Inside the App Store: The New Marketplace for Digital Goods

iTunes became the first widely popular and successful Application Store. Since then, many other vendors have joined the gold rush. I write this blog post on the flight from Barcelona after spending a week at the Mobile World Congress, which is the biggest annual mobile exhibition and conference. This year it also included an event inside the event - Application Planet (an exhibition dedicated to mobile applications).

As I was wandering through the exhibition halls, it became apparent how popular the concept of the Application Store is.

The main goal of an App Store is to increase the attractiveness of a hardware or software platform to end users by engaging third party developers to increase platform capabilities.

Most of the current App Stores have been created either by a hardware manufacturer (Apple, Intel, Samsung, LG) or a wireless network operator (Orange, Verizon Wireless, China Mobile).

The Wireless Industry Partnership Connector Inc. (WIP) keeps track of App Stores for mobile developers and has listed 49 of them already on its web site.

However, App Stores are not limited to mobile devices. For example, Intel has created an application store for NetBooks which run on an Atom processor. According to Intel's product manager Lucas Massuh, Intel sees the store as the main way to distribute software for NetBooks as they don't contain a DVD drive. To make it very easy for a user to move applications from one device to another, the App Store keeps track of purchased applications and authorizes them on user devices.

Intel is planning to extend the App Store to its partners (netbooks manufacturers) and run white-labelled stores for companies like Acer. However, it looks like Acer already has plans of its own and will be offering downloadable software and e-book readers by mid-year.

Samsung has created a store for what it calls multi-device applications - programs that work on a variety of devices ranging from phones to netbooks, TVs to e-book readers. Samsung is encouraging developers to create applications that can utilize multiple devices. For example, using a phone as a remote control for a TV.

Pure software companies that want to attract developers to their platform are also joining the suite. Salesforce has created a store for applications that runs on the Salesforce cloud.

As the number of applications balloons, more specialized App Stores are appearing that cater to a specific market segment or to specific user needs. While most of the stores are targeting consumers, there are a number of new stores that focus on business and enterprise markets.

For example, MobileIron provides each corporate customer with its own customised Enterprise App Store, transforming the delivery model of enterprise applications from ‘push’ to ‘publish’.

The corporate IT department publishes approved internal and external applications, noting whether they are supported and/or reimbursed, and defining access based on the user role or IT policy.

Employees then browse their Enterprise App Store through the MyPhone@Work portal and select the applications best suited for them.

A similar model is used by AppCentral which brings together the efficiency of a self-service App Store with the power of IT controls.

Applications of Application Stores

Application Stores create an opportunity for a new business model when it comes to selling software and its components. Let's say Developer A has a great idea for a new game. To get his super game to the market fast, he wants to use an existing game engine created by Developer B. Currently, the only way for a game developer to distribute his or her game with a 3rd party game engine is to license it upfront.

Intel plans to start a developer-to-developer application store with an innovative revenue sharing model. When Developer A's game is sold, Intel will give Developer B an agreed upon percentage of the revenue. There is no risk for Developer A as he is not paying the licensing fee upfront and the application store takes care of all hassles associated with revenue sharing and payments.

Another ecommerce opportunity is "in-app" sales. In-app ecommerce refers to an application that sells additional content or services from inside the application. For example, a developer can release a free version of a game and allow users to upgrade to the paid version from inside the application, or buy additional virtual goods which can be used in the game.

Another example is an application that sells content. In Barcelona, I visited the booth of a Japanese company that sells Japanese Namga (Comic Books) on a variety of cell phones. The user installs the application on a mobile phone and uses it to purchase new comics which are immediately downloaded to the mobile device. e-book stores use the same approach.

The Application Store as a Marketplace

In essence, an App Store is a Marketplace for selling applications or content produced by a number of vendors.

There are substantial differences between an App Store and a regular ecommerce system.

A standard ecommerce system provides interfaces to two different types of users - shoppers and store operators. Application Stores have a third category of users - vendors. This means that an Application Store's system needs to support interfaces for creating and managing vendors' accounts as well as give the vendors their own interface to manage their products, prices, and generate reports.

The vendor interface needs to be simple and straightforward, as developers want to spend their time writing software or creating content instead of operating an ecommerce site. For example, Samsung, who plans to operate its App Store in 50 countries, makes it very simple for developers to set up product prices across multiple stores and currencies. A developer only needs to select a pricing tier for his or her application and this automatically determines prices in all currencies across all Samsung stores.

There is also an essential difference in managing shoppers' accounts. In the Application Store, order history means "what the user owns" instead of "what the user has purchased". Thus, the store should allow a user to reinstall applications on a new computer or phone as well as make sure that the user has access to application upgrades.

Another interesting distinction from a standard ecommerce system is that most App Stores don't have a web storefront. Like iTunes, the App Store has two types of applications: a store application for PCs, and another for mobile devices.

Some App Stores do have a web storefront that customers can use to look for an application. When a shopper finds the application he or she wants to buy, they are asked to enter either an email address or a phone number, and a link to complete the purchase is sent to their phones via an email or SMS message.

As we discussed above, the main goal of an Application Store is to attract developers, and the main goal of developers is to maximize revenue by selling more applications. Most of the current Application Stores are built internally by companies that operate them, and do not have advanced ecommerce features that have become common in modern ecommerce platforms.

Functionally, most App Stores are very similar to iTunes. The selling process is based on a simple product search, category browsing, and user ratings. This works well for the small number of applications which have made it to the top of the charts. The rest of the vendors bring in less than optimal revenue from their less popular applications.

The Future of App Stores

I believe that a second generation of App Store systems will arrive soon from established ecommerce vendors which will adopt more sophisticated ecommerce techniques like bundling, SEO, cross-sell/up-sell, promotions, and tier pricing to increase revenues for store operators and developers.

Please join me on March 30th for this month's webinar App Store - a new way to sell software, media, and anything digital where we will further explore this new fast growing trend in ecommerce.