Apps Like Waze Attract Millions of Users, but Few Are Finding the Road to Riches

A creative and entrepreneurial spirit is coursing through the community of young Israeli developers – most of whom still need a day job.

At this very moment someone is sitting in a Tel Aviv garage developing the next great Israeli software application. It might be an app used for navigation like Waze or for transportation like GetTaxi, or it could be a popular game like Nooga Nuts. But in any case the developer is probably around 33 with some background in apps development, and the odds are 95% that he's male, according to a Google Israel study presented Tuesday at a conference for application developers at its Tel Aviv offices.

Applications development offers enticing advantages for those with a really cool idea but not necessarily any prior entrepreneurial experience: Time-to-market is short, often just weeks, and little manpower is required. It can even be done alone, at home, and with negligible expense.

According to data amassed by Google, worldwide revenues in the applications market totaled $21.4 billion last year, 37% from advertising and 63% from sales – including subscribers, purchases, or the purchase of virtual credits or "goods" within the applications. By 2016 these are expected to balloon to $72.5 billion, 51% from advertising and 49% from sales.

But the business has its pitfalls too. The business model remains fluid, even for apps that have quickly become commonplace like Instagram. Translating a popular application into cash can be a hard nut to crack.

User base or business model?

Google puts the number of apps developers in Israel at between 2,000 and 3000 with 62% having a professional background in software development and 38% having prior entrepreneurial experience. Developers have a tendency to launch their products without yet formulating a clear-cut business plan. As opposed to most high-tech startups which include development, marketing, and sales teams, apps development is often a one-man show with nobody in charge of generating income or targeting the market.

The study, based on interviews with 130 companies and independent developers in Israel, found that 63% were primarily concerned with having their applications installed on the maximum possible number of user devices, compared with 54% of developers worldwide prioritizing this goal. But 67% in Israel admitted to not having any idea as to their user acquisition costs. Meanwhile only 39% in Israel were concerned with the income-generating potential of their applications, although this compares with just 30% globally.

Like other areas of Israeli high-tech, developers here are focused on the world market. Fully 67% of Israeli developers target the global market while just 14% aim for just the Israeli market, according to Google.

But whereas other fields emphasize quick entry into the U.S. and Western European markets, apps can often gain immediate entry into the Asian and Eastern European markets without the need for local sales staff.

Despite their relatively strong ability to penetrate markets, few Israeli apps actually generate any real income: 30% of those participating in the study made nary a cent while another 40% brought in less than $1,000 last year. In fact, only 8% generated over $100,000 in revenue for the year.

Due to this lack of monetization, application developers are widely shunned by venture capital funds and incubators: 80% are self-financed and 20% are backed by angel investors, with just 7% receiving funding from venture capital funds, 1% from incubators, and 3% from the Office of the Chief Scientist, part of the Ministry of Industry, Trade and Labor.

The lack of institutional funding might also stem from this being a very new industry – both in Israel and throughout the world – which hasn't yet proven itself. Just over half the developers participating in the study said they'd already launched a product, while 23% had released trial alpha or beta versions.

Lowered expectations

Israel also isn't yet competitive in the league of "killer apps." Only 7% have achieved over 500,000 downloads, with 3% exceeding 5 million, while 60% mustered no more than 50,000 downloads. But with a low cost structure and the absence of market penetration barriers, there is no reason an Israeli application supported by marketing and a solid business model can't reach tens of millions of users.

Apple's iOS platform serving its iPhone and iPad devices is relatively more popular among Israel developers than Google's Android system compared to the rest of the world: 81% in Israel gear their products to iOS compared to 56% elsewhere, with 76% of Israeli developers targeting Android users compared to 72% in other countries.

And while games form the biggest income-generating apps worldwide, most Israeli developers – 59% – don't focus on this category but rather on areas considered useful – 70%. Social networks are the basis of 31% of Israeli applications, including Waze which fits into two categories: a social network for drivers as well as having a practical use. Other categories include entertainment – 30%, business and finance – 26%, educational – 10%, travel – 10%, and lifestyle – 8%.

Preference for advertising over freemium

Most developers who do give some thought to a business model prefer advertising over "freemium": providing a basic version for free and charging for added features. Among apps registering over 500,000 downloads, 44% are supported by advertising compared to 33% using the freemium model.

"The industry is still at a very formative stage and is taking its baby steps in the world, too," says Gadi Royz, tech industry manager at Google Israel. "The freemium model and model of purchasing within an application aren't used widely enough. Companies that haven't yet reached 500,000 users need to adopt these models. Developers need to examine what works around the world and not just think along the lines of Angry Birds and Instagram."
 

Daniel Tchetchik