The iPhone Apps Sweepstakes

At first, Jon Trainer had visions of retirement. The software developer had created a game that could be played on the Apple (AAPL) iPhone and iPod Touch devices, and sales were through the roof. Users of the iPhone couldn't get enough of the $7.99 Bullfrog Touch, which pits a ravenous swampland amphibian against a swarm of invading insects.

After two weeks, reality set in. "People moved on," Trainer says. The number of nifty new software-based games, tools, and other pastimes came flooding into the online App Store, elbowing aside early entrants. "As more and more applications got into the store, people weren't delving deeper into the list," Trainer says. The number of applications has surged to more than 4,000, from 800 when the App Store opened on July 10. Even a $3 price cut failed to revive Bullfrog. At this point, "it's not making enough money to be a full-time business," Trainer says, adding that he'll fall back on sales of his Mac desktop application, which keeps track of software licenses and is priced at $20 a pop.

In the latest Silicon Valley gold rush, scores of programmers have raced to perfect and sell their own wares through the App Store, spurred on by stories of overnight riches, including the $250,000 earned by makers of puzzle game Trism. But as the market gets crowded and prices plummet, many developers like Trainer are resetting growth and demand expectations. "Yes, we have gotten some people rich quick," says developer Erica Sadun. "So does the lottery." The odds of striking gold in the App Store, she jokes, are only slightly better.

Surpassing Revenue Expectations

Developers had reason to hope for an iPhone app bounty. In June, Piper Jaffray analyst Gene Munster predicted that if 91% of iPhone and iPod Touch users purchased $10 worth of applications a year, the App Store would generate as much as $1.2 billion in revenue in 2009. Today, a little over two months since the store's launch, the App Store already rings up $1 million in purchases a day, indicating potential annual sales of $365 million.

But considering how fast iPhones are flying off shelves, Munster's figure may prove conservative, says Richard Doherty, director of Envisioneering Group. "It's safe to say that some time this fall, the App Store is going to surpass revenues of all mobile application stores in history," he says.

And the market for mobile software is about to get even bigger, as Google (GOOG) introduces its own online application bazaar, Android Market, later this month. Microsoft (MSFT), Deutsche Telekom's (DT) T-Mobile USA, and other companies are thought to have new stores in the works as well (BusinessWeek.com, 9/5/08). "This is only the very beginning," says Shiv Bakhshi, an analyst at researcher IDC. "It's an immense opportunity. We are talking really big sums."

Taking a 30% Cut

Big sums for Apple, maybe. The Cupertino (Calif.) company takes a 30% cut of App Store sales. But even the most successful developers are seeing sales skyrocket and then plummet after a matter of weeks as other apps rush in.