April App Store Report: Momentum Shifting To In-App Payments

The April edition of the WIP App Store Report is now available. The Report is a PDF version of a set of the data contained in our App Store Catalog here on the WIP site, along with some additional commentary in to the world of app stores. This month, we take a look at the interest that’s sprouting around in-app purchases, seen by many as a big hope for developers to create solid app revenues.

As app stores mature and become more crowded, there’s a race to the bottom for prices of many mobile apps. While some premium games and branded apps are able to hold their purchase prices up somewhat, price competition for other apps remains very intense, particularly as more developers turn to an advertising-based revenue model.

For many apps — particularly basic content-centric apps — free replacements abound; if they don’t yet, they will. Many developers have seen their sales vanish into thin air overnight after a free competitor emerged, leading more and more to try and head off such issues by using a freemium model built around in-app purchases for premium features or content.

In the past few months, app store providers have sought to capitalize on this interest by rolling out support for in-apps payments. BlackBerry App World and Android Market have launched support for them; Ovi Store has them in beta; BlueVia and WAC have announced forthcoming support for them; independent app stores like Mikandi and Nexva are getting in on the act as well.

The in-app purchase model takes on a few basic forms:

  • a user buys virtual goods to use within an application
  • a user pays a recurring subscription for content in an app
  • a user pays to upgrade to access more features in an app

These forms are commonplace on the web and existing social networks, where the freemium model has proven successful in a number of different settings, such as for Facebook games from Zynga, and utilities like Dropbox, Evernote or TripIt. But, as with so many other things, some complications emerge for in-app payments when it comes to mobile.

The in-app payments environment is defined by two key questions: what is technically possible or available on a given platform or device, and what’s allowed by the app store through which an app is distributed. For instance, plenty of payment solutions exist for iOS and Android apps, but if those apps are distributed through iTunes or the Android Market, they must use those store’s payment and commerce systems.

Other independent app stores choose to set no restrictions on the in-app payments developers use, while others provide their own in-app infrastructure. Operators, too, have gotten in on the act, with many looking to support in-app payments through billing APIs, and some similarly mandating their use for apps delivered through carrier channels.

This fragmentation adds an additional layer of complexity for developers, who must match their service provider to their distribution channels, and be prepared to support different solutions for each one.

But the promise of in-app payments may make the additional overhead worthwhile. One estimate credited 1/2 of Apple’s 2010 app revenue to in-app payments, while a research firm has predicted that by 2013, revenues from in-app purchases will surpass those from upfront download charges.