New Opportunities for Small Software Developers

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A few years ago, it seemed as though the days of the "micro-ISV"-very small Independent software vendors consisting of one or two developers-were over. The role once played by shareware windows applications had been supplanted by free web applications financed by advertising revenue. The start-up costs for such web applications-including funding a scalable and reliable web hosting infrastructure-were beyond the reach of most small software entrepreneurs.

However, I've been heartened to see the emergence of at least two viable platforms that provide the micro-ISV with an ability to create software for a virtually unlimited audience.

First, there are the cloud computing environments provided by such vendors as Amazon, Google, SalesForce and-soon-Microsoft. These cloud computing environments provide massively scalable and reliable platforms for web applications, and have a pay-as-you-go pricing model. Small software developers can deploy their applications onto these platforms cheaply, and pay for additional computing power only if the application takes off. These platforms also offer integration with payment and advertising-based revenue systems, providing a way for the micro-ISV to monetize its application.

Another booming channel for the micro-ISV is the Apple iPhone App Store. The iPhone 3G supports third party applications that can be downloaded from iTunes or directly from the phone. Application developers can upload their applications to iTunes for a 30 percent commission on sales from Apple.

Since the emergence of the App Store in the middle of last year, more than 10,000 applications have been made available. About 20 percent of the applications are free, while the average price for a successful paid app is around two dollars.

The diversity of the iPhone application market is astonishing, though games and recreational applications dominate. The price point allows for applications that appear, at first glance, too trivial to flourish. Indeed, the poster child for iPhone application success is the "Ocarina," which turns the iPhone into a sort of digital flute popularized in the Zelda computer games. The creators of Ocarina, which sells for 99 cents, are likely to generate more than $1 million in revenue from the application over the first year.

Becoming the two dollar store of the Internet is not altogether a bad thing. The iPhone represents a true "long tail" phenomenon; the number of potential customers is huge and diverse and it's therefore possible to market to very narrow niches. The low cost of iPhone applications is a mixed bag for the developer because it reduces profits per unit, but the ability to access the long tail through the iTunes store means that overheads are next to nonexistent. Furthermore, Apple seems to have perfected the micro-payments system necessary to make these low cost applications profitable. It's quick, easy and safe to buy these applications directly from your iPhone.

Apple's development environment for the iPhone provides the company with another leverage point. Developers who want to create iPhone applications are now drawn further to the Mac, helping in a small way with the slow but steady inroads the Mac OS is making into PC sales - especially at the high end development market.

The Apple App Store and the cloud application platforms both have reversed the economic trends that were marginalizing the small software developer out of business. They provide platforms in which a single software developer can craft solutions that reach millions of customers with a modest investment on the part of the developer. It's probably a backwards move from the point of view of Venture Capital firms. But, it's good news for the producers and consumers of low cost or free software.