Inside the App Economy

Beyond the goofy games is a world of useful programs that's making fortunes and changing the rules of business

By Douglas MacMillan, Peter Burrows and Spencer E. Ante

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It's easy to shrug off the kooky world of apps. The bite-size software programs people load onto their mobile phones or tap into on the Web seem mostly to be silly games and pointless novelties. But look past the beer-drinking apps and flatulence programs and you'll see something significant taking shape: a bustling app economy that's creating new fortunes for entrepreneurs and changing the way business gets done.

It's happening with dizzying speed. Just two years ago, almost none of this existed. Apple's (AAPL) App Store, the most popular destination for mobile-phone programs, was launched last summer. Now there are more than a dozen rival stores, and at least 100,000 apps have been created. Some startups that staked their claim in the app economy have become large, lucrative businesses in just a few months. Two-year-old Zynga, which makes popular game apps, is already profitable, with more than $100 million in revenues. By comparison, Google (GOOG) didn't start making money until its third year—and still had less revenue.

There are serious business tools among the thousands of new apps. Salesforce.com's (CRM) programs let executives manage customer relationships from an iPhone or BlackBerry. Oracle (ORCL) apps let managers check inventory or get a snapshot of a business unit's performance. The computing that people used to do at their desks increasingly can be done on devices they can carry anywhere.

Early Days
Apps will help determine technology's next big winners. The success of Apple's iPhone is due in large part to the fact that the company can offer customers more software choices than any rival. Research In Motion (RIMM), maker of the business-oriented BlackBerry, has scrambled to catch up and has made progress. But established giants such as Nokia (NOK) and Microsoft (MSFT) are struggling to get traction, raising questions about their prospects.

These are such early days, no one knows exactly how big the app economy is. Companies make money from selling apps, from ads within apps, and from selling digital goods used in apps. Add it up and analysts figure it's at least a $1 billion market today, headed for $4 billion by 2012. Not bad for a brand-new business.

True, much of the money these days comes from goofy games. One popular app is I Am T-Pain, named after the performer, born Faheem Najm. Fans can download software to their iPhone and mimic his robot-like voice. But it's time to heed the opportunities in this fast-evolving world. The $2.99 T-Pain app has put its creator, a year-old startup called Smule, on track to pull in $3 million this year. "Apps have moved into the mainstream. The world's changed," says Jeff Smith, Smule's chief executive.

Zynga's Zing

Revenues are soaring on the success of 'Social Game' Apps like FarmVille

Early this year, Mark Pincus, founder of the tech startup Zynga, huddled with staffers in his company's San Francisco offices to brainstorm new product ideas. Zynga develops game apps that can be played on social networks such as Facebook or mobile phones like the iPhone, and Pincus needed a follow-up to a popular poker app. One employee suggested a farming game, where players could grow digital crops and sell them to make virtual money. Pincus liked the idea and gave it the green light. Four months after its launch, FarmVille is one of the most popular apps in the world, with 60 million people playing it in the last month. "It just exploded," says Pincus.

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