Apple iPhone Software: Developers See Green

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Booyah, an application due to go on sale soon, lets users chronicle and share life achievements and purchase virtual goods to decorate avatars. With in-app purchasing, "you've got a much larger platform and more opportunities to monetize better," says Matt Murphy, a partner at venture capital firm Kleiner Perkins Caufield & Byers, which is backing Booyah. With 40 million iPhones and iPod touches already in users' hands, "the opportunity that in-app purchasing allows is enormous."

Nickel-and-Diming Users?

But will iPhone users be willing to make additional purchases from an app they already had to pay for? As it is, few users are willing to pay more than 99¢ for applications, and average selling prices at the App Store have plummeted. Developers will probably keep initial prices low or even cut prices in hopes of getting users to make added purchases down the road. The onus will be on developers to create a steady stream of compelling new features. "We see this as a shift in the paradigm for iPhone apps," says Michael Bullock, a vice-president at Intermap (IMP.TO), maker of a hiking-map application. "We are going to make applications as inexpensive as possible. The revenue comes through the provision of [additional] content." Bullock speculates that 80% to 90% of Intermap's revenue will ultimately come through in-app purchases.

More ways to charge consumers also present more opportunities to make a buck on low-quality goods. "Initially, we are going to see a mixed bag—some of the developers who are doing it the right way, and others who are nickel-and-diming the consumers," says Adam Sussman, a vice-president at EA. "Consumers could get upset. You have to make sure what you deliver is of significant value."

Rivals Watch Closely

Rivals such as RIM's BlackBerry App World and the Android Market, created by a Google (GOOG)-led consortium, are expected to follow Apple into in-app purchasing within months. "If this particular rollout is successful, I don't think we'll have to look too far into the future to see the same capabilities on Android or the BlackBerry," says Matt Jones, vice-president for mobile strategy and operations at Gannett (GCI) Digital, which is considering putting out a subscription-based app that would let users delve deep into sports scores and statistics. Google and RIM wouldn't comment on possible features.

At the very least, the prospect of added sales will probably spur innovation, Murphy says. Developers may also start launching apps in genres they've bypassed previously. Electronic Arts, for instance, is prepping new kinds of mobile games that users haven't been willing to pay much for before. The company currently charges $4.99 to $9.99 for its 16 iTunes games. Says Sussman: "We had to revisit our slate of games."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

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