Uber API launch validates the “Gurley scenario”

[With the release of Uber’s API, their ploy to achieve world domination has just gotten a lot more probable. The Uber API allows developers to add physical transport to apps as easily as ads or push notifications. Uber as a TaaS (Transportation-as-a-Service) platform.]

After Uber’s Series D round in June, a captivating discussion ensued about the valuation of the ride-sharing company. In one corner, Aswath Damodaran, the NYU finance professor who literally wrote the textbook on company valuation. In the other, Bill Gurley, considered by Forbes to be one of technology’s top dealmakers, and investor in Uber.

In a blog post, Damodaran summarizes the “duelling narratives” (sic) as follows:

“I viewed Uber as a car service company that would disrupt the existing taxi market (which I estimated to be $100 billion), expanding its growth (by attracting new users) and gaining a significant market share (10%). The Gurley Uber narrative is a more expansive one, where he sees Uber’s potential market as much larger (drawing in users who have traditionally not used taxis and car services) and much stronger networking effects for Uber, leading to a higher market share.”

In short, while Damodaran sees Uber as an attractive company, he doesn’t think it’s worth the valuation used in its last funding round. Gurley, however, sees a market potential for Uber that’s 25x as high. With the release of Uber’s API, Gurley’s narrative just got a lot more probable.


Uber just outgrew the taxi market

Several commentators (including a Gartner analyst) present Uber’s API as a new channel slash marketing tactic to draw new users to the service. While this is indeed one of the end goals, there is much more to Uber’s API strategy.

[tweetable]Uber can get all the users it needs. To grow to its full potential, it needs new use cases more[/tweetable].

Wherever Uber establishes itself, users flock to the system. Usually, when traditional taxi services become aware of their new competitor, controversy ensues, which leads to even more brand awareness. When taxi drivers went on strike in London in June, Uber saw a 850% rise in sign-ups.

Uber itself say poetically that it targets “every app with a map” (thanks Daniel Pink for unleashing that marketing tactic onto the world). In all seriousness, that little rhyme doesn’t do justice to the raw potential for innovation of a ‘bits-to-atoms’ transportation API. In fact, the release of its API might mark the moment that Uber stops being a taxi substitute and becomes truly an on-demand transportation company across a wide spectrum of user needs. Many of these needs we cannot imagine yet.

[tweetable]The Uber API allows developers to add physical transport to apps as easily as ads or push notifications. [/tweetable]  Uber as a TaaS (Transportation-as-a-Service) platform, following in the footsteps of BaaS tools. This is possible because all of the ‘infrastructure’ that Uber has built over the past year: users, drivers, and the connection between them through the Uber service and apps.

In the blog post that launched the API, Uber explains: “We’ll never conceive of every great idea, and we could certainly never build them all.” They echo Marc Andreessen, who back in 2007 spoke about addressing “countless needs and niches that the platform’s original developers could not have possibly contemplated, much less had time to accommodate.” The current launch partners and the use cases they represent are but a glimpse of where this is heading. When Uber’s network of co-creators gets in full swing, Bill Gurley’s prediction of widely expanding market will become reality, just as millions of apps – many completely unforeseeable successes – unlocked the market for smartphones.

New use cases are currently focused on the transport of people, but the recent experiments with local delivery of household items makes it clear that it won’t stay this way.

Uber wants it all

The second part of Bill Gurleys valuation argument was that Uber is subject to strong network effects, and hence is set up for a winner-takes-all market share. By releasing its API with an exclusivity clause (barring developers from working with competing services), Uber confirms that this is indeed their intention.

Not only has Uber reached critical mass with strong network effects between drivers and riders. It’s now adding a new network effect, between developers and users, which can possibly grow even stronger. One of Damodaran’s hesitations to accept Gurley’s narrative was that network effects between drivers and riders might be local, i.e. only relevant on a city-by-city basis, and without global effect. This is not the case for the network effects between developers and users. Uber has many competitors around the world, but soon only fellow global players will be able to withstand the competitive heat. This explains the haste with which Hailo pushed forward the timing of its own API release, launching on the same day as Uber.

A lot of the new use cases that the Uber API will spawn, will be scenarios that are not traditionally addressed by taxis. What’s more, taxis will not be able to compete by also providing similar services. They simply don’t have the reach (in users as well as geographies) to persuade developers to adopt a taxi-centric, local solution.

Uber wants world domination, and they’re in an increasingly good position to get it.

Will developers stop playing the app lottery?

[How long will developers be loyal to ecosystems that seemingly set them up for failure? The odds are clearly stacked against developers as most of them struggle to make a living. The sustainability of co-creator ecosystems is in serious peril, it would seem. A look at other lottery-like industries provides an explanation, and a surprising perspective.]


Great news from Apple’s HQ, everyone! The App Store is breaking records (yet again, some point out), both in terms of popularity with users and in the total amount of money they spend. What an awesome time to be an app developer, isn’t it?

Well, not quite. Tim Cook doesn’t exactly paint the whole picture. The truth: all that app store goodness is very unequally distributed across developers.

The figures in our Q3 2014 State of the Developer Nation report are once again crystal clear: [tweetable]the vast majority of app developers struggle to make a living. 7 out of 10 don’t earn enough to sustain full-time development[/tweetable] (we call them the Have Nothings and Poverty Stricken). That would be over 2 million people, roughly the population of Slovenia. Almost 90% of that record app store revenue will go to just 12% of developers.

While more app store revenues are clearly a good thing for developers, the money is peanuts compared to what Apple makes. In Mobile Megatrends 2014, we showed that [tweetable]Apple captures 80% of the total iOS “ecosystem GDP”, while developers capture less than 15%[/tweetable] (including commissioned apps released without any revenue model).

The situation on Android is even worse. [tweetable]Whereas 50% of iOS developers live below the poverty line, the number for Android is 64%[/tweetable]. Also for Android, hardware makers capture 80% of ecosystem GDP, while developers are scrambling over the left-overs. Other ecosystems like Windows Phone or Blackberry don’t have the scale to provide viable escape routes.

Is this sustainable?

Can this situation continue, or will these ecosystems eventually collapse as developers get fed up? [tweetable]How long will developers be loyal to ecosystems that seemingly set them up for failure?[/tweetable]

The prospects are indeed grim. Marco Arment, for example, speaks about “vastly increased commoditization” as well as declining consulting revenues in a post titled “App Rot”. He quotes other Indie developers saying “There’s a chill wind blowing”, “The app gold rush is well over”, “In my tenth year as a full time indie dev, … I think that yes, it is much harder these days” or “Considering the enormous amount of effort I have put into these apps over the past year, [my sales figure is] depressing.” Expressions of distress that are far removed from Tim Cook’s optimism.

And yet, they’re still at it. The number of app developers shows no sign of declining.

The app lottery

[tweetable]App development is a lot like playing the lottery – as long as there is a chance to win big, people will play.[/tweetable]

Investing significant amounts of money and effort when the odds are stacked heavily against you is not a rational choice. But it’s a very human one. We’re collectively bad at assessing likelihoods, especially in situations as complex as marketing a killer app. We get as much pleasure from fantasizing about a big win as we would get from the win itself, especially if we’re poor to start with. The fantasy gets even better because we can’t imagine any other way to get this rich, this quick. The final nudge is the sense of regret we would feel if we didn’t implement that great idea we had, while someone else hits it big on the app store with that same idea. [tweetable]Rational thinking versus pleasure center lit up by fantasies? It’s no contest, really.[/tweetable]

There are plenty of other industries with the same characteristics. The same income inequality and hope-driven creation play out in music and other forms of entertainment, game development, and entrepreneurial communities (as long as there are exits, there will be wannabees). Future industries will show the same pattern, too. Internet of Things, anyone?

Ecosystems can sustain this situation as long as there is supply of developers hoping to get rich. Only 1.6% of developers have an app that earns >$500K per month, but those few big wins will make all the difference for the motivation of the Have Nothings, the Poverty Stricken and the Struggling to keep creating (source). Asking whether developer ecosystems are sustainable is like asking for how long casinos will exist given that most participants lose money. “Indefinitely” would be a safe bet.

The European App Economy 2014: Europe is losing ground to Asia

We have just published a research note with an update to last year’s an European App Economy Research Note. The good news is that Europe’s app economy still accounts for 19% of global revenues and is growing strongly at a 12% annual rate. The bad news is that the rest of the world, particularly Asia, is growing much faster. The global app economy is growing at 27% annually and the share of revenues captured by developers in the EU is falling. We estimate that [tweetable]around 1 million European jobs have been created by the app economy so far[/tweetable]. If policymakers want to see this job creation continue then there’s a lot more they could do to support developers attempting to create businesses.


A $16.5 billion market

In our App Economy Forecasts 2013-2016 report we estimated that apps and app related products and services would generate $86 billion in revenues globally in 2014. The 19% share of this generated by European developers will contribute $16.5 billion to EU GDP this year. This is many times more revenue than is generated directly in the app stores. However, the EU is home to the top 2 app store earners globally in Supercell (Finland) and King (UK) – masters of the Free-to-Play games market. At the same time, European policymakers are some of the most vocal in attempts to enhance consumer protection with respect to the Free-to-Play model. So far there is only strong encouragement to reform practices around cost transparency but this could (justifiably) lead to regulation if insufficient voluntary action is taken. Significant changes in this area would undoubtedly impact the revenues of Europe’s most high profile app market success stories.

1 million jobs

We estimate that the number of direct European app economy jobs is up 26% from 2013 to 667,000, this breaks down as 406,000 professional developers and 261,000 non-technical roles in app-related business. Using a conservative multiplier we also estimate another 333,000 jobs have been created indirectly by the app economy in the European Union for a total of 1 million jobs. A large fraction of these jobs are in software services companies taking the low risk route to profitability building apps on a contract basis. [tweetable]Contract software development is the most popular revenue model in Europe, favoured by 31% of developers[/tweetable]. This may be partially due to the relative lack of seed capital for startup ventures in the region along with a relatively high cost of living versus most global competitors, making bootstrapping products more difficult.


Slower growth

Although the European app economy is growing at less than half the global rate, some loss of share was unavoidable. Europe was very quick to reach high levels of smartphone penetration and most of the device sales growth is in developing markets. A significant fraction of demand for apps will always be filled by local developers with better market knowledge. As smartphone penetration increases in developing countries their local app economies are growing rapidly. European developers are well placed to export to English-speaking markets and South America but it’s not so easy for them to succeed in Asia. It’s likely that developers based in the EU will need specialist support or local partners to maximise app export opportunities in some of the fastest growing markets.

The enterprise opportunity

As smartphones reach saturation, businesses will play an increasing role in the growth of the app economy in Europe. In our Business and Productivity Apps report we forecast that this sector would experience rapid growth, reaching $58 billion globally by 2016. We have identified 5 areas where app developers and startups can add value in the business & enterprise app sector:

  • Vertical market specialisation
  • Productivity/BYO apps
  • Mobile SaaS
  • Bespoke enterprise apps
  • Mobile application and device management

While European developers are well placed to win bespoke enterprise app development business, they may struggle to compete with better funded rivals from other regions for the larger opportunities. Starting a technology business has never required less capital but scaling an enterprise software business is incredibly expensive to do quickly. The biggest mobile SaaS, application management and vertical market opportunities are likely to be venture capital fuelled land grabs. To ensure that Europe makes maximum gains from the future growth of the app economy, policymakers need to do all they can to keep app entrepreneurs from relocating to Silicon Valley in order to access the expertise and capital they need to compete.

North American App Developer Trends 2014: Insights into the app economy powerhouse

North America plays a very central part in the app economy. Not only is it home to the companies that create all of the leading mobile platforms, it is also the largest creator of app revenues. We estimate that [tweetable]in 2013, North America contributed 42% of the world’s app economy output[/tweetable]. Developer mindshare in the region is also considered particularly valuable by OEMs and tools vendors. This is due to the disproportionate global shares of both venture capital and media coverage focussed on the region. North America is often the starting point for new developer trends with high smartphone penetration and relatively mature 4G networks.

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For those that see value in understanding developer trends and preferences in North America we have created a new report which compares the region to the rest of the world. The report covers developer mindshare for platforms, languages and tools, as well as revenues and deeper dives into enterprise and game developer markets. It answers questions like these:

  • Why are developers in North America more likely to target mobile browsers than those in the rest of the world?
  • Android mindshare is higher than iOS in North America but by how much?
  • Despite lower mindshare, iOS is prioritised by more North American developers than Android but how many?
  • How much more revenue does a developer in North America earn on average than one elsewhere in the world?
  • How is that extra revenue distributed amongst the developer population and across platforms?
  • Which revenue models are most popular and which are the most successful in North America?
  • Enterprise developers in the region make significantly more revenue than those targeting consumers – how many times greater is the average revenue?
  • Which revenue models do these enterprise developers favour and what’s their share of the total revenue pie?
  • Games are also monetised differently than other apps, which are the most popular revenue models for North American game developers?
  • Ad networks are the most popular category of tool globally but not in North America – what’s more popular there?
  • What’s the breakdown of developer tool usage across platforms in the region?

The North American App Developer Trends 2014 report includes many more insights and explanations of key trends. It is also packed with 20 graphs, slicing the relevant data in different ways. If you need to know more about developers in the region, then this report is for you.