In any given month, half of smartphone users won't download a single app. With our phones full of photos and text message archives, there's simply not enough storage to go about downloading apps at will.
Some app developers realize this and have worked with a variety of companies to stream apps from a server. Google, for example, allows developers to stream portions of Android apps that show up in its mobile search results. While only about 100 apps are available for streaming today, that number will climb to 100,000 by 2020, according to Raul Castanon-Martinez, an analyst at 451 Research, as reported by Bloomberg.
While the app stores of Apple (NASDAQ:AAPL) and Google -- the Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL) subsidiary -- have about 2 million apps each, even the relatively small predicted shift to app streaming will have a dramatic impact in terms of taking money from each company. Facebook (NASDAQ:FB), Amazon (NASDAQ:AMZN), and Microsoft (NASDAQ:MSFT) stand to gain.
Missing out on billions
Last year, Apple generated an estimated over $6 billion in revenue from App Store commissions. That source of revenue continues to grow every year as the number of Apple devices gets larger and larger. In January 2016, Apple management made a point of saying that its active user base reaches 1 billion devices. It's a sign that management is heavily focused on growing its services business, which includes the App Store.
If more and more iPhone and iPad users start streaming apps instead of downloading them from the App Store, Apple misses out on a valuable revenue stream. Apps like subscription streaming services generate a recurring revenue stream with practically no overhead from Apple. Those apps are ripe for moving to app streaming as they require a strong internet connection for functionality anyway.
Games may be a bit more difficult, but mobile game developers are already working on streaming their games instead of downloads. The economics are often better as developers can get more players and can negotiate lower commissions for app streaming services.
Apple and Google both take as much as 30% of all app store and in-game purchases. Some streamers charge as little as 15%. App streaming removes the monopolies Google and Apple have over Android and iOS app downloads, respectively, making it possible for other services to undercut their pricing.
Google is in a much better position
Google is already helping companies stream their apps from its servers in order to improve its mobile search results. As one of the leading cloud infrastructure services, it's comparatively well positioned to replace any revenue lost from app streaming.
Of course, Google will be competing with Amazon and Microsoft for share of the burgeoning market. Google's initial cloud computing focus on helping developers build and scale apps may give it a benefit in the market. However, Amazon's Amazon Web Services has proven difficult to overtake while Microsoft continues to grow rapidly.
Digital advertisers benefit as well
The second way Google stands to offset lost app store revenue is through improved conversion on its app-install ads. If users can simply click a button and suddenly be streaming an app, those ads are more likely to convert casual browsers into app users. On the other hand, if users don't actually have to download the app (producing a constant reminder of the app on their home screen) there's a need to advertise the app more often to regularly remind someone to use it.
Google and Facebook are the dominant forces in digital advertising, and both have benefited tremendously from app-install ads. Facebook stands to generate about $4 billion from app-install ads this year, according to Citi analysts. Google could generate around $10 billion in app-install ads over the next year.
The growth of app streaming has the potential to supercharge both companies' ad units.
Apple has options
To be sure, Apple won't suddenly lose a $6 billion per year (and growing) revenue source overnight. If app streaming has a meaningful impact on its revenue, it could simply launch its own app streaming service.
But with the shutdown of iAd, there are fewer areas for Apple to get its app streams in front of consumers besides the App Store. App streaming has the potential to shift the way consumers search for apps from the App Store to a simple web search. That would certainly play right into Google's hand.
Apple will need to work quickly if app streaming starts producing a meaningful impact on its App Store conversions.
In the grand scheme of things, app streaming stands to benefit Google, Facebook, Amazon and Microsoft more than it will hurt Apple, which still generates the vast majority of its revenue from hardware sales.