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Last week, The New York Times wrote about the difficulty mobile developers face in actually making money off of their apps. That prompted a smart post by Slate’s Matt Yglesias about hit driven industries and how risk is managed in industries like film:

The way they work is that there’s a lower bound on how much a movie can fail, but practically no ceiling on how much money a hit film can earn (especially when you consider merchandise, licensing, resale to cable, sequels, etc.) so a studio can lose money on most of the films it produces and still earn a healthy profit. So if you look ex post at Hollywood over any span of time, most of the people have been working on money-losing ventures. Book publishing is the same way. Publishers don’t aim to hit tons of singles where most of their books earn a modest profit. Instead they swing for the fences, hoping to score a few huge hits in any given year that compensate for a lot of modest failures.

Though not entirely the same, he notes that book advances also function as a risk mitigation tool in the publishing industry. What was missing from the post, which called for a similar approach with respect to apps, was any mention of venture capital.

This is the role that VC’s play for at least a subset of apps: they invest in a portfolio of potential winners with the understanding that many will fail, some will produce solid returns, and - hopefuly - one or two will be huge hits.

However, venture is just a piece of the solution, and a highly imperfect one. First, VC’s need to be convinced of the possibility of a home run, something most apps just can’t plausibly offer. Second, VC interest in the consumer app space has cooled, at least for now.  

So Yglesias’ question is still a good one. How do we manage risk in the hit-driven app business? It’s possible that crowdfunding could play a role. Creating a market for apps that gain traction but don’t amount to businesses will help get some developers paid, but doesn’t fully address the question of risk.

But there’s a much more practical if unsexy answer that’s already put into practice. Mobile developers can band together to make a good living producing apps for third parties while devoting some time and revenue to a variety of original apps.

Though the Times story does mention developers subsidizing their work with freelance income, it dismisses this tactic as draining critical resources from original development. But I think that’s too pessimistic. There’s a parallel here with Google’s 20% rule, where employees are encouraged to spend a sizeable portion of their time on projects of their own choosing. And, rather than one or two developers doing some freelance, the more developers that band together, the broader the portfolio can become. If the firm’s apps fail, well, that’s what the contract work is for. If they hit, the team captures the upside. Less risk, still plenty of reward.

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Tagged: Computing, Business, Communications, Web, Google, smartphone apps, venture capitalists, mobile developers

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