One Third of Top-Grossing iPhone Apps Are Free

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When Apple began allowing free apps to include in-app purchases a little over a year ago, it opened the door for freemium models to flourish. And they are doing just that, with about a third of the top-grossing iPhone apps using a freemium model.

A look at the top-grossing iPhone apps today finds 34 of the top 100 apps are free, but make their money through in-app purchases of mostly virtual currencies as well as other premium features.  Remco van den Elzen, CEO co-founder of analytics firm Distimo, said he believes in-app purchases now represent about 30 percent of all iPhone App Store revenue. “We’re seeing more developers implement more in app-purchases especially with games,” he said. “Freemium Apps are also picking up significantly. A lot of developers realize it’s a successful model.”

App Annie, another analytics firm, confirmed the growth of freemium apps. In January, there were just two freemium iPhone apps in the App Store among the top 50, said App Annie. By the end of October, that number had grown to 10, and now there are about 20 apps among the top 50 grossing apps with in-app purchases.

The numbers behind freemium apps also got a boost from Apple, which changed the way it calculated revenues from freemium apps on Nov. 1, allowing them to be more accurate and consistent, said Bertrand Schmitt, CEO of App Annie. Schmitt said freemium apps began to take off in May and June as more developers began employing in-app purchases and consumers became more aware of it. The model works because it gives people an easy way to try an app and then allows developers to up-sell them on added features or in-game currencies, which help users buy things or move the game along.

Freemium apps are still a small percentage of apps overall. Distimo said the percentage of free apps with in-app purchases has increased from 1.10 percent in the second quarter to 1.34 percent in the third quarter. While the percentage of freemium apps is low, it’s striking to see how much money they’re actually raking in for the top apps.

The ten top-grossing iPhone apps include Restaurant Story (#3), Tap Zoo (#4), NBA Game Time 2010-2011 (#7), Haypi Kingdom (#9) and Kingdoms at War (#8).  Restaurant Story, Tap Zoo and Empire Story all launched within the last couple of months, but older games, such as Haypi Kingdom (Jan. 2010) and Kingdoms at War (Sept. 2009), also continue to rake in significant revenue. The free titles are edging out established moneymakers like Plants vs. Zombies, Madden NFL and Doodle Jump.

But it’s not just gaming apps. The New York Road Runners Marathon App, which allowed real-time tracking of the marathon, went for $3.99, and shot to No. 1 Sunday during the race. The NBA Game Time app also hit No. 1 on Nov. 1, with its ability to receive videos, highlights, radio feeds advertising free. Distimo said the largest portion of in-app purchases are in games (3.8 percent) and social networking apps (4.3 percent).

Meanwhile, the iPad, with its generally higher price points for paid apps, isn’t as lucrative for freemium apps compared to paid apps. None of the top 100 apps on the top-grossing list are free though there are free iPad apps with in-app purchases.

The growth of the freemium model on the iPhone shouldn’t be a surprise. Freemium has been popular in Asia for years with pioneers like Nexon leading the way, and has also been the model of choice for Facebook games, helping Zynga achieve a $5.5 billion valuation. IPhone games publisher Ngmoco switched early to a freemium model and hit No. 1 on the top-grossing chart with Eliminate Pro, a shooter game. Now success is becoming much more common for app developers as the pace of freemium app adoption picks up.

Free apps won’t work for every category, and they still need to provide people with plenty of use and not make them feel like they’re being cheated out of a good experience if they don’t spend money. The best of them increasingly seem to have the formula down when it comes to drawing in hordes of customers and monetizing a small percentage of them to great effect. Schmitt said top freemium developers are finding they can make more money with in-app purchases than advertising. As we’re learning more and more: Free can definitely pay the bills and more.

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