Does the app economy need institutions?

A New York Times piece on the app economy makes the point that very few apps make money and even fewer make lots of money. It is basically a cautionary tale that like everywhere else making money is hard. Like being in on the first days of a Gold Rush, having an app when there were only a thousand in existence was a very different prospect than having one when there are three quarters of a million of them. As a consumer, the apps that had me agog back in 2008 wouldn’t warrant any attention today. The quality improvements have been stunning. But quality requires effort, skill and resources and that can’t always be achieved by ‘quitting your day job.’ I myself had app aspirations back in the day. Today, I’m still just writing about them and my experience with bold start-ups trying to make headway does not attract me personally to that life.

That said, one wonders whether we have yet evolved to the right set of institutions in the app economy. To be sure, the employment prospects concern me less than they appear to concern the NYT who notes that a full half money app paid to app developers went outside the US. Shock. It is like it doesn’t count. The job counting game just isn’t helpful in part because it doesn’t tell us what app developers might have been doing otherwise. What if they are would-be hackers? What if they are teachers as in the NYT case?

Matt Yglesias does see an issue, risk management. In the app economy, developers are on their own. They have to develop the app and market it. They are bearing a ton of risk which, not surprisingly, will deter many. He considers the situation in book publishing as a more mature outcome:

Since both you and the publisher are putting in work, the revenue that comes in from the book is split between the author and the publisher. But in addition, a book contract almost invariably gives the author an “advance” to help mitigate risk. The advance is basically a loan. When the book starts selling, the author doesn’t initially get any royalties. Instead what would have been your royalties goes to the publisher to pay back your advance. But it’s a non-recourse loan. If you never earn enough author-side royalties to pay back your advance, the publisher doesn’t come after you to collect the debt. And since it’s not technically a loan, failure to repay your advance doesn’t count against your credit rating. It doesn’t hurt you at all, except in the sense that if your book had done better people would be more eager to bid on your second book. What this does for you as a writer is transform book publishing from an incredibly risky business to one with a guaranteed payout—if you deliver your book on time, you get a nice check even if the book is a flop.

Now, what is not stated here is the share of authors receiving an offer of risk management in this way. I suspect it is less than the 25% of app developers who make more than $30,000. And it is also not the case how this matches up with timing. A book will take many months to come to market. My book was written in December, submitted to publishers in January, was edited in March and then didn’t appear as an eBook until October. There was no advance and definitely no income impact (but that is another story). If the book were an app under my control, I could have launched it in January and started earning whatever it may have earned a full nine months earlier.

My guess is that there is more opportunity for ‘advance type’ contracts than the publishing industry example would allude to. For starters, many app developers aren’t sole proprietors but start-ups or established firms that employ developers with ideas, give them a salary and go from there. In addition, like much of software, launching an app isn’t necessarily a money earning opportunity in of itself but a way of signalling programming and other skills; that is, it leads to employment. Sparrow is the case in point. To be sure, you can write a book and signal but who are you signalling too? It is less obvious. You write an interesting game, and game companies become interested. Finally, there are the makings of a market for apps that can be invested in. It isn’t risk management but it provides another option.

That said, the sheer volume of apps is creating an issue. The reason apps that people love are $0.99 or free is because it is really hard to grab people’s attention. You pay a low price for a great app to pay for the dozens of crappy apps you have purchased. That makes it hard for apps to be a direct monetisation product. Instead, it suggests that, like so many information industries, the path to commercialisation lies in revenue tied to use — specifically, something akin to advertising. Now advertising won’t work because of the sheer volume of apps and lack of a core advertising platform. But there are possibly other paths yet to come that might provide an alternative. It is these institutions the app economy is waiting for.

5 Replies to “Does the app economy need institutions?”

  1. Now, what is not stated here is the share of authors receiving an offer of risk management in this way. I suspect it is less than the 25% of app developers who make more than $30,000.

    The share of authors who get advances is stated. Specifically, by the phrase “almost invariably”. If your book is a physical book available in bookstores (as opposed to print-on-demand or eBook format only), and you didn’t get an advance, then you got ripped off by your agent or your publisher. Advances are absolutely STANDARD.

    If your book is print-on-demand or eBook-only, that’s actually a very different kind of model than traditional publishing (lower start-up costs lowers the risk for both author and publisher). The traditional model is still the vast majority of the industry.

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