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There are many thousands of iPhone & iPad developers. Some have already built a series of applications, while others are building their first one. The mobile apps developer scenario is very similar to that of book authors, musicians or artists. There are the ‘rock stars’ who have a series of hits, and then there are many more participants (‘the long tail’) who enjoy the activity beyond fame or financial rewards.
One common theme for app developers (as well as authors, musicians and artists): they would love to find a way to be paid earlier in the life of the product – to pay bills, to finish the work, or to build their next app. Presently, developers have to complete their work, market it, and then get payment typically 30-60 days after the channel generates the sale.
Wouldn’t it be great if there were a way in which a wholesale market for (initially) iPhone & iPad mobile apps could be created -- where commitments, along with discounted upfront payments, would be made on various mobile apps to the developer?
App developers would receive immediate payment while the entity that made the commitment for wholesale purchase of the app would reap financial rewards as the application flowed through the normal Apple Apps Store distribution process. A young startup company in Silicon Valley called appbackr is creating just such a wholesale market.
appbackr has created a cool way for developers of popular apps to get early payments and access to a distribution network to help them build their business. The company solves a tremendous pain point for most developers -- “If I only had the money, I could build this amazing application.” Seem too good to be true? It’s actually very true because appbackr provides a rational, straightforward business process to make this happen.
There is precedence out there in other markets for what appbackr is doing: for example, book publishing. The book publishing industry has been around for over 200 years helping bring authored content to market. Artists, composers and authors interact with one or more agents who interact with one or more publishers who, in turn, work with distributors so the created product can reach the most people and make the most money.
Publishers make upfront commitments to authors (called the ‘advance’) based on how many books the publisher feels it can sell. The publisher then distributes the book through book retailers (e.g. Barnes & Noble, Amazon.com, etc.) and makes money from selling the book at a higher price.
The publishing ecosystem looks something like this (prices, percentages as well as publishers named and distribution amounts shown are illustrative and vary on a case-by-case basis):
Creating an open market for app developers is also similar to the market dynamics of eBay. Wholesalers purchase products at a discount and then resell them on eBay. This creates a wholesale market for thousands of popular products. That’s why you see so many national retail distribution firms using eBay – it’s another channel of distribution for their products.
Up until now, the mobile application development business had developers (authors/manufacturers) building their application, but then left to sell them to the public by themselves. It’s a very difficult business model for developers. Most developers need to have payments occur earlier in the business development cycle. appbackr solves the funding challenges.
appbackr operates much like a cross between a book publisher and eBay: Wholesale Buyers make volume commitments, thus buying iPhone mobile apps at a discount, and then work to promote the sales of those apps through the iPhone or iPad App Store. Here’s the model*:
Wholesale buyers reap rewards from successful sales through the App Store. They get either 77.92% or 82.25% of the revenue coming from Apple depending on the app status (finished/ unfinished). Here’s a summary of the distribution of revenue depending on whether the developer has an unfinished or finished app:
Developers get early revenue that allows them to enhance the application or, perhaps, build their next app. appbackr enables developers to place their applications in the appbackr Network. Wholesale buyers pick and choose which applications they feel will succeed. Then, they can conduct PR and promotions to build traffic on the App Store for the app that they have purchased. As Apps are sold, the Wholesale Buyer is paid (according to what the Wholesale Buyer has purchased).
Also today, multiple Wholesale Buyers could make a commitment for the same iPhone or iPad app at the same time (buyers purchase apps based on the queue number in Apple, so one buyer can purchase copies 1-10,000 and the next can purchase 10,001 to 11,000). Or, a Wholesale Buyer could make commitments to multiple developers at the same time.
As a glimpse in to what is ahead, after the volume commitment is made, the developer will be able to retain their listing in the appbackr Network (for 5% of the retail sale through the Apps Store) since the appbackr market can become a valued leading indicator of promising apps and so that other Wholesale Buyers can consider similar volume commitments. Also, appbackr is planning to build functionality that will set up a store for every buyer. This will help to more efficiently drive sales to purchased apps.
The appbackr Network is simple for Developers: they just list the application with appbackr and wait until wholesale commitments are made. It obviously helps if the developer promotes the app to the target market to help fuel demand. When the Wholesale Buyer makes a volume commitment, they realize an upfront payment of 35% of list for unfinished and 45% of list for finished products for the volume commitment that’s made. appbackr takes 10% of list at buyer’s volume commitment.
The appbackr Network is simple for Wholesale Buyers: they select the iPhone apps they feel will succeed in the market and make a commitment & upfront payment to appbackr. The Wholesale Buyer then promotes the app which is sold as normal through the Apple Apps Store and reaps preferential financial repayment of either 77.92% or 82.25% (unfinished/finished) of the distributed revenue until the volume commitment is reached depending on the app status.
The appbackr Network is simple for consumers: they buy apps just like they do now -- buying the most popular apps or the ones in which they feel they will most benefit.
What about all those free apps in the Apps Store? Can appbackr provide any benefit to developers of free apps? The answer is yes if there is a downstream service that generates revenue. Take a mobile gaming network in which the app (game player) is given away free but there’s an ongoing fee to run the online game with others. The financial flows are the same as the for-paid apps.
There’s another place for free apps in appbackr: major brands may consider buying iPhone & iPad apps at wholesale and then giving it away through the Apps Store. The brand (and their ad agency) makes the offer for the app at the wholesale price. appbackr takes 5% for enabling the transaction.
Once the developer signs on with appbackr, the developer signs an agreement authorizing Apple to send net sale payments to a bank account controlled by appbackr. App developers sign agreements like this all the time, and Apple accepts alternate payees for developers all the time. (It’s exactly the same process used when the developer goes to the bank and borrows money to get the funds necessary to build the mobile app.)
The bank has the developer sign an agreement to direct the net sales from the application be sent to the bank instead of to the developer. And the process for signing over payment authorization to a third party is similar to the process of factoring Purchase Orders. When a company receives a PO, they present it to their bank which will then advance funds on a discounted basis to the company. The bank then requests the vendor that issued the PO to redirect the payment to the bank instead of the company.
Consumers pay for the application just as they have in the past. Apple takes their 30% of the sale and passes 70% on to appbackr which represents the net sale. At this point, appbackr distributes either 77.92% or 82.25% (unfinished/finished) of that portion to the Wholesale Buyer who made the wholesale purchase. This allows the Wholesale Buyer to make a good return on their wholesale purchase commitment.
There isn’t any reason why a Wholesale Buyer couldn’t go out and strike a deal directly with a developer. But, appbackr has all the systems and relationships in place so that Wholesale Buyers only have to deal with appbackr -- which provides a consistent business process. And, developers would likely prefer to work with appbackr so they don’t have to negotiate different contracts with different organizations.
All of this works as long as the application that the developer creates will actually sell and generate revenue. If sales don’t materialize, they can always reduce the price – just like what happens today in retail sales. Also, buyers become a material part of the sales process. Just like ingenious “Power Sellers” at eBay, wholesale buyers on appbackr can use ingenious ways of creating sales for the apps that they have purchased.
I commend appbackr for their creativity in solving that big pain point in the creation of applications for the iPhone and iPad – generating revenue for the developer much earlier than is available today. Many deserving developers with creative applications can now get the paid, like in most other industries, in line with manufacturing timetables rather than waiting for the end retail customer’s payment to be processed by Apple. This will foster more great applications that can be rewarded more quickly than ever before.
appbackr is launching the appbackr Network now for the Apple iPhone, iPad and Apps Store. Once the operational details of the appbackr Network are worked out, appbackr will migrate the appbackr Network to the Android Marketplace, RIM App World and other successful app stores on other platforms.
I could image at some point that the appbackr Network will operate across all major app platforms since the wholesale commitment can be made across different platforms and subsequent retail purchasing can be made through specific retail platforms such as the Apple App Store, Android Marketplace and BlackBerry App World.
appbackr becomes like Grand Central Station for developers (trains), wholesale buyers (railroad lines), and consumers (passengers).
Written By:
J. Gerry Purdy, Ph.D.
Principal Analyst
Mobile & Wireless
MobileTrax LLC
gerry.purdy@mobiletrax.com
404-406-5309
Disclosure Statement: From time to time, I may have a direct or indirect equity position in a company that is mentioned in this column. If that situation happens, then I’ll disclose it at that time.