Apple IPhone's Halo Effect Yet to Reach Software Developers

Published on: 6th August 2008

SAN FRANCISCO -(Dow Jones)- Sliding software prices have damped the halo effect many music and software companies expected from selling their products through Apple's iPhone software store.

Take, for example, game maker Jirbo.

The Los Angeles-based company thought it would have trouble getting customers to buy an iPhone version of its popular "Break" video game, which it had wanted to launch for $2.99 on July 10. That's because it would be crowded in with 1,400 other titles, like "Super Monkey Ball" and "iPhoneHome," some of which sell for as little as 99 cents.

So on Monday, Jirbo did what many other iPhone software writers are doing: It dropped its price by two-thirds.

"You've got to roll with the punches," Jirbo Chief Executive Jonathan Zweig said.

Jirbo's experience is like that of lots of other software makers. Lured by the promise of selling programs for one of the hottest gadgets since Motorola's super-thin Razr cell phone, scores of software companies - big and small - rushed out applications ranging from social networking to global positioning services. Now, they're finding competition so fierce that they're slashing prices. Over the last two weeks, prices on hundreds of programs were slashed.

The extreme discounting raises questions about how profitable the market for iPhone-compatible software will be for both manufacturers and Apple itself. The most popular price for an iPhone program is now 99 cents, compared with around $9.99 on July 10, when the virtual software bazaar opened. So companies are trying to make up in volume what they're losing in margin.

The price cuts also could put pressure on Apple. Although the Cupertino, Calif.-based company sees the App Store as a marketing tool - it believes the more software that's available, the more iPhones it can sell - the company still keeps 30% of every dollar spent on the download site. If revenue drop precipitously,the results may be more disappointing than initially expected on the business.

Apple declined comment. The company's shares were recently trading at $163.58, up 1.8%.

Apple isn't limiting its sales to software programs. It also is selling full-length songs for the iPhone only through its iTunes store, the virtual record shop that helped turn the iPod MP3 player into the benchmark for the mobile music player market. Apple did that by linking all sales of online music compatible with the iPod to the store.

In expanding that model to the iPhone, Apple is already generating a backlash. Music companies are locked into Apple's platform, limiting the avenues for digital distribution. Meanwhile, opportunities for competing models from the telecommunications companies that provide service for the iPhone have been squeezed shut, bruising relationships with the companies that provide the iPhone's main service: voice communication.

Apple has "an iPhone choke-hold" on mobile music delivery, said one music industry executive, who asked not to be named.

"This is a business decision that Apple's making," said Linda Barrabee, an analyst at research boutique Yankee Group. "The iPhone keeps eating into the potential service opportunities carriers and others are trying to create."

Still, many analysts think Apple has a winning formula. Even if revenue from the App Store falls, Apple will be able to ride it out because it will become so popular and pervasive, said Gartner analyst Mike McGuire. "A lot of Apple's competitors don't have nearly the breadth of the App Store," he said.

The same may not be true for software makers, which are struggling to make money when they sell their programs for less than a dollar. Analysts say their pain might be mitigated if the mobile-software market grows as quickly as expected. In five years, the market for programs downloaded to cell phones is expected to balloon to $67.3 billion, up from the current $17.9 billion, according to research firm Frost & Sullivan.

In the meantime, software makers, particularly the small ones, will continue to feel pricing pressure. Paris-based GameLoft, slashed the price of its six iPhone games, including "Brain Challenge" and "Platinum Sudoku" in half to $3.99 each. Sega, which sells half dozen games at $10 apiece, seems destined to follow.

GameLoft couldn't be reached for comment. A Sega spokesman declined to comment.

The price cutting could also spill over to Apple's competitors in the mobile-phone market, which might feel forced to trim prices in order to compete with the iPhone. Greg Yardley, who runs iPhone software tracker Pinch Media, says that with iPhone software downloads running at 25 million in the first month, the pressure is already on Nokia's Symbian and Research In Motion to follow suit.

"The response to the App Store has been dramatic enough that others will have to come up with one of their own," Yardley said.

Spokesmen for Nokia and RIM remain optimistic about the potential for software sales, but offered no further comment.

-By Ben Charny, Dow Jones Newswires; 415-765-8230; ben.charny@dowjones.com

(END) Dow Jones Newswires

 

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