generated by the impending launch of of the device, now set for April 3 in the U.S. A large proportion of the applications we are seeing are custom ports of existing applications tailored for the iPad. With over 140,000 applications in the App Store, developers who modify, or build from the ground up, their applications early on for the iPad may have the opportunity to establish an early presence on this new device and drive more downloads. To wit, Apple announced today that it will include a dedicated "iPad" app category in the App Store.