My iPhone apps | Apptism.com (Photo credit: Bart Claeys)
For a long time Apple maintained that apps were a way of selling iPhones, and then iPads, rather than a significant profit source in their own right. Last quarter it began breaking out Apps and iTunes (along with software services) into a separate revenue line - and no wonder! The global Apps market is going stratospheric.
Just counting the four major apps stores the market is quickly reaching an annualized total in excess of $10 billion, with $2.2. billion of Apps revenue in Q1 2013 flowing into Apple, Google, Microsoft and BlackBerry. Apple has 74% of that market, according to research from Canalys.
A different analyst firm, Asymco, in mid 2012, estimated annual revenue at the App Store to be around $4 billion historically but the Canalys' estimate puts it at closer to $7.5 billion going forward (Because Apple counts software services in the same income line making it difficult to pin down Apps store income).
The Canalys data covers paid-for apps, in-app purchases and subscriptions. Perhaps the most interesting insight in the research is that the mature smartphone markets, Europe and the USA, where device sales growth is slowing, still show robust growth in apps' sales. In other words the overall smartphone opportunity could still e growing healthily for Google but especially for Apple.
At the same time, emerging markets are also growing strongly.
Some of the strongest growth was seen in emerging markets, such as South Africa, Brazil and Indonesia, helped not least by the growing base of smart device users in those countries. But robust growth, both in revenue terms and download volumes, was seen in mature mobility markets, such as North America, up 8% and 6% respectively, and Western Europe, up 8% and 10% in Q1.
This is clearly no longer a market that Apple and Google maintain for the sake of the ecosystem and phone sales, though Canalys point out Microsoft and BlackBerry urgently need innovative apps highly attuned to their specific target markets.
The current incarnation of apps markets, from an innovation standpoint, must surely rate as the most dramatic and vibrant innovation ecosystem ever seen.
But from a broader smartphone standpoint, it also shows that American companies dominate the top tier of the smartphone industry and that they are likely to draw increasing value from their apps stores as consumers in emerging markets increase their purchases of smartphones.
It also becomes clearer why Samsung is beginning to resent Google's ownership of its OS, given that Google retains 90% of the profit it derives from apps sales.
In effect Apple and Google have created an industry that they now own, one that competitors like Samsung and Huawei are locked out of for the moment. In contrast Samsung retain over 60% of the value added from components that go into its new S4 smartphone and 40%+ from their other smartphones.
I put it to Tomi Ahonen, a veteran of the mobile sector and globally recognized expert on mobile trends that American and Europeans might still rue their lack of manufacturing capability (I'll be running a longer version of the interview with Tomi through this week).
If we look at the USA and Europe and mobile telecoms specifically, the innovations in the services and applications side are enormous, with plenty of huge commercial successes led by Rovio's Angry Birds out of Finland.
So partly, I'd say it makes sense that the Western countries have focused on the services and software side of the mobile revolution, as that is where the big profits are likely to be. And partly, I'd say that is where Western competences lie, from the creative arts and skills which are far more necessary in such innovations, understanding creative industries like advertising, television, music, gaming etc and bringing those types of experiences to consumers now increasingly on smartphones, tablets and other portable digital media platforms.
I've been reluctant to buy that argument but the Canalysis research suggests he is right. It also underlines the dilemma for Apple as it contemplates launching a phone product into the lower reaches of the market to capture revenue from people coming into the smartphone enabled mobile web. Google Play has by far the larger number of downloads compared to Apple but the owners of lower priced phones are simply not buying apps or songs like high-priced iPhone owners do.
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