“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.” – George Soros
And so begins the next installment into my absolute favorite series of blog posts where I hope you steal all my ideas. If you haven’t read the other posts of app arbitrage or the silent disco app, please do so. My goal is to deliver good ideas that are highly tactical in hopes that some tenacious and hungry entrepreneur scoops it up and makes millions.
Let me preface this by saying this is actually an idea that I’ve thought about doing myself. It could potentially be a billion dollar company and is EXTREMELY sexy. Everyone I’ve told about this has usually listened, processed the information, and then muttered a quiet “holy shit.”
Naturally, I’m giving it away.
Let me say again – this could be huge. Like, Titanic size huge. But there are a lot of unknowns. My goal is to get a lot of comments and have you send this to financial and entrepreneur people you know so that we can hopefully uncover all the reasons this would fail, then remedy that.
I hope you get fired up about this and maybe someone even goes as far as to do something about it.
Market Freakonomics – Four Years In the Making
Let me begin with a short and simple explanation of the assumptions necessary to make a perfect/free market:
1. Complete information – this is transparency and total communication
2. Interchangeable goods and services – substitution
3. Lack of market power – there are no forces messing with the flow
….but most importantly:
A market needs to be a certain size to be statistically significant but also to allow for the above conditions to be true. Before a market is perfect (none can ever really be), there needs to be a pretty sizable number of players in the space so that everyone can compete. Every market is different, including the app market.
Up until 2012, the app store market has been in the 400-500K range, with a few thousand apps being loaded each day. 30-40 Million downloads a day, etc. As any appreneur will tell you – it was very different back in 2008 when the app store was much smaller. The biggest reason? Fewer apps…
….and less predictable.
As an avid iPhone app marketer myself, I know that it’s very hard to “game” the system now – if you want to win, you have to execute strategies very well and use creativity to beat the system. You can’t just pop an app into the world of iTunes and hope it blows up. The market has gotten big enough to crush the crappy apps and reward the good apps.
This is exactly what I want to focus on – predictability. Four years ago, an app launch was really unpredictable. Now, it’s a lot more predictable. It’s kind of like businesses going public now – if the numbers make sense and the business is sound, chances are the launch is going to do well.
The obvious next question is:
How can I make money on this market change?
By trying to predict it’s impact on the market players.
Bet Your Life On An Angry Bird
Here’s a quick anecdote – I was having lunch with a team of developers a few months back and they were telling me all about their launch strategy for this awesome new game. They were talking so much shop about their advertising strategy, burst methods, cross promotions, PR companies, etc, that I couldn’t even a word in. They showed me almost everything they were doing.
Then I played their game on my iPad.
I knew right then and there that it wasn’t going to blow up the way they thought. Beyond all the knowledge I have about app marketing, something just wasn’t adding up and I had a bad gut feeling.
These guys were SO amped about it. I KNEW it wasn’t going to do as well as they thought. So what did I say?
“I’ll bet $100 that you won’t hit top 50 in your category by week 2 of your launch.”
At first they were offended (obviously), and then they actually entertained the idea. We didn’t end up doing the bet, and the game ended up failing, but my point is that there was something there.
If had the ability to wager that bet with someone else who believed in that game’s succes, I would have made $100.
At the same time, I could have lost the $100.
I walked home and started thinking about how this was exactly how my friends used to talk about NFL sports betting…and how the companies that broker those deals made more money than anyone else.
I also realized that almost 25% of the top grossing games involve gambling.
Betting on the unknown – predicting the future – wagering on markets.
That’s where the BIG money is.
Pioneering The Wild West of Financial Success
OK cool. Let’s bet on the app market. Let’s see if we can create a system where analysts can come in and actually put down wagers on an app’s success (or failures). How would that work?
1. The preliminary business would have to match bets to go live. There couldn’t be a house with odds at first because of the nature of the business and liability someone could do. If someone places a $5K bet on an app with 20:1 odds, that person could just spend another $10K on advertising to drive the app to the top. With a matched betting system, however, you negotiate the deal with someone else, so the accountability is there and there are no multiplied odds.
2. You would have to use public information at first. This is mostly rankings since they are the most objective. You can split that off into countries and different buckets, but you couldn’t bet on success based on revenue (until phase 2, which I will discuss).
3. There would have to be a timeframe on each bet. It couldn’t be just “this app will hit #32 in Lifestyle,” it would have to happen in a designated time period.
4. Collusion would have to be enforced as well as possible. This is where things get really tricky – unlike the NFL where there is no incentive to lose (ahem, Pete Rose), if someone offers a garbage app a $15k payday if the launch sucks, it’s probably better for the app to suck. I think the solution for this would be that the app developers need to sign off on the bet before it can be live which would enter them into a legal agreement but also pay them a commission on the bet.
With this framework in place, there could begin to be some semblance of a betting market in place.
Let’s say this all goes pretty well and people are happy making the bets, developers are happy taking the bets and getting paid + exposure, and more people get interested. What’s next?
1. Create the “House.” Move away from betting 1 to 1 and collecting some small fee and towards becoming the bookie. Then you can start collecting all the bets that you win, along with establishing what’s available to bet on (creating the lines).
2. Engage developers for more data. You will need to move beyond rankings and towards figures that are much more incentivized like revenue and downloads by offering a percentage to developers for sharing their information. Being able to place a bet on an app’s revenue in Month 1 is a lot more exciting than their rankings.
3. Bring in a fleet of analysts and lawyers. This will probably account for 50-60% of your budget as you create the lines and deal with legal backlash from the community.
4. Partner with iOS marketing companies and Ad networks. Unlike sports betting, there’s actually something that a bettor can control after they place the bet. Clearly the betting structure will have to be pretty low price points to start, but this service should make it very easy to go out and promote the apps they are betting on. Everyone makes WAY more money if this happens.
And so on.
Feasible? Maybe. Sexy? Definitely.
There are going to be an enormous amount of hurdles to overcome to make something like this work, but I have to think it’s possible in some capacity. If you look at companies like www.appbackr.com there is already something kind of like this, except this is fast and scalable.
More importantly, this idea will get you on the map. Conversations around this will be extremely scintillating for everyone involved and you may even find a way to make this work.
The potential to bring the financial world over into the app world will be the next major money pool. When investment bankers start to look at the app market the same way they look at the NASDAQ and when ESPN analysts start breaking down app launches, you’ll see what I mean.
Probably the biggest piece of this is that you would get an ENORMOUS amount of PR. Everyone would want to write about you and this idea. It’s completely revolutionary for the app market and could fundamentally change the game if it worked. The market is finally big enough to be able to cut out a lot of the BS that was available before and bringing in the financial analysts to gauge probabilities and all that – it could get interesting.
Like I said – PLEASE comment and share this with your commentary, especially with financial or sports betting types. I would love to see everyone contribute and tell me why you think this could work or why it’s doomed to fail.
So, what do you say? Wanna be a billionaire?
I bet you do.
Thought this was a great idea when you told me about it and now reading it in a blog post it gets even sexier! So awesome that you are so giving of your ideas and knowledge…keep it up! Hope SF is treating you well 🙂
Is there a template you use to build a revenue projection of an app? What to expect from each monetization method is difficult, especially when you have to scavenge the net to find data. Data like free to billed conversion, average revenue per user, average time played in the app etc.
There was a factoid I found on one of your posts: if you have ads, expect around $2 from every 100 downloads. I am looking for factoids like that (which was extremely useful btw) built in a model.
I am sure others here would benefit by this as well.
Interesting question and the short answer is yes, but it’s not universal. As you well know, the best way to create a revenue projection is using historical data of your own (when applicable) which is what I do. I pull in all my data each day from all the different sources (paid apps, in-apps, iAds, RevMob, Chartboost, Playhaven, a few others) and drop it into a spreadsheet. This gives me daily downloads and revenues by channel.
If you’re looking to get a lot more serious, which I think is an awesome idea, you need to categorize it all by download number vs revenue, which is a lot of work. The bottom line in this situation is you need to pull in http://www.ideaswarm.com/AppViz2.html which works really well for all the iTunes data.
In the interim, try installing something like http://www.localytics.com to get more accurate data about your users and revenue. This will have to be reverse engineered to accomodate ad networks outside of iAds, but its a start.
Here are a few more factoids for you:
eCPM = earnings per thousand impressions. One download can produce multiple impressions.
Revmob typically has an eCPM of $7-$40 for me depending on game and day of week (weekends are way higher)
Chartboost typically has an eCPM of $5-$15 for me
In-app conversions is about 10% – that’s free downloads that purchase the full version or no ads version
Hope that helps.
I think this is a very interesting idea. What about another idea multilevel app marketing. The way it would work is one would have a system whereby one could invest in an app. Based on the number of downloads the person refers under them they move up a level. Once they reach a certain level they get a payout. Also in app purchase could also boost them up as well. Well it was just a thought.
That’s actually a really cool idea. It’s kind of an incentivized crowd source – X number of people invest in the game and the payout comes in relation to how many downloads you drive to the game. You’re right in that this would probably happen in tiers so as to clean out some of the garbage, but it could be a whole new way to do a CPI network.
Kudos for the insight. Keep ’em coming.
i don’t think betting on apps would become that mainstream.
i bet you $100 that that idea will not work. 😉
Haha I like your pessimism. Maybe we should just stick to betting on mortgage derivatives? I can’t imagine that ever getting mainstream. Oh wait….
Is this what you had in mind?
No – AppBackr is more in line with this:
This is an awesome idea, really wish I could do it. It would probably cost 10’s of thousands in litigation fee’s as far as rules and regulations alone but an awesome idea.
Agreed. I think it would have to start really small at first, but it would be pretty amazing to do.
For example, if I told you I was going to launch an app co-branded with NFL that was launching 3 days before the SuperBowl, would you bet that it would go to #1?
I am still learning, but it seems like many apps have a pretty short shelf life. Unlike the stock market, individuals may be wary investing in an app that may fizzle relatively quickly. That limited shelf life would make it difficult to make an educated projection on how well the app would do in the app store and determine whether an investment is worthwhile. What information would people base their bets on? How do you determine your ROI?
If this is simply more of a gambling game, how does a player develop a winning strategy? What determines whether one app will beat out another in the app store and how do players develop that knowledge so they can become better at the “game”?
I would bet yes and would believe it was an awesome bet, but that would be because its going to be marketed by the NFL with a call to action several times during the broadcast lol. I would definitely bet and bet big.
Yeah, exactly. Part of the platform would be the developer/publisher would lay out their strategy and why they predict a specific rank. I think their incentives would be in the fact that they want to just make it higher in the ranks, so they have no reason to hold back info. Also, the more info they put out would probably lead to more bets.
@Curious – this is much more like sports betting than the stock market. It’s focused on an event (the launch) and not the lifetime value of an app. The financial equivalent would be like options trading where you predict a certain price on a certain date.
The model used to determine rank would be a myriad of factors. Marketing, distribution, budget, reputation, publishing, everything. There is a science that is in its infancy but could easily be cracked by a statistician.
Interesting post, & I have one answer to those who talk too much, either you are a talker or a do-er.. there is no in between… I was thinking about a great new game that would be a hit, but again, it’s all talk… The answer will come if the world likes what i have to offer. I wish i could share my idea with someone and bounce it off their brain and see if it is viable.. then to figure out how to make money from this app / game..