Prediction: Eventually All Applications Will be Free

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smartphone apps

The app economy is growing at a pretty tremendous rate and one of the major innovations in the space is in-app purchasing. With in-app purchasing, users are downloading the apps for free, and purchasing upgrades or new features to the app. There’s a lot of cool stuff you can do with in-app purchasing like buy new levels in a game, buy virtual currencies or credits, or upgrade the app in a free-trial sense.

With in-app purchasing, developers will see far more downloads because there is no barrier to entry. With a free app, users can download the app and see whether it’s worth purchasing. Since there are far more opportunities to monetize the app, and users can choose what they want to pay for rather than put the money upfront, there will be more money spent and more satisfied users. We’re seeing a lot of growth with in-app purchases and my prediction is that this strategy is so successful, we’ll soon see the end of paid apps entirely.

The first to implement in-app purchasing was Apple. Apple enabled in-app purchases as far back as October 15th, 2009 and effective for free apps June 17th, 2009. The main difference between the way Apple and other companies implemented this system is that Apple is a closed ecosystem where other app stores leave a few payment options. Apple forces the user to use their Apple ID to pay which streamlines the process to some degree but in the end we know an open system will prevail globally where many different types of payment options are preferred.

RIM followed a couple years later and on January 17th, 2011, RIM announced their BlackBerry Payment Service SDK in beta. The payment service allowed developers to sell digital content, additional functionality and digital services to the end user from within the app. The service is still a little lacking in that developers can’t sell virtual currencies or in-app credits which are pretty crucial to the whole experience. This was the same when Apple launched their in-app system and it seems like it just takes some cleaning up of old policies and practices. We’ve asked about this and the reason RIM can’t sell in-app credits or virtual currencies is an accounting issue they need to rectify. It’s also probably tied to RIM legal which is an incredibly inflated department at RIM (thanks NTP).

The last of the three major platforms to implement in-app purchases is Google, who just a few days ago announced they had implemented. On the 29th of March, Google announced the Android Market In-app Billing to developers and users. As an Android developer, they can now publish apps that use In-app Billing and their users can make purchases from within apps. This will definitely help those apps that are free find new and interesting ways to make money on their apps.

Companies that have yet to implement in-app purchases are the affiliate and third party networks like Mobihand. For some reason Mobihand is trailing behind the rest when usually the small company has been able to lead in terms of what it can offer developers. Whether it’s a legal, accounting or technology issue, affiliate networks are going to have to figure out how to implement in-app billing or be dead in the water.

While Apple, RIM and Google have all implemented in-app purchasing, the effect so far has been prices dropping with revenues increasing. Here is a roundup of data collected by the people at Distimo that points to in-app purchases and free apps becoming increasingly prevalent.

average price by region
This graph shows prices in Apple’s App Store dropping between December 2009 and February 2010 dropping in every region.

app distibution
Here is Distimo’s breakdown of app prices and free vs paid distribution in November 2010.

in-app purchases
Apple app revenue share generated by in-app purchases has steadily increased over the course of 2010. The revenue generated by in-app purchases from the highest grossing free apps more than doubled for the iPhone and iPad. Remco van den Elzen, co-founder of Distimo, said he believes in-app purchases now represent about 30 percent of all iPhone App Store revenue.

falling prices
Other than on Android, Distimo shows that every single app store has a negative change in app prices. Android shows a single percentage point growth because for a while the store didn’t support paid apps in many regions including Canada. Also, many app companies were placing their apps in the store for free because they wanted to see growth but didn’t expect any revenue.

So what does the growth of in-app purchases and free applications mean for everyone? Well for developers it means more work but bigger payoffs. In-app payments takes a little more creativity and coding to implement but it also creates more ways in which the user can purchase from the developer and creates more points of monetization. From a user perspective, this means trying more apps and spending money only on the content you know you want and will be happy with. All of this will result in better end user experiences and more dollars generated. The only question is, how long until there isn’t a single paid application left, and app stores begin to assume your app is free and you’ll charge the consumer entirely with in-app purchases.

  • http://twitter.com/marquardt24 Matthias Marquardt

    mhhh – Kyle – what should I say – isn’t “InApp purchasing – buy now to get the full functionality” the same as offering a free fully functional trial version of your app?

    Actually I have to admit that personally I am pissed when I see a new so called “free” app and then after the installation (on my iPad) I have to realize that I have to pay in order to be able to do something reasonable…

    Actually I personally prefer a clear statement if it’s free (or not) – and if it’s not free then I appreciate a fully functional trial – if I can buy the full functionality IN the app (after the trial have expired) it’s a nice addon…

    But have in mind that AppWorld is not the only Platform on which you can actually buy BlackBerry software. And for me its good to have an alternative to AppWorld (something other platforms does not offer!) – so when I would implement InApp purchasing into any of my applications then this mean that I can only sell these in app stuff to AppWorld Markets [and only get the information about my customers AppWorld is willing to tell me - well that's another story...]

    So as BlackBerry developer I have alternatives to sell my App – and actually I am very happy that I have this choice.

    Sore InApp purchasing offer some new options (like the mentioned additional levels) – but I personally prefer the “honest” way – which means the Application would let me know, if I get it for free (or if I have to pay) – and not only let me know if I can “install it for free”…

  • http://about.me/kylemcinnes Kyle McInnes

    I see how paying up front can be considered a little more honest. There’s a lot of in-app payment schemes that are designed to specifically confuse the user. One example is virtual currencies. The currencies are designed such that they don’t feel like real money and therefore users don’t spend them as such. The conversion rates are often very difficult to calculate on the fly and the user isn’t always aware of how much he or she is spending. But this isn’t specific to mobile. More recently companies like Microsoft have been doing this with XBox Live points but the practice arguably goes back as far as any loyalty program.

    It’s going to be important for developers to do in-app payments in such a way that it doesn’t piss off the user. This is where the creativity part comes in. Being able to offer an app that does everything the user wants, but entices them to buy additional features. With an any app, you’re going to get 1% of users who will use your app more than you probably expected and in-app purchases gives you a way to offer them additional features at an incremental cost.