Winners and losers in the global app economy
Hint: Where you live matters
This post discusses a few of the findings from a recent research project I’ve done at Caribou Digital.
The buying and selling of apps is becoming a big business, with Apple and Google paying out a combined $17 billion to developers in 2014. But aside from a few public announcements by a handful of app developers, we really don’t know much about where all that money is flowing. The ubiquity of mobile technology and networks means there are now app developers and app consumers just about everywhere in the world. But what this research shows is that the vast majority of successful developers — and almost all the app store revenue — is located in the largest economies, leading to a very skewed global landscape of participation and value capture.
The app store model is interesting because it has some inherent contradictions. On the one hand, it is a meritocratic system that enables anyone to be successful — the digital nature of app production coupled with the global reach of telecommunications networks allows developers located anywhere to easily sell to consumers around the world (Exhibit A: Flappy Bird creator Dong Nguyen). The app stores disintermediate previous value chains, allowing producers (developers) to connect directly to consumers and avoid hiring publishers or regional distributors. And all producers pay the same margin (30%); there are no backroom deals or favorable terms for the biggest producers or someone’s cousin. As Julien Codorniou, director of global platform partnerships at Facebook put it, “[I]t’s a flat world where everybody competes with everybody — everybody is treated equally in the app stores of the world.”
Yet at the same time, the app store model leads to an uneven playing field. That disintermediation has the effect of shifting all risk to the producer, who is essentially selling on consignment, and has no protection if a product doesn’t sell after investing in its production (either way, the platform doesn’t lose). And some argue that a progressive margin would actually be more fair, since it would allow the smallest producers to keep more of their earnings when they are most critical for keeping the lights on. But most importantly, the model has led to winner-take-all markets, where a handful of apps rake in tremendous profits (Japan’s Mixi earned $4.2 million per day with Monster Strike) while the long tail of less-popular apps and developers struggle to support themselves.
I was able to explore these tensions in a 6-month research effort on the global app economy, with the goal of answering basic questions such as: Who is making apps? and Who is making money? As a geographer, I’m especially curious about how these dynamics are configured across space, so the research is anchored by a country-level analysis of 37 different national markets. For each market, the team recorded the 500 top-ranked apps in both the “Top Grossing” and “Top Downloads” categories, for both the iOS and Android platforms, and then performed a manual online search to identify the city and country location for the developer. To be clear, the sample represents only the tip of the iceberg in terms of developer population — there are hundreds of thousands of developers, and we captured only the ~8,000 that were ranked in the top 500 in the app stores. The resulting data reveal not only see which countries are successfully developing apps, but also where those apps are being “exported” into other national markets worldwide, painting a picture of the global flow of app commerce. I then used a simplified power law curve to estimate value capture across all developers in our sample, showing the often stark difference between app production and app revenues.
Where are the developers?
The research shows pretty clearly that developer participation in the app economy is heavily skewed toward the largest and richest economies, with the United States, Japan, and China dominant. The winner-take-all nature of the market means that the top-ranked apps in the most-lucrative markets earn multiple orders of magnitude more revenue than low-ranked apps in markets of the Global South. The result is that 95% of the estimated industry value is being captured by just the top 10 producing countries.
For lower-income countries, the outlook is relatively bleak: Most have very few developers, and even those who had significant numbers of developers — for example, India — earned very little revenue; as a group, the 19 lower-income countries in our sample earned an estimated 1% of global app economy revenues.
In fact, a small handful of firms earn so much that they outperform most of the countries; we estimate that Finland’s Supercell earns more than 28 of the countries in our sample, combined.
How markets shape participation and trade
While the data can’t reveal all of the causes of the skewed distribution, there was evidence of both market-based factors and platform-based factors. In the former category, it is clear from the analysis that home field advantage plays a role. That is, consumers in every market showed a preference for apps developed by local producers; the degree varied, but was most pronounced in the East Asian countries, with Japan, South Korea, and China all dominated by local producers (Japan was the highest, with about 70% of the market controlled by Japanese developers).
This isn’t very surprising, as it’s always easier to design products and services for people like yourself rather than others, and in some places — such as East Asia — the linguistic and other cultural differences can be very strong. But one knock-on effect of home field advantage is that the most lucrative national markets, usually considered to be the U.S., Japan, China, South Korea, and U.K., are harder to penetrate by foreign firms. Put another way, Indian developers do very well in the Indian market. But there’s no money, relatively speaking, to be made there. And few Indian developers are able to enter the U.S. or other lucrative markets.
In fact, when we look at lower-income countries vs. higher-income countries in our sample, we see a sharp distinction in the ability of developers to enter foreign markets: in higher-income countries, about 29% of developers were unable to export and limited to their home market, while in lower-income countries, that figure rose to 69% of developers. When your home market has limited revenue, that constraint hurts.
The figure below illustrates some of these dynamics, showing the regional trade (and market insularity) of East Asia. The left column is the origin country of the app developer, with the width of the flows representing the number of apps that were “exported” to the national markets shown in the middle column. The width of the flows on the right side represent estimated financial value being captured by each country, based on the rank of the app and rank of the national market.
In this chart you can see how dominant local producers are in Japan, China, and South Korea, whereas Hong Kong is much more international. What is most surprising is the very low levels of intra-regional trade among the big three economies — despite their close spatial proximity, both Japan and South Korea export very little in the region. This is especially notable given the strong role of mobile gaming apps, and Japan’s history of exporting gaming technology and culture worldwide.
Why the platform matters
Not all of these effects are market-based — some are due to platform design and structure. I’ll describe three here. First, Google only allows developers in certain countries to monetize their products through the Google Play app store: Developers who want to earn revenue from Android apps on the Google Play app store are required to set up a merchant account, which is what links their bank account to Google so that they can receive funds from the app store. However, Google merchant accounts are not available in 74 countries, with half of sub-Saharan Africa and much of Latin America excluded. While not every developer is trying to directly commercialize her apps, the inability to monetize one’s app directly through the app store is a deterrent for participation, and the data show very few developers from excluded countries.
The second factor is the structuring of the app stores into discrete national stores. This allows the platform to adhere to different tax laws, content regulations, and copyright licensing for music and other media. For example, Australia and Belgium have shown indications of wanting to ban gambling apps, and Apple banned apps related to the Dalai Lama in China. But a secondary effect is that each app store maintains its own top rankings, reflecting that country’s preferences for apps and content. Given the home field advantage trend discussed above, this results in higher visibility (and thus downloads/revenue) to domestically popular apps and content. Our analysis shows that if the national store structure were abolished in favor of a single, global market, we would see a sharp decrease of 20%-36% in developer diversity — that is, the Supercells and Tencents of the world would overshadow smaller, less popular producers. If the EU’s efforts toward establishing a Digital Single Market  result in consolidating all the national stores, it could have the unintended consequence of hurting smaller EU developers in favor of the largest global brands.
And finally, the app stores, like all digital markets, are constrained by the human-computer interface. On the human side there are cognitive limitations: while digitization has allowed product catalogs to grow to millions of items, our ability to process information and choices hasn’t scaled accordingly. Miller’s Law — named after the famous experiments by psychologist George Miller that identified 7 (plus/minus 2) as the number of objects a typical person can hold in short-term working memory — applies just as much today as it did in the 1950s. On the computer side, even the largest screens have limited real estate, effectively constraining the number of choices or product options that a user can reasonably view. Whether faced with 1,000 or 1,000,000 choices, there is a limit to the cognitive load that users are willing or able to process, and they tend to employ behavioral heuristics, such as top ranking lists or user reviews, to aid in the decision-making. In the context of the app stores, these interface dynamics mean that those apps that occupy prime virtual real estate, typically because they are popular and thus highly ranked in categories or search results, are the mostly likely to be seen and selected for download or purchase, creating a virtuous cycle that reinforces the popularity of the top apps and winner-take-all effects.
The global app economy is effectively controlled by the two largest platforms, belonging to what are at present the two most valuable companies in the world, located 9 miles apart in the most important technology cluster that exists today. Apple and Google have very different revenue models and core competencies, but their smartphone platform strategies have converged over time and are essentially similar, and represent a tremendous concentration of power.
The app economy has the potential to offer new economic opportunities to a wide range of independent digital producers, but its current state is skewed toward the largest firms and most lucrative markets. Proclamations that “everyone is treated equally in the app stores of the world” fail to acknowledge the very real institutional constraints, both market-based and platform-based, faced by independent developers — especially those in emerging economies. As more and more commercial activity is mediated by digital markets, it becomes increasingly important to identify and address these structural factors that shape outcomes. Because even when they are presented as open and meritocratic, technological systems are never neutral.
 Google paid out $7 billion, and Apple $10 billion, in 2014; this accounts for paid downloads and in-app purchases, but not advertising revenue from 3rd-party networks.
 Kushner, David. “The Flight of the Birdman: Flappy Bird Creator Dong Nguyen Speaks Out.” Rolling Stone, March 11, 2014
 Lauren Davidson, “How Facebook Is Fuelling the Growth of the Super Start-Up,” The Telegraph, August 9, 2015
 Craig Chapple, “Japanese Mobile Game Monster Strike Making $4.2m a Day,” Develop, August 19, 2015.
Vision Mobile (“Developer Megatrends: H1 2015”) estimates 60% of developers make $500 or less per month.
 See the full report for the complete methodology and its limitations
 Google website. https://support.google.com/googleplay/android-developer/table/3539140?hl=en
 “Digital Single Market — European Commission,” http://ec.europa.eu/priorities/digital-single-market/index_en.htm
 George A. Miller, “The Magical Number Seven, Plus or Minus Two: Some Limits on Our Capacity for Processing Information,” Psychological Review (1956).
 For a developer perspective, see Alex Austin, “Mobile App Developers Are Suffering,” https://medium.com/swlh/mobile-app-developers-are-suffering-a5636c57d576#.wv6ecgk7i