Last year was big for Apple's (NASDAQ:AAPL) App Store. Billings rose 50% from the year before and apps generated over $10 billion in revenue for developers. This is a no-joke figure. As Apple analyst Horace Dediu from Asymco noted, "Put another way, in 2014 iOS app developers earned more than Hollywood did from box office in the U.S." And this growth in app revenue isn't over yet. By 2018, Google Play marketplace and Apple App Store revenue will double, and in-app advertising revenue from the two app marketplaces will more than triple, according to new forecasts from App Annie and IDC (via Re/code).
App sales soar
This data supports the ongoing upbeat storyline for Apple's App Store. A whopping 40% of cumulative App Store revenue paid to developers was paid in 2014 alone, Apple said in a press release earlier this year. In the same release, the company said it started 2015 with a bang: During the first week of January, customers spent nearly $500 million on apps and in-app purchases.
App sales are rapidly growing in importance to Apple's top line. While the company doesn't state the profit margins or earnings of the fast-growing segment, it's also likely that the App Store business is beginning to contribute meaningfully to Apple's bottom line.
Since Apple takes a 30% cut of App Store revenue, total App Store billings for 2014 must have been about $14.3 billion. But it's only the 30% cut of billings that Apple reports as revenue; so total App Store revenue from App sales in 2014 contributing to Apple's top line was likely about $4.3 billion, or about 2.2% of Apple's total revenue last year.
If App Annie and IDC's prediction for App Store sales by 2018 pans out, total annual app developer revenue would hit $20 billion, and total billings including Apple's 30% cut would reach nearly $29 billion. App Store revenue would contribute about $8.6 billion to Apple's top line, amounting to 4.4% of sales.
Re/code's Ina Fried explained that this prediction was conservative.
"I would consider this projection conservative," App Annie CEO Bertrand Schmitt said in an interview, noting that the company has consistently been revising its forecasts up over the past two years as revenue has exceeded expectations.
Apple's App Store revenue is somewhat disguised since it falls under Apple's services revenue, which features revenue from the iTunes Store, the App Store, the Mac App Store, the iBooks Store, AppleCare, Apple Pay, and licensing and other services. Thus, analysts must piece together snippets of information on total dollars paid to developers to date from different Apple press releases. Dediu, who has followed Apple's App Store business closely, illustrated recent growth in App Store billings in a chart earlier this year.
Apple cited its new programming language Swift, frameworks for HealthKit and HomeKit, and its Metal graphics technology as catalysts for app innovation in 2014.
Will the App Store get a boost from wearables?
When Apple Watch is finally available for purchase on April 24, Apple will bring its App Store to a new frontier: wearables. While Android has already tapped into this market with its Android Wear, the nascent category's impact on the App market is still mostly unknown given the minuscule sales of wearable devices to date. But if Apple Watch proves popular, the market for wearables could soon be meaningful enough to begin to assess its potential.
Apple is building an App Store specifically for the Apple Watch.
Notably, if App Annie and IDC are correct in their bullish view for Apple's App Store potential, developer revenue from Apps plus the 30% of billings Apple takes for itself could potentially exceed, or at least rival, the company's Mac and iPad businesses in 2018.
Daniel Sparks owns shares of Apple. The Motley Fool recommends Apple, Google (A shares), and Google (C shares). The Motley Fool owns shares of Apple, Google (A shares), and Google (C shares). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.