Earlier this week, I wrote about how Facebook is in danger from a new kind of social network, one that's born mobile and figures out how to make money on that mobile usage.
I figured, in response to many questions and comments, it was only fair to get a little wonky for a moment about who actually is making money on mobile, or how a site or startup might try a mix of potentially successful strategies in the future. Here are my guesses.
How to make money on mobile
First, the only apps and companies making significant money on mobile right now are making most of that money off in-app purchases. The apps are free, and if you want upgrades like extra jewels, more levels, additional features and so on, you pay small amounts of money over time. Research house IHS speculates that in-app purchasing would generate $5.6 billion in revenue in 2012, up from $970 million in 2011. That number would equal fully 64 percent of app revenue.
And in-app purchases can take all kinds of forms: it doesn't just have to be buying extra jewels in Bejeweled 2 or the Mighty Eagle to get you out of your Angry Birds jam. It's a popular option in photo filter apps, fitness apps like Skimble are trying it for additional workouts, and the model works fine for subscriptions, as well.
Amazon just started testing in-app purchasing, and while it appears that only 2 percent of Android apps offer in-app buying, that really just means it's kind of an untapped market. It's a proven winner, too: 72 percent of revenue from App Store titles on iOS come from apps with in-app purchasing.
So, that's one obvious mixer in the money-making cocktail we're creating here.
The next is retail and leads: a company gets paid because users click on coupons, take advantage of a local deal, or buy things that are aggregated on a mobile site or app. I know Groupon's current stock price would seem to indicate that local deals are a dead end, but I've never seen a busier cul-de-sac. There's still something to the idea of local offers -- maybe not local deals that feel a little off, somehow, but to the concept of letting you know what's around you when you've got your nose glued to your smartphone while you're walking.Plus, there are in-app commerce opportunities galore. Apps like Karma, which we profiled at South by Southwest, have a simple premise: aggregate products, make it super easy and social for you to buy gifts for people, and then get paid every time you buy one of said gifts. (Why Facebook, for example, doesn't have gift-giving integrated all on its own is just beyond me.)
Start imagining a fun, easy-to-use app that's social, offers in-app upgrades, and lets you buy really great curated items either as gifts or based on your interest and location...and you start feeling like you've got a winner on your hands.
Then, of course, you've got the booze in the shaker: ads. Advertising is still the biggest moneymaker in mobile -- it's just had a slow takeoff. You can't blame Facebook entirely for not making any money on mobile (although they should have seen the mobile shift coming and made some alternate plans). Mobile advertising accounts for just 29 percent of mobile revenues because advertisers have been slow to jump in the pool. That means, as Mary Meeker pointed out this week at All Things D, that there is massive growth potential in mobile advertising.
Right now, advertisers are concerned that maybe mobile ad tracking isn't as detailed as Web tracking; publishers are figuring out how one ad in an app or on a mobile Web site can make up for five or 10 ads on a full-sized Web page; everyone is trying to figure out mobile CPMs and targeting that isn't too creepy and how to work with ad networks that can sometimes be more trouble than they're worth.
But as I said earlier this week, these issues will sort themselves out, especially as advertisers and publishers start to see how much money is really on the table. Maybe that money will come in smaller increments, and it will take a creative combination of money-making strategies. But it'll happen; only question is who will get the proportions right first.