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iPhone Software Sales Take Off

The Wall Street Journal reports that I’m not the only one downloading an obscene number of iPhone applications:

In the month since Apple opened an online software clearinghouse called the App Store, users have downloaded more than 60 million programs for the iPhone, Chief Executive Steve Jobs said in an interview at Apple's headquarters. While most of those applications were free, Apple sold an average of $1 million a day in applications for a total of about $30 million in sales over the month, Mr. Jobs said.

If sales stay at the current pace, Apple stands to reap at least $360 million a year in new revenue from the App Store, Mr. Jobs said. "This thing's going to crest a half a billion, soon," he added. "Who knows, maybe it will be a $1 billion marketplace at some point in time."

"I've never seen anything like this in my career for software," he said.

So. What does this remind me of? That Microsoft recently reported its Xbox Live Marketplace had generated $240 million since going online in 2005, $180 million of that in the past 12 months. Put in perspective, by simply opening up the iPhone, Apple has a created a market that’s dramatically bigger than something Microsoft has been nursing for over three years.

Now, to be fair, I’ve also bought a ton of content (mostly XBLA games) on Xbox Live Marketplace. But I’m a gamer. The smart phone market is demonstrably bigger than the video game market and it encompasses virtually every person on earth. It’s a good business to be in.

I’m also reminded of Microsoft’s claims of 18,000 software titles for Windows Mobile. This is just a guess, but the number of paid Windows Mobile apps has to be in the single digits. Who the heck is paying for Windows Mobile software? And how good is it?

Regarding business models, Apple is positioning the Apps Store as it does the iTunes Store: It doesn’t really make money, but it’s a value-add for their high-volume, high-markup hardware products:

Apple isn't likely to derive much in the way of direct profit from the business, Mr. Jobs acknowledged. It is keeping only 30% of the proceeds from application sales -- about enough to cover expenses from credit-card transactions and other costs of running the online store -- while the programs' creators keep 70%.

Instead, Mr. Jobs is betting applications will sell more iPhones and wireless-enabled iPod touch devices, enhancing the appeal of the products in the same way music sold through Apple's iTunes has made iPods more desirable.

"Phone differentiation used to be about radios and antennas and things like that," Mr. Jobs said. "We think, going forward, the phone of the future will be differentiated by software."

Exactly. This type of thinking, not technology, is at the heart of the iPhone’s success, and my own interest in the product: Flaws be damned, the thing is a game changer.

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