Mobile application downloads: hype to slow but growth set to continue

Michele Mackenzie & Adam Leach (Principal Analysts), Ovum

UK: Application downloads to mobile devices have been the subject of a great deal of hype since Apple launched its App Store in 2008. Many of its competitors in the devices market are following hot on its heels, and not a month goes by without an application store launch.

There have been some impressive announcements from Apple –- most recently that 2 billion applications had been downloaded to the iPhone and iPod Touch. Ovum’s Mobile application downloads forecast: 2009–14 looks at how the market will grow going forward, and how much revenue this will generate.

Global mobile application downloads grow to 18.7 billion by 2014
Between year-end 2008 and year-end 2014, the total number of application downloads (including both free and paid-for applications) will grow from 491 million to 18.7 billion worldwide. This represents a CAGR of 83 percent across the forecast period.

Apple has driven much of this growth between 2008 and 2009, and has fuelled market demand for applications. We estimate that in 2009 Apple’s App Store will constitute around 70 percent of the total application download market, but that Apple’s share will decline to less than 20 percent by the end of the forecast period.

Growth in mobile application downloads will accelerate over the next two to three years. Ovum estimates that the global market will grow by a CAGR of 153 percent between 2008 and 2011, but will drop to around 33 percent between 2011 and 2014. In brief, we believe that a number of substitutes will emerge for application downloads, including browser-based services.

We believe that there is significant potential in this market but that there is also a great deal of hype. Not all players will succeed in taking a significant share of the market, and we expect to see a period of consolidation following greater fragmentation in the early years.

Consumer willingness to pay will be a key factor in determining the overall size of the market, and the industry is already seeing a great deal of pressure on application pricing, even though some high-end applications are successful. Overall, we expect to see fast growth in the early years followed by a period of slowing growth and commoditisation.

Global paid-for applications to grow to 3.3 billion and end-user revenues to $5.7 billion
There will be strong growth in the number of downloads that are paid for by the end user, achieving a CAGR of 68 percent over the forecast period. Paid-for applications will reach 3.3 billion, up from just under 147 million in 2008. However, this is lower than the growth in free downloads, which are set to grow at a CAGR of 88 percent over the period.

End-user revenues generated through non-operator-controlled application stores, including those operated by device vendors and independent stores, will grow from $367 million in 2008 to almost $5.7 billion in 2014.

Lack of operator billing will be a barrier in some markets for paid-for applications, particularly emerging markets, where there is low penetration of credit cards and bank account holders in general.

Asia-Pacific to have strongest growth throughout the forecast period
Revenues will grow by a CAGR of 108 percent in Asia-Pacific across the forecast period, compared to around 35 percent in North America. This reflects the fact that the North American market has dominated in the early years of the forecast period, accounting for the lion’s share of the market early on.

Although throughout the forecast period the North American mobile application download market remains the largest market, although its share of the market declines steadily over the period.

In 2008, we estimate that Asia-Pacific market constituted only 6 percent of total mobile application downloads, but this is set to increase to around 19 percent at the end of the period.

While the Asia-Pacific market will grow at a CAGR of 126 percent, other regions will grow at a slower rate; for example, the Western European market will grow at around 94 percent CAGR and North-America at 62 percent.

Despite the fact that some of the newer application stores are establishing themselves quickly across various regions, one of the common complaints from end users is that the number and availability of locally relevant applications is low. Hence, unequal distribution of applications in the early years impacts the speed of development in some regions including Asia-Pacific.

This also explains the heavier initial consumption in North America and Western Europe, where more applications are available. However, we believe that by 2010/11 applications will proliferate in all markets and supply-side issues will have less impact.