Apple started a mobile app store revolution -- and plenty of people are making plenty of money from the concept. Indeed, mobile app stores will see annual downloads reach 102 billion in 2013, according to market research firm Gartner Inc. That's up from 64 billion in 2012.
Money-wise, total revenue in 2013 will reach $26 billion, up from $18 billion in 2012. And that's even with free apps accounting for 91 percent of total downloads. But the real money is in in-app purchases (IAPs). Gartner said IAPs will account for 48 percent of app store revenue by 2017, up from 11 percent in 2012.
"We expect strong growth in downloads through 2014, but growth is forecast to slow down a bit in later years," said Sandy Shen, research director at Gartner. "The average downloads per device should be high in early years as users get new devices and discover the apps they like. Over time they accumulate a portfolio of apps they like and stick to, so there will be moderate numbers of downloads in the later years."
Major Monetization Method
According to Gartner, IAP purchases will drive 17 percent of the store revenue in 2013 and increase to 48 percent in 2017. Much the same as downloads, IAP is expected to post strong growth in 2013 and 2014 and slow in later years. As Gartner sees it, this is because smart devices are reaching more mass-market consumers who are not as willing --- or cannot afford -- to spend on IAPs as early adopters. Nevertheless, Gartner said, IAP will become a major monetization method for apps stores and developers.
Brian Blau, research director at Gartner, noted that free apps currently account for about 60 percent and 80 percent of the total available apps in Apple's App Store and Google Play, respectively. And iOS and Android app stores combined are forecast to account for 90 percent of global downloads in 2017.
"These app stores are still increasingly active due to richer ecosystems and large and very active developer communities," Blau said. "However, we expect average monthly downloads per iOS device to decline from 4.9 in 2013 to 3.9 in 2017, while average monthly downloads per Android device will decline from 6.2 in 2013 to 5.8 in 2017. This relates back to the overall trend of users using the same apps more often rather than downloading new ones."
A Dual Strategy?
Gartner research also shows that IAP contributes to a significant amount of Apple's App Store revenue from iPhones worldwide. Other platforms have not reached such high levels as the iPhone, but analysts expect they will also see IAP contributions increase in the future.
"We see that users are not put off by the fact that they have already paid for an app, and are willing to spend more if they are happy with the experience," said Blau. "As a result, we believe that IAP is a promising and sustainable monetization method because it encourages performance-based purchasing; that is, users only pay when they are happy with the experience, and developers have to work hard to earn the revenue through good design and performance."
We asked Greg Sterling, principal analyst at Sterling Market Intelligence, for his take on the research. He told us there's considerable historical data that free apps are downloaded more often and in greater volume.
Still, he doesn't have any view on whether the precise percentages in the forecast are accurate. He said often forecasts such as this are based on a set of abstract assumptions of growth and can be inaccurate. But the idea that users will be more inclined to pay for things within apps -- after they've had an opportunity to use the apps for a time -- is sound, he said.
"Provided there's some obvious value to end-users, developers can drive in-app purchases and generate revenue more effectively," Sterling noted. "Unless there's already a brand or existing value established, such as Hulu and the New York Times, exposing a consumer to a free app with a higher-value paid version can be a more effective strategy than seeking to charge out of the gate."