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.