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.]

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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.

European-App-Economy-2014_final

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.

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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.

The UK App Economy 2014

The UK has been quick in adopting smartphones, tablets and apps with smartphone penetration expected to reach 74% by the end of 2014. But beyond the benefits that one can derive from using apps, there are potentially much bigger benefits in creating apps, or creating an app industry for that matter.

We’re happy to present our new research report, charting the mobile app economy in the region, investigating revenues, jobs, the profile of the British app developer, and how the UK can provide better opportunities for developers (you can download the full report here).

06 UK App Economy

VisionMobile set out to assess the state of the UK app industry in 2014 and find out whether the UK is on the right track to becoming a vibrant and global hub for the app economy. Our findings are based on our Developer Economics survey series (our 7th edition reaching over 10,000 app developers) and a UK App Developer Census survey of over 300 developers across the country.

We estimate the UK app industry will exceed £4 billion in revenues in 2014 and will be growing at a CAGR of 38% between 2013 and 2015 and 22% between 2013 and 2025. The UK has approximately 8,000 companies that are directly involved in app development and approximately 380,000 jobs centred around the app economy. We expect that approximately 30,000 new jobs will be created in the in the next 12 months.

UK-mobile-app-jobs

Most of the UK app industry is concentrated around Greater London, which is home to 31% of UK app companies while the South East hosts another 24% of app companies. There are several app startup hubs located in Brighton, Cambridge, Birmingham, Bristol and Edinburgh, however these are much smaller in scale than London.

App-companies-in-UK
The UK is certainly among the top global tech hubs with several metrics indicating that it is in fact the biggest tech hub in Europe and most likely the second most important tech hub after the US. In 2013 the UK accounted for over a third of the total app revenues generated in EU28 and slightly less than a fifth of all app developers in the EU28.

The UK app economy attracts developers & designers across all ages, from teenagers to 65+ year olds, with 4% being 17 years old or younger. Female app developers or designers account for just 8% of the developer/designer population.

UK-mobile-developer-demographics
44% of app developers and designers in the UK generate most of their income from apps, while 22% generate no income from apps. These are most likely Hobbyists and Explorers for who app revenues is not the primary goal, or early stage startups that have yet to monetise their products. The average salary of developers and designers that generate all their income through apps is £47,000, which is well above UK average salaries.

83% of app developers and designers are self-taught and only 7% have attended a Bootcamp or other taught course. This indicates a gap in the market for affordable training for app developers.

Overall, app developers and designers are pleased with career prospects, flexibility, income and work life balance. But they are quite critical of the UK as a technology hub and the support it provides, highlighting gaps in training and mentoring, funding, industry presence and support, particularly outside of London.

The UK has gathered a lot of momentum in the past two years and the government has been visibly supportive of the startup economy, introducing several incentives and investment in infrastructure. However, there are several areas where more work needs to be done in order to sustain this momentum: continuing tax incentives, providing affordable training, even at an early age, cutting the red tape for fledging startups, educating entrepreneurs about funding resources and support schemes. Industry must also strengthen its support in these areas and confirm this support through developer events across the UK.

Looking for more insights? Download the full report for free!

How much does it cost to create a successful app?

The app stores contain a range of apps from hobbyist creations built for fun to the carefully crafted output of venture backed startups and mega-corporations that have had millions of dollars spent on their development.

05 App Profit & Loss 2014

Even though the market is maturing and exceptionally well-funded developers have taken over the store charts, the occasional small independently developed app that goes viral can still break through and achieve a decent level of success. The question is, how likely is a small budget developer to succeed? What platforms give them the best chance of success? Where should the budget be spent? With all the competition out there, how much does a bigger budget improve your chances of turning a profit?

What are the odds?

In order to look at how budget can impact profitability it’s worth calibrating by the average chances of making a profit on each platform.

The figures in this chart are probably more positive than most industry observers would expect. Looking at the data it seems likely that many solo developers have valued their time at zero when reporting costs. For hobbyists and explorers, working in their spare time this might make rational sense. They don’t expect to be paid for the time anyway and their small app profits more than cover their other development costs. This is reflected in the slightly lower level of Android developers losing money versus iOS (there are far more hobbyists on Android than iOS).

Leading platforms

On the most popular platforms – iOS, Android and HTML5 – there’s a general correlation between spending more on an app and making more revenue. However, not all spending produces equal results. Spending more on development only slightly increases the chances of making a profit, while increased spending on design and marketing are strongly correlated with higher probability of making significant profits. Higher spending on customer service is almost always associated with greater profit probability but here the causation is almost certainly in the other direction; successful apps incur greater customer service costs because they have a lot of customers! These platforms show very similar patterns but they aren’t identical. The biggest difference between them is that spending more on design for HTML5 apps seems to produce much less of a boost to profit probability than for either of the leading native app platforms.

The second tier

BlackBerry 10 and Windows Phone show similar patterns of spending versus profit probability that are very different from the leading platforms. For small amounts of spending, there are similar patterns to the leading platforms. More investment, greater chance of a profit, with better returns from design and marketing spend. However, before reaching a level that would sustain a full-time designer or developer, the trend reverses; investing large amounts in any aspect of apps for these platforms reduces the probability of a profit and increases the chances of making a loss. This suggests that these platforms have not yet reached sufficient scale in terms of app revenues to sustain many highly complex or polished apps.

Opportunities everywhere

On the leading platforms, developers with budgets in the multiple thousands of dollars a month have roughly twice the chance of turning a profit on their apps as those spending minimal amounts. Even at lower spending levels, the probability of breaking even or better is reasonably high across all platforms, particularly for those investing in design and marketing. While it’s clear that only some of the platforms discussed above are likely to support scalable app businesses at the moment, there are plenty of opportunities to build profitable apps on any these top 5 platforms.

Want to know more?

I’ve only scratched the surface of our data here. What scale of profit or loss can be expected on different platforms with different levels of investment? Are there optimal investment levels to maximize the chances of success? Which app categories are most likely to product a profit. What do successful app development companies look like at different sizes? All this and more is covered in our App Economics report.

Developer Economics: Ecosystem wars drawing to a close

Welcome to the brand new Developer Economics report! Now in its fourth year and 6th edition, the latest Developer Economics survey reached over 7,000+ developers across 127 countries, setting new standards in developer research.

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Get your free copy here and read about the movers and shakers in the app economy. Dive deep into our rich dataset and discover how developers select and prioritise platforms, which developer tools they use and how their choices translate to revenues.

As always, we have a lot more data available so get in touch (moredata@visionmobile.com) to get the data you need if you can’t find it in the report. Continue reading Developer Economics: Ecosystem wars drawing to a close