The Economics of Windows Store

Over the last few days Microsoft has announced their plans around Windows Store, the component in Windows 8 that will directly compete with the application download functionality delivered on iOS devices through AppStore. I’ve been looking forward to details about the Window Store because its where Microsoft has an opportunity to “do better for us” than Apple has with its AppStore policies.

Price to Play

According to the Windows Store blog, it’ll cost you 49.00 USD to get registered to publish on the application store, however, if you are a company it’ll cost you 99.00 USD. Presumably this is the cost of the verification process. Here’s hoping that they have the internal error handling processes sorted out, but my advice is don’t make a typo on registration or you might find yourself in a bad place (note, this issue was never resolved, and I had to create a second Live ID). Here’s how the registration fees compare.

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Overall, for individuals the price to play is competitive with Apple, but not as cheap as Android, the other rising star in the mobile marketplace. That said, the Microsoft eco-system is (potentially) much larger. I say potentially because although Microsoft cited Gartner as saying that there was a reach of 500M PCs (compared to 247M and 152M for Android and iOS respectively), it will take some time for the user base to switch over to Windows 8 – this is especially true in the Enterprise space. Windows 7 had impressive license sales, lets hope the same is true for Windows 8 and it carries through to deployments.

The 70/30 Split on Application Sales

I’ll let you read the detail about price increments yourself, but in essence application sales via the Windows Store will attract a 30% commission to Microsoft (channel), with the remaining 70% going to the publisher. If you are lucky enough to get over 25k USD in sales then Microsoft will reduce their commission to 20%. Other than the commission cut I just mentioned this is pretty much the same as AppStore.

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Ultimately the commission isn’t the biggest factor in the commercial success of your application. Adoption is, if you are planning on retiring on beach off the back of your first Windows Store application you are going to have to get used to being disappointed, either that or you are exceptionally lucky.

To give you some idea of what breakeven looks like for a 5.00 USD application at various development cost levels, I present the following spread sheet (shoot me an e-mail if you want a copy of the actual spread sheet).

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That means, that on the back of a 50k USD investment, you could need to sell 13,150 copies of your application. That takes into account the commission discount once you reach 25k USD in revenue. The only real benchmark we have as to whether that is achievable is what application sales in the iOS device market looks like. TechCrunch has posted some data from last year – let me know if you can find some more complete, and up to date information.

The general consensus is that whilst some applications do well, the vast majority don’t end up with too many sales, and you have to factor in other costs associated with delivering a complete application such as hosting costs for backend processing as well as the ongoing support of the application (assuming you care about your reputation). That leads us onto other revenue generation models to help you get to where you want to go faster – in particular In-App purchases.

In-App Purchases

A little while ago posted that Microsoft needs to have a policy around Windows Phone 7 in-app purchases. I’m pleased that Microsoft has started publishing policies for Windows 8 on their web-site. By the looks of it the 20-30% commission applies to in-app purchases when you use Microsoft as the payment provider. But according to this article on the Windows Store blog, you can continue to use your own payment systems. This is huge! Unlike Apple who wants 30% of every transaction, regardless of which payment platform you use, Microsoft is going to play fair. With this model I think that Microsoft will end up dropping down the hefty 20-30% in-app purchase tax because they are exposing themselves to competition – I guess time will tell. One problem in this space isn’t the policies themselves but actually comparing them.

Summary

The economics of building applications for Windows 8, or any other marketplace is going to depend a lot on how popular your application is. Previously on the Windows platform there was no charge that Microsoft levied on you for the distribution of applications, but at the same time they didn’t help you do it. Today, they are introducing a new distribution mechanism and will charge you between 20-30% for accessing that platform benefit. With the 20% fee over 25k USD, Microsoft is rewarding successful applications whilst still preserving a healthy cut for building the platform. The real promise is in the in-app purchase policies. Hopefully we’ll see content producers with existing payment systems rush to the Windows platform.

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