360iDev: Saurik on the mobile application market

Jay "Saurik" Freeman took the stage here at 360iDev last night to explain the mobile application marketplace. The entire mobile application marketplace, that is. Most people wrongly perceive the App Store to be a simple user-and-developer relationship, but in reality, it's a much more complicated place, with lots of inputs and outputs for time, money, and work. You can see the big picture of his chart above -- the "user" is the faceless woman near the middle, and the "developer" is the bearded man to her left. But everything else is a company or a connection that Saurik spoke about.

Saurik runs the jailbreak app store Cydia (which has over 10,000 packages available, hundreds of which for a fee, on which they've pulled in over $1.3 million so far), and so he's closely interested in almost all facets of this relationship chart, and how money can flow from users of all kinds to developers across the world. In an entertaining and very insightful presentation, he basically walked the audience through his chart and, piece by piece, gave a wide-reaching overview of how the mobile app marketplace works today.

Saurik started out by talking about where most of the money comes from: the banks. Most users keep their money in a checking account or use credit cards, and that's where most application purchases actually come from. Banks take a cut, credit companies take a cut, and the companies around them like Paypal (Saurik had a quick glance over his shoulder at the mention -- 360iDev is being held on the eBay/Paypal campus here in San Jose) also take their cut. And when you're talking about $1 apps, even a 1% or 3% slice can threaten your bottom line.

Companies like Apple and Akamai were next on Saurik's list (you can see them hovering above the developer in the chart above). These are the companies that actually run the mechanics of an App Store -- Apple delivers the software and moderation required to distribute and release the apps, and Akamai contributes the bandwidth for pushing updates. Saurik said that this contribution was more sizable than he expected -- application updates can run all the way up to even a gigabyte in size, and downloads can get pricey fast. When you're selling a 99 cent app, and it takes you 12 cents a GB to send out, there's still a profit to be made. But if you start also pushing free updates that don't have an associated cost, the price rises accordingly. Apple keeps this kind of cost from most developers on the App Store, but when Saurik was setting up Cydia, he quickly discovered that the costs can get significant very quickly.

The flags on the right side signify governments, who also take a cut (and are trying to take more) of app sales. Taxes are a big part of that -- while most app sales work as "interstate commerce" and thus aren't necessarily subject to local sales taxes, governments are looking into an "Amazon tax" or an "iTunes tax." Again, the government may think that just a few percent of any purchase might be do-able, but when you're only talking about 99 cents of an already 70/30 split, that charge is more significant.

International sales are also an interesting issue -- countries often have treaties or tarriffs that govern how money can pass between them, so not only are there forms to fill out, but when you're trying to pay a developer in Germany for an app bought by someone in South America, the issues can get tangled quickly.

Next, he went across the top of the chart -- users traditionally pay a carrier both for service and for a phone, and while Apple has changed that a little bit by selling iPhone and iPad hardware in their own stores, you still generally go to a carrier like AT&T for both the phone and the software to run on it. Apple, HTC, and RIM are still the biggest smartphone makers, and those guys go to Microsoft (for Windows Phones), Google, or a group like the Open Handset Alliance to make their OS software. Beyond that, software comes from the various App Stores -- there's Apple's of course, but T-mobile's T-zones (which has since changed its name) and Handango offer mobile software as well. Wo is also on that part of the chart -- because China doesn't allow foreign companies to sell software there, they've apparently set up their own marketplace, and run all of their own app sales.

Across the bottom is advertising and sales -- the triumphant sales guy under the user is extremely happy that he's just created an ad and a website that sells his product, and he interacts both with the user directly (he takes their money when they see his ad and buy his product) and with the media that sells advertisements and covers both apps and his products (iPhone Life and sites like TUAW would fit in that spot as well). On the other side, companies like AdMob and soon, iAds (that's why the Apple logo is there again -- Saurik said that he built this chart a while ago, and since he created it, he's been putting the Apple logo in more and more places, as Apple sneaks their company into more and more sections of the app market), sell advertising both to and from developers and media.

Next, Saurik moved over to Johnny Depp and talked a little bit about app piracy. He was speaking to a roomful of some of the smartest iPhone developers you'll find, but he basically told them that there was no solution to piracy, and any attempt to find one was likely a waste of time. Saurik described software pirates as "smarter than you," said they have better tools at their disposal (including some that he's written to tear apart apps and enable or disable some of their code), as well as being more bored in general. Saurik said that many of the pirates he's dealt with are just kids, no more than teenagers, very smart but with not much solid life experience to speak of. And he said that like children, they were both vengeful (they will give bad reviews and attack developers who attack them), and easily won over -- sometimes, by just sending a nice email, he was able to get a former pirate to cooperate with him or even "...come over to the light side." More than anything, they want a challenge, and claiming that your app is "unhackable," or even just trying to make it so, only creates a target.

The best solution to piracy, he said, was to convert the pirates -- don't disable their app or attack them (because likely, they will simply blame the app rather than learn a lesson), but instead inform them that they're breaking the rules, and give them an easy way to do things right. One app Saurik described simply put a one-time notice in the app that the user was using a pirated version, and saw sales spike when the notice went out.

Finally, Saurik pointed out where most of the money in this whole arrangement really comes from: the user's mother. Many App Store users are younger than he's expected, and while he had more anecdotal data than actual demographic information, the picture Saurik painted of the App Store beyond the top 10 or top 20 apps is a very young, technologically savvy, and easily distracted set of users.

It was a fascinating presentation -- while it was more broad than most of the iPhone-specific talk here at the conference, Saurik provided a heck of an overview of the app market in general, and a lot of great insight on just how it all works, even beyond the bounds of Apple's official purview.