Did Apple make a mistake with free apps?

Did Apple make a mistake with free apps?

Manton has an interesting post up where he theorizes that a lot of the problems we've seen in the App Store, from the across the board 30% revenue cut Apple requires for paid apps, to in-app purchases, to iAds, and now subscriptions can all be traced back to Apple's decision to host free apps for free. In other words, that the cost of approving, hosting, marketing, and delivering free apps is high enough that Apple is struggling and stumbling to make enough off paid apps and content to cover it.

When Steve Jobs said it, offering free apps for so little seemed almost foolish, like Apple was compensating for the high 30% by giving too good a deal to free apps. Why not charge some hosting fee? Or why not give up exclusive distribution and let free apps be installed directly by the user without forcing everything through the App Store? Unlimited bandwidth, promotion in the store, and everything else just for the $99 dev program fee was a pretty good deal. And now I wonder if Apple hasn't been backpedaling ever since, trying to make up for that mistake.

So in order to run the App Store at just over break-even -- as Apple reports they during their financial results -- they need to earn enough off paid apps to defray the cost of free apps. They also have to make sure they don't lose revenue -- they can't let developers offer free apps, shouldered by Apple, with ads that make money for Google or that use subscriptions or other forms of outside payments as a way to circumvent the revenue sharing. (Which is why we said from the beginning Apple couldn't charge less than 30% for subscriptions or every paid and in-app purchasing app that could would just switch to subscriptions in order to keep more of the revenue.)

Are free apps a burden? Apple doesn't say so it's difficult to tell. It's possible the cost of approving, hosting, marketing, and delivering all those free apps while not insignificant is easily covered by paid app purchase. (I'm not counting profits from hardware sales because Apple is going to want App Store to be profitable, if only barely, on its own.) If it is, then Apple certainly didn't make a mistake and their platform has benefited tremendously from having free apps in the ecosystem. If free apps are costing Apple significant money and resources, however, and if that cost is increasing as they reach milestones like hundreds of thousands of apps and billions of downloads, then it could help explain

Manton's answer is for Apple to allow side-loading of apps -- to allow developers to sell and users to install apps from outside the App Store on iOS the same way they do now on the Mac. That would take the hosting burden away from Apple... but it would create a new burden on consumers.

Sure, it would be a good answer for some developers and power users but certainly not for all of them -- even most of them. Many developers value the trust relationship Apple has created for users. Successfully creating a place where users feel safe and secure enough to buy an app and know they won't get malware or be defrauded, and can delete it easily if they don't like it is invaluable (even if not always valued.) That simply didn't exist before the App Store (it certainly wasn't the case with Palm OS and the Treo, which was side-load heaven and mainstream user hell.)

And not to be too cliched about it but if my mother couldn't find an app on the App Store she would either simply not realize it existed or bug me to help her side load it. (Or she would call me asking if "Amazon Kandle" was safe to buy via "PayPul".) That's not an Apple solution, and it's a crummy mainstream experience overall.

So what is the answer? Getting rid of free apps and creating a baseline of $0.99, like iTunes music of old, doesn't seem realistic. The genie is out of the bottle. Given how Apple has added in-app purchases, reversed their policy and allowed in-app purchases in free apps, added iAds, added subscriptions, they certainly don't seem to have found it yet.

[Manton via Daring Fireball]

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Rene Ritchie

EiC of iMore, EP of Mobile Nations, Apple analyst, co-host of Debug, Iterate, Vector, Review, and MacBreak Weekly podcasts. Cook, grappler, photon wrangler. Follow him on Twitter and Google+.

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Reader comments

Did Apple make a mistake with free apps?


What?! You're feeling sorry for Apple not making enough money? Have you seen their financials lately? More apps = sell more devices = make more money. Sheesh, Apple is the last person I am going to worry about in this economy. B

Given that Apple is going to insist every division is at least barely profitable, I'm feeling sorry for developers that have to deal with ever-changing policies trying to ensure that barely profitable status.
Microsoft makes so much money off Windows or Office they can lose billions on internet and everything else. Apple hasn't historically been run that way (jokes about MobileMe aside...)

But the AppStore is one of the main reasons people buy apple hardware, just like the iTunes music store was one of the main reasons people bought iPods. I don't think apple cares too much if the AppStore is barely profitable but helps sell hundreds of millions of idevices.

I hope they aren't going that route. It's kind of the fallacy of big companies or getting stupid. Some divisions of a company might be valuable to the overall organism, even if they might look useless to the bean counters. Apple has been increasingly making dumb decisions like this, which scares me they are headed the way of the big-company dodo. (case in point... the Xserve)

Apple might claim divisions as "barely profitable" but as wcarlson40 said we've seen their financial disclosures and their profit margins on hareware sales.
From my point of view if Apple does start to end the free apps that would be a good thing for everyone else because it would be the kick that a lot of large shops need to stop making OS specific apps when they don't need native hardware access and instead build real mobile web apps that operate cross platform.

The day Apple does away with free apps is the day I switch to Android. Even if it is a half-baked hacked together OS.

The App Store has the market force it does because of the sheer number of apps that are available (looking back, maybe not forward). In a way it has been a marketing expense. But also, developers sometimes work for free like an amateur musician might. I am sure Apple understands that it would be a shame to put a barrier up to their free participation in making the iOS platform more appealing. I do not appreciate Apple's share of the developers' profits, however. They force the sole control of the distribution of iOS applications which gives them totalitarian / non-market based control of the fees they can charge.

so many free apps are merely canned websites, and would be totally unnecessary if the iPhone supported flash.
i'm not advocating that the iPhone support flash, but this category of free "siteapps" removes much of the incentive for apple to build up a proper support structure for html 5 web apps on the device.
when you load up a web app you get a ton of chrome and hassle, or else else you launch the web app in "app mode" and lose "nitro" performance enhancements .. and at any rate apple hasn't advanced the state of the art in terms of html 5 or small but important things like granting web apps easy access to camera and photo library.

Are some of the implications that it hurts developers too, as they are kinda underwriting the free apps?
At the same time, a lot of the free apps have buy ins, which result in more paid apps, plus more $ for developers and app store, no?

Yep, the free apps help drive the whole eco-system. If any developers are complaining, they aren't really thinking.

Apple is good. They don't have to change anything, and yah like the person above me said, a lot of free apps are basically demos. Also most of the apps I use are free.

I think the two commenter's before me have missed the point. If Apple got rid of free apps, charged for everything, they wouldn't have to take 30% off paid apps, purchases and, importantly, subscriptions.
Media organisations wouldn't be so upset about having to hand over 30% of subs. It costs about 30% of the purchase price to publish print media, Apple is taking 30% of the e-price (before sales tax) so they are making less on e-media than on old fashioned print media.
No free apps = lower percentage cut all round = more media take up of iOS = more success and revenue for Apple

if you think any savings apple might make by removing free apps would go to reducing the 30% cut on apps and subs, instead of going straight to apple's bottom line, you are sorely mistaken.
apple is not a "break even" company, and they don't take gambles on market forces. apple tends to price for high margins until the market clearly manifests, and only then will they look at pricing for volume. even then they won't price for market share unless they absolutely have to.
apple is a mega-profit machine. they believe that they can keep a 30% cut AND increase media uptake of iOS.
in some ways it's the safer bet, not just the most potentially profitable one. either the uptake remains marginal but apple gets a fat piece of the pie, or the market gets HUGE and apple gets a fat piece of the pie. the alternative is pricing for volume before the market exists, and potentially ending up with a thin slice of squat.

Disagree. If there were no free apps Apple would not be selling nearly that many devices. I think no one has the numbers, but I´m willing to bet that people download at least 100 free app for every paid one. Without the free apps the iTunes would be where the Ovi Store is, restricted to a niche of users.
Apple did what it had to do, creating the right conditions for the App Store to take off. I agree with Rene though, the cat is out of the box and there is no going back now.

Sounds like it's going to push against anti-trust/monopoly issues that Apple is kinda leaning on the wall on as is.

I believe what he is saying is Apple did try to make iAds the only advertising you can use in your apps but the government was against it so that is why you can use iAds or Google.
Now the question is, Google can be used to advertise in iOS apps can iAds be used in Android apps.

Manton wanting it to be true doesn't mean it is true. He presents no facts, just his desire to offer apps outside the app store.

Didn't read Manion's article, but Rene's response was absolutely not persuasive. So some developers really value the app store? No problem, because no one is suggesting the app store go away. Rene's mom couldn't find an app without the app store? Ok, again, no one said the app store should go away. This solution really solves everyone's problems: the sheer volume of apps on the store would go down (lowering Apple's costs), users/developers who need the curated experience would still get it, and users/developers who don't need or want the curated experience could avoid it. What's not to love?

The Apple developer program is $99/year. That works out to $8.25/month, or about what you'd pay to host somewhere else. I don't see a problem there, unless someone is hosting a huge amount of app space, and it probably averages out with the smaller apps.
I suspect the real issue is side loading and Apple's rules. Luckily, Apple is smart enough to not allow it. It looks to me like others are figuring that out too, and the trend is going that way. Say what you will about innovation and freedom, customers prefer the walled garden.

I hate the fact that we champion the dumbing down of the American populace.
It's great that the iPhone is this dead simple and what not...but to get to the fact where you making the American mind lose common sense on what to download and what not to. In my 24 years of living, I've never had a virus. Never downloaded a corrupted file. Sigh...
But off my rant, and onto topic...I think they'll just have to deal with it. Music and Apps are two different things. People are willing to buy music easily. But it's going to be harder to sell apps, even at .99 cents, after they've paid $200 for the phone, paying $70/mth for the service, then all the extra for the add ons. They'll expect something free to come out of it somewhere down the road. Apple makes enough money...they'll be okay.

It is the foundation of their eco-system... which benefits everyone. If they change it, they lose the big-picture and cut off an appendage without thinking through the implications (hey... I don't seem to need my left arm, lop!). Having this great eco-system ultimately benefits those developers. If the developers are complaining about this, they are short-sighted IDIOTS. Let them go develop Android apps.
What I think Apple could do, if anything, is filter out more of the junk. I run across apps quite often that are obviously junk. Of course then they get hounded by the 'censorship' crowd. It's a bit of a no-win, though I think they have been handling it reasonably well.

Google should not have to mange their Android Market , if you have Android you sinned up for the Open-Ecosystem.

It's good that it's open, but there are apps there that people charge for that are garbage or have viruses in them. I'm not saying that iOS doesn't have bad apps but at least there's an approval process for the Apple app store to make sure there's some quality control. The Android Market has no quality control, it's only when an app is malicious is when they pull it. The Android Market is like the dump: Open to everyone, but full of garbage with the occasional gem in it.

I'm not sure how anyone can say the app store is barely profitable. Look at those lines out there for an ipad a week ago. That app store is a main reason for those lines. Even if Apple had to subsidize the app store (which they should be thankful they don't), that's their bread n butter. It sells more iOS products.
I think its bad business for Apple then to want to demand more than what all these app developers give them already. There's other ways to make more revenue than to make a squeeze play with the ones who give you that competitive edge.

Reference the adds in free apps, doesn't apple charge a hetfy price for them? That was one reason for iAds. Are there free adds in apps that apple does not charge for? That would be a mistake. There is large amount of money to be made in adds.

I kinda think the same way about 64 gig version of the iPad. They make up for the 16 gig version being so close to cost by charging $200 more for 48 gigs of space in the 64 gig versions.

Not a mistake. Having a lot of free apps attracts many many users to iOS devices. So, they sell more iPhones, iPads, iPods...

"So what is the answer?"
There is no question. It's a non-issue stretched into several paragraphs by Manton who apparently impresses himself as a deep thinker. Shame other sites pick it up on this nonsense.

I think Apple is just always thinking of new ways to make money. Just because they are implementing new ways to generate revenue doesn't mean they aren't making money on apps. In fact, I would argue the App Store made the iPhone what it is today.
I do understand what Rene is saying though. Companies typically don't like to have divisions that make zero money or lose money, regardless of the strategic reasons for having that division.

And there are a LOT of really dumb companies... especially the big ones! I'm just hoping Apple doesn't go there.

Forget about the narrow focus of apps, Apple has always hosted free. There have been free music tracks and free audio and video podcasts, some of which are long running series. Apple has not harmed itself by allowing and hosting free content.

Wait. Since when has Apple been at loss ever with the App store. If anything it's all gains across the board. They just have to keep the infrastructure up, update the main page, review apps, etc. These hardly conpare to how much shwer revenue they make. Their a company, profits are understandably their goal. This guy commenting on Apple's "bad" decision seems to be very anti-consumer.

Curious -- what costs does Apple incur for marketing free apps? Take, say, Shazam (at least the free version). That figured prominently in iPhone ads a few years ago. I suppose you could call that free marketing for Shazam, but that was actually marketing for iPhone. So that doesn't count as a marketing cost for free apps. So... where is the marketing cost? Opportunity cost that any app featured in an ad or on the App Store home screen is taking up space that could go to a paid app? Okay, but that's a pretty thin argument. I don't see where Apple is losing any money on the marketing side of things (leaving aside hosting/bandwidth costs of serving them up).

The only thing Apple should do with Free apps is scan them to see if they are infectious or not and let them into the market. No need to market free apps.

This is to be one of the most stupid posts I have ever read on this blog. Really.
It was either this or allow other App stores. The great use of free versions of apps is a major factor in what makes the App store such a financial success. People like to try before they buy. I certainly do.
And don't EVER try to pretend that Apple is not making money off the App store. EVER. I don't think you can find a more profitable division of Apple.

100% d´accord
seems like most people posting are quite hungover from last night ;)
including the author of the original article

Free apps are what attracts people to the whole iOS ecosystem. Insanity to get rid of it. I personally have way more paid apps than free ones. Free apps are one of the main reasons for me getting the iPad. Once I discovered what great apps were in the app store, I paid for them. Now, you tell me that free apps are not a good marketing strategy. Often a free version of an app, prompts me to buy the paid version. Getting rid of free is a bad idea. Simple.

Simple solution: Apple can add a charge for verifying "quality" apps that the developer has to pay to get a special "seal" in the App store like something that says "Apple Certified" and for devs that don't pay up, the users will get a warning that pops up saying "This app has not been reviewed by the App Store Team and is not guaranteed for content, quality, or absence of malware. Download only if you are familiar with this developer or program, or are willing to accept this risk. [Agree] [Cancel Download]" Make it sound bad enough and devs will kinda have to pay up or face the stigma of not being "Apple Verified"

scuse me???
what was the amount paid to developers?
30% of that should be around 600 MILLION DOLLARS
if Apple decides to finesse their financials to reflect that amount barely covers the costs, mate, you as well can believe in the tooth fairy
geezus, guys

HELL no. I don't care about apple making money. i care about ME saving money. That's the game. I'm out for self. I got a palm pre and i haven't paid for a single app. now i'm gonna get an iphone and there are several apps i'm eyeballing to that i will pay for but most of my apps will be free. I'm not trying to give nobody my money. NOBODY!
Real Talk.

They're already charging every single developer $99/yr....I think that's more than enough to cover the cost of hosting the application

Free apps draw people to the app store. Therefore there's no way someone can enter the app store without seeing a paid app. Aldo , free versions of paids apps allow people to not only test the app out and love it enough to pay for the ' full ' version but possibly be annoyed enough by the ads to pay for the ad free version.
Free apps are beneficial to the app store regardless if that individual app directly brings in cash .

one thing I don't get about the article...
How is Sideloading app a burden for the customers?? The customers who don't wanna deal with sideloading apps can always use the App store.

Actually i had installed lots of free apps... But after reading this I am annoyed that apple doesn't charge any money for these apps. Thanks to apple!!!

None of these "platforms" is good for making any money, really. 99 cent developers pocket 70 cents, then split those peanuts with Uncle Sam. Doesn't leave anything after taxes, really. I keep seeing developers bring up Rovio Mobile & Angry Birds like it has something to do with them. Like they all think they're going to earn millions of dollars from their apps. That's not going to happen. That's like saying they're going to play the lottery because somebody won $2 million. Developers are so stup1d.