Apple has proven its ability to sell high-end mobile devices to a surprisingly large segment of the Chinese population. iPhones and iPads are recognized status symbols among students and young and middle-aged white-collar workers and entrepreneurs in cities like Shanghai, Beijing and Guangzhou. More than one in ten people in these cities now own an iOS device.¹
Perhaps even more impressive, iOS device penetration rates approaching 10% in provinces such as Jiangsu and Zhejiang – provinces bordering Shanghai with populations of 78.7 million and 54.4 million respectively – is a clear indication that sales of Apple’s iOS devices are spreading beyond China’s largest cities. This is way beyond most people’s expectations.²
As a consequence of Apple’s hardware success, China has become the second largest App Store market in terms of number of downloads with around 18% percent of global App Store downloads.³
The next challenge for Apple is to get its Chinese users to pay for apps. This is also a key issue for developers of iOS apps targeting Chinese consumers who capture 70% of all revenues on the App Store, with Apple getting the remaining 30%.
So far iOS app developers are struggling to make money in China. One reason is that a large amount of iOS devices in China are ‘jailbroken’, allowing users to download apps for free from alternative ‘app stores’.4 Another challenge is the fact that Chinese users tend to be reluctant to pay for apps, resulting in low revenue per user.
But exactly how big is the Chinese iOS app market? Since Apple does not release App Store revenue data, we used data from various app analytics firms, in addition to data released by Apple, to estimate the total revenue of Apple’s App Store in China (see Chart 1).
Based on newly released data from Apple’s Q3 earnings report, we estimate global App Store gross revenues at 1.2 billion for Q2 2012. Despite representing 18% of all downloads, Chinese users just contributed to 3.1% of global App Store revenue. Resulting in total iOS App Store revenue of 37 million USD in China for the quarter.
The low contribution is a result of a revenue per download just over USD 3 cents in China, compared with revenues per download of USD 28 cents in the US and USD 19 cents globally.
This does not mean that App developers should give up on China. The Chinese iOS app market looks set for strong growth in the next couple of year. Using a back-of-the-envelope calculation we arrived at a scenario that sees the China App Store market growing by 98% in 2012 and 88% in 2013, with 2013 sales reaching 321m USD (See Chart 2).
Other interesting observations include:
- Average revenue per download in China down from 4 cents at the end of 2011 to 3 cents in June 2012. This is an indication that the many new iPhone owners are not yet willing to spend money on apps. Our discussion with consumers indicate that paying for digital products such as apps or e-books is a threshold that takes some time to overcome.
- Global average revenue per download down from 24 cents at the end of 2011 to 19 cents in Q2 2012 according to our internal estimation. Asymco found similar results in their analysis. This is a natural consequence of countries with lower average revenue per download making up a larger percentage of total downloads.
- For the Top 10 Worldwide publishers in China, 90% of their revenue still comes from outside of China.
- Only two years ago it was not hard to find industry observers who threw serious doubt on Apple’s ability to make it in China. Here is one example: Forbes: How Apple And IPhone Blew It In China
- According to analytics firm App Annie http://www.appannie.com/blog/game-of-phones/#.UBn2ZWHB9ho
- It should be noted that this is basic scenario based on the growth in number of iPhones. Other iOS devices have been assumed to grow at the same rate, with revenue per device to remain constant.