Getting Set for the iPhone App Department of iTunes

Hundreds of developers are ready to introduce new software to sell through Apple's new iTunes section

by Olga Kharif

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Programmers at Iconfactory spent 1,000 hours creating Twitterific, an application that's ready to let iPhone owners view and post updates on Twitter's popular social network. Another software firm named 360mind has already built some 20 applications for the iPhone. In fact, hundreds of developers are set to stock the virtual aisles of the Apple's new App Store.

Too bad the store hasn't opened yet.

Apple (AAPL) CEO Steve Jobs is expected to disclose more details about the store, a new section of iTunes geared toward software for the iPhone and iPod Touch, on June 9 when he takes the stage at Apple's Worldwide Developers Conference. But anxious third-party developers will likely need to wait another few weeks to start selling their wares. "There's a gold rush mentality at the moment," says Nick Dalton, CEO of 360mind in Evergreen, Colo. Software firms "want to put a lot of things into the App Store and see what happens."

The hope, naturally, is that the App Store will absorb vast pent-up demand among iPhone lovers for new capabilities ranging from productivity tools and video games to specialized applications like Lingolook, which offers travelers helpful phrases in Japanese, Chinese, and French. Users will be able to download iTunes applications to an iPhone or iPod wirelessly using Wi-Fi or through a computer. Goldman Sachs (GS) analyst David Bailey expects iPhone and iPod users to download 20 million applications from the App Store by the end of this year, about 110 million more in 2009, and 210 million in 2010. Broken down, that means the average iPhone user will download five applications in 2009.

CLICK AND BUY

With their credit- and debit-card information already stored to their iTunes accounts, iPhone users will likely be able to browse and buy applications with one click. "It's going to encourage impulsive buying," says Dalton. More accurately, perhaps, the store will encourage impulsive downloading, as most applications offered there will likely be free, but display revenue-producing ads. "I think the vast majority of applications will be ad-subsidized," says Matt Murphy, a partner at venture capital firm Kleiner Perkins Caufield & Byers, which recently established a $100 million "iFund" to finance development of new iPhone and iPod applications and gear. That's the way to go "if you want to monetize on the mass market," he says.

Raising advertisers' hopes is that the new iPhone, expected to be unveiled on June 9, may enable applications to take advantage of the built-in GPS receiver, which can pick up satellite signals from the Global Positioning System to determine the device's location. Knowing an iPhone user's coordinates could be a boon for new capabilities and related advertising. That's exactly what Pelago, one of the firms funded by Kleiner, is counting on with its first application, named Whrrl. Whrrl is designed to tracks bars, restaurants, and other places recommended by friends or the wider Whrrl community. And as you search these suggestions for a local sushi joint, it may beam you a coupon for one.

Josh Koppel, who runs New York-based ScrollMotion, says he's seen so much interest in ad-supported iPhone applications that he's brought on extra developers via Elance, an online hiring marketplace. ScrollMotion has already built three iPhone applications for the media conglomerate Tribune, and has 25 more iPhone projects for other clients in the works.

"We'll be building out [iPhone] applications for the next two years," he says. One free, ad-supported application for Tribune that's expected to be available when the App Store launches keeps track of an iPhone owner's commute, estimates the travel time, and suggests alternative routes.

NOT ASKING TO SHARE IN REVENUE

One factor working in the iPhone developer community's favor is that Apple so far hasn't asked to share in the potential ad revenue. And for applications sold by subscription or with a one-time download fee, developers will keep 70% of the money, more than they usually get when wireless service providers feature their applications on other cell phones.

Based on Bailey's estimates, download fees alone will line developers' pockets with nearly $34 million this year and $280 million in 2009. That's impressive growth compared with other segments of the mobile application market. For example, U.S. sales of personal productivity applications such as health-monitoring tools, currency converters, and to-do lists are expected to increase just 19% this year, to $285 million, according to consultancy IDC.

Since Apple will be taking a smaller cut than distributors of applications for other mobile devices, many App Store downloads may be priced cheaper than comparable versions for rival platforms. Lingolook's iPhone application, for instance, will likely retail for $4.99, vs. $5.95 for the BlackBerry and $7.95 for the Windows Mobile versions. Yet rival mobile applications retailers don't see the App Store as a big competitive threat. "The issue we've had is building awareness to the end customer that you can use your phone to do all these things," says Bill Stone, CEO of Handango, a leading online vendor of mobile applications.

APPLICATIONS WILL DRIVE IPHONE SALES

The likely publicity surrounding the App Store launch could solve that problem. And with Apple's penchant for simplicity, rivals may feel competitive pressure to make it easier for users to find their applications. Already, Microsoft (MSFT) plans to improve a site where owners of Windows Mobile smartphones can download a few dozen free ringtones and games. In the future, the site may direct users to Handango and other retailers, where they can find 18,000 applications now available for Windows Mobile devices. "We have no plans for our own stores," says Scott Rockfeld, group product manager for Microsoft's mobile communications business. "But you'll see us raising awareness on where you can get [applications]."

And what's in it for Apple? In addition to its share of the revenue from software sales, Apple may benefit from rising iPhone and iPod sales if the new applications make those devices more appealing. "The whole BlackBerry market is based on an application called e-mail," says Ray Lane, a managing partner at Kleiner. "There'll be certain applications that will be popular enough to drive phone sales."

Kharif is a senior writer for BusinessWeek.com in Portland, Ore.

Ed: Apple recurring revenues from iPhone: 30% of subscription fees; 30% of software sales; 100% of $99 annual .me phones; iTouch update fees.