Mobile apps to hit >$70B revenue driven by explosion of diversity

Digi-Capital, an investment bank for mobile apps and games, has just published its Mobile Apps Investment Review Q1 2014 ( Commenting on the Review, Digi-Capital Managing Director Tim Merel said:

“Everyone knows that mobile apps are hot, and that games have taken the lion’s share of revenue so far. We think the balance is going to change, with other app categories using new approaches to win. We’re already seeing SaaS-like App as a Service models emerging, and we can’t wait to see what happens next.

We forecast that mobile apps could reach >$70B revenue globally, with non-games apps to double revenue share from 26% to 51% by 2017 (61.3% CAGR 13-17F).

Global Mobile Apps Sector Revenue ($B))

Dramatic mobile app usage growth is disrupting incumbents, with mobile usage having grown 5x in 4 years to ~20% of media consumption last year (50% CAGR 09-13).

Consumer Media Consumption Market Share/Growth

Mobile apps investment has doubled across categories since Q3 2013, with ~$10B invested in the last 12 months. There are clear hotspots in specific app categories, with an increased level of investment across the board.

Global Mobile Apps Investment By Category ($M ex-IPO's)

Mobile apps M&A hit a record >$35B in the last 12 months (>$16B excluding Facebook/WhatsApp), continuing a 3 year strong growth trend even without that spectacular transaction. At over $7B (excluding FB/WhatsApp), Q1 2014 M&A was >2x Q1 2013 M&A. Including FB/WhatsApp, Q1 2014 M&A was >7x Q1 2013.

Global Mobile Apps M&A by Category ($M)

M&A has been more concentrated around specific app categories than investments, which is not surprising given the early stage of the apps market.

Global Apps M&A by Category (excluding Facebook/WhatsApp) ($M)

The Digi-Capital mobile apps public company index has grown in value, although there have been significant differences in performance across app categories.

Digi-Capital mobile apps public market indices

Mobile app public and private valuations have also varied significantly across categories, with some app types valued much higher than others relative to their economic performance. For investors and acquirers, it appears that not all apps are created equal.

Mobile app category M&A valuation ranges Mobile app category public valuation ranges

Free downloads and in-app purchases are dominating revenue (>90%), but not for all app categories. In-app purchases have monetized most effectively for mobile games (40% downloads = 74% revenue share), where the user gets most of their fun from standalone apps on mobile devices with limited cloud functionality. In-app purchases for all other app categories have monetized 4x less effectively (60% downloads = 26% revenue share), including those apps which leverage the cloud to give users what they want. We’re seeing the SaaS model being adapted to operate as App as a Service, which looks like one way that a range of app categories can lift their monetization to levels matching their downloads and usage.

App as a Service emerging as a different model for mobile

While it’s still early days, App as a Service models could change the landscape for how apps make money in future.

Global mobile app sector revenue 2013

As everyone knows, the highest grossing apps outperform all others against key metrics. Digging into the data to compare the top 1% grossing apps to other apps, the focus and level of performance required looks pretty clear.

Key metrics:  top 1% grossing app outperformance vs. other apps

The apps market is also creating billion dollar companies at what looks like an accelerating pace globally, and we expect to see as many Asian as Western companies delivering outsize returns for entrepreneurs and investors.

Selected mobile app companies with valuations >$1B

With such massive value being built so quickly, today’s growth companies could become tomorrow’s consolidators. Many of the recent blockbuster acquisitions by incumbents have been focused on strategic growth, but we’re also seeing defensive moves to ward off potential threats.

Changing pyramid of potential consolidators

In what is still an early stage market, we think now is the time for mobile apps companies to either invest all out for growth, or position themselves to be bought.”

Mobile app category consolidation curve

Tim Merel will be presenting the highlights of the Mobile Apps Investment Review at GMIC Beijing on 5th and 6th of May.