From The Verge:
As last year began, the app developer Pixite held its company retreat at a converted Old West movie set outside of Palm Springs. They spent a few days dreaming about the future while eating barbecue and sipping whisky in the sun. But 2015 was not a good year, and by last month the company’s dreams had narrowed to survival. This year’s retreat took place at the company’s office in San Diego, a handful of rooms perched above a hair salon. The printer was broken, so the agenda was distributed by email.
“I’m sorry it’s called a retreat and we’re still in the office,” says Eugene Kaneko, one of the company’s co-founders, as the daylong meeting begins. The company’s six employees frown at their laptops, where the numbers in a Google Doc chart a steady decline. “If money were better, we’d be in the desert. Unfortunately — that’s not the case.”
Since Kaneko founded the company with Scott Sykora in 2009, Pixite has released eight applications dedicated to photo editing and design. Each has been featured by Apple as a Best New App; photo editor Tangent and design tool Assembly won year-end awards from Apple. Between 2013 and 2014, downloads of Pixite apps jumped from 395,472 to 3.1 million, and annual revenue doubled to $943,000. Pixite grew along with its cash flow, expanding from two to six employees as it explored ways to link its apps together and grow a loyal base of customers.
Then the bottom fell out. Last year downloads flattened, and Pixite’s revenues plunged by a third, to $629,000. Suddenly, a company that needed to bring in $2,000 a day to break even found itself making $1,000 or less.
. . . .
Last month, Apple announced it had paid $40 billion to developers since the App Store opened, saying the store was responsible for “creating and supporting” 1.9 million US jobs. More than half a million iOS developers have created apps; the company’s Worldwide Developer Conference is so popular that tickets have to be distributed via a lottery. “[Apple] made our company,” Sykora says. “If Apple didn’t exist, we wouldn’t have a company at all.” And the market for apps is growing: between iOS, Android, and smaller platforms, apps could generate $101 billion annually by 2020, according to market research firm App Annie.
But the App Store’s middle class is small and shrinking. And the easy money is gone.
For a time, Pixite was a shining example of the businesses made possible by the app economy. Like thousands of other developers, Pixite’s founders took what had been a side project and turned it into a full-fledged career. But the company’s recent financial problems illustrate a series of powerful shifts in the industry toward consolidation and corporatization.
For all but a few developers, the App Store itself now resembles a lottery: for every breakout hit like Candy Crush, hundreds or even thousands of apps languish in obscurity. Certain segments of the app economy remain vibrant — ludicrously profitable, even. Apps for massive social networks, on-demand services like Uber, and subscription businesses like Netflix and Spotify remain in high demand. Then there’s gaming: Last year, 85 percent of all app revenues went to games, according to App Annie. Supercell, the top-grossing developer of Clash of Clans, reported revenue of $1.7 billion in 2014. (It spent $440 million on marketing.)
But for a large swath of these app developers — particularly those without venture capital and sophisticated marketing tactics — the original App Store model of selling apps for a buck or two looks antiquated. In 2011, 63 percent of apps were paid downloads, selling for an average of $3.64 apiece. By last year, a mere 27 percent of downloads were paid, and the average price had fallen to $1.27. Today, profiting from the App Store most often requires a mix of in-app purchases, subscriptions, and advertising.
Meanwhile, a fatigue is setting in among customers. There are now more than 1.5 million apps in the App Store (Android users have 1.6 million to choose from), but by 2014, the majority of Americans were downloading zero apps per month. And it turns out people simply don’t use most of the apps they do download. According to ComScore, the average person spends 80 percent of their time on mobile devices using only three apps.
Massively profitable new software platforms come around very rarely — but when they do, consumers race to fill them up with utilities, productivity tools, and games. The gold rush only lasts so long, though. “After a while, the saturation of apps catches up to the user growth,” says Ryan Sarver, a venture capitalist at Redpoint Ventures. “And people are no longer searching — they’ve got the apps that they need.”
Link to the rest at The Verge and thanks to Will for the tip.