The iPhone Apps Sweepstakes

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Sketches, a tool that lets users make quick notes, earned $150,000 in the first three weeks, but then trailed off as new tools pushed it down the rankings, says Jorge Llubia, co-founder of LateNiteSoft, maker of Sketches. "We are happy to be part of the game, but we need to find the right strategy in terms of value for effort," says Llubia, who lives in Madrid and says his team spent a year developing Sketches. "We have to decide whether to keep the same strategy for future products or reduce our risk by making simpler, short-term-oriented apps."

Developers can't go too slapdash, though. Consumers won't pay for applications created in a matter of days, Sadun says. Some programmers tried to keep their apps near the top of the rankings by issuing frequent but incremental software updates. But starting Sept. 27, Apple made it more difficult for developers to rise to the top through frequent releases.

Even for quality apps, consumers won't overspend. So developers often have to slash prices. Steve Demeter, owner of Demiforce, the company behind Trism, dropped his price by $2, to $2.99, on Sept. 25, to climb up the charts. "I made about the same amount of money a day [since the price drop]," he reports. "But we jumped 25 spots." Apple ranks apps by number of downloads.

Apps Being Given Away

Most applications in the store now sell for 99¢, compared with $9.99 in July, according to Rubicon Consulting, which researches tech trends. "You are not going to get the next Adobe (ADBE) built on 99¢ a copy," says Rubicon analyst Michael Mace.

An increasing number of apps are being given away. Demeter is working on a free, simplified version of Trism that he hopes will lure users to the paid version. Dave Howell, who runs software maker Avatron, offered a version of his file-sharing application, Air Sharing, for free for several weeks recently, so it scaled the iTunes ratings, before starting to charge $6.99 for it on Sept. 23.

When the rival Android Market debuts with a score of free apps in October, the proportion of free applications in the App Store could jump as well. Already, about 90% of downloads through the App Store are free, says Matt Murphy, who runs the $100 million iFund at venture firm Kleiner Perkins Caufield, which funds iPhone-related startups, most of them in software. "Free has been the predominant model on the Web," Murphy says. "We'll see the same thing play out in mobile."

Ads Part of the Model

Long term, the money won't be in the fees, but in advertising, subscriptions, and sales of virtual goods, Murphy says. For now, Apple does not take a revenue cut in those areas. AdMob advertising network already places ads on some 25 iPhone applications. "Some publishers make $6,000 or $10,000 a day," from advertising, says Jason Spero, vice-president for marketing at AdMob. But as the economy slows, many advertisers are cutting back.

Even Google doesn't expect to make money off advertising on apps on its Android Market for a few years. While the company is looking to integrate AdSense ad-serving software into the store, that may not happen for several years, says Andy Rubin, who runs Android for Google. After all, he notes, applications have to attract millions of users to pique advertisers' interest. Few iPhone apps have reached such critical mass yet. "The jury's still out on the appropriate business model," says Craig Wigginton, telecommunications practice leader at consulting firm Deloitte & Touche. Developers are hoping the verdict comes down on their side.

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