Alternative Payment Services Ride the Freemium App Boom

The news that Tapjoy, formerly Offerpal, raised $21 million in funding last week, is not only a feel-good comeback story for a company tainted by the Scamville Facebook case. It also shows there’s a big opportunity to be had by helping the freemium model expand on mobile. In addition to Tapjoy, there are other companies hoping to ride the freemium app boom.

For example, W3i, a longtime web application recommendation service, is looking to help match up advertisers who want to promote their mobile apps with developers who are looking to make money through in-app purchases with a new ad-funded payment platform for iOS. Similar to Tapjoy’s platform play, W3i is looking to exploit the growth in in-app purchases by uniting developers, advertisers and users.

A user who wants to buy virtual currency or goods in an app can choose to install another app in lieu of payment, which the advertiser delivers to the developer upon installation. I talked with the CEOs of both companies about the opportunities in alternative payments for mobile apps and why they feel that they’re on to a big opportunity, helping fuel the in-app purchase economy and taking advantage of its growth.

Mihir Shah, CEO and president of Tapjoy said a year ago, the company began testing out a freemium model for one of its mobile games Tap Defense a year ago and found that within a week, it was making six times more money going freemium than paid with traditional display advertising. Eventually, the game was making 10 times what it was before. The news spread, and other developers came on board with Tapjoy’s virtual currency model. Shah said the market for freemium mobile apps went from about 20 a year ago to about 2,500 today, of which he said 90 percent use Tapjoy. It’s unclear if these numbers are accurate, but as I reported a few months ago, we’ve seen a big spike in the number of freemium apps on the top-grossing rankings of the Apple App Store

Tapjoy employs its platform on iOS primarily and is also on Android. The company’s move to mobile has attracted some 400 developers, who are now partnering with Tapjoy for its in-app currency platform. And big brand names are also lining up with Tapjoy because of its success in helping distribute apps. Companies like Kayak, Fandango, Tapulous and Groupon pay for each user who installs their app in exchange for virtual currency. Shah said it only works with apps that have already been approved by Apple so it helps assure users the downloads are legitimate. He said the messaging is also made clear when users agree to download a paid app in exchange for currency. That has allowed Tapjoy to avoid the problems caused by the earlier Scamville episode, in which Facebook users were encouraged to use offers to pay for virtual currency in Facebook games, sometimes unwittingly buying things or subscriptions.

Shah said alternative payment through offers is still emerging; most iOS users still pay for virtual goods and currency directly. But he said it’s a significant business that will grow over time. He also said while many freemium apps right now are games, the model can work for many other types of programs. Communications app Pinger offer users currency for the service in exchange for app downloads. “The amount of content that is switching to this (freemium) model is astronomical,” said Shah. “And the top of the curve is not leveling off.”

This helps explain W3i’s move into this space. Andy Johnson, CEO of W3i, said its W3i Ad-Funded Payment Platform is trying to create a win-win-win for developers, advertisers and users. He said developers are able to better monetize their apps, a struggle in increasingly crowded app stores. Advertisers can get better distribution of their apps and insight into their marketing efforts while users are able to get something for free, which is overwhelmingly how they like to obtain things.

W3i is just getting started but has a lot of experience in helping distribute desktop apps. The company, which launched in 2000, has built a profitable business out of its InstallIQ app installation manager, which has helped W3i hit 500 million app downloads in its network. Now, W3i believes it can take its learnings to mobile, which Johnson believes can be an even bigger market.

“We see the mobile platform as the dominant platform moving into the future,” Johnson said. “We think this entire application distribution ecosystem is just beginning and there is so much market created each day, we don’t think there is one company that owns it.”

As I wrote about last week, in-app purchase revenue on the iPhone is now basically on par with paid download revenue, according to Distimo, an app analytics firm. With in-app purchases expected to be the dominant revenue driver for mobile apps, it’s smart for Tapjoy, W3i and others to try to take advantage of this momentum.

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