Over time the prices of personal software (ex-Games) for desktops has gone to zero and I see no reason why the same won’t happen for software for iPhones. Furthermore profitability of these apps will decrease as the market is getting extremely competitive.

Here’s how I think of the stages that PC personal software went through (excluding Games):

Remember this?

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Personal PC Software Market Evolution

  1. Expensive Software Phase / Software engineers are scarce: fragmented base of developers producing software (remember when download.com was the place to go to get new software; you could find software like HotKeys or Greeting Card Creators or WinZip / Compression software for sale)
  2. Freemium Software: software begins to give 2 week free trials or trials with limited features which often get the job done for most people. E.g., during the first half of 2011 game revenue in App Store shifted dramatically from premium to freemium, with 65% of all revenue generated among top 100 games now coming from freemium games. Source
  3. Supply of Software Engineers Grows / More open source development: As this happens, people begin to develop as a hobby vs profit driven motives. Since there has been a growth in supply of engineers, engineers have more free time and more and more people begin to contribute to open source for fun / recognition / creative outlet / stepping stone for commercial opportunities.
  4. Acquisition Large companies who’ve made it big on software acquire smaller ones. They have reach to a larger user base and can drop the prices sometimes to zero (e.g., when Google acquired Picasa)
  5. End state today: People still pay for certain categories of software: business productivity software like Office, antii-virus security, Operating Systems and games (most of these have very good free versions too – Hotkeys today is free).  Everything else is also available for free:Image

What’s different this time? 

I don’t think much. There are only things that will cause it to move faster and slower. My sense is that we are at the third stage (increasing supply of software engineers) of this and we are about to see a huge increase in the number of software developers for iOS and other mobile platforms. But its not going to happen overnight – it may take 2-4 years, because it will take a while to build new development capacity. But, look at what’s happening at students entering Stanford:

Stanford has seen its computer science enrollments recover at about 20% per year since 2007-08, after turning the corner the year before that … In 2009-10, Stanford fell just short of its all-time record enrollment in our CS1 course, which we call CS106A.That record of 762 for the three regular-term quarters was set back in 1999-2000 at the height of the dot-com bubble. The numbers are now in, and the enrollment in CS106A in those three quarters is 1087, which represents a year-on-year growth of 51%. More frightening still, the enrollment this quarter in CS106A is running ahead of last spring by 120%, suggesting that the trend is accelerating rapidly. That conclusion is supported by enrollment data from other courses. Compared to last spring, enrollments this quarter are up by 74% in CS107 (Computer Organization and Systems), by 78% in CS109 (Introduction to Probability for Computer Scientists), and by 111% in the course I’m teaching, which is CS181 (Computers, Ethics, and Public Policy).  From Eric Roberts Source

Its a good time to be a developer (the greatest was probably a little time back when you could charge for  simple apps) but if you are banking your future on an app that’s providing you steady 99-cents-a-download-income, chances are its going to get tough.

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