by Donald Macleod

iPhone economics and lower barriers to entry
[Via O’Reilly Radar]

Tomi Ahonen at Communities Dominate Brands has an interesting analysis on iPhone economics. It’s a substantial piece with a lot of good stats, and his key conclusion is:

… don’t invest in [app development] today … Put your creativity and investment into the real money opportunities, remember Pop Idol simple SMS votes earning half a billion dollars in USA this year alone …

He comes to this conclusion after observing that the vast majority of apps will lose money, while only a tiny handful generate significant revenue. Consequently, the logical response is for developers (and businesses) to instead focus their attentions on more lucrative opportunities. In other words, the only way to win is not to play the game.

While his numbers are sobering, they’re not all that surprising. Consider publishing — people have long known that the vast majority of authors slave away on projects that will never make any money, while a very few stars (think J.K. Rowling) make a killing. Whatever you call it — the long tail, the Pareto principle, the 80/20 rule — this simply appears to be the brutal truth of most media industries, from publishing to movies to music.

What I think he overlooks — or is bemoaning — is the important role the App store is playing in lowering the barriers to market entry for developers. He cites the big money opportunities as “SMS, MMS, and WAP” (seriously, WAP?). But, good luck trying to get a biz dev deal there. Only a few, really well-connected organizations are going to get those. When you compare the costs of hiring some kid out of college who can’t believe he’s actually getting paid to write apps to the cost of building the kind of highly skilled (and highly compensated!) sales force required to put these deals together, an app investment suddenly doesn’t look so bad.

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Why industries are being overturned comes down to one simple fact – work that used to require years of training and a tremendous expense to accomplish can be done by someone in their basement. It is true in software development, in music, in books, etc.

While it may be difficult to be a superstar here, it does make it easier for creative people to actually make more money, since they can reproduce their work so easily.

I first heard about this new economy two years ago at an O’Reilly meeting. A class at Stanford was devoted to understanding how people choose apps. Breaking into small teams, they worked on developing apps that people would use. They discovered that you can learn what makes a winning app.

In 10 weeks, they had created apps with a possible yearly revenue of $10 million dollars. Some students left school to run the companies that created the best apps, which were bringing in close to $1 million.

The faster they could run their test cycle, the faster they could create a winning app.

The key is low barriers. This allows people to rapidly produce a variety of apps, with the focus then going to those with the best results. This way, instead of having to hit some grand slams in order to pay for overhead, a bunch of singles can give one a comfortable amount of money.