You may already be aware that Piper Jaffray’s Gene Munster declared this week that, even though app sales had totalled total $1.43 billion since the launch of the store in July 2008, the App Store still only delivers just 1% of Apple’s gross profit.
Meanwhile Tomi T Ahonen has just released a very important and detailed analysis on the “iPhone Economy”. This work takes the ad-hoc “Scrapbook” analysis that I have been conducting over the past 9 months on the Long Tail of the iPhone to a whole new level of detail. The analysis is brilliant so I will leave it up to you to discover the story for yourself by following the link above. Needless to say this post, along with Flower Garden’s Making A Living (Barely) On The iPhone App Store, is a must read for anyone thinking about investing their energy in iPhone or iPad App Development today.
The most interesting figure from Tomi analysis, at least for our purposes here, is his estimation that most apps cost between $25,000 and $50,000 to develop with an average cost of $35,000 per app.
Back in January GigaOm told us that there was approximate 135,000 Apps in the store from 28,000 Developers. This suggests the app store economy translates into 135,000 apps that cost $35,000 each to produce. So the iPhone has generated an estimated $5 Billion in economic activity by the developer community.
The first thing that stands out is the simple fact the global developer community has invested $5 Billion to generate a $1 Billion ROI in the App Store. Further evidence, if any more was required, to illustrate the long tail of iPhone economy and the unquestioning loyalty of those who support the Apple Brand.
Now consider this. When we took a closer look at Apple’s Innovation Engine we discovered that Apple spends 2.3% on R&D as a Percentage of Revenues. Apple’s sales revenue for the past 8 quarters has total $91.2 Billion. 2.3% of $91.2 Billion is 2.1 Billion.
However Apple’s R&D expenditure is across the whole product range and not just the iPhone. iPhone sales have grown from 0% to 25% to 40% of the total sales revenue over the past 2 years. So let’s correlate the model back to the sales revenues by assuming the R&D budget for the iPhone was 25% of the total R&D expenditure over the past 2 years. This would suggest the Apples R&D commitment to the App Store economy has been $0.5 Billion.
This suggests that for every $1 Apple has invested into the iPhone and the App Store economy the iPhone Developer community has invested $10.
This then is the true value of the Apple Lovemark. The “Free” R&D investment by the Apps Developers means Apple spends a lot less on R&D than its nearest competitors.
Apple Lovemark is what I call “Bankable” Brand Equity. It allows Apple to leverage Supply Side Freemium economics to significantly reduce their costs of entry into any new market.
BrandZ – part of the Global WPP advertising and media group – publish an annual list of the Top 100 most Valuable Brands. In the study they attempt to estimate the value of the Brand Equity held by the Top 100 Global Brands by combining quantitative customer research and in-depth financial analysis into a single metric.
This report is an excellent study and I suggest you take the opportunity to download the pdf file and examine the document for yourself.
If do you choose to study the document in detail you will discover the Top 4 on the list are the same as Business Week’s Top 50 Most Innovative Companies – i.e. Google, IBM, Apple and Microsoft. (See If you’re talking about innovation in America today then you’re probably talking about the MobCon) You will also discover that a significant number of other key players in the MobCon landscape also appear on both lists (e.g. Nokia and Sony). So clearly there appears to be a correlation between Brand Equity, Innovation and the success in MobCon marketplace.
In the study Google is ranked number 1 with a valuation of $114.26 Billion. Apple is number 3 with a valuation of $83.2 Billion.
This would suggest that Google has a significantly stronger and more valuable Brand Equity than Apple.
Following on from the previous posts on this topic (e.g. What Lady Gaga can teach Google about the Mobile Phone Business, What Google can teach the newspapers about innovation and Innovation Clouds and Rainbow Brands) I would argue that this is clearly not the case because Google doesn’t have customers, it has traffic and, since its IPO, it has struggled to convert that traffic into customers in every market it has attempted to disrupt – (Think Google Apps, Gmail, Chrome, Nexus One, Google News).
Time and time again Google has struggled to convert its “Freemium” audience into paying customers. This is because Google does not have a customer relationship with its audience. The audience chooses Google because it is both cost-effective and tactically the easiest solution for solving what are, after all, relatively unimportant problems or more accurately, low value impulses to discover information.
The key to comprehending Google’s problem is the ongoing market confusion with Name Recognition or Brand Awareness with Brand Equity. Yes, Google is a popular and well-known Brand. After all it’s the only Brand in the Top 100 to become a verb. But would you pay for any of its service offerings?
Surely the answer to that question, and not some exotic cross pollinated metric, determines the true valuation of the Brand’s Equity?
Apple on the other hand not only has a very loyal customer base that is will to pay a premium for its products and services it also benefits from a very loyal and largely free supplier network. More importantly it has discovered the happy knack of disrupting virtually every market it has targeted over the past 7 years.
Apple’s Lovemark is what I call “Bankable” Brand Equity. I’m not sure you could say the same about Google’s Brand. It may be well known but is it loved? I suspect not.
This then is what I suspect was at the heart of Google’s recent campaign to promote the positive impact that Google has on the American Economy.
Earlier today Bradd Libby of the Search Agency suggested that I take a look at a couple of articles he had written on the subject (Intermediate Microeconomics for Google and Google’s Addition Problem is Significant).
In these articles he takes the time to point out (among other things)…
- Google’s mistake in their calculation is to count the advertiser’s profit as if Google deserves credit for it, and
- The problem here is obvious: we are double- and triple-counting economic activity. If every company used the same logic as Google, the combined impact of every industry in the US would be many times greater that the US economy as a whole.
Both these articles are worth while because they help to set up the context for what I think is the real problem Google needs to resolve. Particularly if it is to turn its ongoing investment in disruptive innovation into future profits.
Obviously by publishing the Economic Impact Study Google has tried to say to the market “look we are very important so you need us more than you think”. In doing so it has attempted to communicate with the market place in the only way it knows how. With metrics.
The problem is the way it has chosen to make those claims is perhaps inappropriate because it has now positioned itself with a quasi “scientific” proposition that can be easily tested and mocked if it is found wanting by the “Wisdom of the Crowd”.
Look past the content of Economic Impact Study and you’ll see that Google has broadcast a subliminal message out into the market place. That message says quite clearly “We have given to you all these free gifts so why don’t you love us [in the same way you love Apple]?
What I find amusing is the simple idea that Google doesn’t need an Economist to tell the world how important it is. What it needs is someone who can create a campaign that will engage us and allow us to love Google in the same way that we love Coke, McDonald’s, BMW, Porsche, Manchester United, the New York Yankees, and yes Apple, the iPad and the iPhone.
Apple spends 1.17% of revenues on advertising. Google just 0.04%. Apple is the crown price of techno cool. Google is just a verb (or was that a nerd?)
This then is the great Google paradox. It is the crown prince of an industry it neither understands nor wishes to actively engage in.
July 18th, 2010 → 11:59 am
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