Apple (NASDAQ:AAPL) will make more money from iPhone apps as the number of paid app downloads increase. We believe that both the total number of apps downloaded and the percentage of those apps that are paid will increase over time. There could be an upside of $30 (11%) to our $267 Trefis price estimate for Apple’s stock if the percentage of paid apps were to increase to one-third of all apps by the end of our forecast period.
Growing Popularity of iPhone Apps
iPhone apps are software applications sold through the iTunes store and downloaded onto a user’s iPhone or iPod Touch. Users can download apps for things like websites (Facebook, Yelp) and games (Poker, BlackJack, Align Five) as well as a variety of other software applications. There have been more than 3 billion iPhone app downloads since the iPhone launched in mid-2007.
App Developers Decide; Apple Takes 30%
App developers decide whether sell an app or provide it free of charge. Apple makes money by taking a cut (30%) of the purchase price of an app. We estimate that only around 4% of the total apps sold are paid, while the remainder free, and in some cases, ad supported. We believe that the percentage of paid apps will increase in future to around 4.7% by the end of Trefis forecast period.
Paid Apps Are More Profitable for Developers than Free (Ad Supported) Apps
According to estimates by Pinch Media, the average paid app generates $0.70 of revenue per user for the developer. It also estimates that users run free apps more frequently than paid apps and that the average free app is run 80 times (sessions). For a free ad-supported app to be as profitable as a paid app, it would have to earn $0.70 in advertising across those 80 sessions. This implies an advertising rate of $8.75 per 1,000 impressions ($0.70 / 80 sessions * 1,000).
Since, ad rates have been falling and most iPhone app ad rates are in the range of $0.50 to $2, developers will be motivated to make their apps paid. As a result, we expect the percentage of paid apps to increase.
11% Upside to Apple’s Stock if A of Third Apps Are Paid
Although we forecast a small increase in the % of Paid Apps, there could be a $30 (11%) upside to the $267 Trefis Price estimate for Apple’s stock if one-third of the apps become paid by the end of Trefis forecast period.
For additional analysis and forecasts, here is our complete model for Apple’s stock.