Apple Inc. (AAPL) reported record-setting holiday sales at its App Store, recording over $1.1 billion spent on apps and in-app purchases in just two weeks. Payments to app developers surpassed $40 billion between 2008 and 2015.
Source: Apple
Despite the big numbers and predictions of future growth, the App Store has a problem and it threatens to join declining iPad sales, slowing iPhone growth and a softening PC market as long-term concerns the company and its investors will eventually face.
App Store Sales, Growth Are Solid –For Now
The App Store has been a star performer for Apple since its inception. Although it’s no longer on top in terms of sheer number of apps — Alphabet Inc’s (GOOG, GOOGL) Google Play now holds that distinction — Apple was able to leverage App Store leadership after launch of new iPhones and the iPad to drive the popularity of its devices.
Without apps, an iPhone, iPad or iPod Touch was limited in what it could do, but AAPL has been phenomenally successful in attracting third-party developers to release apps that have made its devices everything from productivity powerhouses to mobile gaming systems.
The ability to trot out infographics at pretty much every Apple Event showing App Store sales and how much the company has paid out to developers has further cemented buy-in to Apple’s platform.
In that January holiday sales press release, Apple also touted the nearly $40 billion it has paid out to developers through App Store sales since 2008, as well as the App Store’s huge impact on job creation:
“Largely as a result of the App Store’s success, Apple is now responsible for creating and supporting 1.9 million jobs in the U.S. alone. Nearly three-quarters of those jobs — over 1.4 million — are attributable to the community of app creators, software engineers and entrepreneurs building apps for iOS, as well as non-IT jobs supported directly and indirectly through the app economy.”
It all sounds good, and there’s no denying the fact that the App Store’s success has played a valuable supporting role in driving Apple stock to where it is now.
Shifting Demographics Are Hurting Its Appeal
However, like the iPhone and iPad market, the App Store is also maturing, and that could spell trouble for Apple in the long term.
The Verge’s Casey Newton recently published an article called “Life and Death in the App Store” that follows the plight of a successful independent app developer whose sales have cratered as a result of the shifting dynamics of the App Store.
The numbers show that rather than the independent developers whose apps helped to make Apple’s App Store the place to be, driving sales of the iPhone and iPad, it’s now large software companies with huge budgets who are dominating the scene.
For example, Supercell — the company behind hit titles Clash of Clans and Boom Beach — had revenue of $1.7 billion in 2014, but had to spend a whopping $440 million in marketing to hit that level.
Speaking of games, last year they accounted for 85% of all app revenue, and prying that money from consumers has also become more difficult. According to The Verge, where 63% of apps were paid downloads in 2011 with an average price of $3.64, by 2015 only 27% were paid and of those the average price had fallen to $1.27.
To make things worse for those independent developers, there are now 1.56 million apps in Apple’s App Store, so even being seen can be next to impossible. And if all this wasn’t bad enough, even as the number of apps grows, consumers are downloading them less.
Comscore released stats in 2014 showing 65% of U.S. smartphone owners downloaded zero apps per month, on average, with 42% of their time spent on their single most-used app.
In other words, the App Store is maturing. The novelty of apps is wearing off, as is the rush to download as many apps as possible. Consumers are sticking with the ones they use frequently, like Facebook Inc (FB), and when they’re paying, they favor games, a segment dominated by huge companies like Supercell, Electronic Arts Inc. (EA) and Activision Blizzard, Inc. (ATVI) — which just spent $5.9 billion to acquire King Digital, the publisher of the top-grossing mobile game Candy Crush.
How Does This Impact AAPL?
The maturing of the App Store will impact Apple in several ways. As it gets tougher to make a living in a crowded market dominated by games and many of the same huge companies that rule PC and game console sales, the independent app developers Apple likes to feature in its press events will begin to give up. When that happens, there’s a risk that they take their creativity to a different platform.
The remaining apps will largely be cross-platform, offered in competing app stores as well. More of the apps will be free and designed to keep users on a specific service like Facebook, Microsoft Corporation‘s (MSFT) Office or Twitter Inc (TWTR).
The App Store isn’t going to flip from helping drive Apple device popularity to cratering AAPL stock. However, in the long term, the App Store is on track to cease being a competitive advantage for Apple. Instead, it will be something consumers simply take for granted.
That doesn’t bode well for a company that has grown by leaps and bounds by pushing quality and a unique experience with its products.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.
