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How will in-app purchases change the app economy

About a week or so ago Apple announced that developers can now use in-app purchases for their applications, giving them the opportunity to give away the app for free initially and then charge for any upgrades or content within the application itself. So what opportunities does this bring to the table for iPhone and iPod Touch app developers?

The ability for in-app purchases through applications is something that has been discussed in the iPhone and application community for a long time already, but it still came as somewhat a surprise that Apple would announce it already. Personally i think the decision from Apple came as a result of the frustration that many has experienced trying to find their way in the jungle of applications available in the iTunes App Store. Sorting between the many “lite” versions of applications and then having to buy separate full versions is often frustrating. The other reason is of course that in-app purchases opens up an additional source of revenue for both Apple and the developer, considering that the model is built so billing is still handled by Apple which again takes their cut of the business.

There is of course a huge potential in this for both Apple and developers. Just imagine a games developer who can either give away the basics of the game for free, or with a small initial charge, and then charge extra for new levels and content within the game once the consumer gets “addicted” to the game. Other types of apps that definitely stand to gain from this are content based apps, such as images, videos, articles, and even music. Imagine that you are a content owner, instead of charging a one off for the content you have available, you can now sell levels of service and packages, making your own revenue model more flexible and attractive.

The in-app purchase model in these cases can potentially lift the revenue model for the developer into new heights. The way i see this is as a natural step for a very young economy to evolve into something that both will increase the quality of content available, and the complexity of the marketplace in terms of developers and content providers competing over share of the app market and the users available purchase power. In the coming months i believe we will start to see some of the bigger players in the app market start testing out different strategies for increasing their revenue potential from in-app purchases.

From a user perspective this can also be a good thing as it can potentially lower the entry cost for many applications that will now instead focus their revenue model around upgrades and upselling within the app. This means that the cost of trying the application could potentially come down. It also means that we will hopefully see less clutter of so called “lite versions” of apps in the iTunes App Store, making it easier to find decent apps.

There are definitely some positives to see in this move from Apple and we will look forward to following these development further and see how they will shape and change the app economy going forward.

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Filed in: Apple iPod, Third party applications

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