As the app development landscape continues to evolve, entrepreneurs and developers are forced to adapt their revenue strategies to stay ahead. The traditional reliance on advertising as a primary monetization method is under siege, with two major events driving this shift: COVID-19's impact on ad spending and Apple's upcoming iOS 14 update requiring end-user opt-in for data sharing.
The ad-driven model has been the cornerstone of app monetization since the App Store and Google Play launched over a decade ago. Even when users don't explicitly pay for an app, publishers can still earn revenue through ads. However, with 76% of all apps generating revenue from advertising, according to a recent survey, this reliance on ad revenue is becoming increasingly vulnerable.
In 2020, two events have started to impact advertising revenue. First, COVID-19 has driven a significant drop in ad spending. Initially forecasted to grow by over 20%, U.S. mobile ad spending is now expected to decline by 10%. Second, Apple's announcement at WWDC in June will require app publishers to gain end-user opt-in for sharing data, which will cause an even larger drop in ad revenue. This requirement goes into effect when iOS 14 launches in September. While the stated reason is user privacy, low opt-in rates are expected to render Apple's IDFA largely unusable, leading to a de facto depreciation.
With the removal of this identifier from the ecosystem, the IAB estimates that publisher ad revenue will drop by another 52%. As a result, app developers are forced to consider alternative revenue models. Flurry Analytics, owned by Verizon Media and used in over 1 million mobile applications, analyzed 3,500 unique apps that use ad revenue, in-app purchases, or a combination of both to monetize their applications.
Revenue Models in 2020: A Shift Toward Paid Models?
The study found that app developers were already using a mix of revenue models at the beginning of 2020. On iOS, 38% of apps used in-app purchases (IAP) only, while on Android, 28% used IAP only. The number of apps using a combination of IAP and ads was slightly higher on iOS at 23%, versus 21% on Android. Meanwhile, 52% of Android apps used advertising as their primary monetization method.
As COVID-19's impact became more pronounced in July, the study found that app developers were shifting away from relying solely on advertising for monetization. On both iOS and Android, the percentage points of apps using only ads decreased, while the sum of apps using IAP increased.
App Categories: Which Ones Rely Heavily on Advertising?
The study also analyzed changes at the app category level. News & Magazines, Education, and Business apps rely heavily on advertising for revenue, with over 20% of apps in these categories using only ads. In contrast, Games, Photo & Video, and Social apps rely less on advertising exclusively for revenue.
As app developers face declining ad revenue and the prospect of iOS 14's changes, they are likely to prioritize paid models. With Android still supporting advertising, developers may focus on their Android apps in the short term. However, it remains to be seen whether this shift will lead to a long-term adoption of paid models or a hybrid approach combining ads and IAP.
The future is uncertain, but one thing is clear: app startup ideas that prioritize revenue diversification and adaptability will thrive in this evolving landscape.