Mobile App Subscriptions Are Going To Change Everything(?)

Mobile App Subscriptions — Part III

This is the third (and last?) part of my random subscription thoughts, which summarizes recent dramatic changes in mobile subscription and my own humble opinion of why this is freakin’ HUGE. The first two parts cover challenges in mobile app subscriptions and tips to get it right.

*Disclaimer: While I did spend quite a bit of time studying this, everything here, including the facts, is just my opinion.

A New Model in Town

In June 2016, the floor shook in our cozy JoyTunes office. Well, it didn’t physically move but it might have for all I knew as I was trembling with the news on Apple’s revenue cut change for subscriptions.

In short, Apple’s SVP of Marketing, Phil Schiller, announced that they would drop the regular revenue cut from 30% to 15% from the second year for a given subscriber. Within hours, a strong aftershock was felt as Google announced a similar cut but from day one of a subscriber’s membership. To top it off, Apple declared it will be opening up the subscription model to all app categories and not only content-based apps. EARTHQUAKE

I’ll leave it to the conspiracy lovers to concoct what exactly got Phil to uncharacteristically make this announcement a week before Apple’s grand developer conference WWDC, and Google to make a very similar announcement within hours (though I do have my own fun thoughts), and focus instead on the magnitude of this change.

No, I’m not talking about the revenue change at all. Growing from getting 70% of the revenue to 85% means a growth rate of 21%, which is really sweet, but it’s probably not a game changer for most companies by itself. I believe the bigger thing here is the statement that both giants are sending — No more ads-based short-lived crappy apps!

Wait, if this happened months ago, why is this relevant now?

That’s an excellent question. After iOS10 rolled out recently with its magnificent changes to subscription management and features (some details at the bottom), we became convinced previous announcements were not cosmetic ones but actual strategic changes.

Better Apps, Better Mobile Companies

The App Stores need to mature at some point. Mobile developers know how amazingly hard it is to build a big viable business based on micro payments especially when expectations are going up. Right now most of the successes belong to the companies that build tools (like in a classic gold rush), and your occasional gaming company that has cracked open the whale economy, meaning they have found a way to get some customers to pay a ridiculous amount of money (in the thousands of dollars, aka whales) for their drug-level addicting games. Other than that, it’s mostly indie devs that often can’t afford to go beyond mediocre experiences, or startups that can but at the expense of losing lots and lots of investor $$.

In the beginning this worked fine with tens of thousands of flashlight apps, crappy games, fart-sound apps, etc., but people are now looking for better experiences and more value, for the same $0.99 (at most!) that they used to pay before. Arguably this is even more evident in the Play Store where it is known few people pay which leads to low quality ads-filled apps with very shallow experiences that discourage people from buying, and so on.

As an example, it was a shocking finding that a very well known paid app which is heavily promoted by Apple and spending a shitload on ads is making somewhere in the $10M range per year. Now, this might sound like a lot, but this app has achieved the holy-grail of store attention and built a sizable acquisition machine. One would expect it to be a huge juggernaut when instead its revenue isn’t particularly interesting in the investment world. Is that all that we can hope for? That’s our role model company?

In essence, there isn’t really a middle class of app companies that have great millions-of-dollars-per-month businesses. There are the huge players, and a very long tail. Consider this, the Apple App Store generated $20B in revenue in 2015 (70% of it going to devs), with your current ‘big players’ (Candy Crush, Clash of Clans, etc.) responsible for a good chunk of that. This implies a quickly diminishing power graph with only the top companies making real revenue. You only need several thousands of dollars a day to be in the 500 top grossing in the US, which says a lot.

To demonstrate this, illustrated below is the daily revenue of one of the JoyTunes apps from some time ago as a function of the rank in the Top Grossing Education in the US. The plot and its fitted curve show the extent of the drop in revenue —few companies make money, followed by a very long tail.

Daily revenue vs. top grossing in the Education category in the US, demonstrating the power law of quickly diminishing revenue with a very long tail of daily revenue

Apple and Google have decided to push developers into creating greater value by rewarding them with more profit, which is nothing short of a paradigm shift, or at least an attempt to create such a shift. Just consider how dramatic it is for companies like Apple and Google to make such a big pricing change in the holy domain of the App Store.

The acquisition costs through various paid channels and the average revenue per user (ARPU) are at a balance today that doesn’t allow much room for change. By opening the lucrative subscription model to all app categories and adding more revenue down the line for retained users, this will (should?) encourage many companies, probably mostly in non-game categories, to create meaningful lasting experiences with a much greater ARPU over time. This in turn means more valuable apps → more usage, more device sales, more app store revenue over time.

Final Words

It’s exciting to see if this paradigm shift actually succeeds in increasing ARPU of users while creating better, healthier and more viable app ecosystems. All of us at JoyTunes are thrilled about this and can’t wait to see what else will be rolling out.

See also — Part I with the special challenges of mobile app subscriptions and Part II for tips and tools to get it right.

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