Apple’s App Store: Hot or Not?

The iPhone App Store is kicking butt to the tune of $1 million in sales per day ($30 million to date) and 60 million total downloads. This from an article put out yesterday in The Wall Street Journal, based on an exclusive interview with Steve Jobs.

But a few contrarian viewpoints have since emerged from venerable online sources such as TechCrunch and GigaOm (adding to last week’s analysis of a similar question: have we jumped the shark with iPhone apps?).

Their points, to paraphrase, include the lack of a discernible “killer app,” and the fact that the majority of application use is consolidated to a few apps that come with the phone and aren’t from the App Store (maps, alarm clock, browser, etc.).

Along with this is the notion that the App Store doesn’t really possess the business case that it’s been lauded to have in press adoration, because the majority of downloads have been free apps. Point well taken. One area this argument ignores, however, is the incremental revenues that will develop outside actual application fees. Namely directional ad models integrated into mobile local search apps.

In addition to the possibilities examined here in the past few weeks (CPA, social/save & share, pay-per-call etc.), here are some excerpts from a recent TKG report that sums up the monetization opportunity for (free) local search apps:

Most of the local search applications will continue to reside in the free section of the App Store, while the paid section is mostly populated by games, reference or novelty applications.

As in the online world, local search products are more conducive to directional advertising (free to users) than to subscription models. The existence of popular free local search apps will also drive the market toward a standard of free …

… Web searches involve the inherent difficulty of determining intent and then serving ads effectively. Save for the use of a geographic modifier (signaling a local search), intent can be clouded by the vast array of things that can be done online, including research, entertainment, image search and news browsing.

But the use case of mobile search is decidedly narrower as it excludes some of these activities (research, for example). As such, other forms of search that are more conducive to the mobile use case will make up a greater percentage of searches.

Local is one of these. Given this premise, advertising on the mobile device will have relatively less share devoted to display advertising and will take on the forms of ad delivery most appropriate for local search (i.e., directional).

Location-based services are the holy grail, but they involve well-known privacy concerns. While we’ve all heard the classic example of walking by a Starbucks and receiving a mobile coupon for a double foam latte, that day hasn’t come and likely won’t for a while.

Advertising [instead] will be very directional in nature and will include advertising tied to specific searches for products, as well as predefined opt-in alerts for location specific promotions when geographically relevant …

… As sales and ad serving models develop, we’ll see experimentation around ad tracking and reporting. Since the media outlet is, after all, a phone, lots of call tracking pay-per-call ad models will likely develop. IYPs have a head start with their experience and systems in place for call tracking and reporting.

Given that a mobile device is often present at a local point of purchase, we could also see CPA-based promotions and trackable coupons served with mobile search results. In this way, the mobile device could develop a greater role as the missing link to bridge the traditional online/offline gap.

Getting Down to Business

There is a great deal more to the overall argument, including the complexity involved in mobile ad placements; the fragmentation of audience (already fragmenting with many apps) and advertisers; and the inherent difficulty of ad insertion for the mobile interface (much of this explored in the report). But things are starting to move, thanks to Apple, after being at a standstill for many years.

Apple’s position in all this, meanwhile, is interesting to consider. It currently takes 30 percent of all application revenues, while the rest goes to app developers. This is basically enough to “keep the lights on” in the App Store (overhead, credit card transaction fees, etc.). It essentially benefits from the sale of iPhones that apps draw — and, in turn, the sale of Macs and other products that indirectly result from iPhone penetration.

But Apple’s role as a filter for all these applications (by virtue of its approval process) could position it to do more, such as be a central source of ad placements. This admittedly is a “dark horse” scenario but is interesting to consider.

Google is probably a more likely candidate to do something like this with the applications that emerge from its comparable Android open platform. Google has already included its existing paid search text links in mobile browsers. Its mobile adjunct to AdWords will likely evolve with mobile search growth to allow advertisers to target users more comprehensively and specifically.

But it will be a while before we see Android-based apps reach the market because of the difficulties in getting carrier deals that essentially land a given operating system on a phone. Wheels are in motion though, and Apple has effectively “broken in” the market in this respect.

For now, is the App Store hot or not? What do you think?