Revenue growth in the apps market. Where is the money coming from over the next 5 years?

Revenues in the app business come from paid downloads, advertising and in-app purchases.

Paid downloads are an ever reducing segment of the overall app market. Although absolute revenues are growing, the percentage of the total app download market that is paid-for is reducing. Consumers prefer free apps. In 2012, 90 percent of apps downloaded worldwide were free, meaning that only 10 percent were paid for.

By 2017, that figure will drop to 6 percent, and the other 94 percent of apps will be downloaded for free. In 2012, 67 percent of the total revenue generated by apps worldwide came from paid downloads, but this figure will fall to only 20 percent in 2017.

So if people are going to stop paying for apps up-front, how will the apps business generate so much more money?

The number of smartphone owners is growing, the number of apps users is growing, the number of apps downloaded is growing, but consumers are increasingly choosing to download free apps, and save their money for spending later. The answer lies in the other two revenue streams – advertising and in-app purchases.

Increasingly, apps will become free to download, but they will generate far greater revenue streams from advertising and in-app purchases. The most buoyant of these categories, is in-app purchases.

In-app purchases

Presently, two models exist for offering in-app purchases. These are Freemium for in-app purchases within free downloads and Paymium for in-app purchases within paid downloads. From the end of 2012, worldwide in-app purchase revenues are forecast to increase from just USD 1.2 billion, at a staggering CAGR of 86.4 percent, to reach USD 26 billion for the full year 2017.

In 2012, average in-app purchase revenue per user (worldwide) stood at a rather small USD 1.21 per person. Average revenue per user from in-app purchases is highest in North America, closely followed by Europe, then Asia Pacific, Latin America and finally the Middle East and Africa. The data for each region will remain in the same rank throughout 2013, as revenues per average user in almost all regions rise by approximately 50 percent this year. Over the next 5 years, this figure is expected to grow significantly to reach USD 6.46 per person in 2017.

Revenues from in-app purchases will make a significant contribution to non-voice revenues by 2017. The Asia Pacific region will see revenues of almost USD 10 billion, North America will gross over USD 5 billion, and Europe will sit roughly half way between those two.

For all the details and year-by-year forecasts broken out for each region, take a look at our new report Mobile Applications Futures 2013-2017. Full details available here.