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The Sparrow Problem (appcubby.com)
310 points by kirillzubovsky 1099 days ago | 154 comments



I've been saying this for years. It is easier, way easier, to sell someone a 12 dollar a month subscription to a traditional SaaS app that stores their sales leads. Get your monthly churn rate down to 2% over time and you have a client with a life time value of $600.[1]

Now, you could spend the same time making an app that you sell for $0.99 but you would need to sell about a thousand of them just to break even (since Apple takes such a huge cut, plus it costs more money to service a thousand people than it does to serve one). Furthermore your cash flow is much more predictable under a SaaS model (hence, easier to raise on, exit with, hire on, or just plain sleep at night with) so it isn't even a 1:1000 ratio. More like 1:2000.

The psychology behind this is pretty simple. Most business owners know that saving time increases their billable hours. If you can do that, then great. They would be thrilled to hear that they will be paying you that 12 bucks for the next 4 years, because it would mean that they survived at least that long! Most of them think there is a good chance that they will be toast in their first 3 or 4 months, and what's $40 bucks compared to their other expenses?

Whereas a general app purchaser isn't costing in their saved time (for business or productivity apps), since they don't view their mobile device as a work tool, and consumers don't usually care that your game is good because their are plenty of alternatives to choose from when it comes to wasting time on the internet.

Where I would build an app:

For an existing product that exists in a browser, mostly as a sales gen tool. Possibly for functionality that people would like to be mobile but doesn't work in a traditional SaaS app (check-ins for a ticketing app, for example, could be done on an iPad).

Most other cases I just wouldn't bother.

[1] I'd say 1.5 to 2% is basically the floor because that is roughly what small businesses close at.

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>> Whereas a general app purchaser isn't costing in their saved time (for business or productivity apps), since they don't view their mobile device as a work tool, and consumers don't usually care that your game is good because their are plenty of alternatives to choose from when it comes to wasting time on the internet.

I like the way you identify the costing "point of reference" for various segments (web/mobile and business/consumer). To add to that, it seems the costing point of reference for mobile is the monthly phone bill. In comparison with that $1 is negligible (in the ballpark of carrier overage charges), but $10 or $20 extra is a "major expense".

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"The age of selling software to users at a fixed, one-time price is coming to an end. It’s just not sustainable at the absurdly low prices users have come to expect."

While it is fun to watch folks figure out that business school is more than just a big party until graduation, watching them draw the wrong conclusions from their experiences hurts.

There is an old joke about a scientist who teaches a frog to jump when you yell "Jump!" he then proceeds to cut off the frog's legs and notes that it no longer jumps when he yells "Jump!". From this he concludes that removing a frog's legs makes it go deaf.

The same is true about concluding that the age of selling fixed price software is over. It is not economically viable at these prices. So people will go out of business, and the people who remain will raise their prices to the point needed to support themselves. Now it may be that its not economically viable to live off the revenue from a 'simple' application, but its also true its generally not possible to live off the revenue of a single paperback book either.

That said, its easier to see how a 'subscription' is a better model for somethings, but people aren't too excited about those either.

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It seems like there's a key point you're missing, which is that there is currently a constant stream of people entering the market to write $2 apps. They write an app, it fails, and they move on, but instead of a situation where the surviving app makers can now raise their prices due to scarcity, instead the people who left are replaced my someone else who tries to do the same thing. The end result is that no one can raise their prices, because the instant they do, some college kid comes along and does the same thing for $1. And of course the acquisitions of instagram and Sparrow make this even worse, because now there are 10 times more college kids thinking they're going to make $1b by making an app and getting acquired.

Of course, the key to being able to charge a premium comes down to marketing, and positioning yourself well in the market, but that's obviously not a fairly difficult thing to do, especially in these competitive markets.

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Actually no. Like most things it takes a while for the market to correct.

The quantity of crap produced is large, it begins to swell and what emerges is a discrimination filter. Be it review magazines, web sites, or even word of mouth. Take a look at computer games, initially people were putting out what seemed like lunar lander clones in BASIC and selling them on the Apple II and becoming zillionaires. And a lot of crap followed in little baggies. Sometimes there were gems like Ultima, but a lot of times there was crap. And to filter through the crap came user groups and other communication venues where the goal was to not bother with the crap but buy the 'good stuff'.

The total crap fell by the wayside and the cost of entry got higher because you needed talent a few production points to make it past the crap filter. Lots of magazines made a ton of money being crap filters. PC Gamer was one of my favorites at the time. The market matured and you got the 'studio' system and even higher production values. Some people made it big in computer games but it required actual talent or at least a decent idea.

The 'AppStore' as an environment for software delivery has been around 5 years. We're in the Microsoft Flight Simulator 1.0 era relative to that. The arguments were the same "You can't make any money selling games, its too hard, no one buys them, the market is illusory." But the reality was that the market was developing, and during development early movers get an advantage but they don't necessarily win or even complete the race.

People have needs that can be filled by applications running on their phone/tablet that would serve them better than a similar application running on a laptop. Selling applications that can solve those problems can support a development team working on the problem. There are multiple ways to monetize now that didn't exist before. Solve a need, get paid. But understand that some great ideas solve no problems and are thus not convertible into cash.

Until you can talk to your computer and it can figure out what you want and synthesize a solution on the fly, there will be a market for 'apps.' Give it another 5 - 10 years before you write it off.

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> We're in the Microsoft Flight Simulator 1.0 era relative to that. The arguments were the same "You can't make any money selling games, its too hard, no one buys them, the market is illusory." But the reality was that the market was developing, and during development early movers get an advantage but they don't necessarily win or even complete the race.

Indeed, the article's conclusion is flawed: the gold rush is not over. We blindfold ourselves with a scenario where a hypothetical gold rush would make every arriver rich, observe that it is currently not the case, and justify not trying our luck by saying that therefore, it's over and there's no use trying.

As long as there are constant or increasing numbers of people "thinking they're going to make $1b by making an app and getting acquired.", there's — by definition — a rush.

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As long as there are constant or increasing numbers of people "thinking they're going to make $1b by making an app and getting acquired.", there's — by definition — a rush.

And rushes, by definition, inevitably end. I'm sure there were gold miners that showed up in the Sierra's and were disheartened by all of the claims everywhere. They, being in the later wave, no doubt cursed their luck at missing out on the 'easy' riches. I can tell you that very few independent miners are wandering the Sierras these days to stake a claim (surprisingly it is not zero but that is a different story).

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Yes,

Forming a rock band is not a viable business plan. Hasn't been for years, since long before the music industry's current woes. The music industry survived for years and years parasitically feeding on the free labor that would-be stars put into skills for their hoped-for careers. The movie industry and the sports industry similarly harvest the freely available talent of would-be stars. And some musicians, some actors and some athletes indeed make lots of money but total final rewards look like very little if you divide them by the effort expanded by those aspiring to success. And consideration of the problems involved here can easily avoided if everyone who fails in any of these fields is dismissed from consideration as a "loser".

This stuff may not sustainable but it can be sustained for longer than one might imagine.

I heard once that the only ones who got rich in the gold rush was the ones selling pans. Too bad Apples seems to have a monopoly on the mobile-app equivalent.

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> I heard once that the only ones who got rich in the gold rush was the ones selling pans. Too bad Apples seems to have a monopoly on the mobile-app equivalent.

Not just Apple... The original pan seller's legacy isn't doing too badly, either: http://mashable.com/2012/07/01/stanford-top-major-computer-s...

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Others can 'sell pans' by creating products that target developers (cloud backends (like Parse), mobile advertising, mobile testing infrastructure, etc.). Note that doing this makes you very susceptible to a tech bubble popping, though.

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Agreed. You've basically described the concept of the "race to the bottom."

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This is a fallacy of the 'goods' economy. It goes like this,

"If something is free to reproduce and distribute, the marginal cost for an additional good is zero, so new entrants simply reduce the profit they take until the price of the good stabilizes at its lowest possible price (the bottom)"

The problem with this fallacy is that it doesn't capture the 'cost' of the good which involves creativity and implementation, combined with a system of copyrights. So while it may be true that a generic good like a text editor might reach a price point near the cost of maintenance, something like AngryBirds generates revenue over a longer life cycle. Things that people want, they pay money for if they cannot get value out of a 'free' offering. Capturing that value requires understanding a bit about what the actual user value is and how they weight it, but as we read in another set of comments about people weighing the pros and cons of an app vs plonking down $5 for a cup of coffee without even batting an eye, the market for coffee is mature, people know what they are going to get for their $5 so the value proposition is in the bag, not so with Apps yet, and perhaps not for many years yet. But that education process continues.

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"So people will go out of business, and the people who remain will raise their prices to the point needed to support themselves."

This sounds a lot like what newspaper people were saying a decade ago: current prices couldn't support professionals, so prices would have to rise. But that's not what's happened, in most cases.

The tools one needs in order to build and sell software are accessible to more and more people every year. The barrier to being an indie programmer is getting lower and lower. You can build and sell an app on the app store without having ever heard of quicksort. Indie developers may well go the way of indie journalists: while a few flourish, most wind up working for beer money.

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Journalism is an interesting parallel, its further along the transformation path. When I was at Google I was really excited about being able to build a better newspaper with e-readers. I did a lot of research on that topic and talked with a number of different folks. As it turned out, if you threw out the printing presses, the delivery trucks, the newsprint, the facilities that held the printers, the people that maintained the printers, and all of the recurring costs like ink, maintenance, and pest control, and charged the same amount to advertise you would have a fabulously profitable business for the same subscriber base. But here is the rub, you don't have the same number of subscribers (the advertisers pay by subscriber) and trying to negotiate print prices for what someone perceives as a web site, doesn't go very far.

Now that isn't really a problem because all things being equal you can be fantastically profitable at lower ad rates if you keep the subscriber base. But you need the subscribers. And for that you need people that have e-readers. The publisher of the NYTimes pointed out they could be wildly successful if they gave all of their subscribers an e-reader for free and took away the paper copy. Not everyone was willing to go there.

So you've got an industry in transition. I expect the Economist to be the first 'old world' journalism outfit to flip its profitability from the print publication to the digital one (they are furthest along the curve), but the Wall Street Journal has some great trending numbers as well.

Truth be told, people still read the news. And the folks who appreciate good news, are willing to pay for it, and if they are willing to pay for it they are pretty good folks for advertisers to have their ads in front of. But its all about stepping across that chasm of print to e-print.

The 'app' market was hugely disruptive because it kicked a huge chunk of infrastructure to the curb. That chunk added no value to the product they just did distribution and duplication. So you can sell a product for less than you would have if they were taking their cut, and still make money. Except Apple bends you over for 30%. Once the opportunities open up that price will fall, its not supported by actual costs (meaning others can get under it and still make a fair profit). But there are other pieces in the puzzle that have yet to fall out (like the horrible platform diversity on Android). The key though is that people continue to want to 'own' software and largely resist 'tax' type features. So as the business models flourish and die we will get to the place where things stabilize.

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This is a similar problem to what you can see at etsy: people are willing to take minimal profits because being paid anything for their hobby is reward enough.

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It's more like noting that cutting off the frogs legs makes the frog unable to jump: after cutting off all future revenue from a user, you no longer receive revenue from that user.

Regarding your second point, software is plagued by the zombie minimal-viable product. Sparrow is a pretty damned good email client right now. What could they offer to make me upgrade?

This is why smart developers and good software will move into SaaS, whether users are excited about it or not.

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I can buy a lawn mower, why should I have to rent software?

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You can buy a lawn mower or rent a lawn mower, but you can't buy it for a rental price.

I'd rather own myself, but I suspect we've got a lot of market education on all sides to go through before we figure out that you can't sell apps for $0.99 at anything other than lottery-ticket odds.

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A lawn mover still has cost after the initial purchase. You need to buy oil and gas, fix minor issues, etc, and at some point it dies and you need to buy a new one. Similarly, software needs to be maintained. Except, somebody else maintains (and even improves) it for you, and they need to make a living as well.

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Not true. Software should work without any oil or maintenance (modulo bugs). Consumables are a lousy argument. My computer uses electricity, the money I pay for it doesn't go to the software developers any more than the gas money goes to the lawnmower manufacturer.

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The maintenance is keeping compatibility with current versions of the operating system.

I'm starting to become a fan of base module free/low cost + pay per extra feature.

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> The maintenance is keeping compatibility with current versions of the operating system.

Back in my days, operating systems kept compatibility with applications. If you want it the other way around, you'll have to pay more for the application, one way or another.

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Eh, Apple has had an issue with this historically.

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Because the developers that sold you software are all out of business, and the ones that are left will only rent it to you.

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I think the devs that rent software have yet to demonstrate longevity. Renting services, e.g. Cloud storage, Internet access, or whatever yes, but pure software rental has yet to demonstrate it can work.

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The devs that don't rent are demonstrating lack of longevity today. If the market choices become rent software or learn to make it yourself, people will rent and deal with it--a demonstration won't enter into it.

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The customers you want are the ones that recognize value, and are willing to pay good money for it.

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I think this captures it. You develop your code, you charge a price that allows you to be supported, and if the value equation is there you win, if not you try again.

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This is not a software-specific problem, see planned obsolescence in the real world. Everyone loves a steady revenue stream.

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Lawn mowers cost hundreds of dollars for the most basic bare-bones package, and into tens of thousands of dollars if you want all the bells and whistles.

If you want to buy software, then you need to pay buyer's pricing. Almost nobody is willing to do that.

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There are a lot of lawnmowing and landscaping services out there which save you the time of having to mow.

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Sparrow did everything right. They built an incredible email app

I would say they did everything right except choosing to build an e-mail client. The days of paying for e-mail clients is long gone. The days of even using a local mail client are over for most people. It's just a tough sell to make money selling a paid client to a free service. I use Sparrow and will continue to use it but I can understand why they were going to have difficulties making any real money off it. Way too small of a market.

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> The days of paying for e-mail clients is long gone.

I'm not sure I totally agree with that. My first example is the ridiculously wide-scale enterprise adoption of Microsoft Outlook and Exchange -- sure, there's a bunch of features that are piled onto those "email clients," but at the heart of it, people are still paying for this stuff.

The second example is Sparrow itself. If people weren't paying for e-mail clients, then would Sparrow have such a huge, dedicated userbase? Or is this just the vocal minority we're hearing from?

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I agree - people are no longer willing to pay for the little bit of the client that connects to a server, downloads the email, and renders it, because all of that is widely available for free.

What they are willing to pay for is a value proposition that goes beyond the mere mechanics of email. Outlook succeeds because it integrates email with calendaring (so does GMail, with less success), does a fantastic job with sortation, filtering, and highlighting, and also is a champ when dealing with unmanageably large address books.

The market for an amazing email management service is absolutely existent. The market for a rubber-stamp me-too mail client is not.

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I agree that if someone could improve email management they would indeed make more money. However, I still feel that sparrow was able to become so popular because it's iPhone interface was so much nicer to use than both Google's and Apple's free alternatives.

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> sparrow was able to become so popular because it's iPhone interface was so much nicer to use than both Google's and Apple's free alternatives.

Sparrow became popular way before the iPhone version. Anyway, how is making an app more convenient supposed not to be an improvement worth at least a couple of bucks?

BTW, "All mail clients suck. This one just sucks less."

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Even in that example, the real product being sold is the Exchange server. The Outlook mail client is essentially a freebie.

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> My first example is the ridiculously wide-scale enterprise adoption of Microsoft Outlook and Exchange ...

Yes but there is a completely different dynamic driving those sales: top-down adoption mandated by people whose main goal is not to get fired. Same reason as why you see so many middleware posters in the airport raving about security. Most users, given the choice, would not choose to use these products.

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Humans don't buy Outlook. Selling to humans (like Sparrow tried) is categorically different than selling to organizations.

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I took a more general message: a $3 app cannot sustain a funded startup in any field.

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Why was this even funded? It could have been a nice business if they built the app and sold it through the app store, it seemed to be making enough money to support the team (based on the fact if was highly ranked in the top grossing sections of the App Stores).

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Because some investors don't mind 4x returns when the company exits to Google.

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I understand why investors might want to get in but why would a company like this take investment? It seems like it would be pretty easy to bootstrap and build a sustainable business from. If they had given it away for free I could understand the need for investment but not when they were making money from the day it launched.

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Maybe they perceived they could win more money by selling the assets the company, one of Sparrow guys came from Apple and Amazon so I really think this was the case, or maybe they perceived that at some point in the future a single software would not be sustainable at all, and since with app stores you cannot charge for upgrades this would be on their way, that's why the majority of OS X indies I know have a couple and not a single software selling at each time.

Who knows, ultimately it probably has to do with personal projects of theirs and I think it would be paternalistic to have a say in their lives.

There are people who really do not wish to have the lifestyle business life, it's not evil to seek more money as long as it's not something immoral that they're doing.

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It is an interesting point, investors may have been looking for this type of exit from the start.

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Doing an email client in a dying (but far from dead) market is quite alright. They even made loads of money !

The problem is how they would continue to make money - next year, the year after and 10 after that - what plan did they have in store? If all they had was "better mail app", then sure, as you summarised it, the writing was on the wall and selling while still being hot property was the best decision to take.

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I don't believe that's true. Given many people still spend 4 - 10 hours a day in an email client it's not hard to believe they might pay 50 cents a day if it was a meaningfully better experience than a free app.

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Isn't Sparrow primarily a GMail client? I mean, that's pretty much all I use it for (iCloud email pales in comparison, and I haven't run my own IMAP servers for years).

It does GMail really really well and GMail users tend to be a bit more affluent or clueful - better customers.

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I paid for my desktop email client (The Bat) upgrade just couple of weeks ago.

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The Bat!'s still around, since 1998? That is awesome.

I don't think RITLabs took any VC money... hmmm ;)

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I've said it in two previous threads and gotten down-voted for it, but it's the truth: apps must have a recurring revenue model.

The upgrade-train model is over for a lot of software out there. Those of us who want good desktop software should be begging our favorites (I'm looking at you, JetBrains) to charge on a subscription basis.

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Perhaps I'm just cheap (I prefer frugal), but I refuse to purchase anything with a recurring subscription. Don't even own a cellphone. That said, I had no problem buying Sublime Text 2 for $60 because it was a great product, and I was guaranteed updates until the next major version. If it was subscription, even at $5 a month, I'd have never made that purchase.

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And, because of that, Sublime's developer will never make a living at it, and it will either be a labor of love or abandoned.

I'm with you, man, I'm cheap too. But that's the reality of todays software.

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As long as Sublime can charge for upgrades in the future, it's not too large a problem. The problem is all the App Store software that can't and the user expectations of free upgrades that are being set by Apple (not familiar with other app stores to know if they are following the same path).

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Right, but my thesis is that the upgrade-train model of software revenue is faltering. I think Sparrow is evidence of this (what you say about Sublime could apply as easily to Sparrow.)

I think it is a large problem, and we are seeing the manifestations of it now.

Time will tell, but I'm sure not gonna work on one-time charge software, nor would I recommend it to anyone. I'll work on free open source stuff, financed by work on whatever recurring models I can figure out.

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Having purchased sublime text 2 I would definitely encourage the author of it to do this. The main competition text mate is a great example itself of this model being unsustainable in terms of having someone continue to develop the product full time in the long term.

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Opposite problem. TextMate made Alan Odgaard so much money that he didn't need to work on it anymore[1].

Who wants to maintain an old code base when they could spend ten weeks trekking in New Zealand[2] and then hunker down for the Great Rewrite That Fixes All The Problems?

(Not that I blame Odgaard; in fact, as an ST2 user this is my greatest fear about that product--selling thousands and thousands of copies at $60 is an extremely viable level of revenue for a one-man shop.)

[1]: http://blog.macromates.com/2006/year-in-review/ [2]: http://blog.macromates.com/2006/20-will-require-leopard/

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I had always suspected that TextMate was a huge financial success but never did the googling. Thanks a lot for posting this.

I wonder if PixelMator is on a similar trajectory after Apple has featured them in nearly every possible spot on the Mac App Store.

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I disagree, I think it it more that the future effort vs reward didn't stack up as well. Because so many developers had already purchased and it was well known, a free version 2 wouldn't represent the same kind of financial gain the initial spike did, despite all the extra effort.

A paid version 2 though produces a similar windfall again, rather than diminishing returns.

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> A paid version 2 though produces a similar windfall again, rather than diminishing returns.

Marginal utility. The first million is worth a lot more than the second.

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I respect you, but anyone who refuses to get a cell phone because of the recurring fee is a bad barometer for what the market will bare.

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I had this problem when I wanted to buy phpStorm. It costs 94.05 EUR (which I view as expensive for a personal license) with a one-year upgrade.

Why can't you give me fixes for the version I purchased and then sell the next major version ?

Years ago it was the same thing with Trillian IM. While I happily paid Reaper (a DAW) that gives me two major versions.

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JetBrains does something similar. They give you access to all updates, including any major versions, for a year. (They put out a new major version approximately every 8 months, so depending on when you buy, you might end up with two major version upgrades for free.) Then you pay to maintain your subscription year after year, which you can think of as upgrade pricing.

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Actually PhpStorm is a product of JetBrains ;)

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Exactly :-) My point was that their business model is already very similar to what you described ("give me fixes for the version I purchased and then sell the next major version").

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Ooooh my bad, I see your point now.

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I disagreed with you in a previous thread, but I have another point to make.

I think the SaaS model applied to desktop software would run into some problems. I think people would react with hostility if their desktop software stopped working once they stopped paying a license fee, even though they may very well accept this model for browser-based apps.

I think the sparrow guys charged too little for their email client, personally. People will pay for beautiful and quality, productivity tools.

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I think you are right for most pure-play desktop software, which is why desktop/mobile people should be looking for a service aspect to their apps: syncing between devices, backups, publishing, etc.

It's unfortunate, but the desktop model just doesn't pencil out in many places in todays world. That means that stuff will end up in the cloud and on the web, not because that's where it can be best implemented (I far prefer a good thick client over a good web app) but rather because that's where the economics force it. And users will end up being held ransom by a cloud service anyway.

It's a funny economics problem.

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Unfortunately iOS/Mac users aren't really willing to pay subscription fees for syncing between devices (or cloud based backups).

iCloud/Dropbox has really set the expectation that syncing should be free.

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It's not really an economics problem. It's unfortunate but an email client is a feature of a platform, it's not a service itself. You can become an email provider and make a kickass client the differentiator, but that won't happen with a 3 person team either.

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How is it not an economics problem?

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There is no solution. You're proposing to sell a package no one wants.

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I think there are solutions (if you read my posts above, I propose that desktop developers find services within their software, such as publishing/hosting, syncing, etc.) but even if there weren't, it's still an economics problem.

The economics of the upgrade-train desktop model are bad and getting worse, and the market will supply less of that. I may be proposing something not inherently appealing to you, but I think increasingly that's where people smart enough to build great software will focus their efforts.

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Isn't Microsoft using the SaaS model for desktop software like Office?

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I believe we are seeing the beginning of the transition to SaaS for desktop apps, even for big companies. You can see the example of Adobe and its creative cloud subscription model http://www.adobe.com/products/creativecloud.html

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You can't charge a subscription price without providing subscription value. No one is going to buy a subscription to an email client. I do agree with your (and the article's) point, but that doesn't change how purchasing decisions are made. Either you provide marginal utility or you don't.

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Adobe creative suite a Microsoft office are doing this and I doubt most would be buying for the tack on subscription based services they get.

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We'll also see how successful they are. My guess is not very.

Right now they have customers who do stuff like buy CS Design licenses for every computer in their organization because a few people wanted it. If customers like that jump on SaaS options while normal folks do the math (hmm after eighteen months am I ahead or not?) it's a net loss.

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Edit: after posting I realized my reading comprehension needed some work - I'd misread who was getting the net loss. That said, it remains to be seen if adding palatable SaaS pricing will help or hurt.

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These SaaS options aren't necessarily the net loss you describe.

I don't mean this to sound like an ad for Adobe's subscription model, but as someone who's used a lot of their products for over a decade, it's hands-down the best way for companies to get access.

In Adobe's case, per-app pricing is really there to set value for the Creative Suite bundles, which in turn set the value for subscriptions.

Let's say I need Photoshop. I have 3 primary options:

- Buy Photoshop CS6 for $700 right now. It's on a 2 year release cycle, and was recently updated, so that's a solid 2 years of guilt-free use until the next rev.

- Buy a CS bundle - eg Design & Web Premium for $1,900. Includes Photoshop Extended, Illustrator, InDesign, Acrobat, Flash, and Fireworks.

- Subscribe at $50/mo for 1 year ($75/mo w/ no commitment). Gets everything above, plus Premiere Pro, After Effects, et al.

If I buy the bundle, that's a $4150 value for a mere $1200 more than Photoshop by itself. This is why the bundles have always sold so well.

If I subscribe for 2 years, it's $500 more than Photoshop by itself, and $700 cheaper than buying a standard CS bundle. Also, I get the latest version of every Adobe tool for the duration, so if different people in the org have different needs I don't need to care.

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Right, SaaS (from folks like Adobe) is actually downward pressure on software prices. If they switch to a pure SaaS model (which some companies have sporadically attempted to do) they simply bleed customers AND lose revenue from the ones they keep.

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I think Adobe will make a killing on the new subscription pricing. I think the customers with volume licenses will most likely still buy them because a) it will still be cheaper to buy outright when you know you will need a license for hundreds of seats and also b) because IT departments will continue to hate dealing with Adobe's activation process, which a volume license makes much simpler.

Meanwhile all the small shops who could not afford to buy licenses just to equip the 3 freelancers for a month will suddenly be able to justify the small cost of a month's subscription. I almost expect them to roll it into each job's billings, whereas previously they would either use a hooky copy or suffer the pain of juggling licenses and old software.

There are a lot of small shops using hooky Adobe software.

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Under the pay-for-upgrades model, software developers have an incentive to keep updating and upgrading their software. I want new features and the developer wants upgrade money, so our incentives are aligned.

Under the subscription model, don't you think the software you're subscribing for will end up like IE6, left to stagnate because there's no incentive to spend developer time on it?

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Once everyone is charging a recurring fee, and competition drives those margins down to a "paying for maintenance" amount you have the same problem.

Both business models can work, and both business models can fail. I haven't seen any evidence that SaaS is immune to competitive pricing, which is the issue being described in the post.

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Any reason some kind of Kickstarter-like service couldn't help with this? There are a couple interesting economic tricks going on in various Kickstarter projects that could be applied to this.

Developers publish feature lists for an upgrade cycle, users vote with their dollars, different features can be funded, etc etc? There are a couple of open source projects (like PostGIS) that have similar programs...

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The quality of Sparrow is it's simplicity. Adding features to it would make it evolve in bloatware. See MS Word. They now reshuffle menues to justify upgrades. I guess in some next version, menues will be at the bottom of the window.

This is not a long term solution. The only viable solution was to reduce burn rate as close to zero as possible. This means producing a new software.

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They even did tried that out, proposing an yearly payment subscription for the push notification, but that was not well received by customers. http://www.macgasm.net/2012/05/16/ask-and-tell-sparrows-subs...

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Maybe a small disagreement: JetBrains does work on a form of subscription mode, right? About once a year I pay an upgrade fee for IntelliJ, RubyMine, and PyCharm. This is a recurring cost, but the advantages of have up to date IDEs far out weigh the "subscription cost." What is the difference between "I want to have" upgrades and subscriptions?

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These are working tools. Their cost should be a fraction of the revenue generated with them. Sparrow is not a revenue generating app. It saved some time to the users. That's all.

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Out of curiosity, is there a reason you bought RubyMine and PyCharm in addition to IntelliJ? The paid edition of IntelliJ includes access to the Ruby and Python plugins.

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They are lighter weight that IntelliJ. I spend a lot of time writing code so the extra investment is reasonable.

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Apple seriously needs to implement support for paid upgrades on major version releases without having to add an entirely new, separate product. If that were easily done, this point is moot. No one seriously discussing this really expects free updates for life. I'm happy to pay for a major new release every year or so.

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Paid upgrades are allright, but if they had a subscription model, that'd be even better. Imagine if you could just pay $5/month for Sparrow? If you live inside your email, that's $60/year well spent and for the developers it's a significant boost in $ generated.

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"Imagine if you could just pay $5/month for Sparrow?"

The word 'just' has no place here. If Sparrow cost $5/month I imagine that 99% of their customers would never have used it to begin with.

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I wouldn't pay a subscription fee for desktop software I relied on. As a customer, I want to buy something and own it. If Sparrow had been under a subscription model and they killed off the product, we'd all actually totally lose access to the product we had been paying for rather than just having it go undeveloped in the future. Paid upgrades at semi-regular intervals give the developer money for work they've completed when they finish a new set of features.

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The point is that under a subscription model these developers would be able to provide you with ongoing updates and quality service, w/out having to surrender to Google.

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How many ongoing updates do you want from an email client? I don't know about you, but I want a pretty consistent experience when dealing with email; email is a chore more than a pleasure after all. And I don't exactly want to dish out $5/month for bug fixes. What is the value-add for the end user here?

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> How many ongoing updates do you want from an email client?

Because of Spam? Perhaps indefinite. Because of new file types? New authentication schemes? New mobile platforms? New user interface technology? Perhaps indefinite.

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Could offer a $5 license or $120 lifetime subscription.

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Go figure. In certain B2B segments people pay for software billed PER DAY.

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There is a chance that willingness might have something to do with using the software to trade millions of dollars in derivatives instead of using it to email friends and family.

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Or in that case, monitor their subsea oil & gas project.

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That's what in app purchases are for. If you want to add new functionality then allow people to purchase it separately.

That way existing users still have a core product that will see upgrades.

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I'm not a big phone/tablet app user, so I'm ignorant about this: how does that work for new purchasers? Is there a way to say "anyone who buys this from date X on gets these additional purchases included free"?

For instance, if I buy Photoshop today, I get all the features. If I had bought the last version, I'd have an upgrade price to pay for the new features. In the in-app purchase world, does everyone always have to pay the original price + in-app purchase price? Do you just make the new base price lower (but with the low prices of apps in the first place, there's not room for many versions if you knock a buck off each one...)? And even that seems to still be new-user-unfriendly: I would be bummed if I bought an app for $1 and found out that the coolest features required another $3 in purchases, even if the app cost $4 when it first came out a couple of years ago (I probably don't even know that).

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I've yet to really think about it like this, but your comment seems spot on. Has any app really gone the route of already being established before introducing in-app purchases? The only utility app I can remember paying for an in-app was Paper — but even then, a large chunk of functionality wasn't available without it (the different brushes) and it wasn't an established app beforehand.

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I listened to a talk by a game developer last week, and their thrust was exactly in this direction.

The app is free and revenue is made from in-app purchases.

The basic app is structured so that upgrades are infrequent, because of the time lag.

However, the app connects to back-end servers which contain much of the smarts of the app. Thus they can upgrade them whenever they like, without having to upgrade the app. Then can also introduce premium features to be sold with the existing in-app purchases.

How you achieve this in a non-game setting is a challenge, but I believe it is the key.

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I think IAP is a pretty kludgy way of solving the upgrade problem in a lot of cases.

As a user, I don't want to be nickel-and-dimed for every little feature.

As a developer, I don't want to shoehorn every change I make into an IAP feature.

Can you imagine if you had to "upgrade" OS X, Aperture, Photoshop, or Office by purchasing a bunch of "features"?

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What's the granularity of an In App Purchase? Could you make the next version of OS X a single IAP?

(Serious question, I'm not familiar with the mechanics of IAPs.)

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IAP is (roughly) limited to unlocking functionality that exists in the app, offering a subscription of some sort, or offering new content.

You sort of could deal with something like OS X Mountain Lion as an IAP, but it would be incredibly ugly - you'd essentially have to ship both code bases, and "unlock" the new one based on whether or not they purchased the "upgrade".

IAP works pretty well if you have new features that are fairly discrete and are worth paying for individually. As a substitute for an actual upgrade, it is an ugly hack.

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That works if all the upgrade entails is the addittion of new features, but frequently news version are different than just features. They are frequently a rework of the UI or other core code (Apple's Logic 7->8 upgrade jumps to mind, as do most upgrades to 'large' software applications like MS Office.)

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I'm pretty anti-IAP. The core problem is I don't know what the purchases are or for until I've already committed to using the app. So, I naturally assume it's hobbled shareware. I'd much rather have a price and feature list in front of me, like what Tweetie did.

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There are some issues with the numbers in this post:

Thus, when Dominique revealed to Ellis Hamburger in August 2011 that Sparrow had made at least $350k in it’s first 6 months in the Mac App Store, they had already been working at least a year on the app.

The article actually states they made over half a million in the first 6 months

    DL: In terms of numbers we've made more than half a million dollars in the past six months since Sparrow was introduced in February.
I don’t currently have an app in the Mac App Store, so it’s hard for me to estimate sales, but I’d bet the Mac version isn’t generating much more revenue, even at the higher $9.99 price point.

I do. You really can't take iOS App Store sales trends and extrapolate them to the Mac App Store, the markets are quite different.

1. Sparrow is first and foremost a Mac app, and its target demographic is (or was) Mac users. The iOS version is supplementary. Without the ability to do push on iOS they wouldn't have been able to deliver as great of a user experience on iOS anyway. I would bet that the vast majority of their sales actually come from the Mac version.

2. Mac apps don't drop out of visibility nearly as quickly as they do on the iOS App Store. Part of this is because it takes a LOT more effort to produce a quality Mac app compared to an iOS app.

3. The Mac version of Sparrow has been pretty consistently in the Top 50 Grossing on the Mac App Store since launch[1]. I would be surprised if they weren't averaging at least $1000-1500/day on sales of the Mac app alone, with much higher spikes when they hit the Top 10 Grossing.

That said, I will agree that whatever they were making was probably not sustainable for a team of 5, especially compared to the $25M that Google was offering.

[1] http://www.appannie.com/app/mac/sparrow/ranking/history/#vie...

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350k is the net after Apple's 30% cut.

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Hm, I suppose that's a possible explanation. Although since the sales reports provided by Apple already include the 30% cut, I'm more used to developers reporting their net revenues. And the original quote says "we've made more than half a million dollars", which to me implies that's after Apple's cut, and how much they're actually taking home.

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The value obtained from the application should mirror the value received by the developer.

For games, one-time app payment makes more sense: usually, you complete the game or there is finite set of game rules that is implemented.

For most apps one uses day to day, one-time-pay model works against the user by mis-incentivizing the developer, just like TFA said.

It's somewhat ironic that AppCubby itself is an illustration of the same problem: their GasCubby app, which I use several times a month, has been effectively abandoned. Now, I would gladly pay at least $4 a year for that app, if it were actively developed, as it continuously delivers value AND getting improvements is important to me. However, since I've paid for the app once and that's the end of story, the app's own development reflects the same.

Pay to get updates is really the way to go.

Now, I am afraid to go shopping on the App Store for the same kind of app, as I'm wary of another disappointment. If I were to develop a competing app that filled the same need, but was critically more usable on several subtle, but important fronts, I would have a very uphill battle against the established stalwarts, which have been reviewed and rated since the early days of the App Store.

Thus, we are stuck in a situation where, given a popular app category, existing/old school apps tend to dominate based on reputation, but stagnate due to the lack of incentive to update or innovate, and the new apps a tough time breaking through.

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And yet Mailplane continues to pay the salary of a sole developer. Maybe Sparrow's aspirations were too big for an email client? The interesting thing about Mailplane is that it targets an arguably different user base (gmail power users?) at a higher price point ($24.95). Personally I'm a Mailplane user because I prefer gmail's web-interface and I have three accounts to juggle. I never saw the appeal of Sparrow over OS X's Mail.app. And I'm still waiting for something like Mailplane for the iPad.

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    Maybe Sparrow's aspirations were too big for an email client?
Why is it people keep painting a $25 million dollar exit and jobs at Google for a year and half's work as some kind of failure? It looks like like a home run to me.

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Because it is, in terms of the goal of building an awesome app and a sustainable business solving peoples problems with email. It is a personal win for the founders but not the one I imagine they were hoping for when they set out.

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and what is the difference between mailplane and the much hated Gmail for iOS (both of them are webview wrapper as far as I can see).

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I can tell you, as a developer on Growl, being in the top 100 paid app list at $2.99 is not going to be like being in the top 100 paid apps on iOS by a extremely huge margin. Growl retails at $1.99. We are always around the top 20 paid apps and have been for a long time and even that rate, it's not really sustainable for multiple developers.

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Ahh, I hadn't realized Sparrow had taken funding. That explains a lot. Forget revenue, forget breaking even, forget being a well paid lifestyle business.. once you have that funding, you've gotta head for big profits or a big acquisition.

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The price of the desktop app seemed too cheap to me. Why only $10 for such great piece of software? So, it seems they made around $1,000k in two years. That's about $100k per employee per year. Google bought them for $25,000k which gives $5,000k per employee. That's 50 years of work at the rate they were.

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My takeaways from this article:

If you can't make it with a team of 3 or fewer, you're not going to have a sustainable business.

The community needs an "App Escrow" organization which developers can sign copyrights to their software over to. In the event of a "acquhire," the app developers won't be able to kill their app. In essence, the app developers who sign up for this "escrow" have made a precommitment to not killing their app. (Perhaps the app the software can be licensed to a new development team for a fee commensurate with the app's earnings history. Perhaps it could also be open sourced.)

http://en.wikipedia.org/wiki/Precommitment

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In March, I emailed the CEO of Sparrow begging him to offer premium SaaS features on a subscription basis that integrated the functionality of "was my email opened?" services like Toutapp.com and automated follow up services like followup.cc into the email client.

http://mattmireles.com/post/27676258826/what-sparrow-could-h...

The market wants it. I still believe.

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When using mail most people don't want to let know when they read a mail. I do for instance because it hurts my privacy. If the notification was delayed so that the sender doesn't have the precise time when I red the mail, it could reduce the problem. Though in other context, like intra-work, beeing able to know when someone opened a mail might be of value for both ends.

Add to the equation the spammers who would be delighted to know if their mail was red.

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I think you're right. It's really bazaar why Google hasnt implemented those features into Gmail, but if they were seamlessly integrated into Sparrow, I'd pay.

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If gmail starts notifying people I've read their email I'll be switching email services...

At the last full-time gig I had we had a plugin installed on the mail server to strip out external read-receipts

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We're doing something along those lines. I'll let you know how it goes if you're curious.

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It's not about SaaS vs one-time payments or anything like that. It's about how much value you provide.

Mail.app is free, Outlook is free. How much better is Sparrow? Is the improvement worth $60 a year? Cause if it's not worth even $5 a month to your users (2 cups of coffee) - then it's probably not worth doing.

No matter how much people say they love your product, if they aren't willing to pay $5 per month, $60 per year or $200 one-off - they are kidding themselves. Think everyone loves Facebook? How many of those folks love Facebook enough to pay $5 per month to use it?

People aren't stupid. They will pay for stuff that translates into the bottom line - just like businesses. They may pay for Photoshop - if that's their work tool. They'll pay for a Mac - cause it helps them be more productive and earn more money.

My personal benchmark is dating sites. When most guys in the world are prepared to pay north of $20 per month to access a dating site, and if you are charging less you have to ask yourself - if people don't value my product more than a dating site, should I be working on something else? It's kinda sad but true.

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I find these articles looking at the economics of the app store interesting.

I'm still learning mobile (iOS) development having got back to software development last year although I've been doing Rails contract work for much of the time. I released my first real experiment http://itunes.com/apps/fastlists (yes it's another lists app but it is currently free, with no ads and has a couple of useful features making it especially useful for reusable lists for shopping, packing etc. The design is functional rather than beautiful).

I'm currently adding some in-app purchase options to test the reactions of the users.

My current idea is to offer the following options:

1) No-ads (tier 1 price)

2) Privacy - No anonymous usage collection.(tier 1 price)

3) Raise item limit (by 100 to 200 items) (tier 1 price)

4) Unlimited items (tier 3 price)

5) Everything including future in-app features (tier 5)

For me option 5 is important because like several other commenters I hate feeling I will need to keep paying bit by bit for something. It will include everything that doesn't need server side support and expense. I actually hope most customers choose this, the other items are there largely to justify the pricing of this item.

Ads and anonymous usage monitoring will come in releases after the purchases have become available and for ads I will probably make the first month of use add free to try and get the user stuck in. I may also add some alternate skins as in-app purchases too later although that is lower priority than using the iOS 6 social framework as a way to try to get users promoting the app for me by sharing lists.

There is currently no item limit so I will allow users with more than 50 current items to have their initial limit be 50 higher than the current level.

At the moment this is just a small scale test because I haven't done any promotion for the app yet so the current numbers of users is small although the reviews are currently very good (despite a usability issue leading someone not to work out how to reorder items - but I'll add some help in the release after next).

To become self sustaining as an independent developer I'm expecting to need to keep a small suite of apps ticking over. Some will be more ambitious than this although others may be even simpler with different unique features or niche target markets.

Any thoughts on the pricing model? Or the app?

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Couple important caveats with the provided graphs:

The graphs are rankings not revenue (understandably he doesn't want to share). But this introduces the problem that a week in the top 10 and a week at #500 does not equal to two weeks at #250. Not even close.

Further 250th place today =/= 250th place in 2009 or 250th place in 2016 or 2030.

Ron Nicholson [1] roughly fits the following formula for app store sales:

unitSales = totalPaidApps * ((1 + rank) ^ -1.0) - 1.5

This suggests that a week at #5-10 is worth about 23-42 weeks at #250.

[1] http://www.musingpaw.com/2011/04/estimating-iphone-app-store...

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Yup a 3 dollar app will not make enough money to sustain a company. It seems foolish to think it would. Now if you sell 10 of those apps you are getting closer.

The app store and the mentality behind it is a race to the bottom. So unless you are insanely lucky (angry birds), app store devs will be living with their moms just like drug dealers. :)

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I generally agree that the email client market is a hard, hard market to be in.

One thing I think could have worked to bring in substantially more revenue is price differentiation.

A number of people have claimed that a significant number of Sparrow users were on paid Gmail plans. If Sparrow had split their pricing in a similar way (eg, $3 if you are on the free plan, $20 if you pay to use Gmail) then they might have brought in significantly more revenue. Additionally, the people paying for Gmail are already known to be to be people who spend money on email services.

Joel Spolsky's essay is the best resource on this: http://www.joelonsoftware.com/articles/CamelsandRubberDuckie...

Of course, some kind of recurring revenue is the real "solution" here.

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Eventual payout from Google aside, I wonder if the team ever regretted the fact that taking funding "changed the yardstick" for success. I'd guess that going back to work for a big company (even with a big payout) wasn't really the original goal.

But then again, maybe it was.

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Remember. The "changed yardstick" is 100% conjecture. It's undeniable that taking outside investment increases the number of people who expect a return from your venture. However, we can't presume to know what the investors were really thinking. They may have known that a talented web and mobile email team will always be a talent buy irrespective of revenues and just sat back and waited to double or tripe their money in 12 - 24 months. Point is - we really don't know if that changed the game that much for them.

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I think you can still do a one-time purchase app with support for the next X versions and still get the revenue model of a SaaS. Stop thinking about the app as the final product and start thinking about it as a platform.

Sell email client for X, then build additional plugins for client that solve a problem for a subset of users and offer that as an upsell. You avoid bloating the original app for those that want a sleek solution but offer enough plugin functionality to let users tailor to their purposes.

And each of those plugins can have a paid upgrade cycle as well, a long with the ability to bundle plugins with app for "Enterprise" or "Power User" price points.

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Another thing this OP leaves out is Sparrow was also probably running advertising, and thus burning more capital, to try to get their app store organic coefficient up. The peaks and valleys in the ranking numbers lead me down that train of thought.

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Was the title of this submission changed? I'm pretty sure I read this yesterday as "the gold rush is over" or something. If we are going this way why not simply grab page titles automatically and disallow edits? (because that sucks)

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I see it as something like the historical gold rush - developers flocked to the app store because they sensed there was a lot of money to be made. This vastly increased the supply of apps, which in turn decreased the demand per app, and so decreased revenue per developer. I think there will inevitably be a fall in the rate of apps being added to the app store, and sucesses will continue to be focused on a handful of publishers.

PS: This is probably wrong in some fundamental way (I'm not an economist)!

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I wonder if Sparrow had a subscription model... let's say you had to pay $2/month to use it across any platform. How many people would have signed up?

Sparrow seemed more complex than a typical 0.99c app, and it seems like they had their fans. I wonder if they followed the subscription model if their finances would have looked better and gave them the ground to stay independent.

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My team makes around $2 to $2.5 million a year on app sales.

I'll tell you one thing -- both of these guys and almost everyone I've met in the Valley deeply misunderstand how to make sustained profits in an app store. I'd say, from what I can tell, Gameloft (not my company) is one of the few companies that gets it.

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What apps do you guys make? Are they games? I think the general consensus is that it is hard to make any decent money on the app store unless you are selling a game

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The problem is, most people I've met don't understand that profitable apps, by and large, are not software platforms.

They are:

1) Disposable 2) Timely 3) Shallow 4) Impulsive

These can be games, but they can also be many other types of content. Everytime I see a guy betting on one app, on one platform, trying to make it perfect, I try to explain to him it has a snowballs chance in hell of working, he doesn't listen. No one wants to face that profitable apps are mass produced at medium to low quality on every platform.

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So do you make games ?

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We make some trivia games and simple word games. However our 3 top sellers in the Apple App Store make about 120k per year each and are simple reference content. The key is that it is branded with a well recognizable name.

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That is the point of the discussion. Could you explain ?

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It's a bit hard to buy the "never going to be a millionaire" thing when my friend joined a relatively new start-up and became one overnight. Yeah, I realize a lot of people don't become one, but I still have a good deal of optimism.

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What if the Sparrow problem was a too high burn rate ? Apparently they were planing to integrate ads in Sparrow, probably for a free version. This could have worked since the app was very popular.

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How long until some team, with an acqui-hire offer in hand from one of the big boys, opens a Kickstarter campaign to collect a 'community crowdsourced counteroffer'?

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A bird in the hand is worth a crowd in the bush?

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I believe "flock" is the correct terminology

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Well it's a bird in the hand is worth two in the bush. At least where I grew up.

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Won't happen. Their suitor would simply walk.

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Interesting.

I may have to revise some of my opinions about Sparrow's sale. New data means new conclusions.

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nailed it. period

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