Markman Capital Insight

App makers chase an elusive dream

To get our regular email updates, simply click here.There has always been an income-inequality problem in the world of software development. Now a new study from Sensor Tower illuminates just how big that divide has become. Like most gold rushes, the app-development frenzy started with a good slogan. Steve Jobs knew the first...

To get our regular email updates, simply click here.

There has always been an income-inequality problem in the world of software development. Now a new study from Sensor Tower illuminates just how big that divide has become.

Like most gold rushes, the app-development frenzy started with a good slogan. Steve Jobs knew the first iPhone was revolutionary because it elegantly replaced the ubiquitous iPod and the most important elements of Blackberrys.

By the time the “there’s an app for that” campaign reached office water coolers, the word was out: Apps just might be something really big.

They were shape-shifting , turning iPhones into personalized radios, lens blurring cameras and a place to catch up with friends. When Facebook (FB) paid a more $1 billion for Instagram, a photo-sharing app with just 13 employees, developers began sprinting westward to plant their own stake in app economy. So we got a lot of new apps. In fact, the App Store still gets more than one thousand new apps every day in a dizzying array of categories.

Facebook and Google (GOOG), major makers of free applications, dominate app downloads in the categories of the most popular apps and the apps people spend the most time on. What’s interesting is the top 1% of developers making pay-to-play apps – firms behind software titles like Clash of Clans, Spotify, Netflix and HBO Go – account for 94% of all App Store revenues.

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To put these numbers in perspective, the App Store collected $1.43 billion in revenue in Q1. Of that number, 623 developers generated $1.34 billion in sales, meaning just $85.8 million was divided amongst the remaining 61,677 software developers. At an average of about $21,000 that’s not a lot left to pay software engineers and run a business. The truth is most software developers are scraping by.

Discoverability and the forces of friction are against them. Apple (AAPL) has been criticized by software publishers because it’s simply too hard to find new applications in its voluminous App Store. It is making strides to change the way people find apps, but the issue of process is more difficult. In the App Store, visitors must find the app, download it, enter credentials or set-up an account and then interact. All of that friction between them and the software developer creates a disincentive and explains why the average iPhone owner downloads zero new applications per month.

For developers there is some hope though. At its I/O developer conference Wednesday Google announced Instant Apps . The idea is applications get a deep link in the Google Search algorithm in addition to a spot in the Google Play Store. Choosing that link in Google Search provides instant access to the pertinent information indexed by the software application. All credentials and payment information are stored in the user’s Google login or Android Pay accounts, so that part is seamless.

The result is all of the functionality of the full application without a lengthy download and better discoverability. In theory, this rich experience puts smaller software developers on a level footing with their larger competitors. Unfortunately, Instant Apps are available to Android devices only.

Smartphones were game-changing devices enriched by the ability to download shape-shifting software applications. The promise of great riches spawned many thousands of new developers and applications. Yet real winners have been few and that is unlikely to change. The richest developers are getting richer while the rest chase a dream that remains elusive.

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About Jon Markman:  A pioneer in the development of stock-rating systems and screening software, Jon Markman is co-inventor on two Microsoft patents and author of the bestselling books The New Day Trader Advantage, Swing Trading and Online Investing, as well as the annotated edition of Reminiscences of a Stock Operator.  He was portfolio manager and senior investment strategist at a multi-strategy hedge fund from 2002 to 2005; managing editor and columnist at CNBC on MSN Money from 1997 to 2002; and an editor, investments columnist and investigative reporter at the Los Angeles Times from 1984 to 1997.

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