If you read the trade press, you’ll come away with the impression that there’s big business in creating applications for smartphones. The iPhone now has over 300,000 apps, and Android apps are growing exponentially. Stories of software developers getting rich overnight from iPhone apps they wrote in their spare time are enough to make anyone who has ever heard of Objective C to think about quitting their day job to write apps for a living. Think twice before doing so.
I speak from experience. For six months, I led a small team of entrepreneurs in a startup venture with the intention of creating a successful business developing smartphone apps—initially for the iPhone and later the Android. We had a good idea, a reasonable marketing plan, and interest from outside investors. But I finally decided to shut it down because our chances of success were infinitesimally small. In this blog entry I’ll share some of the lessons I learned along the way in the hope they could be instructive for others thinking about following a similar path.
The Idea. Our starting premise was that the market for traditional printed books is in rapid decline. Amazon’s Kindle, Apple’s iPad, and countless other eReaders threaten to make the printed book obsolete. (That’s a gross exaggeration, but many otherwise intelligent people believe it.) It turns out, though, that all the focus so far has been on the simple transition of printed words into an electronic display. EBook pages look just like printed pages, they’re just electronic, not paper.
One part of the eBook industry that’s still in its infancy is the market for travel guides. If you want a guidebook that tells you about the sights to see in San Francisco, Paris, or Yosemite Valley, you’ll most likely pick up a printed guidebook from the likes of Frommer’s or Lonely Planet. Even if you choose an eBook tour guide like those available for the iPhone, you’ll usually find it’s little more than a digital transcription of a printed book.
It doesn’t have to be that way, though. Today’s smartphones invariably have built-in GPS capability. Imagine an iPhone app that uses GPS to guide you along a tour, automatically presenting audio and visual information about each sight as you get there. No need to juggle a book as you walk, and there’s never any question as to exactly which feature is the true point of interest. Such a tour guide would not only be useful for walking tours, it would be especially valuable for driving tours.
That was our basic concept. We had a good team with the experience to pull it off. I’d written a popular book on GPS navigation as well as several travel guidebooks; one of our team members was the former publisher of a guidebook company. Other team members had experience with software programming and marketing. But even with this experience, we weren’t able to pull it off. Why?
The Economic Challenge. We quickly discovered you can’t build a successful business if your only income derives from sales of the iPhone app. At a typical selling price of $0.99 to $2.99 (with 30% of that revenue going to Apple), you’d have to sell hundreds a day to generate any significant revenue. That might be possible for some of the gaming apps written by a one-person company, but even there it’s hit or miss. For a multi-person company, you won’t have enough money to pay your salaries unless you come up with other ways to generate revenue. We came up with several ideas. Here are the two we felt were most promising:
In-App Advertising. Our first objective was to generate significant revenue from in-app advertising. Since ours was a GPS-based location-aware app, it would be easy to deliver only those ads from businesses in the immediate vicinity of the user. As you walked by San Francisco’s Union Square, for instance, you would see ads for restaurants or coffee shops nearby. Advertisers could perhaps even offer a discount coupon if the customer came in today. These are fairly high value ads—one recent study reported that nearly 10% of the viewers of such ads took advantage of them. As a result, advertisers are willing to pay premium prices for such ads and we could generate significant revenue. We planned to broker our ads through one of the big mobile advertising engines, either AdMob or iAd. But we weren’t convinced the incremental ad revenues alone would be enough to make us successful. So we pursued one more path.
Software as a Tool. We knew our growth would depend on how quickly we could generate a large number of tours. If we had to develop each tour ourselves, it would be years before we had enough tours to break even. But if we could recruit existing guidebook publishers do the work for us, we would reach breakeven much sooner. There are dozens of guidebook publishers who want to offer electronic versions of their printed guidebooks, but these publishers don’t typically have technical people on staff; they are all English majors. Our idea was to offer a tool that would allow them to drop their existing guidebook content into a simple template. Our software would then automatically create the iPhone app for them. For example, an editor could load the content of a tourist guidebook for the city of San Francisco into our template, push a button, and out would come the iPhone app. We would handle the placement and marketing with Apple and take a cut of the revenues. Add location-aware advertising to this concept and it could be a winning business.
Cold Hard Reality. Reality is never as simple as you imagine. We quickly discovered that most guidebook publishers are small concerns that are barely getting by. (The book publishing industry is a terribly low margin business.) While the publishers we talked to liked the concept, they didn’t have any money to invest in it. It would be up to us, not one of their editors, to load the content into the template and create the app. Once again, our growth would be limited by the size of our own staff.
More importantly, although some of our team were software engineers, none of us had experience writing iPhone apps. Apps that use the GPS function are the most difficult to write, and iPhone developers with GPS skills are in high demand. They can easily get high-paying jobs at established companies, so they have little interest in joining an unknown startup. By the time we cold hire one, there was a real risk we would be impossibly far behind the competition.
Even with these obstacles, we had investors ready to make investments. In the final analysis, though, I didn’t want to take investor money when I wasn’t confident we could be successful. Perhaps that’s not the mark of a true entrepreneur—someone who doesn’t lose sleep if their idea fails and their investors lose everything. But that’s not me.
If you’re thinking about making your fortune writing iPhone apps, be sure you’ve thought it through. While you’re not likely to get rich enough to retire, it’s possible to build a successful business. You need to pull together the right people, come up with a credible business plan, and execute the plan flawlessly. Not a lot different than what it takes to be successful in any other venture.
Notes from Steve - Observations from Off the Beaten Path
