Will These Tech Titans Benefit From App Market Hypergrowth?

Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

App developers look to the mobile market to provide revenue for their products. Mobile apps accounted for 45.6 billion downloads by the third quarter of 2012, and are expected to exceed 81 billion and 131.6 billion downloads in 2013 and 2014, respectively. The number of apps available is driven by the number of app stores. App stores are going to see combined share of total downloads increase with the demand for apps dominated by Apple (NASDAQ: AAPL)Google (NASDAQ: GOOG) and Microsoft (NASDAQ: MSFT). Gartner also estimates that by 2016, there will be over 300 billion apps downloaded worldwide.

The Growing Popularity Of Apps

Mobile dominates any new undertakings by app developers in the market right now. Operating systems must support any number of new and cool apps that are used by consumers. Facebook (FB), Twitter, Pinterest, and Maps are now the norm. The new order is what app will serve the broadest base of consumers and the platform it will operate on. Apps are more popular than mobile web. Mobile device users spend 94 minutes per day on apps that deliver specific information, compared to 72 minutes on the web spent searching for information.

<img src="http://static.cdn-seekingalpha.com/uploads/2013/1/2386701_13571539348787_0.png" />

IHS iSuppli is a reputable source for mobile data. IHS iSuppli is a global information research firm backed by world-class experts from 30 countries. IHS iSuppli focuses on energy, economics, geopolitical risk, sustainability and supply chain management.

According to IHS iSuppli, the Apple App Store will account for 75% of the market in 2012. Apple App Store revenues jumped 63.4% in 2011 due to the iPhone, iPod and iPad. iSuppli predicts that revenues will jump 76% in 2012. Apple currently offers over 550,000 apps for the iPhone and iPad. Google now offers over 600,000 apps. Apple generates $5.54 million per day for its 200 top apps, while Google, according to the same article, generates $679,000 per day for the same number of apps.

Both Google and Apple provide significant barriers to growth for Microsoft. Google generated nearly $1 billion in sales from Google apps and mapping software to businesses and governments alone in 2012. Google has even stated that it has no plans to build out Windows apps. It will go where the users are, and so far, it has been investing heavily in Apple iOS.

According to zdnet, Microsoft is expecting to have 100,000 apps developed for sale by January 2013, and has invested millions of dollars into that effort. The Register claims that Microsoft is selling four times as many Windows Phone devices, compared to the same period in 2011. The Register also says that the Windows Phone Store now offers more than 120,000 apps and that Microsoft will own 46 of the top 50 apps that people use.

Apple apps make developers money with 87% of apps on Apple iPad versus 34% on Google. Apple developers earn $1 per iOS version, compared to $0.24 on the Google Android version. Apple has fewer devices, which means fewer challenges for developers, compared to thousands of Android devices. Apple's approval process requires each developer to guarantee quality, which provides better credibility to the developer. Apple users are early adopters, and on average are more affluent, and more loyal, than other mobile users.

Looking Ahead

Samsung is on target to dominate the mobile handset market for the first time in 14 years. According to IHS iSuppli, Nokia (NYSE: NOK) will be unseated at the end of 2012. IHS states that Samsung will control 29% of global handset shipments by the end of 2012, up from 24% in 2011. Nokia's share is expected to drop to 24% in 2012 from 30% in 2011.

Trading around $548, Apple stock is reflecting the entry of viable competition in the mobile and smartphone marketplace based on a long-term discounted cash flow model. Apple stock has reflected a stellar year in sales and religious customer dedication to the iPhone, iPad and iPad Mini. Apple's current price also reflects investors’ viewpoint of a saturation point for Apple's products and some skittishness on behalf of the investment community with respect to the ability for Apple to retain the top spot. Apple will benefit from app market growth over the long-term. I anticipate Apple Stores will capture 80% or more of the market in 2013 and 85% in 2014, which will accordingly boost revenues in this segment by 80% in 2013 and 85% in 2014. This will help push the long-term value of Apple stock higher over the next 12 to 24 months.

Conclusion

Microsoft will only be able to compete with Apple by creating high demand apps that benefit a large cross section of platforms. It has to pay its developers better than Apple, and it has to target markets and provide those markets with apps that become integral for end users. Unless Microsoft makes substantial progress in gaining market share in the mobile app market, investors should steer clear of it and buy Apple instead. Apple is much better positioned to profit from the app market growth expected in 2013 and 2014.


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