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Apple (s aapl) made quite the fuss about the App Store download total reaching the 1 billion milestone, complete with a contest and what was probably a fairly expensive advertising campaign. It seemed appropriate at the time, but I’m now wondering if promoting the landmark achievement didn’t cost more than it was actually worth.
Jeremy Liew, the managing director of Lightspeed Venture Partners, reported in a blog post that, according to his estimates, Apple couldn’t have made more than between $20 million and $45 million on all those apps. That’s not a whole heck of a lot, when you consider that maintenance and advertising could carry a hefty expense.
Liew talked to developers and others in the industry to arrive at a rough estimate of what the ratio of paid to non-paid apps in the App Store was, and came up with between 1:15 and 1:40. He then used O’Reilly’s recent survey about the mean price for apps, which is $2.65 (which he points out is probably much higher than the weighted average mean), and then multiplies that by 25 million to 50 million paid apps, what you get when you apply the ratio estimates Liew arrived at in the beginning.
Total revenue for all paid apps would then fall between $70 million and $160 million. Apple, according to its revenue-sharing model, then gets 30 percent of that, leaving it with between $20 million and $45 million. Liew also notes that if you do the same calculations with a weighted average app price of around $1.50, which is probably closer to the truth, the number drops to only $12 million to $27 million. $12 million probably doesn’t even cover the App Store’s advertising budget to date, let alone operational costs.
There are a lot of speculative numbers there, but even given the generous range of revenue possibility, that would mean the App Store is far from being a cash cow for Apple. It would, at best, be a minor direct contributor to its bottom line, and at worst actually an income drain that costs more to run than it takes in. Of course, even if it is operating at a small loss, that’s to be expected for a venture in its first year, so Apple wouldn’t really be acting out of the norm there. Sony sold its PS3 consoles at a loss initially, counting on the software revenue to cover the difference.
Apple seems to be doing just the opposite. If Liew is correct, it’s using the App Store as an incentive to get buyers to pay up for iPhone and iPod touch hardware, which is where the real money is made. That’s great news for us Apple consumers, because as long as the store keeps bringing in hardware buyers, Apple will make sure developers get lots of new hardware feature updates to play with to entice those buyers.