Mobile App Pricing

I read an article today about Microsoft supporting a premium app model for its own version of the iPhone app store. Basically, they want to avoid a race to the bottom where there is so much competition for users that app developers price their products at very low prices to capture sales. The problem, which is not a problem at all for consumers, is that this encourages everyone else to lower their prices as well. Since you do not want to be the only $10 app when everyone else is $1.

Trying to just introduce something anti-competitive like arbitrary price controls will not work, for a few reasons.

For one, the cost of distribution is zero. The cost for entering the application market is effectively zero. You can market your application at any price you wish. So, if you cannot demonstrate effective value for your price, that is your responsibility. No consumer owes you a certain price, especially with relation to digital goods for which there is no necessary ongoing cost following development.

For another, even though many people now have iPhones, most of the ones I know rarely use any special apps. They seem to spend most of their time texting or web browsing. I rarely encounter anyone who uses any other third party apps with any regularity. So, my impression is the potential application market is actually deceptively small and very casual. No one really cares that much to begin with and the more apps produced, the less people will care.

Thirdly, the best apps for mobile devices tend to be free and tend to tie into larger web services. For example, the Pandora mobile app for Blackberry and iPhone is amazing. I would have paid $10 for it. Luckily, Pandora wants me as a user, so they throw it in for free. So, when I consider all the mobile apps I use with any regularity, the bulk of them are provided for free by companies I already use: Google Voice, Google Maps with Google Latitude, Google Talk, Pandora, Facebook, and the Amazon mobile app. The only app I use other than this is TwitterBerry, which is free. I would pay for a mobile app, but the fact is most of them are not all that compelling.

Obviously, a lot of companies are making money developing for the iPhone. But, there is a gold rush phenomenon. The first companies to capitalize on it will make the bulk of the revenues. Then it will just flatten out, as users take mobile applications for granted as much as they do most websites where it rarely occurs to them to pay for anything. That’s not their problem.

What do you think?

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