Is Investing in iPhone App Development a “Fool’s Errand”?

The iPhone economy may have generated more than $1 billion for developers, but when you break down the numbers as Tomi T. Ahonen has done, it’s clear that creating software for Apple’s (s aapl) mobile devices is a losing proposition for most developers — “a fool’s errand,” he calls it. After reviewing Ahonen’s analysis, which cuts through rhetoric with simple math, I’m convinced that most developers would be better off targeting more mainstream devices such as feature phones and services such as SMS. And while Ahonen’s argument revolves around iPhone development, it applies equally to other smartphone platforms as well.

In many cases, effective software can make up for the shortcomings of today’s mobile browsers and the connectivity they require, but that trend could easily shift as mobile broadband matures in terms of speed and coverage and phone browsers gain offline storage features and other advanced functions. For now, web apps are generally less capable than software solutions, so developers are focusing on mobile software programs. But as Ahonen points out, those doing so for the iPhone are only targeting 13 percent of the worldwide smartphone market:

So worldwide there are 80 million iPhone compatible devices today in use. That seems like a big number. Except, that compared to just the installed base of smartphones at the end of 2009, it is 13%. So if you do any kind of free iPhone app, and intend it to be a mass market media vehicle to reach the pockets of the total population, you have abandoned 87% of all smartphone users in the world today. That seems like a poor idea to me.

Indeed, although Apple has sold tens of millions of iPhones since June of 2007, the company is still a small smartphone player when compared to Nokia (s nok) or Research In Motion (s rimm). And Google (s goog) is fast catching up to Apple thanks to more than 100,000 Android activations daily. But the more important point is how small the smartphone pool is to begin with. As Ahonen notes:

The world has actually ‘featurephones’ which do apps fully well, using Java and Brew and Widgets etc. How many of those are out there in the wild? Try 2.1 Billion. So that moron who approved the ‘brilliant’ marketing idea to develop a cool app, and did it only for the iPhone eco-system, conveniently spat in the faces of 96% of the population with reasonably advanced phones – that all could have easily taken that free app, and engaged with your brand, through a mobile phone app.

In other words, the number of smartphones still pales in comparison to the number of feature phones. Yes, the trend is for smartphones to take more of the market — over half of those in the U.S. are expected to use a smartphone in lieu of feature phone by the end of 2011 — but on a worldwide basis, the feature phone still rules.

Perhaps even more important than the device is the services such a device is capable of using. Nearly every feature phone I know of includes SMS or text messaging, and as Ahonen points out, in 2009 the U.S. version of “American Idol” generated $500 million through SMS voting. With “Idol” available in another 50 countries, Ahonen’s example makes a good case for developers to focus on the lowest common denominator of simple services across more devices: SMS, WAP, and HTML, to name a few.

If Ahonen’s rationale isn’t enough to convince developers to stop working on iPhone apps, perhaps his math is. Using a combination of data points from Apple, Distimo, the Yankee Group and other analytics firms, Ahonen makes the case that for most developers, iPhone app activities are anything but a money-maker. (Related: The Apple App Store Economy) I recommend the full walkthrough Ahonen provides, but here’s a summary of the logic:

  • The iTunes App Store has generated 5 billion downloads and $1.4 billion in revenues, which works out to 20 cents per downloaded app for a developer, after Apple’s 30 percent cut.
  • After considering that 73 percent of all apps are paid, each of the 164,000 paid apps in the App Store generate an average of $3,050 for a developer in a year.
  • Although there are more paid apps than free apps, 85 percent of all downloaded apps are free. Even with an average of 94 apps installed, each Apple mobile devices only generate $14 for developers annually.
  • With the low estimated development cost effort of $15,000 it can take a developer up to 22 years to recoup costs from creating a mobile app, using the median revenue of $682 annually.

Certainly there are plenty of success stories in this app economy — between ads and in-app purchases, Tap Tap Revenge was earning $1 million a month in 2009. But I’d love to hear the reaction of some smaller development shops to Ahonen’s insights, especially those that are eschewing iPhone development in order to focus on services that leverage feature phones and simple revenue generators like short messages.

Related content on GigaOM Pro (subscription required):

Why Feature Phones Are the New Black for Mobile Apps