The economics of In-App Purchase
With iPhone OS 3.0, Apple introduced in-app purchasing. The idea is that applications can charge for additional functionality (or game levels), content subscriptions, or pay-per-use features.
There are two interesting caveats, though:
- An app can only offer in-app purchasing if the app isn’t free.
- Content within the app can be priced on a timed subscription (e.g. a month’s worth of ESPN-something for $5), but the app itself cannot. Based on comments from Apple, some level of basic functionality seems required without subscription charges. (The specifics of this, as usual, are a mystery to us. But I’ve written enough about that for a while.)
The latter is a fairly straightforward restriction: no subscription-priced applications. I can’t charge $1/month for a social farting to-do flashlight. I need to charge only once for the application — say, $1 — and have it work forever as promised. But then I can offer separate buyable features (Twitter integration?) directly from the app, and maybe, under some very vague guidelines, I might be able to time-limit those and charge you $3/month for them.
But the former restriction — only paid apps can charge for add-ons — is much more interesting. Because without that limitation, we could have solved one of the biggest problems for publishing in the App Store: the ability to offer a demo for customers to evaluate before buying.
We’ve faked it so far in two ways:
- Free/”Lite” versions: Somewhat acceptable, but they’re treated as completely separate apps, so they don’t share rankings or ratings, and there’s no automatic upgrade path. Apple’s guidelines on free versions differ between everyone I’ve asked. Apple told some people that the free version can’t mention the paid upgrade, they told others that the apps must be feature-equivalent and can only differ by putting ads in the free version, and there are tons of apps in the store that grossly violate these and somehow got in. Furthermore, your free version can’t be time-limited (as demos usually are), so it usually becomes your paid version’s biggest competitor.
- Offering only a cheap version: This increasingly popular option avoids the free/paid issues and just charges a low price for the full application, usually $0.99-3.99, in hopes that it will sell at enough volume to earn reasonable revenue. But this is a much bigger risk: it’s hard for many apps to sell in meaningful volume without a free version for people to try first.
By imposing the free-stays-free rule on in-app purchase, we can’t offer a free version that you can then upgrade from within the app itself. But I don’t think that’s a problem that Apple intends to solve.
But it will further entrench a growing App Store reality: a price of $0.99 for nearly every app.
Free apps will move in droves to $0.99 so they can start using in-app purchase. And many paid apps will drop from higher prices to $0.99, hoping to drive up sales volume and sell additional features later, possibly by subscription, from within the app.
I bet, by next summer’s iPhone launch, nearly every major app and game will cost $0.99.
And that may not be a bad thing. Even if only half of Instapaper Free users had paid $0.99 instead, it would dramatically exceed the revenue from Instapaper Pro.
We may be about to see a lot of Free/Lite apps disappear.