In-App Purchases Will Dominate the Smartphone App Business

What’s the best way to make money in the smartphone apps market? Surprisingly, the answer is to give away apps for free—and to generate revenue on subsequent sales of in-app purchases. In-app purchases will rise to account for 64 percent of total market revenue in 2015, up from 39 percent in 2011, as shown in the figure below.

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Revenue from in-app purchases will increase to $5.6 billion in 2015, up from $970 million in 2011, according to the IHS Screen Digest Mobile Media Intelligence Service[JW1]  at information and analysis provider IHS (NYSE: IHS).

 

“Smartphone users overwhelmingly prefer free apps to paid apps, as we estimate 96 percent of all smartphone apps were downloaded for free in 2011,” noted Jack Kent, senior analyst, mobile media for IHS. “In 2012, it will become increasingly difficult for app stores and developers to justify charging an upfront fee for their products when faced with competition from a plethora of free content. Instead, the apps industry must fully embrace the freemium model and monetize content through in-app purchases.”

The business model of offering apps for free, then charging for in-app content, is known as “freemium.” This app strategy represents the fastest-growing segment of the global smartphone apps business, and will soon dominate the market.

By the end of the third quarter of 2011, free-to-download applications already represented 45 percent of the top-grossing U.S. iPhone applications as well as 31 percent of the highest-earning U.S. Android Market applications. IHS Screen Digest calculates that 68 percent of the top-grossing U.S. applications featured some form of additional content or functionality available via an in-app purchase.

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