Papering Over App Store Problems

This series of posts is about enabling sustainable businesses on the App Store. In Part 1, I discuss why Paper and other productivity apps may not be doing as well as you might think. Part 2 explores why casual games, in contrast, are a sustainable business, but not a differentiator for platforms (I added a follow-up here). Part 3 analyzes why Apple in particular seems hesitant to enable sustainable businesses on the app store.

On the occasion of the launch of Stratechery, I set Cosmonaut to iPad, and drew this:

I drew this to illustrate the first Stratechery post
I drew this to illustrate the first Stratechery post

Admittedly, compared to some of the stuff Made with Paper, my sailboats are nothing special. But for me, it was honestly a feeling I really didn’t anticipate: I drew something, and it didn’t suck!

Paper is a transformative, device-defining app, and has been awarded accordingly by both Apple and the design industry. According to App Annie, as of June 21, Paper ranked 7th in the Productivity category according to downloads (119th overall after a recent jump), and 4th in revenue (108th overall).

By every visible measure, FiftyThree, the makers of Paper, are the definition of an app store success story, and this week they closed a Series A round of financing led by Andreessen Horowitz.

It’s easy to see this as a big endorsement of the App Store: startup creates a breakthrough product, gets noticed, gets funding, changes the world. And perhaps that’s the path FiftyThree is on.

But there’s another scenario that may be in play, and if I were Apple, this round of funding and FiftyThree’s plans going forward should be a yellow flag that the App Store may not be as strong as it could be.

Some pertinent facts about this round of funding and the circumstances leading up to it that deserve a closer look:

  • As recently as January, FiftyThree had the same five employees they started with. In the intervening five months, they have quadrupled the size of their team.

    The positive spin is that business is good, ideas are large, and amazing products are on the horizon. The more pessimistic view is that FiftyThree has decided they need to “Go Big or Go Home”. In other words, while they were an App Store success story, the revenue they generated wasn’t sufficient to support five employees, so they’ve decided to take their shot at massively increasing revenue.

  • Last October, Paper added the Mixer for a $1.99 in-app purchase. This was the first new additional item for sale beyond the original pencil, marker, pen and paintbrush (available for $1.99 each or $6.99 for the set).

    Then, this May, Paper gained the ability to zoom in a really unique way. It was a major feature request, yet surprisingly, it was completely free. No in-app purchase required. Perhaps FiftyThree just loves their customers. Or perhaps this is the sign of a new business model.

  • According to FiftyThree’s blog post announcing the funding, they are looking to focus on collaboration and hardware.

    The positive spin is that these are really interesting areas to take a creation app; imagine the possibilities!

    But the truth is I really struggled to find the positive spin; collaboration and hardware, while interesting, seem counter to the original Paper vision:

    It seems to me that Paper was originally about inspiration and ideas easily and simply created, not collaboration and finicky hardware. But, and I think this is the crucial point, collaboration and hardware have obvious paths to sustainable monetization.

    • Collaboration could require a subscription service that will provide revenue over time
    • Hardware can be sold for much higher prices than $1.99 (The Pogo Connect, which Paper supports, sells for $79.95 plus accessories).

This is what I think happened to FiftyThree and Paper:

The FiftyThree Timeline. Months mark the founding, Paper releases and updates, and fundraising.
The FiftyThree Timeline. Months mark the founding, Paper releases and updates, and fundraising.

With a small amount of seed funding, the original five employees set out to build Paper, the best place to capture your ideas. After launching a year later, they began to reap the rewards through in-app purchases. They kept improving the app, and came out with a significant update in October – the Mixer – for $1.99.

And then they realized that they were five people living in New York City without an obvious route to sustainable revenue.

The problem for Paper is the same for all productivity apps in the App Store: there is no way to monetize your existing users. Look at me:

The revenue FiftyThree has made from me (after Apple's 30%) versus the value they have created.
The revenue FiftyThree has made from me (after Apple’s 30%) versus the value they have created.

My use of Paper is an essential part of stratechery, yet I needed to only pay $8.99 for two in-app purchases, for which I never need to pay again. That’s a hell of a bargain, but it’s ultimately unsustainable.

I wrote extensively about the problems facing apps like Paper in Adobe’s Subscription Model and Why Platform Owner’s Should Care:

The challenges facing Adobe are shared by almost all productivity apps.

  • Productivity apps are indispensable (and thus priceless) to some users
  • Productivity apps usually have high learning curves
  • Well-done productivity apps require significant investment up-front
  • Productivity apps require regular maintenance and upgrades

Unfortunately, app store economics don’t really work here.

  • If you have a low price, you need massive volume to make up for the upfront costs
  • If you have a high price, users are much less likely to buy your app, especially since there is likely a learning curve
  • If you can’t monetize over time, your users are extracting MUCH more value than you are receiving in revenue. That’s great if you’re a user, up until the company you love sells out because they can’t make money. Sparrow is the canonical example here. How many Sparrow devotees would gladly pay $5 a month to have the app available and continually updated?

Trials do ameliorate the pain a little, particularly if you pursue the high price option, but they don’t address the time mismatch: as a productivity app becomes more valuable, the developer doesn’t get a dime of more revenue.

There is so much more Apple (and the other platform owners) could be doing to improve this situation; paid updates and app-store supported subscriptions (beyond Newsstand) would be great places to start.

Moreover, it’s something Apple should be investing in. The App Store remains the largest moat around iOS; apps like Paper simply don’t exist on Android. Perhaps FiftyThree planned to go in this direction all along, and if so, good for them. But if they originally wanted to make a living on the App Store, and can’t, then their future probably includes more platforms than just iOS (a loss for Apple) and a chance of outright failure (a terrible loss indeed).

Of course, there were no significant changes to monetization options in iOS 7; the team was too busy. But were they busy on the most essential things?

This is a three-part series on enabling sustainable businesses on the app store.