Wireless June 16, 2009, 10:45PM EST

Apple iPhone Software: Developers See Green

The in-app purchasing tool on the iPhone 3.0 makes it easy for app developers to increase sales—and helps Apple compete for mobile software

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Apple (AAPL) wants to give software developers one more reason to love the new version of its mobile operating system. Released June 17, iPhone 3.0 includes a feature that makes it easier for users to make purchases using iPhone applications and, as a result, for developers to make money from the software they create.

Electronic Arts (ERTS) founder Trip Hawkins couldn't wait for the upgrade. His latest startup, Digital Chocolate, sells games for mobile phones. With the existing version of iPhone software, the company charges a one-time fee for each of the 15 games it makes for the iPhone and iPod touch. But iPhone 3.0's in-app purchasing tool will help Digital Chocolate sell additional products, including advanced versions of games and virtual weapons and other items for use by players. "There's no question that [players] buying games for a one-time fee wouldn't be spending anywhere near this kind of money," Hawkins says. Digital Chocolate plans to have released 100 iPhone games in a year.

Bait for Programmers

Mobile game makers aren't the only developers seeing dollar signs in Apple's in-app purchasing feature. Mobile app provider Handmark, for instance, is considering offering a "Zagat to Go" application that would regularly update reviews of 40,000 restaurants, hotels and shops, on a subscription basis. Newspaper USA Today plans to start charging monthly and annual subscriptions for new apps showcasing its travel and sports content. Authors and publishers are considering selling their work in installments instead of in their entirety.

For the software makers who pocket 70% of the revenue generated by the applications they sell for Apple's devices, the appeal of in-app purchasing is obvious. Apple benefits not only from gains in the 30% of revenue it keeps, but also because the tool gives developers added reason to keep writing software for its devices. Competition in mobile software is heating up, as companies including Nokia (NOK), Research In Motion (RIMM), and Palm (PALM) ramp up their own efforts to attract developers. For many consumers, smartphones need to have not just cutting-edge hardware, but also enticing games, productivity applications, and other software-based features. In-app purchasing is one of several tools Apple is working on to attract programmers.

Potential Revenue Gains

As a result of in-app purchasing, some developers' App Store revenues could increase three to five times, says Jeremy Liew, managing director at venture capital firm Lightspeed Venture Partners. The App Store has generated about $318 million in sales since its debut a year ago, he estimates. "Apple could dramatically increase its revenues," says Liew, whose estimate assumes that before long, Apple will allow the in-app purchasing feature with free apps. For now, the in-app tool is available in paid-for apps only.