What is the Revenue Model for Mobile Apps?

Every Internet or mobile app, operating system or browser, communications or entertainment service available to users without charge has to find a viable business model. For more than a decade, at a high level, the implicit hope, or explicit expectation, was that “advertising” would be the ultimate revenue model.

That implies high end user scale, something it is obvious most apps will not be able to attain. Over the past half decade, though, “commerce” and “transactions” have started to get more traction as a revenue model, and mobile apps are no exception.

Though initially many hoped or expected that apps would create a direct app sales revenue model, that is only partly true. Free apps will account for 91 percent of total mobile app store downloads in 2013, according to Gartner.

"Free apps currently account for about 60 percent and 80 percent of the total available apps in Apple's App Store and Google Play, respectively," said Brian Blau, research director at Gartner.

So what is the revenue model for the 91 percent of “free” apps? In a growing percentage of cases, revenue is generated by “inside the app purchases.”

Gartner estimates that in-app purchases will account for 48 percent of app store revenue by 2017, up from 11 percent in 2012 and 17 percent in 2013.

In other words, mobile apps will be, in most cases, the enabler for a revenue stream (selling things inside the app), not a direct revenue generator.

Mobile app stores will see annual downloads reach 102 billion in 2013, up from 64 billion in 2012, according to Gartner researchers, with total mobile app store revenue in 2013 will reach $26 billion, up from $18 billion in 2012.

As with most other parts of the Internet ecosystem, leadership is, and will be, concentrated. "iOS and Android app stores combined are forecast to account for 90 percent of global downloads in 2017,” said Blau.

Over time, it also is likely that users will stabilize their usage of apps that have the highest value, leading to a lower rate of new app downloads, though the trend might slow only gradually.

Average monthly downloads by  iOS users will decline from 4.9 in 2013 to 3.9 in 2017, while average monthly downloads by Android device users will decline from 6.2 in 2013 to 5.8 in 2017, Gartner predicts, as users develop strong preferences for some apps.

What isn’t so clear yet is the relative importance of tangible goods and services, compared to digital content goods, that will be purchased inside mobile apps. What is clear is that the business model for “free” apps will not be driven mostly by advertising, as might be the case for some Internet apps.

Mobile App Store Downloads, Worldwide, 2010-2016 (Millions of Downloads)

	2012	2013	2014	2014	2016	2017
Free Downloads	57,331	82,876	127,704	167,054	211,313	253,914
Paid-for Downloads	6,654	9,186	11,105	12,574	13,488	14,778
Total Downloads	63,985	102,062	138,809	179,628	224,801	268,692
Free Downloads %	89.6	91.0	92.0	93.0	94.0	94.5

Source: Gartner (September 2013)