As DataBanker has been pursuing investors, we frequently get asked about our “App Strategy”. More specifically, we’re often advised that we need to go off and build a mobile application, something on a smartphone, or a tablet, that will magically unleash the power of the Internet and pile bags of money at the feet of our founders and investors. Let’s face it – it seems like everywhere you turn today, someone’s using the “There’s an app for that!” aphorism to explain their platform or their solution. While alternating between inspiration and frustration, I got to thinking about what this all meant 20 years ago in telecom.
Back in the 1990’s, when dinosaurs roamed the earth and PC’s were just beginning to talk with the telecom network in a meaningful way, the search was on for the “Killer App” – the one solution that would transform not just the telecom industry, but life as we knew it. Well, maybe not your entire life, but close. After all, lightening had struck already, hadn’t it?
First there was audio text. People would pay money just to dial a phone and get their horoscope, their fortune, the bus or train schedule, or the latest horse racing tips. From there it was a very small step to audio-porn. Yep, the classic 1-900 “talk dirty to me” business exploded (sorry … ) Then came auto-attendants. App developers realized you could capture the funny sounds those buttons on your phone made (called DTMF’s) and use them to navigate a menu or tree structure. Voila! –Banking by phone was born! And so were those annoying and interminable “self-service” menus that were intended to help direct your call, but were really exercises in corporate cost savings and service avoidance. Pretty soon speech recognition became viable, and you no longer had to press a phone key – you could just say the number, or a simple phrase, and walk through the menus in what was described as a “more natural” fashion. As if walking through a menu was ever natural. Next came video, inserted into each of these applications. By that time, the industry and the market were moving in a new direction. Today all this technology is considered old-school and passé, it’s been replaced by SMS, texting and full-motion video, all in the palm of your hand and connected through the ubiquitous internet cloud. (Hey! There really is an app for that!) But, at the time, it was cutting edge.
I was fortunate in that the company I worked for at the time was squarely at the nexus of PC’s and telecom. If we didn’t invent the technology, then we were certainly the folks that enabled it for mass-market consumption. We were an enabler – our customers wrote the applications, built on top of hardware and software (aka, platforms) that we supplied. And like most boom markets, there were a number of trade shows every year where we would congregate with our customers, prospects and competitors to showcase the latest in PC/telecom technology. And at every show and every conference, the discussion ALWAYS centered on the search for the Killer App – the revolutionary new software application that would revitalize a maturing industry and transform the way we lived, worked, and played.
Unfortunately, that Killer App never materialized. Processor capacity marched inexorably to Moore’s Law, software became more capable, and the need for specialized hardware all but disappeared. The company I worked for had a very good run, and made a lot of money – enough to make us a desirable acquisition target that was picked up by Intel Corporation. I’ve long since left, but the company – once again independent – still exists, and they’re clearly the biggest fish in what is a rapidly shrinking pond. At one of those long-ago trade shows I mentioned, I once heard a competitor refer to us as “the 800 pound gorilla” on the floor. But there’s a funny thing about 800 pound gorillas – they need to eat a lot, just to keep up their weight. By pursuing a strategy of acquisition and consolidation, my former employer has been able to carve out a reasonably successful third act, albeit at a fraction of their prior size.
But what about all the application developers who built on that technology? Most have gone the way of the dinosaur, a few have survived by pursuing a similar strategy of acquisition and consolidation, and a handful of new entrants have emerged. The search for the Killer App continues …
So let’s come back full-circle and talk about that search. At the risk of offending some folks, and antagonizing a few conspiracy theorists, I want to go on record:
The Killer App is a myth, right up there with unicorns and alien spaceships at Area 51.
Building an application can be a good short-term business, taking advantage of momentary market interest and focus. But it’s not enough to build a sustainable business. Today, when people think Apps, they think of Apple and Android devices – smartphones and tablets. So, how many app developers can you name? Anyone made the Forbes list of the Richest People in America? Pretty unlikely. Bottom line, you need a strong second or third act to build a sustainable business. The Killer App is a chimera, that can turn around and bite you if you’re not careful.
I’ve talked to a lot of app developers in today’s new marketplace. A typical successful app for Apple and Android stands to make its developer a return of $70,000 – over the life of the application. More than half of all app developers make less than $500 per month from sales of their app. That correlates fairly well with the fact that an average mobile app developer working for an established company earns a salary of about $72,000 per year. A senior developer might make $100,000. per year, but they aren’t going to retire on that after a year or two. As a result, most independent app developers are always working on something new, in order to make ends meet. For every Angry Birds (by Rovio), there are literally thousands of apps and app developers who are just scraping by.
The real money is not in the app, it’s in the platform and the app store. Consider the ecosystem above – who’s making the serious coin? Apple and Google are, of course. Because they supply the channel, they supply the tools, they supply the infrastructure, they control the value chain and they get 30% of the revenue stream. They don’t have to react to every market shift immediately – the developer ecosystem does that for them. Instead, the 800 pound gorilla can keep on growing to become the 1000 pound gorilla, because it’s leveraging its platform to take advantage of the capacity and risk-taking of the developer community.
Apps – especially mobile ones – are an essential part of building a new business. Apps are great for accomplishing two things: (1) gaining exposure, and (2) building traffic. That’s why mobile applications are an essential part of DataBanker’s Developer Ecosystem Strategy. Essential enough that we plan on seeding that ecosystem by helping underwrite the first app or two. But let’s be honest – would you rather build an app, or would you rather build a platform that includes an ecosystem and an app store for enabling a plethora of applications, all focused on the Internet of Things? I know which one I’m betting on.