Opportunities for app developers are growing as Apple and Google make changes on mobile

Over the last few years, the mobile Internet ecosystem has become an increasingly difficult environment for new companies to emerge and grow compelling businesses. Sure, we have seen the occasional lightning strike of a PokemonGo, but it’s become somewhat of an accepted truth within VC and entrepreneur communities that the current system favors the largest app providers and prospects for upstarts is limited. The top 25 mobile apps are dominated by the largest internet companies with Facebook and Google owning the top of the list according to comScore.

Mobile app startups face a multitude of challenges. Take the limited avenues of app discovery; today users really only have three ways to find your app: organic app store search results, app store features or Facebook ads. Add to this the build-up of consumer fatigue around adding new apps to their phones (time to download/register, the incremental memory/battery life drain, etc) and you face an uphill battle. Nearly half of smartphone users don’t download any apps in a month, and the average user only downloads two (source: comScore).

Even if an app provider can get onto a user’s phone, the real work has only just begun. Driving engagement and monetization presents a whole other set of hurdles. Consumers are fickle and have short term memories. If you’re like me, half the time you forget that you even have the app on your phone after the initial usage. And all this assumes that your app or service is sufficiently compelling to enough users to even merit an app download. Otherwise, you’re relegated to mobile Web, and good luck trying to drive meaningful transactions there.

But it’s not all doom and gloom. Several recent developments suggest that prospects are brightening for mobile app developers across both iOS and Android. Looking at these developments holistically, there could be a resurgence of opportunity for mobile app developers if played well. The trick will be to nimbly take advantage of these windows as they emerge and before they become saturated.

iOS 10 Game Changers

Two significant developments came out of the iPhone7/iOS10 release. The first is Apple’s decision to open iMessage to third party developers. Suddenly, mobile app developers have access to an enormously powerful channel that could become larger than Facebook in user reach. After all, iMessage is the most-used app on the iOS according to Apple. While it’s relatively early days to see just how the iMessage gold rush will play out, companies are jumping in. One of our investments, Tenor, immediately saw a 20% increase in daily shares per user after integrating with iMessenger. We expect to see a full range of players taking advantage of iMessage as distribution platform soon.

Even more interesting, Apple has extended Apple Pay from the app environment to the mobile Web. This could help address a huge problem for ecommerce players beyond Amazon and eBay who struggle with low mobile Web transaction conversions and challenges to convincing mobile users to download their apps. We think Apple Pay represents a major move that could radically improve conversion rates and monetization, potentially even surpassing that of the desktop Web. For many mid-tail and long-tail services, mobile Web + Apple Pay may be the way to go vs the app install route.

Finally, Apple recently unveiled its plans to offer search ads within the App Store which will give app developers a highly-targeted, intent-rich, performance-based ad model for driving app installs. Depending on the signals Apple chooses to leverage in its targeting engine, the efficacy of this paid channel could surpass the performance of Facebook’s app install ad offering, which is a huge deal.

Android Moves

Meanwhile, Google has been working hard to level the playing field for third-party apps and services in meaningful ways as well. Back in July 2015 Google rolled out Play Store search ads and has evolved their pitch to small developers with ‘universal app campaigns,’ enabling developers to promote apps across different Google properties.

At Google I/O this past May, Google announced its Instant App platform, effectively enabling native app-like functionality without the need for the app download step. While we don’t think Instant Apps is quite ready for prime-time (it requires developers to write to the Instant App platform so they’ve got a chicken and egg problem), it is an encouraging step in the right direction. And not to be outdone by Apple, Android pay is headed for the mobile Web too, on Chrome of course.

On top of these platform-layer developments, forward thinking startups like Button, one of our investments, are helping app providers embed their functionality into other highly relevant app and web experiences through deep linking. By creating a seamless experience from app to app or mobile Web to app, app makers suddenly have brand new avenues for discovery and re-engagement. The early traction here reminds us of how Adwords and Overture helped to directly connect Web users to highly relevant pages deep within commercial websites.

Why is all this happening now? Most of it is simply the underlying platforms catching up to the full demands of mobile Internet users. Internet traffic shifted from desktops to phones faster than anyone could have possibly imagined and the pace is just accelerating as mobile apps start eclipsing the mobile web. Comscore reports that mobile app usage continues to outpace mobile web by a 7:1 margin in time spent, a ratio that has held constant for the past two years.

Savvy first-mover, mobile-first players like Uber and aggressive Web incumbents like Facebook and Amazon staked their claim to consumers home screens early. Now, the platforms and enabling startups are providing the tools and capabilities to enable the rest of the ecosystem. All of which means we expect to see a few promising trends over the next year:

  • Dramatic improvements in conversion/monetization rates and LTVs overall for mobile Web and app providers;
  • Significant efficiency improvements in customer acquisition costs across both mobile Web and app provider (not necessarily lower CPI’s, but lower CAC’s)
  • Resulting growth in mobile commerce startups broadly

I’m excited to watch how companies will take advantage of these mobile app opportunities to build a long term competitive advantage and lasting businesses.