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iAds and the Future of Mobile Apps

Describing iOS 4 at the WorldWide Developers Conference 2010, Steve Jobs kept one of the most interesting of the system’s upgrades until point seven. But the launch of iAds, the iPhone’s new advertising platform, may well be its most influential feature. While multitasking and folders will all be very useful, the incorporation of a native advertising program designed specifically with iPhone apps in mind could well have a huge effect on the 200,000-plus apps already in the App Store, and the thousands of others still to come.

The ads, demonstrated through the use of samples created for Nike, Target and Toy Story 3, aim to bridge the gap between the interactivity of digital ads and the emotional engagement of television advertising, Jobs explained. Initially, they look similar to ads currently distributed by Google’s AdMob service, appearing as a small banner at the bottom of the screen. When users click that banner though, they’re given a whole different experience. They’re no longer whipped out of the app as they would be when clicking on a Google ad. Instead, the app is frozen and the user is taken into what looks like a new app that may contain a number of different features, from mini-games and animated timelines to videos and wallpaper downloads. The features may be as inviting and enjoyable as the app itself, providing a reward for a user who clicks on them. And with the original app frozen rather than closed, there’s no penalty for clicking, pleasing the advertiser.

Apple’s Takes a Bite from Both Ends

But it’s in the benefits for the developer that things start to get really interesting. According to Advertising Age, an industry magazine, AdMobs currently charges between $10 and $15 on a CPM basis. Advertisers who want to buy CPC campaigns can expect to pay 15-30 cents a click. iAds however is expected to charge $10 CPM and $2 for a click, passing 60 percent of the revenue to the app developer.

That’s a big leap in the price of mobile advertising (and in practice, advertisers looking to catch the first wave of ads will have to pay even more: with the iAds Developer Kit still to be released, ads can only be developed by Apple, a service for which the company is charging $50,000 -$100,000 for advertisers spending less than $1 million.) But it’s also a big leap in revenues for app developers.

One of the first challenges developers faced when the App Store opened was whether they should give their programs away for free and live off the advertising or charge the buck or two that seemed to be the standard rate for the iPhone. It was a puzzle that was solved pretty quickly: AdMob and other mobile advertising systems just couldn’t generate enough revenue for developers to make it worthwhile to give their products away for nothing. It always made financial sense to charge something — even just 99 cents — than to look to the ads to make cash.

If iAds can make free pay more than 99 cents, then the effect on the App Store, on mobile advertising and even on mobile computing would be enormous. For one, there will be a lot more free programs available. According to Greg Yardley of PinchMedia, a firm that supplies analytics software for iPhone apps, free apps are downloaded on average 7.5 times more frequently than paid apps, although they’re also used less.

But not only would more apps become free, those apps would also need to change to maximize revenues.

Free but Slow

Apple has estimated that the average iPhone user spends about half an hour every day inside apps. Steve Jobs has talked about showing one ad every three minutes, exposing iPhone users to an average of ten ads a day.  The more time a developer can keep a user on his or her app, and the longer they can make that app last before it’s removed to make way for something better, the more ads they can show and the more they can earn on both a CPM and a CPC basis.

Some apps are going to find that easier to do than others. Although all apps now pause when a user clicks an ad, users will still be more likely to click when their eyes are free to wander to the bottom of the screen, something that happens more often while playing strategy games without a timer than action-packed first-person shooters. Similarly, users are more likely to keep the game on their iPhone and return to it — even once the game has been completed — if the developer continues to release regular updates that extend its life.

Three immediate results of a functional iAds system then may be an increase in free apps, an emphasis on apps that exercise brains rather than the speed of fingers, and a greater reliability on frequent updates — all good news for dedicated Sudoku fans looking for a regular free fix.

But developers will also want to extend each play session in order to have time to show more ads. That may mean longer cut scenes between levels or more time in which little happens, moving characters from one place to another. The games may be freer and longer, but they may also turn out to be less exciting.

All of this though depends on iAds living up to its promise. In practice, it may not. Greg Yardley says that he used to be a fan of the potential of advertising on iPhone apps until he crunched a few figures and found that apps needed to show a CPM of around $8.75 in order to be successful. That’s a much smaller amount than the $30 CPM that advertisers can expect to pay for an iAds campaign (according to Advertising Age’s) figures, but much higher than the current 50 cents-$2 CPM that developers have seen from AdMob. iAds then could have a radical effect on the nature of mobile phone apps, creating apps optimized for advertising or  it might just make a few bucks from lite versions of paid apps — which could be why it was only point number seven in Steve Jobs’ presentation.

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