Why App Stores Won't Survive

The recent news that online retailing giant Amazon.com would open an app store to compete with Google’s Android Market has set off a flurry of speculation about the future app store landscape.   Within the next few months there will be no fewer than three major Android app stores, including the VCast app store recently announced by Verizon.  Several other major players have announced their app store intentions (including AT&T, Sprint, Motorola, Samsung and Best Buy in the U.S. alone), though specifics are not yet public.  And of course, there are existing independent app stores that publish Android apps, such as GetJar, SlideMe and Appbrain.

All this activity raises the question:  How many app stores can the market sustain?   I am going to go out on a limb and say that the answer is probably none.  In fact, I predict that within the next five years, app stores will go the way of carrier walled gardens and consumers will get most of their apps directly from the developers and brands that create them.    Here’s why…

Until now, the app stores (by “app stores” I mean Apple’s iTunes primarily) have served four functions:

• Making the Market: By generating market awareness and excitement about apps, the Apple iTunes store conjured a market for apps where there previously was none.   The iTunes store is part of a virtuous circle:  demand for apps draws developers into the fold; more developers means more desirable apps are created; more desirable apps means higher demand for iPhones; and more iPhones means even greater demand for apps.
• Curating: App stores are in a position to separate the wheat from the chaff.  Nobody enjoys paging through dozens of ‘crapps.’  In a world with tens of thousands of niche developers and few well-known brands, the app store provides a service by keeping out substandard apps (as well as malicious or poorly executed code).  The app store can also stimulate sales of selected apps by featuring them in a prominent location.  While I don’t have statistics to cite with regard to app stores, in studying consumer behavior in supermarkets, research by Wharton professor David Bell suggests that up to 45% of purchases are unplanned within the app store demographic of ‘young, unmarried adults with above average income.’   If the same proportion holds true for app stores purchase behavior, as I suspect it does, then the curation function could account for as much as $3.2 Billion of the $7 Billion that is forecast to be spent on apps in 2010.
• Feedback:  Apps that receive positive user feedback outsell those that don’t.  No secret there.  Numerous studies have shown that online reviews are second only to direct word-of-mouth recommendations when it comes to influencing online purchase decisions.   By providing a forum for user reviews and comments, the app stores give prospective buyers a valuable information source that is not currently available anywhere else.
• Collecting Payment:  Making the purchase process flow smoothly is a key ingredient for app sales.  Online consumers are loathe to enter credit card information – especially for a one-off purchase of $0.99 from an unknown seller.  And from the merchant’s perspective, dealing with credit card fraud (both the malicious andfriendly variety), and the resulting chargebacks, is as appealing as a stick in the eye.  As a result, offloading this function to the app store is the best option available.

In a closed system, such as Apple’s iTunes, the app store concept makes a lot of sense.  By locking app downloads for iOS devices to iTunes, Apple has been able to carefully orchestrate the right mix of style and curation, resulting in the great user experience that iTunes is known for (let’s not forget that none of this would be possible if the Apple devices were not compelling to begin with).  In return for their efforts, they levy a very hefty 30 percent fee on any commerce that’s conducted. Don’t get me wrong, I believe that Apple is entitled to whatever it can command for its role in creating the market for apps.   As I blogged back in 2007, smartphones, as we know them today, would not exist if it were not for Apple.  But, let’s recognize iTunes for what it is.  Apple’s 30% fee and the tight control that it exercises over the iOS ecosystem are monopoly constraints that would be unsustainable in any open market situation.

Apps are digital goods that will naturally find the path with the least friction.  And, all things equal, market participants will gravitate to the markets that are open.   Of course “all things equal” is the key.   Before demand for apps existed, and later when the iPhone was the only real smartphone available, all things were not equal.  Apple held a natural monopoly and could afford to impose its “style” constraints in any way it chose.   With the explosion of Google’s Android OS, there now exists another smartphone ecosystem that is comparable to the iPhone and iTunes.  As a result, the landscape must change.

In an open system such as Android, where it’s possible to install apps from any source (known as side loading) the logic for an app store breaks down.  Developers will market their apps through the channels that best suit their needs.  In most cases, that will mean a direct transaction between the developer and the user.  Even today, there are hundreds of new startup companies developing better alternatives to the app store model.    App recommendation engines such as Flurry, Appsfire and appSpace will duplicate, if not improve upon, the curation and feedback functions. Others, like BilltoMobile, PayNearMe, Bling, Venmo, Boku and Zhong, are giving consumers and developers better ways exchange money.   As enterprising third parties find ways to innovate around the curation, feedback and payment functions, app developers will embrace them.  And, as developers embrace open systems, new ecosystems will evolve.

Just like the iTunes app store made carrier walled gardens obsolete, open app store ecosystems will make the iTunes model obsolete.  And if market forces don’t do it, the Department of Justice will.  After all, what’s the difference between Apple’s position with iTunes and the iPhone today, and the one that Microsoft had with Internet Explorer and Windows not so long ago?  Not for nothing, the fact that Microsoft’s Windows Phone 7 will not allow side loading virtually guarantees its failure, in my opinion.

In case it’s not already obvious, it’s my assertion that there really isn’t much of a role for a third-party ‘store’ in an open ecosystem for digital goods.  That’s why you don’t find many software retailers online.   I suspect this is also why Google has chosen not to invest any resources in the curation and feedback functions of the Android Market (much to the dismay of current Android developers).  Unlike the enviable position that Amazon has carved out for itself in the world of physical goods, where fulfillment and physical delivery is a critical function, I can’t see them adding much value to the delivery of apps in the long run.   In a digital world, it’s just too easy to bypass middlemen and go direct to the source.