In-app purchases are poised to change forever the way mobile application developers sculpt their business plans. The days of paying up front for an app are coming to an end. As application markets become saturated, developers are opting to get basic versions of their products into users' hands for free and then allowing them to get additional functionality for an extra buck or two.
Zynga, maker of social game titles like Farmville and Mafia Wars, has perfected the in-app purchases model. Both Farmville and Mafia Wars are free apps on any platform, but once you're in there, you're sure as heck going to need some "Farm Cash" to remain competitive, right? Users can buy virtual cash with real cash from within these kinds of apps.
Driving home the point that in-app purchases are the wave of the future is research from app analytics firm Distimo, which found that in 2010, 49 percent of the revenue from iPhone apps came by way of in-app purchases in both free and paid apps. Additionally, Juniper Research forecasts that revenue from in-app purchases will eclipse that generated by standard downloads by 2013.
Carrier Billing Versus Credit Card
Most in-app purchases are currently billed to a user's credit card, which is entered one time through an application store like Apple's App Store or the Android Market. But some say in-app billing could be more seamlessly offered through existing carrier billing systems, with purchases added to the user's carrier bill at the end of the month.
Aepona, a company that provides various cloud computing solutions, offers a cloud-based billing platform, as well as developer APIs that it brought to life through the 2009 acquisition of Valista, a software company that provides payment, settlement and service life cycle management solutions.
Fran Heeran, vice president of product strategy for Aepona, who came from Valista, says that bridging the gap between carriers and developers in a way that simplifies in-app purchases is a major coup for both parties, and something that even organizations like the Wholesale Applications Community (WAC) sees as an important initiative.
WAC has taken on exposing network services for developers as one of its key missions and billing is tops on that list. "The most important one for WAC is the in-app billing API, because I think we've all seen the shift, certainly on the app stores, away from paying for the app up front to more of the freemium model," Heeran says, adding that in-app billing is appealing because everyone on a mobile device has an account and billing information already is set up with a carrier.
Heeran says the "try-before-you-buy" model has become increasingly popular with developers who are finding it hard to charge much more than $1 for their apps because so many alternatives are available to the end user. Aepona's solution, which sits in the cloud between the developer and the carrier, seeks to simplify and facilitate in-app purchases for both developers and operators.
"With in-app charging, where it's different, is that you've got potentially billions of origination points for your charge requests, because my phone is now making a direct request to the carrier's infrastructure," Heeran says. "It's not coming through a trusted partner server... it's literally from any phone in the world."
Heeran says developers expect a complex billing solution capable of handling everything from fraud to refunds, which hasn't been the case with past home-brewed carrier solutions. "What we've done is we've put in place the infrastructure that essentially transforms the carrier's bill into what developers would perceive as being a robust traditional financial network."
It's one step closer to easing the challenges for developers who want to sell content and virtual goods from within their apps, while keeping the carriers relevant at the same time.
Developers Serious about Revenue
App development has become big business. Developers have moved beyond the experimental stage and are now looking to make real businesses out of their software. A survey of 318 mobile developers conducted by Urban Airship, a company that provides developers with various APIs for things like push notifications, found that only 13 percent of developers plan to make a non-revenue-generating app in 2011, compared with 33 percent who did so in 2010. In-app purchases are becoming the foundation of those businesses, with implementations rising from 8 percent in 2010 to 31 percent in 2011, according to the survey.
Sasha Mace, director of product for Urban Airship, says that a developer's first concern is driving engagement of their product and an upfront purchase is just a barrier to engagement, making in-app purchases an ideal way to monetize after the user is already hooked.
But in-app purchases also create a simplified way for developers to reduce the amount of work they have to do to keep making money on their software. Game developers are already experimenting with ways for users to purchase additional levels for a title without having to rewrite the whole game as a separate application.
"You don't typically go to market anymore with a one-hit wonder that doesn't have an additional release," says Dylan Boyd, director of growth for Urban Airship. "So being able to focus on that release from a standpoint of selling advanced functionality or the unlocking of content…is a very easy way to continue to monetize almost anything, a newspaper, a game, a music app, anything, without a lot of development work."
Both Boyd and Mace say in-app purchases, in combination with other APIs like push notifications and location, are the perfect cocktail for developers looking to further monetize their apps. Imagine the user of a social scavenger hunt app getting a push notification that they're near a hidden item. For just 99 cents, they could purchase, from within the app, an additional clue as to where to look for the item or RFID tag in question.
In the end, developers are gearing up to nickel-and-dime users on their way to a profit. It's the recurring impulse 99 cent purchase that developers are targeting, which might not seem like much on its own. But imagine a million people all wanting to get to the next level of whatever game happens to be top of the charts; then you've got a mountain of pennies, as well as a viable business.