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December 16,2017

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Can You Get Rich Creating Apps?

With the proliferation of smartphones and mobile devices, apps have emerged as an integral part of the new tech economy. Over a million apps are available for download via Apple (AAPL) iTunes app store, the Google Play store, or Amazon (AMZN) in dozens of categories. Some apps help people manage their finances, and some provide up-to-the-minute news of the world. Others act as a GPS for navigation, allow users to shop at their favorite stores from their phones, take pictures, send messages around the world, find somebody to date within a five-block radius, or find the best nearby bar or restaurant. Whatever you can think of, there is probably an app for that.

Some free apps generate revenue via in-app purchases or advertising, while others are purchased for a modest price. The good news for both kinds of apps is that people use them a whole lot. ComScore's Mobile App Report for the year 2014 found that approximately seven out of every eight minutes spent on mobile devices is app related. The bad news is that ComScore also found the majority of mobile device users download no new apps each month. There is, however, a small set of around seven percent of smartphone users who download apps like crazy, accounting for nearly half of all monthly downloads.

Apps can be a huge source of profits. Apple reported that people had spent in excess of $10 Billion in its app store in 2013. These days, there are thousands of developers working independently, with start-ups, or with established companies to come up with the next big app. The competition to develop a successful app is fierce, and there's no guarantee that even a well-executed, great idea will catch on and bring financial success. Even though some apps have made millionaires out of their creators, most app developers will not strike it rich, and the chances of making it big are depressingly small. In fact, less than one hundredth of one percent of the millions of apps that are available will benefit from any sort of financial success.

That said, before breaking down the bleak prospects of most app developers, let's look at some of the notable success stories.

SUCCESSES
First, it is worth noting that the most popular apps – rated by unique visitors per month – are owned and operated by large technology firms. The top app in 2014 is the Facebook (FB) app. And among the top 10 most popular apps, five are products of Google (GOOG) – YouTube, Google Play, Google Search, Google Maps, and Gmail.

Some companies have been developed for the sole purpose of creating and marketing apps. Zynga (ZNGA), whose apps include socially networked games and puzzles, brought in over $870 million in revenue in 2013. Storm8, a competitor of Zynga reported more than 600 million unique downloads last year. In Japan, COLOPL said it brought in sales of more than $300 million in 2013 and $237 million in the first quarter of 2014 alone. Kabam, Paris-based Gameloft, and Japan's GREE all brought in well over $300 million in revenues last year. Of course this short list of winners in the app space wouldn't be complete without Finland's Supercell, creator of the wildly popular game Clash of Clans, with almost $900 million in revenue in 2013, and King (KING), the developer of the addictive and ubiquitous Candy Crash Saga. King generated nearly $2 billion in 2013.

There have been a few instances of small apps generating big success and making their creators exceedingly rich. Some apps have been snatched up by larger companies for huge sums of money, for example when Facebook bought Instagram, Onavo and WhatsApp. Productivity app Evernote is worth about $1 billion. Square, which allows people to accept credit card payments from their smartphone is valued at $3.3 billion. Snapchat, the app that allows users to send photos and videos that will self-destruct after a number of seconds is now valued at around $10 billion.

Uber and Lyft, which are the largest among a growing number of ridesharing and car livery service apps, are valued at $40 billion and over $2 billion, respectively. Airbnb, which has both an app and a website that allows people to rent out their spare room or second home to travelers, is worth over $13 billion.

For a more comprehensive list of billion+ dollar start-ups, including app-related companies, check out this chart.

THE CHALLENGES TO BECOMING AN APP MILLIONAIRE
While those valuations and sales numbers may seem encouraging, don't be fooled: the average app developer is unlikely to strike it rich. According to Forbes,the average app developer produces between three and five apps, each app bringing in an average revenue of $1,125 on Google's platform and $4,000 on Apple's. A hard-working app maker with five apps can expect just around $20,000 a year before taxes. And that doesn't account for the money, time and effort invested in creating those apps.

With those small revenue potentials it is hard to build a team of developers and create advertising and marketing campaigns to increase recognition and the number of downloads. There is also a huge amount of competition. For every category of app, there are numerous options to choose from and making yours the one to gain traction can be hit or miss.

On top of all that, even with a hugely successful app there is no guarantee that it will be able to produce a profit. It is increasingly difficult to monetize activities that many people have come to expect to be free – such as messaging, social networking, photo sharing, and cloud storage.

And success itself may be fleeting. King and Zynga saw their IPOs generally flop and their stock prices suffer over time. Rovio, the maker of Angry Birds was reputed to be worth $6-8 billion by analysts in 2012, but the current 2014 valuation is now less than 50% below its peak. Many other apps have seen their valuations drop as users' short attention spans and increasing access to new offerings make them passé in ever shorter periods of time. A 2013 study by Techcrunch showed that anywhere from 80 to 90 percent of all downloaded apps are used just once and then eventually deleted by users

THE BOTTOM LINE
Apps of all kinds have become ubiquitous, and the majority of mobile device owners use multiple apps daily. Some apps have become hugely popular leading to success and wealth for the developers, bringing in millions or even billions of dollars. These success stories, however, are the exception and not the rule.

The unfortunate truth is that most app developers will work hard to create the next best thing while barely scratching by in a world of ever-increasing competition and a consumers with short attention spans.

 

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