App Store Trouble: Success Is Becoming a Problem For AAPL

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It’s not as sexy to investors as selling 74.5 million iPhones in a single quarter, but the latest earnings release from Apple Inc. (AAPL) also trumpeted the App Store’s “record performance.”

App store a looming issue for AAPL
Source: Apple

There’s no doubt that the success of the iPhone and the app store are intertwined — without its massive selection of apps, the iPhone loses much of its advantage over competing platforms. Apps are important enough that rivals BlackBerry (BBRY) and Microsoft (MSFT) have both resorted to paying developers to release apps for their smartphones in an attempt to beef up their app stores.

However, a recent article on Cult of Mac points out that Apple’s App Store is under attack — by zombie apps!

Unless something is done to remedy the situation, AAPL’s app advantage is at risk. And that could eventually affect both iPhone and iPad sales.

AAPL App Store Offers Big Profit Potential For Developers

The App Store has been a runaway success for Apple. Google Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) Google Play may now hold a slight numbers edge, but AAPL’s still grew from 890,000 to 1.42 million last year. Windows, BlackBerry and Amazon.com, Inc.’s (AMZN) app stores aren’t even close.

More importantly for developers, AAPL’s App Store is the place to make money. Last year alone, it generated $10 billion in developer revenue, bringing the cumulative total since launch to $25 billion.

To put that number in perspective, brick and mortar retailers sold a total of $5.3 billion in video games for 2014.

Google Play has more apps and a higher download rate, but AAPL brings in 70% more revenue. For app developers, Apple’s App Store is the place to be.

Zombie Apps

And that’s where the App Store’s zombie app problem comes into play.

So-called zombie apps are the ones that nobody knows about. They don’t make it onto the top download lists, they’re not featured by Apple, and the only way an iPhone owner would download it would be to search specifically for the app name. These apps are destined for obscurity and add clutter that makes it harder to find anything.

The problem is that those zombie apps make up the bulk of the App Store, and the numbers are rising. According to the stats reported by Cult of Mac, 83% of all apps are now counted as zombie apps, up from 74% in 2013.

From a developer perspective — unless you’re Electronic Arts (EA) — being lost in the shuffle is more likely than getting rich on the Apple App Store. Which could make developers less likely to develop for Apple.

What Happens If App Store Submissions Dry Up?

So far, Apple has been able to avoid any fallout from being surpassed by Google Play in sheer app numbers. There are virtually no apps of consequence that are Android exclusives, and the App Store remains the launch venue of choice for many new apps.

However, the carrot of getting a chunk of those App Store billions is a lot less effective if developers realize they’re probably doomed to obscurity.

At that point, people who do the math might conclude the money is in focusing on a less crowded platform.

It’s one thing to be passed by Google Play in sheer numbers — AAPL can easily dismiss that as a bunch of knock-off apps — but if the next Instagram bypasses the App Store for launch, that’s a different story.

Momentum could quickly swing away from Apple, turning the App Store into a repository of older and unknown apps along with premium apps that aren’t updated as frequently or lack features of versions on rival platforms.

Besides hitting App Store revenue, that could start to affect iPhone and iPad sales. AAPL’s No. 1, No. 2 and No. 4 sources of revenue would be at risk of being negatively impacted.

What To Do About the App Store Problem?

Apple is quite aware of the challenge it faces. In recent years, it has spent $250 million on the acquisition of Topsy and Chomp — the former a mobile app search engine and the latter focused on social media analytics.

In the long term, these sort of purchases could result in a much better App Store experience, one where iPhone and iPad owners can discover new apps much more effectively.

The company is also working hard to fix the problem in the short term. A perfect example is the deal just announced that puts apps on Pinterest with App Pins. This lets developers showcase their apps on the popular social media site, with the ability to download the apps from within Pinterest.

Apple is even creating its own Pin boards, showing just how serious it is about the venture.

There’s a lot at stake here. The iPhone and iPad are currently AAPL’s No. 1 and No. 2 sources of revenue. The App Store makes up a big part of Services, Apple’s fourth largest revenue generator. If zombie apps are allowed to completely overrun the App Store, Apple will have a big problem. So look for more AAPL acquisitions and partnerships in 2015, especially in the app curation and discovery space.

As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.

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Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2015/02/app-store-aapl/.

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