The freemium model rules for consumer apps. But alternatives will emerge

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Freemium became the standard business model for mobile game vendors in 2013, as my colleague Loren Hockenson wrote in December, and two months into the new year the model shows no signs of slowing down. Forbes’ Ewan Spence reported that at one point in December premium titles accounted for a whopping 90 percent of the top 20 apps in Apple’s App Store are built on the freemium model.  Distimo recently reported that 98 percent of revenues in Google Play were generated on freemium apps. And we’re not just talking games here: A recent report from App Annie determined that non-game apps generated that non-game apps are increasingly leveraging the freemium model.

There are several key reasons that have given birth to the rise of the freemium model, of course: Apple’s App Store and Google Play are gigantic markets teeming with knock-offs and garbage offerings, so it’s no surprise that gamers are reluctant to pay even 99 cents until they’ve taken an app for a spin. Publishers have to get paid for the apps they’ve invested to build, and coercing users into spending a dollar or two as they play along extends the shelf life for those users as well as creating a potentially sizable revenue stream.

The new wave of low-end smartphones

Meanwhile, data continues to suggest that iPhone users are more willing to spend for mobile content and apps than their Android-toting counterparts. That makes sense, of course, because iPhones are still largely high-end devices while Android gadgets can also be low- and mid-range smartphones. Users who are less willing to spend big money on a smartphone are probably less likely to pay a premium for top-of-the-line apps. And it’s worth noting that advertisers are willing to pay substantially more to reach iPhone users than Android users.

I was thinking about all those factors as I watched the race for the low end of the smartphone market heat up at the opening day of Mobile World Congress this week in Barcelona. Nokia made perhaps the biggest statement, as predicted, by introducing a new lineup of Android-based handsets aimed directly at emerging market and starting at roughly $120. Mozilla, which may be gaining some modest traction in those same emerging markets with Firefox OS, unveiled an initiative to bring handsets running that platform to market for as little as $25. And one vendor reportedly showcased an Android phone that already sells for a mere $35.

The promise of HTML5-based platforms and better mobile ads

Many of these handsets are targeted at promising markets like India and Brazil, where smartphone penetration remains very low. Consumers in those markets may be even more eager to embrace the freemium model that dominates the mobile app market in North America, Western Europe and pretty much the rest of the smartphone world. It’s important to note, though, that Firefox OS looks to be the first web-based mobile operating system to gain any reasonable traction in those emerging markets. If it can gain some solid footing, and if similar platforms like Ubuntu Touch and Jolla’s Sailfish can somehow find an audience, developers in those emerging markets may suddenly have much more flexibility in terms of business models because they will be able to address a broader swath of handsets for substantially less money.

Meanwhile, tablets, hybrids and oversized smartphones will increasingly provide opportunities for developers to monetize their wares beyond the freemium model.  The bigger screens serve as a canvas for more sophisticated, immersive games for which developers can truly charge a premium.  Just as importantly, that added real estate will give marketers a chance to approach gamers in innovative ways that aren’t seen as interruptions or distractions. We’re certainly going to see the freemium model continue to drive mobile app revenues for at least the next few years. But I expect to see some innovative, compelling new business models during that time as well.

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