I am the author of this blog post about Facebook and iPhone application development. Thank you all for your comments and thoughts. There are some excellent points raised here. Let me expand on my post in several ways, drawing on some of your comments.

Several HNers have suggested that my post misses the point that not all developers for Facebook and the Apple iPhone should be classified as new ventures. I agree, and I could have been more clear in my post. There are at least three types of developers: a) hobbyist/part-timers that are developing applications in their spare time; b) established firms that are porting existing applications over to Facebook or the iPhone for the purpose of expanded distribution or marketing; and c) new ventures that have been founded to develop Facebook and iPhone applications. My post speaks most directly to this last type, new ventures founded to primarily focus on Facebook or iPhone application development. These are the firms that are depending on generating enough revenue from their Facebook or iPhone applications to support and grow a software business. Given the current economics of the Apple App Store (and probably the Facebook platform) I think the outlook is bleak for most of these firms. Of course the outlook would improve if customers’ willingness to pay for applications increased, if paid application downloads increased, or if application revenue was augmented through other sources, such as advertising or in-application purchases.

Several HNers have questioned the scenario analysis. The analysis is admittedly rough, as noted in my post. I based the analysis on several assumptions, most of which were informed by publicly available information; e.g., the July 14 Apple Press release, App Store revenue allocation, the App Store top selling application lists, etc. Some of the assumptions are rough educated guesses: the percentage of apps that are free versus paid (I assumed 50%, which is a very generous assumption) and the eventual concentration of the market (10 firms controlling 25% of the market). I believe the scenario I presented is plausible in view of current information. Of course there are many variables to consider and the landscape is evolving quickly, so the scenario I presented might miss the mark considerably. For instance, as noted above, application downloads might increase significantly, willingness to pay might increase, etc. Despite this uncertainty, I believe the analysis is informative because it shows how the current economics of the App Store can not possibly support anywhere close to 100,000 developers, or even 10,000, unless a vast majority of these developers are hobbyists or establish firms not relying on these applications for revenue generation. Furthermore it suggests that very few, if any, new ventures dedicated to iPhone application development will realize the top line revenues that will satisfy a professional investor. In the scenario I presented just 0.01% (i.e., 10/100,000, or one hundredth of a percent) of current developers participating in the iPhone developer program will realize $10-15 million in annual revenues. This is striking given the number of venture capitalists that are financing companies dedicated towards iPhone (and Facebook) application development. Admittedly, venture capitalists will fund the more competent ventures that have a higher chance of success, but what VC would have guessed that the top free and paid applications would include iFart, the Moron Test, and Mirror Free.

Let me be clear that I think there are opportunities in these markets. However, I believe that given the very low barriers to entry combined with the economics suggest that the fluid phase may persist for an extended period of time and the shakeout might be particularly harsh to new ventures. PJ suggested that it’s a mistake to build an application for a potentially ephemeral platform such as the iPhone or Facebook. I agree. It seems that the new ventures most likely to succeed over the long-term are those that develop excellent software that are platform agnostic. Does iFart and Mirror Free fit this model? I don’t think so.