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About Those iPhone App Store Revenue Numbers

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I don’t reckon it’s a stretch to say that Apple’s App Store has been more successful that even Apple ever imagined. It entered a market that had been completely controlled by carriers and handed the keys over to third-party developers to make their own apps. Just over nine months later, over 35,000 of those apps had been made which have been downloaded over a billion era. So it’s startling when you see numbers like the ones Lightspeed Venture Partners published days gone by, estimating that Apple had made only somewhere between $20 and $45 million dollars in revenue off of the App Store. Startling, until you dig deeper.

First, I’m not convinced these numbers are sound. While the author, Jeremy Liew, makes some excellent calculations, the numbers are still drawn largely from a survey. He did this because Apple doesn’t relief really numbers for App Store sales further than the huge numbers like a billion downloads. But Apple has given out what are probably better numbers than the survey results numbers over the past year. For example, back in August, none other than Steve Jobs himself said the App Store was pulling in $1 million a day in sales.  Now, that was a long time ago, and the App Store has grown tremendously in view of the fact that then, but let’s go with that figure for argument’s sake.

$1 million a day means that Apple would be making $300,000 a day (its 30% cut). Extrapolated out over 10 months (the approximate age of the App Store), that would be about $90 million. That’s already double Liew’s high-end estimate. And Jobs would not throw a number like this out here lightly. Apple, if anything, likes to set expectations low and exceed them. For Jobs to throw out that figure and say that the App Store could one day be a billion dollar a year industry, to me means that he thinks it will at least be that huge of a business.

Yes, it seems likely that the average price of apps have fallen in view of the fact that August given the rise of $0.99 apps, and probably that the ratio of free-to-paid apps has grown, but that’s why the daily sales angle is an fascinating one to look at. No matter what ratios changed, here are also a ton more apps life downloaded — both paid and free — than here were in the first 30 days. And so if anything, this $1 million a day sales mark is probably low compared to what it’s at now.

And here’s other numbers that recommend this as well. Back in March, one analyst cut into Apple’s December quarter numbers and came out with $200 million in app sales just for that quarter. That’s probably way too high for a number of reasons — namely that it’s hard to know the ratio of iTunes/App Store/iPod accessory sales, which are all clumped collectively. But even if it’s way off, that’s just for the quarter, and it’s another sign that Liew’s numbers are probably way too low.

But even at $100 million, the App Store would still be a small drop in Apple’s bucket when it comes to revenue. But what Liew fails to mention in his report is that this is what Apple has always been expecting. In view of the fact that day one of its unveiling, Apple has said that it did not plot to a lot of money off of the App Store. Sure, that may have been slightly disingenuous (again, Apple likes to set expectations low), but Apple’s stated rationale behind taking a 30% cut was to be able to keep the App Store up and running — not to make money.

Apple is a company notoriously mindful of its high margins, so why doesn’t it care about making a lot of money with the App Store? Dan Frommer of Silicon Alley Insider has this exactly right: it’s because the App Store is one of the, if not the, key driver of two products that are very high margin: The iPhone and the iPod touch. The App Store is based around the exact same model as its parent iTunes Store, which sells music at a very small markup in order to sell iPods. I don’t reckon I have to clarify how well that has worked.

Another thing to reckon about is even with the success of the iPhone, Apple still has a very small percentage of the mobile market. Depending on the moves it makes over the next couple of years — namely getting into China and getting off of its exclusive AT&T deal in the U.S. — this percentage could grow by leaps and bounds. When that happens, App Store sales will continue to grow and thus, revenue from the App Store will continue to grow. Remember, the App Store is still not ever a year ancient, and for much of that time, the number of iPhones and iPod touches in the market was nowhere near what it is even today. The download pace is quickening, and the revenue pace must be as well.

Yet another variable is that Apple takes $99 a year from developers who develop for the App Store. Here are tens of thousands of those. Again, not a huge chunk of money, but it all adds up.

But the largest thing that these numbers draw attention away from is the right potential of the App Store. The reason for that is, it’s not here yet. When in-app payments launch with the iPhone 3.0 software this summer, the sky could literally be the limit in terms of how much both developers and Apple could make off of this. Yes, Apple will still take a 30% cut of these sales. And given that it has to do basically nothing more than it’s already doing to get that extra 30% — it’s pure gravy.

I reckon Liew’s numbers are well not more than the actual revenue numbers, but no matter if its $50 million, $100 million or $200 million, that’s not a huge amount of money for a company that has nearly $30 billion in cash in the bank. But vacant forward, that number is only vacant to increase both as the platform expands and as in-app hold come into play. That’s not terrible for a company that just sought after to make enough money to keep the App Store running.

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