Apple recently revealed iAd at a press conference and I have to say I’m quite excited about it. Regardless of the nature of the advertiser/agency/apple relationship, I think what they’ve come up with is a solid opportunity to create much better ads that can deliver a richer experience to the user. However, people have cried foul at the concept of more ads being available in iPhone/iPad applications. I think it should be pointed out here, that many of these arguments are, in a word, bunk.

Why Mobile Ads Are Essential

Paid apps, while an essential part of the ecosystem of mobile apps, are only a part overall. A user is not always going to be willing to shell out money for an application, and many apps are not even worth a significant enough amount of money to make it worthwhile. For example, it may be possible to develop an application and sell it for $1.99. Let’s say in 6 months you get 20,000 downloads. ~$40,000 at first glance looks quite good. A lot of that could be profit if your app took two weeks to build (I am being quite conservative here). But, it starts to break down once you get to the next version, and the next, and the next. As features are added, cost of development goes up, and at that price, margins go down.

The Nuts And Bolts Of Mobile App Monetization

Now, as an app grows in features, so should the user base. If you make version 2 of the application, and still charge $1.99 per download, but sell 40,000, that is a pretty big jump in gross revenue. However, what about the development cost?

Profit = Revenue – Expenses

This is a simple equation that we all basically know. But lets plug some numbers in here for good measure:

  • Version 1: $40,000 Rev. – $10,000 Exp. (est.) = $30,000 Profit
  • Version 2: $80,000 Rev. – $50,000 Exp. = $30,000 Profit

Now, that is a big jump in expenses, true. However, expenses jump steeply quite easily. As your app grows and you add features – say integration with FourSquare and Yelp – that takes time and money. You also need to market it so you start to do some advertising of your own (oh, the irony) to drive more installations. Expenses will grow over time. The profits between versions may seem to be good, but it is actually a major drop in the profit margin – 300% to only 60% – and that number will drop over time.

In short, to develop an application that can grow, make money and stay ahead of the game, application developers need to do one or all of the following:

  • Find alternate avenues of monetization (ie: ads)
  • Raise application prices
  • Lower costs
  • Increase installs (marketing!)
  • No one wants to pay more for apps and no one wants to start outsourcing app development or features, so there isn’t much of a choice. Mobile ads are here to stay. I understand some people being unhappy with such a major company pushing a big platform, but I feel iAds will do a great job.

A Richer Ad Experience

I think quite a few people don’t realize yet that the ad in the application will be no more obtrusive than before – possibly even less so. Apple, the kings of clean user experiences, have absolutely no desire to make it possible for junky ads to clutter up applications. If ads are overly obtrusive or annoying, people become “banner-blind”. I understand Mark Wilson’s issues in this article, but I also have to disagree quite strongly. The assumption seems to be that the ads will diminish or detract from the user experience in significant ways. However, in the end it will likely be the exact opposite, but we will see as people vote with their downloads.