Analyzing the Demand and Survival of Mobile Applications: The Case of Apples App Store

Dongwon Lee Associate Professor of MIS Korea University Business School mislee@korea.ac.kr
August 8, 2011

Research Background
Characteristics of Smartphone Market
The Environment of Smartphone
Number of Smartphone Subscribers in Korea 1)
600 500
High

Relationship
Market Segment

400
SKT KT LGU+

200 100 0
Mar-10 Jun-10 Sep-10 Dec-10 Mar-11

Wi-Fi Coverage (%) in Korea 2)

7 6 5 4 3 2 1 0 2009 2010 2011
SKT KT LGU+

Number of Smart Device Subscribers

Low Low High

300

Service Availability
Source: Aggregated data (e.g., newspaper, each company)

Source: 1), 2) Announcement of each company, 2011 Unit : 1) thousand, 2) ten thousand

Research Background
Characteristics of Mobile Application Market
Mobile Application Market in the U.S.
Mobile Application Market Forecast1)

Characteristics of Market (App Store)

Market
400,000 350,000 300,000 250,000

Multi-sided market Uniqueness : Ubiquitous transaction Spontaneity : Platform (or service) providers play a minor role compared to those of other markets. Consumer centric product Uniqueness : Affected rarely by external factors such as mass media, but by user experience or WOM Spontaneity : Application developers and consumers play a key role.

Product
Jan-11 Jun-11

200,000 150,000 100,000 50,000 0

i-Phone Android i-Pad Ovi Blackberry

Price

Important but a minor issue Uniqueness : Co-existence of free and paid market Spontaneity : Application developers and consumers play a major role rather than service providers (almost fixed price).

Source: 1) Distimo Report , April 2011

Research Background
Free vs. Paid Download Ratio & Average Selling Price Among 300 Most Popular Applications

Source: Distimo Report , June 2011

Research Background
Content needs to be localized to be successful in Asia
Among 300 most popular applications, 87% of free apps and 78% of paid apps are regionally aimed in South Korea.

34%

Source: Distimo Report , June 2011

Free Apps

Research Questions
Different in Free vs. Paid Market? WOM (Word of Mouth)? Level of Exposure (Slot Effect)? Rationality vs. Herding? PodGate App Apple iTunes
Free Apps Paid Apps Paid Apps

Research Context
iTunes SW and PodGate website provide identical top 300 popular mobile application
http://podgate.com Apple iTunes

Name of application

Number of reviews Duration after first release

Current price Developer Category of app. Last update date Rating Number of raters Number of recommendations Number of downloads Number of hits

Research Objectives

Key Factors Consumer Demand Product Survival Role of Exposure

Objectives Evaluation of the factors influencing the consumer demand (i.e., application downloads) Understanding of the factors influencing the survival of the applications (i.e., the number of days downloaded) Measuring the role of exposure of applications in smartphones using sales rank (i.e., the number of days listed in the charts (e.g., top 300 list))

Literature Review

Topic

Literature Derived from the information asymmetry: Akerlof (1970), Stigliz (1989) WOM: Individuals use information about the experience of others to make their purchasing decisions (Clemons et al. 2006, Li & Hitt 2008, Zhu & Zhang 2010) Sales Rank: Current popularity is an important determinant of future demand ( Salganik et al. 2006, Duan et al. 2009) Information made by others acts as a source of one's decision. Individuals follow the behavior of the preceding individuals without regarding to their own information. ( Banerjee 1992, Bikhchandani et al. 1992,1998, Kauffman et al. 2000, Walden & Browne 2009) Expectations are informed predictions. Rational means what an agent has to do with the expectations. Individuals may not know about the full information, but they learn enough about it through efficient use of available information over time to make their expectations. (Muth 1961, Grossman 1981, Zimmerman 1986, Herstein 1990, Au & Kauffman 2003, 2004)

Uncertainty

Herding

Rational Choice

Data Collection & Derived Variables

Data for Analysis
Way of data collection Variables
Characteristics: New variables that have not been used in the previous studies. Aggregated Dataset: To consider fixed effect

Collecting Method Period I

From June 20 to July 10 , 2010

Developing a software agent to extract needed information from an aggregate site, PodGate.

Variables Collecting Time Period II

From July 25 to October 6, 2010 Sampling the applications based on the popularity listed on top 300 i-Tunes chart.

Description

Daily downloads Daily downloads of a specific application # of days downloaded # of days ranked Review Rating
Number of days downloaded during the period Number of days listed on the top 300 Number of reviews Consumer ratings scaling from 1 to 8

Period III

From October 29, 2010 to February 3, 2011

Recommendation Number of recommendations

The application listed more than 5 times on top 300 during period II.

Price Released period

Price of an application Period of product release on the market

An example of free apps

An example of paid apps

Data (10/29/2010 2/3/2011)

Descriptive Statistics (Free + Paid = 601 Apps)
Variable Daily downloads # of review # of recommendation Released period Rating # of days ranked Price ($) Obs. 53,747 54,423 54,423 54,423 47,301 54,423 54,423 Mean 121.79 37.25 80.42 143.01 5.34 47.02 1.31 St.Dev. 412.16 113.33 133.30 130.44 2.56 35.81 3.48 Min 0 0 0 0 1 1 0.00 Max 24,058 2,585 1468 937 8 97 49.99

Descriptive Statistics (Free vs. Paid)

Free (335 Apps) Variable Daily downloads # of review # of recommendation Released period Rating # of days ranked Price ($) Obs. 30,170 30,549 30,549 30,549 27,059 30,549 30,549 Mean 194.95 48.70 111.02 107.07 5.07 50.08 0.00 St.Dev. 499.83 137.88 162.37 100.00 2.61 35.82 0.00 Min 0 0 0 0 1 1 0.00 Max 24,508 2,585 1,468 889 8 97 0.00 Obs. 40,017 40,559 40,559 40,559 36,115 40,559 40,559 Mean 28.17 22.59 41.26 188.99 5.71 43.10 2.98 Paid (266 Apps) St.Dev. 227.91 67.61 63.55 149.08 2.44 35.41 4.76 Min 0 0 0 0 1 1 0.00 Max 10,412 1,483 562 937 8 97 49.99

Identifying Analysis Model

Using Different Models for Different Aspects

Model

Dependent Var.

Objective for Use We can understand what factors have significant effects on consumer demand.

Demand

Daily downloads

Survival

Number of days downloaded

We aim to know what factors are significant for the survival of the applications .

Aggregated Dataset
Descriptive Statistics (Pooled Dataset)
Variable Daily purchase # of days downloaded # of review # of recommendation Released period Rating # of days ranked Price ($) Obs. 601 601 601 601 601 535 601 601 Mean 116.69 54.14 36.17 77.52 144.77 5.18 46.30 1.30 St. Dev. 223.50 36.93 107.96 131.07 123.25 2.34 35.62 3.44 Min 0.00 1.00 0.00 0.00 9.80 1.00 1.00 0.00 Max 3.22 97.00 1.96 1,467.02 843.27 8.00 97.00 49.99

Correlation Analysis (Pooled Dataset)

Variable Daily purchase(A) # of days sold(B) # of review(C) # of recommendation(D) Released period(E) Rating(F) # of days ranked(G) Price(H) (A) 1 0.497 0.456 0.484 -0.277 -0.093 0.180 -0.175 1 0.220 0.385 -0.421 -0.135 0.296 -0.293 1 0.546 -0.126 -0.014 0.129 -0.043 1 -0.148 -0.075 0.188 -0.126 1 0.050 -0.095 0.160 1 0.031 0.118 1 0.042 1 (B) (C) (D) (F) (E) (G) (H)

Descriptive Statistics (Free vs. Paid)

Descriptive Statistics (Free Dataset)
Variable Daily purchase # of days downloaded # of review # of recommendation Released period Rating # of days ranked Price ($) Obs. 335 335 335 335 335 299 335 335 Mean 187.96 76.62 47.48 107.06 109.56 4.96 49.37 0.00 St. Dev. 265.59 27.82 134.15 160.98 99.17 2.29 35.71 0.00 Min 0.00 1.00 0.00 0.00 9.80 1.00 1.00 0.00 Max 3,216.19 97.00 1,958.77 1,467.02 843.27 8.00 97.00 0.00

Descriptive Statistics (Paid Dataset)

Variable Daily purchase # of days downloaded # of review # of recommendation Released period Rating # of days ranked Price ($) Obs. 266 266 266 266 266 236 266 266 Mean 26.94 25.82 21.93 40.32 189.12 5.45 42.43 2.94 St. Dev. 98.44 25.86 57.83 61.19 135.86 2.38 35.19 4.68 Min 0.00 1.00 0.00 0.00 15.08 1.00 1.00 0.00 Max 807.41 96.00 870.75 448.43 781.11 8.00 97.00 49.99

Correlation Analysis (Free vs. Paid)

Correlation Analysis (Free Dataset)
Variable Daily downloads(A) # of days downloaded(B) # of review(C) # of recommendation(D) Released period(E) Rating(F) # of days ranked(G) (A) 1 0.361 0.439 0.450 -0.238 -0.039 0.235 1 0.182 0.311 -0.370 -0.117 0.370 1 0.581 -0.163 -0.013 0.129 1 -0.138 -0.051 0.243 1 -0.006 -0.160 1 -0.053 1 (B) (C) (D) (F) (E) (G) (H)

Correlation Analysis (Paid Dataset)

Variable Daily downloads(A) # of days downloaded(B) # of review(C) # of recommendation(D) Released period(E) Rating(F) # of days ranked(G) Price(H) (A) 1 0.529 0.510 0.310 -0.165 -0.143 -0.058 -0.087 1 0.270 0.360 -0.225 -0.058 0.243 -0.004 1 0.200 0.009 0.030 0.120 0.020 1 0.041 -0.062 -0.016 -0.064 1 0.033 0.017 0.035 1 0.165 0.114 1 0.140 1 (B) (C) (D) (F) (E) (G) (H)

Results in Pooled Dataset

Demand Daily downloads 0.551*** [0.087] 0.444*** [0.074] -0.319*** [0.067] -4.836 [3.570] -9.777*** [2.906] 0.495** [0.234] 130.113*** [25.277] 601 0.336 Survival # of days downloaded -0.001 [0.013] 0.058*** [0.011] -0.096*** [0.010] -1.137** [0.521] -3.683*** [0.424] 0.217*** [0.034] 67.543*** [3.688] 601 0.419

Variable # of review # of recommendatio n Released period Rating Price # of days ranked Constant

Observations R-squared
Standard errors in bracket ***p<0.01, **p<0.05, *p<0.1

Results in Paid & Free Datasets

Demand Variable # of review # of recommendation Released period Rating Price # of days ranked Constant Paid Daily downloads 0.826*** [0.092] 0.318*** [0.088] -0.130*** [0.039] -5.127 [2.352] -2.056 [1.443] -0.253 [0.159] 66.471** [16.927] 266 0.367 Free Daily downloads 0.506*** [0.120] 0.384*** [0.102] -0.356** [0.142] -2.205 [5.999] Survival Paid # of days downloaded 0.078*** [0.025] 0.132*** [0.024] -0.049*** [0.011] -0.770 [0.637] -0.303 [0.391] 0.174*** [0.043] 26.612*** [4.588] 266 0.284 Free # of days downloaded -0.004 [0.009] 0.021*** [0.008] -0.063*** [0.011] -0.862* [0.452]

0.816** [0.392] 143.047*** [43.642] 335 0.262

0.168*** [0.030] 82.948** [3.292] 335 0.270

Observations R-squared
Standard errors in bracket ***p<0.01, **p<0.05, *p<0.1

Discussion
Research Implications
WOM plays a critical role on the demand of mobile applications Consumers show different patterns on the free and paid application market The exposure of popularity has no influence on consumer demand in paid app market while a strong influence in free app market

Research Contributions
Using the number of downloads as consumer demand : We did not use the sales rank of applications as a proxy of consumer demand Using sales rank as an independent variable : We evaluate the relationship between sales rank and consumer demand to measure the effect of exposure Explaining different patterns in free and paid markets using rational choice and herding behavior : We found heterogeneous demand patterns in mobile application market

Limitations & Future Research

Research Limitations
Data I. Hard to track the sales rank of the applications when they are dropped from the top 300 lists II. Results were confined to the aggregated data set

Future Research
Data I. Supplementing the different period of data II. Comparing the results of panel data set