It's not just Instagram. The 'app economy' is taking off.
Facebook's $1 billion purchase of smartphone app Instagram is just the tip of the iceberg. Apps represent a $20 billion industry employing nearly 500,000 people.
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"Really, what you're talking about is a massive transformation in the way that people live their lives," says Michael Mandel, chief economic strategist for the Progressive Policy Institute, a Washington think tank, and author of the study that counted nearly 500,000 jobs related to the app economy. "I wouldn't call this a small-company phenomenon.... Small companies are important, but what you've seen is small companies that turn into big companies."Skip to next paragraph
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Large companies anchor the industry by offering platforms for which the apps are written: Android is anchored by Google, Apple iOS by Apple, and Windows Phone and Windows Mobile by Microsoft. Facebook has encouraged the development of many Facebook apps.
One characteristic of the app economy is that, for start-ups at least, the barrier to entry is low. This is an advantage. Unlike building smart phones or creating PC software, apps are small and quicker to develop.
"In the past, with computer software, it would be almost impossible to create something in a month, sell it, and make any money," Banga says. The ease of one-touch buying and the low costs of most applications make it easy for consumers to buy apps over the life of the machine and on a whim, says Mr. Saffo.
The result: The app revolution is happening more quickly and on a broader scale than the personal-computer revolution of the 1980s.
But a low barrier to entry also means that start-ups can disappear quickly, even after initial success. One example is Banga's initial firm, CollegeKidApp.com. After graduation, the firm's foun-ders parted ways. Banga created a new app-design and development company, 9magnets LLC, with new partners.
In its first full business year, 9magnets brought in six figures in revenue and is covering its expenses. That financial stability is unusual.
'Most of the app developers springing up will crash and burn – that's typical of start-ups, especially in tech," says David Truog, vice president and research director in interactive marketing at Forrester Research, a global research and advisory firm based in Cambridge, Mass. But "it's a shift that's resulting in a whole new market and is creating a lot of wide-open opportunity."
For now, the established platform companies face better prospects. Facebook has been an especially savvy innovator in making money from social media. According to Inside Network, the social networking giant made $4 billion in revenue last year and $1 billion in profit.
"We estimate in the US the virtual good market [on Facebook] will bring in $2.1 billion this year," says Justin Smith, founder of Inside Network, a San Francisco-based news and market research firm.
Saffo estimates that the app boom will take five to 10 years to mature.
"The whole notion of an app is going to evolve dramatically and rapidly ... and devices are going to evolve rapidly as well," he says. "We'll look back and laugh and nudge each other, 'Remember when we bought Angry Birds?' But this is a permanent change on the landscape; it's no fad. Anybody who underestimates the scale of the app revolution is greatly mistaken."