Wednesday, June 20, 2012

More on the economics of the mobile space

This article is a nice little snapshot of the changing dynamic in the mobile game/app space.  Its interesting and kinda obvious that the market has reached saturation the way it has.  It will be interesting to see if the dynamics are the same as the PC software market of years gone by when there was 1) Industry leader with "Rolls Royce" product and price tag to match. 2) Product for everyone who hated Industry leader with similar features, some compatability and a "budget" price tag.  3) A small tail of partial/imitation/amature variants as freeware/shareware/scamware with some features, high bug counts and unstable market niches. And to illustrate...

My guess would be that within most of the market segments in the app store, there will be a similar breakdown.  Its only between the top couple of contenders that there is any action as they fight for their market share/profit margins.  The rest will fade away as their startup capital runs out and their dreams of wealth get a little more real. These are the people factors.

The other thing that has a huge attrition effect on the market is platform changes.  It costs little to keep an app alive once its "done". However, having to update it or massage it or keep pumping marketing money into it will bleed a lossmaking product to death, so if the market dictates that there is a high maintenance cost to any app, expect to see a fairly quick rationalisation of the segments.

The problem with the app store is that the whole market place has still not explored all the possible applications that people can/should/might do with a phone/tablet.  Until there is "an app for that" that tests each possible use and gets some sense of demand/need/want... there will be a lot of "prospecting" going on.  This will keep the app store inflated with lots of new entrants and old timers.   This is similar to the model that gold mining boom towns go through.  Until its clearly proven to all the dreamers that there is no easy fortune... they will keep comming and keep pouring their energy into the app store.  Once it gets hard and the rewards reduce and have a larger and larger entry cost you will see rationalisation and consolidation.  Larger companies will be formed that can efficiently extract the value from the availible market.  These will jockey for position but generally get on with becoming more efficient.

I would expect most of the niche segments to rationalise out to about half a dozen profitable apps or less.

We will then see more rationalisation as apps consolidate across niches and cross compete by eating each others markets. 

All this little ecosystem will bubble along until there is another platform change or a new platform entrant ( Microsoft Surface?) which will upset the equilibrium by rapidly changing one or more variables. (Pull away capitalisation, start another round of gold-rush mentality, tap a new group of buyers, offer new technical features or make something obselete)

I would predict that radical changes in platform will reduce simply because it will destroy the existing application pool for the devices.  I think Apple will be very careful about breaking existing applications now that Microsoft are solidly in the game. Backward compatability has always been a bigger issue for MS than for Apple.  Android is in a total mess with the Google platform, so I would expect to see them either stabalise that or go into a death spiral now that MS is in the game.

MS will eat Googles lunch simply because they can walk into the enterprise space, if they produce a good product.  If they produce a great product, they will sew up the enterprise space and a large chunk of the pro-sumer and power user space simply be existing.  If they produce an insanely great product and it has real sex appeal, they can take a chunk out of the mid and top end of Apples pie.  The thing they cannot do is create a cheap product to compete with all the android crapware.  So the bottom end of the market will still belong to Android rubbish and cheap iPads for a while longer.  But then again, theres no money in that segment... so who cares.

Ok... FIGHT!

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