Last week I read a truly interesting piece by Nicholas Lovell on Gamesbrief. He spoke about Valve’s decision to let developers control pricing on Steam, and argued that it would take software prices to zero, just like in the App Store.
Lovell makes an interesting economic analysis on why free pricing and competition make prices plummet. In short, he believes that when there is enough competition, goods’ prices – in absence of marketing or perceived value considerations – tend towards their marginal cost, which in the case of digital goods is zero.
The point that I find most fascinating, though, is when he argues that the reason why the App Store is like that is a deliberate move by Apple:
“The Appstore is less than 1% of Apple’s revenue. Apple has become one of the most valuable companies in the world on the strength of making high-margin, well-designed, highly-desirable hardware. One of the things that makes its hardware desirable is that there are over a million apps available for the platform, many of them for free, that extend the capabilities of the phone in a way that Apple might never have imagined.
Steve Jobs wanted to enable the free price point for mobile apps because he hypothesised that having a competitive market of entrepreneurs striving to make their software work on his device would drive the desirability of his hardware. Boy, was he right.”
And goes on to add:
“In the case of both iOS and Android, keeping prices high for software would have been in direct opposition to the core businesses of Apple (hardware) and Google (search-related advertising).”
So, in his opinion, Apple created a hyper-competitive marketplace – by having a very low entry barrier and hardly any actual curation, see here – where practically anyone could publish – and yes, that includes ourselves – and pricing is not regulated, so the final result is what we’re seeing now: lots of free stuff.
Now, it’s not that the current state of the App Store is necessarily a bad thing, I guess it depends on who you ask. What seems likely anyway is that the trend is not stopping here. Free Apps are getting more relevant everyday – for a funny look back, please read this article fom 2009. In it $0.99 Apps are seen as a terrible thing. I bet its author wishes all Apps were at $0.99 now.
In all, I’ve always thought that Apple somehow was responsible for the rise of F2P, and some of their decisions (like making it easier to make an iAP app than a time-limited demo, for instance) seemed to point in that direction. This article has managed to turn that suspicion into certainty. Now what do you think? Do you agree?