Solving for the Marginal Utility of an App (Or: App Store Economics, Again?)

At Apple’s big fall event last month, alongside the new iPhones and the iPad Pro, they unveiled an entirely new platform — tvOS. The announcement has stirred up fresh discussions of an evergreen topic for Apple’s third-party developers — the sustainability of building software for Apple’s platforms. I’ll be focusing primarily on the ‘what’ and the ‘how’ here — the ‘why’ has been covered extensively.

Apple’s user base has grown so large, and both the company and it’s products have so much momentum, that it seems unwise to bet against their success. As with the Apple Watch, there will be thousands of applications available on launch day for tvOS regardless of how many words are spilled over App Store sustainability. But will Apple’s new platform for the living room support a strong independent software market like the one that has sprung up around the Mac, or will it more closely resemble the race-to-the-bottom freemium graveyard that is the iOS App Store?

Brent Simmons summarizes one position nicely: could it be simple ‘bigger is better’ psychology at work — that the bigger the screen, the more money you can charge? No — software’s value has never and will never be determined by it’s physical size. Software’s value comes from the marginal utility that people get from it.

Using this framing, it’s clear that the market for tvOS apps will closely mirror what we see dominate the iOS app store — free applications with in-app purchases. The vast majority of the applications we use on our phones are for entertainment, not productivity¹. As Ben Thompson eloquently put it in a recent article about Facebook:

It is only when we’re doing something specific that we aren’t using our phones, and the empty spaces of our lives are far greater than anyone imagined.

Most apps are simply entertainment², filling in those empty spaces in our lives. And while people enjoy being entertained, the marginal utility of being entertained by one app instead of another, or by something else entirely, is minuscule. This devaluing of entertainment happens everywhere, even though it’s easiest to recognize when the hornet’s nest that is the internet gets stirred up. It’s a time honored tradition to complain about how much movie ticket prices have gone up while you’re waiting in line to see a movie. The amount of time it takes to complete a video game has become a major component of modern game reviews because people care so deeply about the dollars per hour calculation. All these things are manifestations of the strange mental calculus we perform that informs what intangible entertainment “experiences” are worth.

When your product is entertainment, you’re competing for attention — and everything is competition. Even highly differentiated experiences don’t produce an overwhelming increase in marginal utility for most people. I believe 99% of tvOS applications will fit the mold of apps as entertainment, and that the overall market for apps on the TV will be relatively small³. In opposition to the phone, where you can seek out and discover new apps in those empty spaces, sitting down and turning on your TV set and Apple TV requires intent, a far greater hurdle. This is in direct conflict with how most people consume TV today — it is the ultimate passive consumption medium.

The top applications will be well known content destinations — the traditional networks (ABC, CBS, NBC, etc.), along with Netflix, Hulu, and their ilk. The biggest potential winners on the platform will be the Youtubes and Twitches of the world — the new media companies that will be able to create new, dynamic consumption experiences that leverage the large screen and unique potential for having paired iOS devices as a second screen — the most advanced remote control in the world.

All this isn’t to say I think that the Apple TV will be a failure — far from it. With Apple’s momentum and the support from third-party developers,⁴ I think that the Apple TV will be a tremendously successful platform for consuming content. That just isn’t the basis for a sustainable software platform.

¹ There will always be a market for productivity applications — things that make peoples jobs easier provide obvious marginal utility.

² I would include social networks and some kinds of messaging in this categorization.

³ I also think there will be a few breakout hits in the bunch — I’d guess a Mario Party-style board game hybrid, a smart take on Wii Sports, and a social trivia game.

⁴ Apple smartly has based most of tvOS off iOS and OS X frameworks that developers are already intimately familiar with, lowering the technical barriers to entry for the platform.

Originally published at on October 25, 2015.

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