What Apple’s move to freemium app pricing means for developers

Rob Borley
by
on 12 November 2013

Hidden within the launch of Apple’s new iPads was a potentially major shift in the app ecosystem. The excitement surrounding the new hardware perhaps overshadowed a major change in Apple strategy – the move towards a freemium pricing model. This conflict between paid apps and free apps is one that we at Dootrix wrestle with continually as we develop and release mobile apps with our partners.Freemium Apps

Although free iOS upgrade are nothing new, Apple has now made previously profitable apps for the iWork (Pages, Numbers and Keynote) and iPlay (Garage Band, iMovie and iPhoto) suite available free with new devices.

The move to freemium

The “freemium” model has been used by open source software providers for years as a way of getting users on board with a package before offering “added extras” for a fee. This could take the form of improved service and response times, to the “unlocking” of premium features and functions.

iOS app users are well-used to making in-app purchases to unlock new features or bonuses, and it is this practice that Apple intend to use to recoup some of the “loss” incurred by giving software away free. It is important to note however that only those consumers and businesses buying new devices are entitled to the free apps.

Genius or madness?

Research suggests that smartphone users are increasingly reluctant to pay for apps up front. This latest move by Apple therefore makes good business sense. According to Gartner, 90% of the 81.4 billion apps downloaded from the major stores during 2013 will be free at the point of download.

Gartner’s estimates also reveal a number of other important projections; not only will the number of available apps continue to rise (there are at least 800,000 available in Google Play and the Apple App Store at present), but that the annual number of downloads will continue to rise, topping 309 billion by 2016. The percentage of free app downloads will continue to rise, reaching 93% over the same period.

So how will the app developers make money? Another research company, Distimo, released figures that suggest that paid-for apps have already peaked in importance. In January 2013 in-app purchases accounted for 76% of the Apple App Store revenue, up from 53% on the same period in the previous year. In Asian countries (Hong Kong, Japan, China and South Korea particularly), in-app purchases made up more than 90% of revenue.

The reality is that Apple’s move towards freemium app pricing is neither a gamble, nor out-of-step with the wider app development community. According to the trends, giving apps away for free, and then charging for additional content appears to be the only way by which to generate a sustainable revenue from mobile apps.

This is not just an Apple thing

In reality, Apple is rather late to the freemium game, in effect waiting for their developer community to prove the case for this particular pricing model before adopting it themselves. The aforementioned Gartner report (which discusses the increasing number of free downloads) is based on observing all of the major app stores in addition to Apple’s.

Extrapolating their data, Gartner estimate that downloads featuring in-app purchases will rise from 5% of all downloads (across all stores) in 2011, to 30% in 2016.They also believe that the share of revenue from in-app purchases for developers will grow from 10% in 2011 to 41% in 2016. Although the Distimo’s estimates are much higher than those of Gartner’s, both analysts recognise the increasing importance of in-app purchases for revenue.

An alternative pricing method is to offer a mobile app to accompany an existing service subscription. One of the best examples of such a system is the Office 365 productivity offering from Microsoft; users pay an annual subscription to access a Cloud-based copy of Microsoft’s Office suite. An iOS app is available for free download, but without the paid subscription, cannot be used. Whether Microsoft seriously believe this approach will work remains to be seen – it could be seen as an attempt at moving users to the Windows 8 Surface Tablet which comes with a native Office app as standard.

Mobile apps are expected to generate between $20 and $25 billion in 2013, potentially rising to $75 billion in 2017. But developers and vendors alike need to carefully consider how they intend to claim their slice of that pot – the truth is, charging for apps upfront is unlikely to be the answer and Apple’s move to freemium may prove to be the beginning of the end for the paid app.

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