13 August 2013

Big business is outside of stand-alone applications

Applications have initiated significant development efforts and business activity. Besides very successful game and other application companies there are also other, even more significant opportunities, closely related to applications: Improvement or expansion of existing businesses or creation of completely new ones. This will also have major positive impact on national economies.

Application economy

Application (or app) economy refers to economic activity that relates to mobile applications, industy practically born only after 2007.

It is estimated to be a major economic contributor. In the United States it last year directly employed 466000 persons and in Canada 41300. According to another study, North America employs this year 525000 persons and Europe 531000. Growth forecasts are also very upbeat, in Canada + 51 % by year 2016.  The EU has also woken up to measure economic impact of applications and ways to better harness their potential to support economic development.

Application economy size and business models

Applications are brought to market with wide range of business models, such as paid downloads (incl. subscriptions) , in-application purchases and advertising. In addition, they can be used to make physical product or service purchases or one can purchase different types of media content (such as music, videos, books).

Recently published appNation study evaluated that the size of app economy is 59.8 billion USD in 2013, expected to grow to 151 billion USD in 2017, see the illustration below.

These figures are reasonably in line - but not completely matching - with other market research. Not counting sales of physical goods and services, Portio estimates for 2013 20.4 billion USD, ABI Research 27 billion USD. 2017 figure of Portio predicts 63.5 billion USD, and ABI Research for 2018 92 billion USD.

Portia has also assessed sales according to monetisation methods, see the picture on the right. Consistently with appNation, they predict that relative importance of in-app purchases increases significantly, and accordingly paid downloads will loose. Distimo sees even more dramatic change, they say that in-app purchases are now already three times bigger in the United States and nine times bigger in Asia than paid downloads. 

Also estimates of the role of application advertising vary, for example Strategy Analytics estimated 2.9 billion USD in 2012.

Games bring most of the revenues in application storesin the second quarter of 2013 they accounted for 80 % in Google Play 80% and around 75 % in Apple App Store. 

Applications in physical product and service business

The most noteworthy element in the AppNation prediction above is revenues from sales of physical products and services - much bigger than that generated by other business models. Vision Mobile research strongly supports this conclusion, too. Estimation of sales figures accurately is very challenging, because definitions of included sales vary and because statistics may not be planned to produce results on this.

Amazon and Ebay are examples of companies selling primarily physical products and Hilton an example of a service company: All have created applications for the most popular smartphones and tablets, targeting to create a handy and convenient buying experience.

Besides using applications for commerce, businesses are using them as business model cornerstones, to improve user experience and to build stronger relationships with their customers. While these activities are absolutely essential, there are no consistent methodologies, how to include them in market estimates. Thus when evaluating importance and size of the application economy, reliability of results is often very low.

Inter alia, Siemens utilises applications to improve their business. For example, their hearing aids unit has developed an application that provides information about hearing problems and allows users to test their hearing by themselves - a great way to increase company's credibility and gain customers.

Planmeca again, for example, extends its teeth imaging tool with an application that allows images to be viewed outside of imaging sessions.

Implications for businesses

It is clear that the greatest potential for applications is linking them to company business, either to sell its products or services, to generate better business models and products or to assist in creating and strengthening customer relationships.

This does not in any way rule out a possibility of creating new and thriving business around applications - such as Rovio and Supercell have built in game industry. Besides games, there are also other industries, where successful business, utilising digitalisation, can be established - either by existing companies or startups. And, as Rovio has shown, after sufficient initial success,  it is then possible to extend business model - even in a way that leaves an original monetisation model only a minor role. 

Companies, selling physical products or services, need to develop capabilities to understand opportunities and restrictions of the application world. These insights are then linked to new business model and product development and their go-to-market, marketing and sales support and to activities to tighten customer relationships. Everything need not to be made in-house, but adequate understanding is necessary to create genuine competitive advantages and to partner successfully. For example, detailed application specification and development can well be outsourced.

Anticipated growth of application economy creates new opportunities for application development companies, but in order to be a credible and desirable partner for a wider range of companies, developers have to increase expertise in their customers´ business pain points, business models and customer engagement.

And, finally. Applications, especially together with other products and services, are a great tool for both established companies and startups to radically disrupt existing businesses.


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