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November 01, 2012

Will Advertising or Content Sales Drive Next Wave of Apps?

By Gary Kim, Contributing Editor

Traditionally, both direct product sales and advertising have driven Internet app revenue models. Amazon and eBay have relied on product sales, while Google (News - Alert) has built its business on advertising. But revenue models built up in the days of the PC Web are either challenged in the coming mobile era, or are susceptible to change.

The games and mobile apps business largely started out as a direct purchase business, but increasingly has shifted to a freemium model, where the base app is available for no incremental cost, and most revenue is earned later, in application. 

Image via Shutterstock

The question now is which models will gain in importance. A major move into device sales has shifted revenue opportunities, for example. Apple (News - Alert) still makes most of its money from selling devices.

These days, tablets also are viewed as a platform for content sales by some (Amazon, Barnes and Noble) or as a platform for ad sales (Google).

Of the mix of revenue models that have proven sustainable for virtual goods suppliers, advertising, much more than direct sales, have been key. That is not to say there are not examples, such as iTunes or Netflix or games, which rely virtually completely on content sales.

Still, for most applications, advertising eventually emerges as a significant revenue driver. That is especially true for major end user applications such as Google search, Facebook (News - Alert) and other social networks or content-focused sites such as Yahoo or AOL. .

If a new Forrester Research analysis is correct, advertising markets might not grow as fast as expected in the content vertical, as more consumers shift spending in ways that make advertising an unnecessary or less important revenue model in Western Europe, for example.

Traditionally, media outlets have made money either by selling advertising or directly selling content. Television, radio and live performance have been examples of the former, while music has largely been an example of the latter. Cable TV is a bit of a blend of end user purchases and advertising revenue models.

Forrester (News - Alert) analyst Darika Ahrens forecasts the number of people buying digital content will grow by eight to 12 percent by 2017 in Western Europe. By 2017, 20 percent of tablet users will pay for news, for example.

The online game buying population will have increased by 27 percent, and 60 percent of video-buying will be digital as well.  Also, the number of music subscribers will double, Ahrens estimates.

Some might argue that a mixed, or multiple revenue stream is the more likely outcome, though.

According to the latest market forecast by Strategy Analytics (News - Alert), across the U.S. and major Western European markets, revenue from display ads on the mobile web ($934.5 million) has been overtaken by in-app advertising ($1.7 billion).

Others might argue that sales of virtual goods now rival advertising as a driver of application revenue, especially for games.

Edited by Brooke Neuman
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