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.

Karly Domb Sadof/AP
An Instagram photo is shared with Facebook on an iPhone Monday in New York. Facebook's $1 billion purchase of the photo-sharing company is bringing attention to the burgeoning app economy.

Three years ago, frustrated in his search for a summer job, Valparaiso University senior Cameron Banga decided to try less traditional work: writing apps.

It was a crazy idea. Apple's iPhone was only two years old, and its app store – where Mr. Banga hoped to sell his programs – had opened just the previous summer. Nevertheless, with two college buddies and more confidence than experience, Banga watched a brief computer science class posted online and got down to writing what he hoped would be one really good piece of software.

The result? A battery-monitoring application for the iPhone called Battery Go! Within 36 hours of its release, the free software had rocketed to No. 70 on the Top 100 iPhone apps list. "It was this kind of modern-day gold rush," Banga recalls. "We were really fortunate. We had the right idea at the right time."

Banga and his two partners are members of the new "app economy," a burgeoning industry of mini-software at micro prices. Nevertheless, the sector has spawned nearly $20 billion in sales and 466,000 jobs, according to one recent study, and it shows no signs of slowing down. In a national economy stuck in low gear, the app economy is providing some pop to America's jobs engine that could, in a few years, make a measurable difference.

"Whenever you create a new medium of communication, a new consumer medium of communication, you inevitably have revolutionary changes," says Paul Saffo, managing director at Discern, an investment analytics firm based in San Francisco. "Anything this size is, of course, going to have a multiplier effect across industries."

Apps are a diverse group of low-cost, lightweight software programs, often designed for portable devices, that users can download with the touch of a button, often for 99 cents or even free of charge. (Many firms rely on ads for revenue.) While the names of leading app companies might not be familiar, the games, online tools, and productivity software they've created are known by anyone who owns a smart phone or a tablet computer, or uses social media. From FarmVille (Zynga) to Angry Birds (Rovio) to (Quicken) to the camera application Instagram, there seems to be an app to meet just about any need or desire. There are nearly 1 million of them for iPhone, iPad, and Android devices alone.

In a recent indication of the growing status – and market value – of applications, Facebook said this week it is shelling out $1 billion to acquire the hip photo-sharing smartphone app, Instagram. With its 30 million iPhone users, and even more projected to sign up because of its recent expansion to the Android platform, Facebook's newest investment could mean 100 million more global users in the next year.

"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."

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, 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."

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