Observations on the App Annie Index

App Annie posted their quarterly app report this week, and there were three big-picture trends that jumped out at me.

1. Google Play is getting over the monetization hump, and it’s likely due to in-app purchase

From the report:

Over the past quarter, Google Play has achieved higher growth rates than the iOS App Store for both downloads and revenues. While Google Play reached close to 90% of the iOS App Store downloads in Q1 2013, the iOS App Store maintained its strong lead in monetization, earning about 2.6x the app revenue of Google Play. In comparison, the multiple was roughly 4x for Q4 2012 overall.

The iOS lead may still be strong, but 4x to 2.6x is a pretty substantial decrease. Unsurprisingly, most of that revenue growth comes from games.

Games remained the leading growth driver, even more so for revenue. By Q1 2013, the category had grown to cover approximately 70% of revenue in the iOS App Store and 80% in Google Play.

I think Play is closing the gap because of in-app purchase.

Over the last year in-app purchase has become the preferred app store business model, especially for games. This makes sense: it’s much easier to spend money on something you are already engrossed in than it is to spend on an unknown quantity. The small-picture consequence is that free games with in-app purchases dominate the top-grossing charts in both stores. A bigger result, from a strategic standpoint, is that in-app purchase seems to be solving the Play Store’s attach problem.

One of Apple (and Amazon’s) biggest advantages is their huge base of attached wallets. It is so much easier – and thus, so much more likely – for customers to simply enter a password to make a purchase than it is to find their credit card and enter their information, especially when free apps are widely available.

The lack of credit card attach was a significant factor in the Play Store’s poor monetization record, and I don’t think it’s an accident that the rise of in-app purchase as a monetization model is correlated with the Play Store making significant gains in revenue vis a vis the iOS app store. The incentives for in-app purchases are so powerful that it overcomes the attach challenge. Users will go to the trouble of adding a credit card if they are already committed and invested in a game. They did it for Facebook games, and now they’re doing it for Google Play. And, you only need to get over the attachment hump once.

This is a significant development.

2. Google Play is not very sticky

While Play is monetizing significantly better, the vast majority of that spending is going towards games – 80%, as opposed to 70% for iOS.

That’s fine as far as it goes, and it may increase the incentives for games developers to build for Android sooner, but I don’t know that it is making Android users more loyal to the platform.

The idea that software purchased for a particular platform raises switching costs is an old one; it was certainly a factor in Windows dominance. However, I don’t think that all apps are created equal. Games are much more “faddish”, for lack of a better word. Users engage in them very deeply for a short period of time, and then move on to the next title. They are unlikely to return to an old game, or even notice when it’s gone.

This means that when users are considering a new phone, they’re unlikely to be swayed by the number of games they have purchased for their current platform. Thus, given that most of the purchases on Play are games, I would argue that Android is not achieving much lock-in, despite the increase in revenue.

On iOS, on the other hand, only 70% of revenue is from games, and both productivity and education are in the top 4. Productivity and education both feature higher-priced apps that are more likely to be used for an extended amount of time. They are the sorts of apps that quickly become indispensable: think of your favorite to-do, sketching, or calendar app.

These types of apps are much “stickier” and significantly increase switching costs.

  • They are more expensive
  • The user experience is much more important to the app, and much more dependent on the underlying OS
  • The best productivity apps are often made by individual or boutique developers, and thus less likely to be cross-platform
  • They are much more ingrained in every day life, meaning the thought of going without your favorite productivity app is much more disconcerting than going without the flavor of the day in gaming

iOS clearly has a significant revenue advantage in these types of “sticky” apps, and there is little sign of this advantage decreasing, especially as apps like Mailbox continue to launch on iOS first.

3. Some observations on markets

The country rankings are of particular interest:

iOS Downloads iOS Revenue Play Downloads Play Revenue
1 U.S. U.S. U.S. Japan
2 China Japan South Korea South Korea
3 U.K. U.K. India U.S.
4 Japan China Russia U.K.
5 France Australia Russia Germany

A few observations:

  • Much has been written about Google’s China problem. There, Android is dominant but is sold as the base layer with a plethora of Chinese services on top; Google services are nowhere to be found. And so we see in these rankings: for Play, China is nowhere to be found.

    For iOS on the other hand, China is impressively strong (and growing). This gives further credence to the idea that China Mobile is the single greatest opportunity for iPhone growth.

  • Japan is strong for both stores; the iPhone’s second greatest opportunity for growth is NTT Docomo.

  • Samsung has an incredible home court advantage in South Korea.

  • India is very high for Play; it’s increasingly difficult to understand Cook’s dismissal of the country, although the complete absence of carrier subsidization surely played a part. It’s a poster child for the “Apple needs a low-cost iPhone” idea.

  • Android’s customer base in the U.S. is clearly inferior to the iPhone when it comes to monetization. This jibes with data showing little cyclicality in Android purchases.

    US Smart Sales - Benedict Evans
    US Smart Sales – Benedict Evans

    It seems increasingly clear that Android purchases are people who need a cell phone, go to their carrier, and pick out what appeals to them (or is pushed on them). They may download some games, but that’s about it.

    iPhone users, on the hand, want the iPhone, and are highly driven by launch dates and seasonality. They are much more likely to see the iPhone as a central object and invest accordingly, both in time spent on the device as well as money spent in the app store.

    It’s not surprising the U.S. is unique: the carrier subsidization model means an iPhone is cost-competitive to Android. Probably the single biggest question for iPhone growth (beyond the distribution deals noted earlier) is:

    • Will Apple make a low-cost iPhone?
    • Will customer response to a low-cost iPhone in the rest of the world mirror customers in the U.S.?