How do app developers make money?

With 7 billion people in the world and with worldwide reach via the internet, you ought to be able to make a lot of money, right? With folks in the IT industry claiming they create new jobs to replace the old ones, I got to thinking about the quality of these new jobs. App developers are sometimes mentioned.

My instincts scream, “No!”

Yes, they are creating new jobs but not in the numbers that replace the old ones. With automation and robots, it feels more like a net destruction. I frequently read articles where internet companies do not need to employ as many employees as manufacturing companies.

Okay, well, what about those app developers?

Hmmm, this arena feels like a winner takes all arena. I go to the app store and find that there are so many apps, you end up taking suggestions. And those suggestions tend to be the same over a period of time. And, due to the layout of the store,  the suggestions seems to feed upon each other, i.e., you suggest it and then others suggest it because it is difficult to find good alternatives.

Still, this is all my gut feel, nothing concrete. So I decided to run back of the envelope numbers to see where it leads me.

Starting with the 7 billion in population. Now I know not all of them will be purchasing apps. After some research, I found a website MobiThinking that provides some interesting statistics, one of which is that there are roughly 1.9 billion smart phones or close to 17% of the population. I created a spreadsheet – not so pretty since it’s a rough sketch – which is shown below.

It looks like if you price the app at $4 and you look at 100% of the 1.9 billion consumers (instead of narrowing down by app category), you could be making a lot of money (close to $5 mil), even if one app developer takes 95% of the potential revenue, leaving you and the rest of the app developers the crumb.

However, that is revenue. If you can develop the app all by yourself, doing all of the intricate programming and all of the design work, kudos to you!

I made some assumptions though, like the total field of developers was 50 and that you have access to the full 1.9 billion that wants the particular app you are creating. But it is more likely that not all 1.9 billion is in the market for your kind of app, especially if it is NOT a game. Games are probably a whole different class where you have a HUGE market, but on the converse side, the development becomes exponentially more complicated. Further, the number of app developers are probably in the millions. ComputerWorld’s July 10, 2013 article, “India to overtake US on number of developers by 2017”, mentioned 18.2 million software developers worldwide. Software developers encompasses a broader class than app developers, but still, the number of app developers is probably in the millions.

So, say your app only has 20% of the potential 1.9 billion people interested – maybe you are developing an app for musicians and sell it for $1. And say that the number of competitors is still 50 (can’t tell if this is reasonable or not). The one who wins 95% of the revenue will make $226 million while the rest will make $243K each (see fourth column in attached picture of spreadsheet below). Not bad if you can develop the app yourself. But if you can’t and have to incur expenses, then the profit rapidly shrinks.

In addition, you would have to do this year after year.

After running these calculations, I’m highly dubious about the possibility of making it as an app developer, unless you are a crack game developer and can produce winning games, time after time.

The money is more likely to come from developing apps for corporations who want to get in on this new thing. And research on the internet confirms my suspicions. There are quite a few articles that says it is hard to make money as an app developer unless you are creating them for corporations. Research2Guidance’s July 6, 2011 article (or posting) says “Most developers start out as publishers but the increased level of competition in the main app stores, along with the high failure rates, made more profitable app developers alter their business model. Concentrating on developing apps for 3rd parties, as opposed to creating their own, was seen as a more profitable business alternative.”

So if somebody claims you can make it rich as a developer or whatever, first do research and run some numbers. It may not look as great as they tell you.