Much of my recent talk has been about the emergence of mobile in-app payments, largely from the perspective of developers. But events last week underscored how big this revenue source also is for mobile platform providers Apple, Google and Research in Motion, who typically take 30 percent of each transaction. All three signaled how seriously they take in-app purchases, and provided a good reminder of how much power they’re willing to wield in controlling their ecosystems:
- Apple informed publishing content owners that going forward, they’ll need to include an in-app payment option through iTunes in their offerings. The issue came to a head when Sony said its Reader app was rejected after Apple apparently began enforcing its reported existing rules on in-app payments. As my colleague Mathew pointed out, this was a reminder to content publishers that it’s Apple’s way or the highway.
- Google stepped up with its promised in-app purchase system for Android apps, which will allow developers to enable micropayments inside their apps. The feature will go live by the end of this quarter and should give developers a way to monetize their apps beyond paid downloads, which haven’t been very popular on Android, and advertising, which doesn’t provide much pop for smaller apps. Developers can use Google Checkout or carrier billing when available.
- Research in Motion updated its app store BlackBerry App World with its own in-app payment system. The new SDK offers payment through credit cards, PayPal and carrier billing.
Combined, Apple, Google and RIM are showing they understand that in-app revenue is important in a couple of ways. It gives their developers more ways to make money, which helps them deepen their commitment to a particular platform. And when executed well, in-app revenue can be a lucrative business for the OS.
Controlling the Revenue Gold Mine
Apple’s new rule enforcement isn’t just aimed at book and magazine publishers. It’s targeted at all app makers who are increasingly getting paid through in-app payments. While almost everyone funnels their purchases though Apple, the option to process payments through a browser, like Amazon’s Kindle does, could have been an invitation for other developers to try that route. By tightening the reins on the ecosystem, Apple may sound alarms at the FTC, or at the very least prompt gripes that it’s being greedy. But it shows that Apple is intent on controlling this revenue source.
Meanwhile Google’s new in-app payment system will make things harder for existing payment providers like Zong or Boku. If developers want to implement in-app payments, they’re left with Google Checkout or carrier billing. Google is too close to carriers to deny them direct billing. But it can position itself ahead of other payment providers, who will still be able to offer services to developers, but will have to compete against Google in the process. Google says it’s on track to make $1 billion off of mobile, mostly through search ads. If Android developers start seeing the same success iPhone developers have seen, this could signal a big shot of revenue.
Meanwhile RIM is also showing it recognizes the value of in-app purchase. It still has a ways to go to get its App World clicking with developers, but it also understands that in order to do that, it needs to give them monetization options, especially when other platforms are doing so.
Developers Driving Downloads
Developers, too, are getting more interested. A recent developer survey by Appcelerator and IDC found that 52 percent of developers were looking to implement iOS in-app payments and 53 percent planned to include PayPal in-app payments. The reason? Developers appear to be seeing clear results. Many I’ve talked with say they’re making more money off of apps by making them free and monetizing them through in-app purchases:
- Vince McDonnell, the developer behind Zombie Farm, one of the top 10 grossing iOS apps last year, said he is making more money and driving more downloads since he went free with in-app payments. The added revenue has helped him hire 30 new developers for future games.
- Andrej Nabergoj, CEO of Outfit7, which makes the Talking Friends series of app, said he’s been able to convert 10 percent of his free app customers to a paid version using in-app payments.
- Ngmoco VP of Marketing Clive Downie said the company was able to get 20 times more interactions with users by going free and they made more money as well. The move to freemium helped Ngmoco get bought by DeNA for about $400 million.
The predictions for the app business are now going through the roof with in-app payments playing a big role in monetization. Gartner predicts that mobile app store revenues will hit $15 billion this year. Bango, a mobile analytics and billing provider, said in-app revenue totaled just 5 percent of all mobile revenue, largely due to limitations on many platforms. But as more platforms open up this year, Bango predicts in-app charging will grow more than 600 percent to account for close to 30 percent of all mobile app payments.
And just to be clear, this is a very big revenue opportunity. As we reported, about one-third of the top grossing iPhone apps were freemium apps. That’s 30 percent going back to Apple on the sale of each of item. Distimo reported that by the end of last year, iPhone in-app payments were almost equal to download revenue. Flurry reported in October that payments for virtual goods sales was already generating far more revenue on iOS than ads were. This is after in-app payments were announced in October of 2009. And Xyologic, a mobile research firm said the percentage of new iOS applications with in-app payment grew from 4 percent in October to 7 percent in December.
Big Bets on Big Revenue
It’s in this light that we can see why the platform makers are so interested in this revenue source. It’s largely easy money. If they can set up a solid payment system and make it frictionless like Apple’s iTunes, it’s an incredible form of tax revenue based on the popularity of their platform. Facebook is also moving along this very same route; it recently announced that all developers had to include Facebook Credits in their apps. And unlike the 30 percent taken off for mobile app downloads, a cut of in-app payments is more profitable because it’s often virtual good sales which doesn’t require the same type of manpower compared to reviewing and monitoring apps in an app store.
Mobile ad revenue is still going to be an important area for platform makers. But the road is more challenged, even with better performing location-based and rich-media ads. And paid downloads might be harder to come by as free options flourish. So the big bet is increasingly on in-app payments.
The rush to in-app purchases will to cause ripples with some content publishers who don’t want to share 30 percent of their revenue with a platform maker and cede control of the consumer relationship. App makers are generally happy with the option to monetize through in-app payments, though I wonder if some will, at some point, question the 30 percent cut. As my colleague Mike Wolf points out, some app developers may emphasize HTML5 web apps where they don’t have to hand over a part of their profits. But for now, with in-app purchase still very much in its early days, most everyone involved seems content to make sure this money train keeps gathering steam. And platform makers are making sure they’re firmly at the front, directing this train.