The next big iPhone thing: Apps that pay

Apple's plan to allow developers to add in-app payments to applications sold through its iPhone App Store could be the next big step the company takes as it charges ahead in the mobile market.

Apple announced the new feature at the iPhone OS 3.0 preview event in March. At the Worldwide Developers Conference in San Francisco this week, the company is expected to announce the release dates for the software upgrade.

While in-app commerce is only one of several new enhancements to Apple's iPhone operating system, it may be the most significant. The reason is very simple. By allowing transactions to be completed within applications, Apple is changing the economics of the mobile application market and providing developers more opportunity to make money from their applications.

And if executed well, Apple could leave its smartphone competitors in the dust.

Bart Decrem, CEO of Tapulous, a small developer that creates applications exclusively for the iPhone, said: "My sense is that this will lead to Apple increasing their lead in the market even more.

"It will be a tremendous challenge for Apple's competitors that are trying to build their own application stores to get traction with developers, because we're in no rush to work on other platforms."

There's no question that the App Store has been a huge success. Apple announced its billionth application download only nine months after the store launched. But for developers the financial rewards have been mixed. There have been some paid applications that have sold well and generated hundreds of thousands of dollars in revenue but most developers have barely broken even.

Today most of the applications downloaded from the App Store are free. And of the ones that are actually sold, the majority sell for 99 cents per pop.

"The challenge is that it's hard to sell stuff for more than a dollar," Decrem said. "And it's really hard to make a lot of money that way, especially when the majority of the downloads from the App Store are offered for free."

The ability to add in-app purchasing should provide a greater opportunity for developers to generate some cash. As a result, developers may be likely to spend more time, money and effort developing applications for the iPhone rather than other smartphones, such as the Android devices or Windows Mobile devices.

Electronic Arts, one of the biggest game publishers in the world, also sees big opportunities as result of the in-app commerce function. EA sells many of its games for the iPhone at premium prices around $9.99 and higher. And Adam Sussman, vice president of worldwide publishing for the game developer, said the company is already making plenty of money from the App Store. But the new in-app commerce capability could allow the company to lower the entry price of a game to expand its audience by allowing it to monetise more elements of the game.

"Our belief is that the paid apps in the App Store will move away from a single download model," said Sussman. "The new model will involve these micro-transactions that can broaden the installed base of users and can extend the life of a particular game or application."

Apple was not the first company to offer downloadable applications for mobile phones. But it was the first company to make discovering, downloading, and paying for applications easy for consumers. These were things that previous "storefronts" from mobile carriers or other third-party sources of applications were lacking.

As a result, the market for mobile applications never fully lived up to developers' expectations.

Apple has changed this. The App Store uses a well-established ecommerce platform, iTunes, to bill customers, which has helped make downloading and paying for applications as easy as purchasing and downloading a song. By contrast, Apple's competitors have had to build their own mechanism for discovering and paying for new applications from scratch. And as a result, virtual storefronts, such as Google's Android marketplace, have been slow to get off the ground.

"With the Android market, I think we are still waiting for the market to arrive," Sussman said. "While the platform has been released, there isn't a lot of momentum yet."

Original article: Apple prepares to reset the bar in the mobile app market from CNET News.com