It's uncanny. When known software gets repackaged for iPhones and iPod Touches and passes through the hallowed gates of the App Store, something happens: Almost invariably, it gets cheaper. Waaay cheaper. Good right? Well, not always.


The App Store is a strange new place for developers. Veterans and newcomers engage in bareknuckle combat, driving prices down to levels people wouldn't have imagined charging just a few years ago. Margins drop to razor-thin levels while customers expect apps to get cheaper and cheaper, but with ever increasing quality and depth.

For developers, for other software platforms and potentially for the increasingly fickle customers themselves, it's uncharted, and treacherous, territory. But the most bizarre thing of all is—in an effort to keep people in the App Store, and to prevent competitors from getting a toehold in the mobile app business—Apple's charting a course straight into it.


"The App Store is a very competitive environment," says Caroline Hu Flexer, co-founder of Duck Duck Moose, an indie developer of children's edutainment apps like Itsy Bitsy Spider. "As an independent developer without a large PR budget or well-known brands, it can be very challenging, and you're pretty much at the mercy of Apple."

The Problem

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Most iPhone apps had no life before the App Store, and currently have no life outside it. But with those that did, you start to see a pattern. App prices could reasonably be expected to fall over time—an older game is worth less to customers than a newer game, and with other types of software, a late-stage price drop is a great way to scoop up late adopters. What's strange, though, is how prices dramatically collapse after hitting Apple's store.

Two weeks ago we flagged some bizarre differences in pricing between equivalent PSP and iPhone games. Big titles, like Tetris and Fieldrunners, were inexplicably cheaper on the iPhone, even in cases where they were executed better. This didn't make a whole lot of sense. As it turns out, it had nothing to do with Sony and the PSP, and everything to do with the App Store.



As you can see in the chart above, many apps and services take a price dip in the App Store. Zagat's premium To Go guides cost a healthy $4/month for Windows Mobile phones, but sell for just $10/year on the iPhone. CoPilot 7, a navigation app, used to set you back a full $200 on a Microsoft-badged device (later lowered to $100); the much-improved version 8 sells in the App Store for a measly $35 today. The premium version of WeatherBug runs $5 for people who happened to buy BlackBerry's touchscreen phone, but just $1 for anyone who bought Apple's. VR+ voice recorder, a full-featured dictaphone app, runs $30 on BlackBerry, and an incredible $2 in the App Store. So how can this little App Store, itself a subsection of the iTunes store, squeeze so many developers to the point of near-suffocation?

Update: The BlackBerry Weatherbug app boasts a few extra features over the iPhone app, including push notifications. This accounts for some of the price difference


The Economy

Some of this is pure Econ 101: The store serves a massive, captive audience that's pre-trained to spend money in iTunes. The promise of higher volume makes it easier for developers to lower prices, which they use, along with interesting features and clever marketing, to set themselves apart from the competition.


If things work out just right, the App Store can move a lot of software for you. Spread your lower margins over tens of thousands of sales, and your $2 app could make just as much, if not more, than your old, slower-selling $30 app did. The App Store recently passed the 2-billion-download mark, and there are likely well over 50 million App-Store-ready devices in peoples' hands right now. A vast majority of these downloads—averaging an insane 35 per device—will likely have been free. Only Apple knows just how many. But even if just 5% of the 2 billion downloads were paid for, that's one hell of a market.

It's true that prices are falling as more and more iPhone and iPod Touch owners enter the market. But prices won't stop falling. And more and more developers from all over the world are submitting apps, too, so fewer devs are guaranteed visibility. Not all of the people investing time and money in their products are reaping the return they (reasonably!) expected.


Newsweek's exposé on the end of easy money at the App Store goes a long way toward making the case against going all-in as an iPhone dev. Not only are development costs high, while success appears to be basically randomized. But the story doesn't explain exactly what happened to make the situation so grim.

The Culture

Giz stories rage about app prices all the time, and in your own private way, so do most of you. Buying $1 songs and $2 TV shows has given us an expectation that apps should be cheap, no matter what their use. The glut of free apps you see filling out the app charts every day doesn't help either. Software is worth less to us now, even though we use it more.


I spoke with Steve Andler of Networks In Motion, the company that makes Gokivo. It's an app that we savaged for its introductory price of $10 a month, which then dropped to $5 a month a few weeks ago.


Andler explained reaching the unrealistically low costs with one thing: diminished features. Their app pulls up-to-date map, traffic and POI data from NIM's servers in real time, meaning that—beyond developer costs—they have to constantly pay for new, fresh data to pass on to their customers. But even at $5 a month, it's just about impossible for Gokivo to compete with an app like MotionX GPS Drive, which is $3 a month, or $25 per year.


Andler says there are subtle differences in services offered, which is true—MotionX, for example, doesn't yet read street names aloud when it gives you directions—but your average user probably doesn't know this, and there's a good chance MotionX might add it in an update later on, as their market share and revenues grow. But the damage is done. The app-buying customer is spoiled: As far as we are concerned, turn-by-turn GPS apps should now cost no more than $3 a month, period. This is the new retail, and it's weird.


Loren Brichter, father of Tweetie, is used to getting yelled at by jaded app shoppers. He's charging $3 for Tweetie 2, an update—but a whole new version, really—of his well-established Twitter app. Offering the software as a free upgrade isn't realistic for him:

I priced Tweetie at $2.99 not based on how much work I put into it (it would have been more), or to try and undercut other apps (it would have been less), but simply because I felt like $2.99 was a reasonable price to pay for a Twitter client. Impulse purchase, but not bargain-basement. I never liked playing pricing games either—a popular pastime of other App Store devs. It's always been $2.99, and will probably always be $2.99.


His decision wasn't easy. And even though his app is the darling of the tech press, and has hundreds of great user reviews, he's being lambasted for charging three measly dollars for a high-quality app that people will use again and again and again. Before the App Store, a complaint this petty wouldn't have even made sense.

Apple


From the outside, it appears that Apple is encouraging a race to the bottom. The top 10 lists in each App Store category—one of the only ways for an app to get any meaningful amount of iTunes visibility—are almost exclusively the territory of low-priced impulse buys, and are hard to cling onto for more than a few weeks at time. Flexer, of Duck Duck Moose, says she's experienced it firsthand:

The ranking by volume (as opposed to revenue) on the App Store seems to drive the prices of apps down. Aside from being featured by Apple, exposure of an app is dependent on its ranking in the top lists, so developers lower prices to obtain a higher ranking.


This is echoed and amplified by the makers of Twitterific, an app that, in a bid to stay competitive, saw its price fall from $10 to $4, despite active development and a growing featureset:

While these changes represent perks for users, it also means that sustaining profitability for a given piece of software in the App Store is nearly impossible unless you have a break-away hit.


And if things don't change?

Myself and others like me will have no choice but to focus our development efforts elsewhere.


With yesterday's announcement that Apple is allowing free apps to include in-app purchases, things just got even more tumultuous. Depending on how this is handled, the top "free" apps could all be paid apps in disguise. Either that or the paid app rankings will be dominated by free-on-a-trial-basis teasers. In either case, the rankings open themselves up for opportunistic abuse, and the highest goal for any honest, talented app developer—to just crack that list—just became more uncertain.




This is disastrous for developers, even if it's mostly incidental, and a function of Apple trying to sell apps like they've been selling music for years, despite a totally different set of product types and customer needs. But Apple's effect on pricing goes well beyond incidental. At least in some cases, Apple calls the shots.


A high-profile dev team that has sold a number of apps in the store since the earliest of days, and who accordingly wishes to stay anonymous, told us as much. When they approached Apple with their first app, they had a price in mind. Apple told them it was too high, and that they'd need to cut it to succeed. They chopped it in half. Even then, Apple told them to "be careful."

This company made out fine, since they were in a position to adapt. However, to play the volume game, they had to restructure their entire philosophy around a pricing structure that, just months before, would've seemed ridiculous.


With over 2 billion data points to graph and filter to their heart's content, Apple understands the App Store climate better than anyone else possibly can. As such, their advice is probably golden. Which is okay if you're a relatively nimble, single-purpose company, and you can afford to risk restructuring everything you do around their store, and your costs can be covered at whatever price you evidently need to set to sell at a certain volume. But you'll just want to keep in mind that their advice is self-interested. Apple wants cheap apps, to keep people buying them, and to keep other stores firmly in the second tier—and they're not afraid to say it. From Apple's last quarterly report to investors, a line they've been echoing since the store opened:

[Apple] also expects competition to intensify as competitors attempt to imitate the Company's approach to providing [digital app distribution] seamlessly within their individual offerings or work collaboratively to offer integrated solutions...While the Company is widely recognized as a leading innovator in the personal computer and consumer electronics markets as well as a leader in the emerging market for distribution of third-party digital content and applications, these markets are highly competitive and subject to aggressive pricing.


You don't need to look back any further than the launch of the iTunes music store to see an Apple that will do everything it can to push other peoples' prices down for their benefit. Of course, they can't really fix prices for apps—they're not songs or movies, and each one does something different—but they can nudge like hell.

What Happens Now

So what does the App Store Effect mean, right now? In the short term, we'll get lower prices. This is great. But in the long term, it might not be sustainable.


The promise that sales volume will make up for the rock-bottom prices you need to charge just to be seen in your app category seems increasingly hollow, and to put it bluntly, if developers don't have a chance in hell of recouping their fees, they'll stop trying. And I'm not talking about 99-cent iFart app spammers here—I'm talking about big players who already make money selling software. If the navigation companies, the big game studios and the premium content providers can't thrive in the App Store, they'll have to leave; even playing in Apple's sandbox threatens and undercut their (sometimes much more crucial) product lines elsewhere.

And don't forget, Palm and Android fans, this App Store Effect sends ripples well beyond the App Store. Customers expect to see functionally identical apps priced the same way across platforms, because to us, that's what makes sense. Can devs really afford to port an app to the webOS to sell to the tens of thousands of Pre owners, when they're expected to tag it with iPhone prices, calculated for a base of millions? Whether by Apple's design or totally by accident, everyone who doesn't own an iPhone will suffer for it.


The App Store Effect illustrates a new kind of economy, and it's not going to go away. In fact, it's going to get worse. Developers will either adapt, die or leave. But where will they go? Until there are 50 million Android handsets and 50 million Pre offspring out there, the rest of the mobile software world is pretty much screwed.