The App Store is a strange new place for developers. Veterans and newcomers engage in bareknuckle combat, driving prices down to levels people wouldn't have imagined charging just a few years ago. Margins drop to razor-thin levels while customers expect apps to get cheaper and cheaper, but with ever increasing quality and depth.

For developers, for other software platforms and potentially for the increasingly fickle customers themselves, it's uncharted, and treacherous, territory. But the most bizarre thing of all is—in an effort to keep people in the App Store, and to prevent competitors from getting a toehold in the mobile app business—Apple's charting a course straight into it.

"The App Store is a very competitive environment," says Caroline Hu Flexer, co-founder of Duck Duck Moose, an indie developer of children's edutainment apps like Itsy Bitsy Spider. "As an independent developer without a large PR budget or well-known brands, it can be very challenging, and you're pretty much at the mercy of Apple."

The Problem

Most iPhone apps had no life before the App Store, and currently have no life outside it. But with those that did, you start to see a pattern. App prices could reasonably be expected to fall over time—an older game is worth less to customers than a newer game, and with other types of software, a late-stage price drop is a great way to scoop up late adopters. What's strange, though, is how prices dramatically collapse after hitting Apple's store.

Two weeks ago we flagged some bizarre differences in pricing between equivalent PSP and iPhone games. Big titles, like Tetris and Fieldrunners, were inexplicably cheaper on the iPhone, even in cases where it was executed better. This didn't make a whole lot of sense. As it turns out, it had nothing to do with Sony and the PSP, and everything to do with the App Store.

As you can see in the chart above, many apps and services take a price dip in the App Store. Zagat's premium To Go guides cost a healthy $4/month for Windows Mobile phones, but sell for just $10/year on the iPhone. CoPilot 7, a navigation app, used to set you back a full $200 on a Microsoft-badged device (later lowered to $100); the much-improved version 8 sells in the App Store for a measly $35 today. The premium version of WeatherBug runs $5 for people who happened to buy BlackBerry's touchscreen phone, but just $1 for anyone who bought Apple's. VR+ voice recorder, a full-featured dictaphone app, runs $30 on BlackBerry, and an incredible $2 in the App Store. So how can this little App Store, itself a subsection of the iTunes store, squeeze so many developers to the point of near-suffocation?

Update: The BlackBerry Weatherbug app boasts a few extra features over the iPhone app, including push notifications. This accounts for some of the price difference

The Economy

Some of this is pure Econ 101: The store serves a massive, captive audience that's pre-trained to spend money in iTunes. The promise of higher volume makes it easier for developers to lower prices, which they use, along with interesting features and clever marketing, to set themselves apart from the competition.

If things work out just right, the App Store can move a lot of software for you. Spread your lower margins over tens of thousands of sales, and your $2 app could make just as much, if not more, than your old, slower-selling $30 app did. The App Store recently passed the 2-billion-download mark, and there are likely well over 50 million App-Store-ready devices in peoples' hands right now. A vast majority of these downloads—averaging an insane 35 per device—will likely have been free. Only Apple knows just how many. But even if just 5% of the 2 billion downloads were paid for, that's one hell of a market.

It's true that prices are falling as more and more iPhone and iPod Touch owners enter the market. But prices won't stop falling. And more and more developers from all over the world are submitting apps, too, so fewer devs are guaranteed visibility. Not all of the people investing time and money in their products are reaping the return they (reasonably!) expected.

Newsweek's exposé on the end of easy money at the App Store goes a long way toward making the case against going all-in as an iPhone dev. Not only are development costs high, while success appears to be basically randomized. But the story doesn't explain exactly what happened to make the situation so grim.

The Culture

Giz stories rage about app prices all the time, and in your own private way, so do most of you. Buying $1 songs and $2 TV shows has given us an expectation that apps should be cheap, no matter what their use. The glut of free apps you see filling out the app charts every day doesn't help either. Software is worth less to us now, even though we use it more.

I spoke with Steve Andler of Networks In Motion, the company that makes Gokivo. It's an app that we savaged for its introductory price of $10 a month, which then dropped to $5 a month a few weeks ago.

Andler explained reaching the unrealistically low costs with one thing: diminished features. Their app pulls up-to-date map, traffic and POI data from NIM's servers in real time, meaning that—beyond developer costs—they have to constantly pay for new, fresh data to pass on to their customers. But even at $5 a month, it's just about impossible for Gokivo to compete with an app like MotionX GPS Drive, which is $3 a month, or $25 per year.

Andler says there are subtle differences in services offered, which is true—MotionX, for example, doesn't yet read street names aloud when it gives you directions—but your average user probably doesn't know this, and there's a good chance MotionX might add it in an update later on, as their market share and revenues grow. But the damage is done. The app-buying customer is spoiled: As far as we are concerned, turn-by-turn GPS apps should now cost no more than $3 a month, period. This is the new retail, and it's weird.

Loren Brichter, father of Tweetie, is used to getting yelled at by jaded app shoppers. He's charging $3 for Tweetie 2, an update—but a whole new version, really—of his well-established Twitter app. Offering the software as a free upgrade isn't realistic for him:

I priced Tweetie at $2.99 not based on how much work I put into it (it would have been more), or to try and undercut other apps (it would have been less), but simply because I felt like $2.99 was a reasonable price to pay for a Twitter client. Impulse purchase, but not bargain-basement. I never liked playing pricing games either—a popular pastime of other App Store devs. It's always been $2.99, and will probably always be $2.99.

His decision wasn't easy. And even though his app is the darling of the tech press, and has hundreds of great user reviews, he's being lambasted for charging three measly dollars for a high-quality app that people will use again and again and again. Before the App Store, a complaint this petty wouldn't have even made sense.

Apple

From the outside, it appears that Apple is encouraging a race to the bottom. The top 10 lists in each App Store category—one of the only ways for an app to get any meaningful amount of iTunes visibility—are almost exclusively the territory of low-priced impulse buys, and are hard to cling onto for more than a few weeks at time. Flexer, of Duck Duck Moose, says she's experienced it firsthand:

The ranking by volume (as opposed to revenue) on the App Store seems to drive the prices of apps down. Aside from being featured by Apple, exposure of an app is dependent on its ranking in the top lists, so developers lower prices to obtain a higher ranking.

This is echoed and amplified by the makers of Twitterific, an app that, in a bid to stay competitive, saw its price fall from $10 to $4, despite active development and a growing featureset:

While these changes represent perks for users, it also means that sustaining profitability for a given piece of software in the App Store is nearly impossible unless you have a break-away hit.

And if things don't change?

Myself and others like me will have no choice but to focus our development efforts elsewhere.

With yesterday's announcement that Apple is allowing free apps to include in-app purchases, things just got even more tumultuous. Depending on how this is handled, the top "free" apps could all be paid apps in disguise. Either that or the paid app rankings will be dominated by free-on-a-trial-basis teasers. In either case, the rankings open themselves up for opportunistic abuse, and the highest goal for any honest, talented app developer—to just crack that list—just became more uncertain.

This is disastrous for developers, even if it's mostly incidental, and a function of Apple trying to sell apps like they've been selling music for years, despite a totally different set of product types and customer needs. But Apple's effect on pricing goes well beyond incidental. At least in some cases, Apple calls the shots.

A high-profile dev team that has sold a number of apps in the store since the earliest of days, and who accordingly wishes to stay anonymous, told us as much. When they approached Apple with their first app, they had a price in mind. Apple told them it was too high, and that they'd need to cut it to succeed. They chopped it in half. Even then, Apple told them to "be careful."

This company made out fine, since they were in a position to adapt. However, to play the volume game, they had to restructure their entire philosophy around a pricing structure that, just months before, would've seemed ridiculous.

With over 2 billion data points to graph and filter to their heart's content, Apple understands the App Store climate better than anyone else possibly can. As such, their advice is probably golden. Which is okay if you're a relatively nimble, single-purpose company, and you can afford to risk restructuring everything you do around their store, and your costs can be covered at whatever price you evidently need to set to sell at a certain volume. But you'll just want to keep in mind that their advice is self-interested. Apple wants cheap apps, to keep people buying them, and to keep other stores firmly in the second tier—and they're not afraid to say it. From Apple's last quarterly report to investors, a line they've been echoing since the store opened:

[Apple] also expects competition to intensify as competitors attempt to imitate the Company's approach to providing [digital app distribution] seamlessly within their individual offerings or work collaboratively to offer integrated solutions...While the Company is widely recognized as a leading innovator in the personal computer and consumer electronics markets as well as a leader in the emerging market for distribution of third-party digital content and applications, these markets are highly competitive and subject to aggressive pricing.

You don't need to look back any further than the launch of the iTunes music store to see an Apple that will do everything it can to push other peoples' prices down for their benefit. Of course, they can't really fix prices for apps—they're not songs or movies, and each one does something different—but they can nudge like hell.

What Happens Now

So what does the App Store Effect mean, right now? In the short term, we'll get lower prices. This is great. But in the long term, it might not be sustainable.

The promise that sales volume will make up for the rock-bottom prices you need to charge just to be seen in your app category seems increasingly hollow, and to put it bluntly, if developers don't have a chance in hell of recouping their fees, they'll stop trying. And I'm not talking about 99-cent iFart app spammers here—I'm talking about big players who already make money selling software. If the navigation companies, the big game studios and the premium content providers can't thrive in the App Store, they'll have to leave; even playing in Apple's sandbox threatens and undercut their (sometimes much more crucial) product lines elsewhere.

And don't forget, Palm and Android fans, this App Store Effect sends ripples well beyond the App Store. Customers expect to see functionally identical apps priced the same way across platforms, because to us, that's what makes sense. Can devs really afford to port an app to the webOS to sell to the tens of thousands of Pre owners, when they're expected to tag it with iPhone prices, calculated for a base of millions? Whether by Apple's design or totally by accident, everyone who doesn't own an iPhone will suffer for it.

The App Store Effect illustrates a new kind of economy, and it's not going to go away. In fact, it's going to get worse. Developers will either adapt, die or leave. But where will they go? Until there are 50 million Android handsets and 50 million Pre offspring out there, the rest of the mobile software world is pretty much screwed.

The talk began with an innocent forum inquiry:

I can't recall how many built in applications there are but I have 100 applications installed on my Pre - total.

Starting a week ago, I noticed I was no longer able to install applications (through either the App Catalog or by using fileCoaster). Per the recommendation offered by both the App Catalog and fileCoaster, I began deleting applications.

It seems, no matter how many I delete, I am still unable to install new ones. I've reset/rebooted without any change.

I am wondering - is this a permanent limitation? I can't imagine being limited like this - are there any planned work-arounds?

None of the inquiries such as that one, calls to Palm for help, or complaints seemed to have an effect though. The issue persisted, became more apparent to those who started to more apps, yet Palm remained silent. Now users at PreCentral are claiming that Palm's customer support actually denies the existence of issues relating to limits of how many applications can be installed on a Pre. Sure, they're right about there being no limit — if you use homebrew apps.

Homebrew apps aren't exactly helping Palm's App Catalog though, nor are they resulting in anything resembling profit. So why on earth are they not figuring out how to let users use apps that they buy?

From what I can make of various forum postings, users are speculating that the dreaded "Sorry, not enough memory" is related to some messed up memory partitioning, but who knows. With all the work Palm is putting into resolving iTunes syncing troubles, can't they spare a moment to resolve their own OS issues? And you know...profit? [PreCentral and Gadgets on the Go— Thanks, Christian!]

• It's a corporate policy all apps use a version number of less than 1.0.0
• Ten pages of legal documents to print out, sign and scan
• If an app is in the App Catalog, it can't be distributed anywhere else—a problem, because Zawinski's apps are open source and free
• Developers need a verified PayPal account to pay Palm $99 a year to distribute their apps
• A whole mess of reviews and re-reviews
• 27 emails and months later, the apps are still in limbo

On the bright side, at least Palm actually replied to some of the emails. [jwz via Daring Fireball]

A tipster fed PreCentral a compelling theory about a prospective delay in the App Catalog upgrade and associated WebOS software update, the day before they were set to launch. And lo, launch they did not. Credence, lent!:

webOS 1.2 (and possibly paid apps in the App Catalog) could be delayed (again) until next week. The delay comes from Sprint's need to test the changes made since that first webOS 1.2 leak, including all the changes surrounding the App Catalog. The results will be that webOS 1.2 will be released as webOS 1.2.1. Oh, and though it's not the source of the delay, webOS 1.2.1 should re-enable iTunes sync.

In lieu of an official explanation, this is probably what happened: nothing catastrophic, but unfortunate nonetheless.

Their tipster also provided some insight into Palm's part in the bizarre iTunes compatibility fray. Apparently, cracking iTunes to allow the Pre to sync is extremely easy, and Apple's countermeasures can be circumvented almost instantly—reenabling syncing after the second to last forced compatibility break took developers about five minutes, while the fiddling it took to fix iTunes 9 syncing in the forthcoming 1.2.1 update can be measured in hours, on one hand, on two fingers. Which is disappointing, since I always imagined some kind of Cold-War-style coding race between the two companies, where success is measured in MP3 transfers and human blood. Life is boring. [PreCentral]

We got more applications than we could handle well, which is a good problem to have. Unfortunately, it means we dropped some things on the floor, and that's bad, but with the impending "stuff" that's coming, this is all going to get a lot easier for everyone and a lot more transparent.

Despite these bumps in the road for developers, it does give consumers a reason to be excited about the apps that arrive tomorrow. [Palm Forums via PreCentral]

Here's the news, run through some kind of obligatory excitement filter:

The first app is Word Ace, a must-have game for any Pre users.

Then there's Mileage Monitor, the title explains what the app is.

Bubbles!, another game from the developers that brought you Spades. Goal of game, connect bubbles of the same color and pop them.

ESPN Zoom, a Photo hunt game.

Kosher2Go, Kosher database.

And last but not least, Shabbat Shalom, this app will allow you to quickly check the candle lighting times, havdalah time and parsha for the week in any location in the world.

There's nothing specifically wrong with these apps—Word Ace actually sounds pretty cool, especially for a Pre game—but usually when Palm opens the gates, it's for something a little more, I dunno, subtantial? I mean, I love me some Judaic ceremonial planning apps, but is this really what your Early Access app approval backlog looks like? Unofficial homebrew apps are starting to get pretty impressive, so beyond the odd game maybe throw in a Last.fm client or a photo editor or something, just to let everyone know you're still in this. [Prethinking]

Starting today, you can submit your apps via email for consideration in the Palm App Catalog e-commerce beta program.

We're initiating the beta e-commerce program so we can test the experience for both webOS app developers and users. This is an opportunity for you to submit your app and to market it to the webOS user base before we open the program to all developers later in the year.

All developers can submit both free and paid applications today for evaluation by Palm. Details of the program are the following:

* You can charge a one-time fee for the download of your application.
* Initially, the user base for e-commerce will be limited to the United States.
* Developers will receive 70 percent of revenues generated through application sales (less applicable sales taxes).
* webOS users will pay for their application purchases using credit cards and will download apps directly to their webOS device.

This is followed by a few guidelines for what kinds of apps Palm will accept, which can basically be condensed to "no farts, please." [Palm]

The first thing you'll notice about these efforts—coming from such traditionally competitive companies as Palm, BlackBerry, Nokia and Microsoft—is just how similar they all sound. App World? App Catalog? App Market? Mobile Marketplace? This outward likeness actually runs pretty deep—these stores are advertising uncannily similar feature sets, for both users and developers:

Although it might not evident in the feature-by-feature breakdown above, there are two distinct kinds of app store: The primary store, which is the first and only source of an OS's apps (see Apple), and the secondary store, which is built around an existing stock of third-party apps, and with preexisting developers in mind (see BlackBerry, Microsoft, and Nokia). It's a combination of these different lineages and divergent policy choices that make the smartphone app store experience so varied.

Apple's iPhone App Store
At least for now, the App Store is the standard by which all others are judged. Beyond that, it's given us a rough guide for what works. With a $99 dollar developer's fee and a novice-friendly SDK, the barriers of entry for an iPhone developer are fairly low. Distribution, payments and to a large extent marketing are managed by iTunes, which iPhone owners are necessarily familiar and comfortable with.

And, of course, there's the iPhone: This store may only serve one handset (and its very similar nonphone brother), but it's a wildly popular one. This makes the app store uniquely attractive to developers, because it provides access to the largest uniform app-buying market in the world. Microsoft can argue that Windows Mobile 6.5 will connect developers to x gajillion different customers through y zillion different handsets, but this variety is a curse: Handsets have different resolutions, processors, 3D hardware, input types and basic feature sets. A motion-sensing 3D game with a GPS social networking feature won't work on a lot of WinMo handsets, but a 2D, keypad-controlled Asteroids clone won't make a developer rich.

But the App Store is far from perfect. Apple, like all App Store owners, has the final say in what gets listed, delisted or banned, and they aren't afraid to remind us of this. Along with the typical risque/racist/infringing content prohibitions, Apple enforces strict and often limiting rules against apps that compete with the iPhone's native set—iTunes, Mail.app, Safari to name a few—and apps that their partnered carriers aren't too fond of, i.e video streaming and tethering apps. Now, all these rules are showing signs of loosening with OS 3.0, but as long as the App Store is the sole source of iPhone apps, any rules will seem like too many rules—especially if you're accustomed to a totally unregulated system like Windows Mobile 6.1's. Hence, the gray market.

Android App Market
This second major entrant into the app store race represents a consciously different approach than Apple's, but not in that many ways. Immediately, we see a lot to compare: A single-handset userbase (at least for now), low costs for developers and a presence as the primary—though not sole—source of apps from Day One.

But the App Market is a different breed than the App Store. Most importantly, it's not the only place you can get apps. Google has been much more lenient about what they allow in their store since the beginning but in the rare case that they don't approve of an app, as in the case of tethering apps earlier this month, you can just go download an .APK file and sideload it onto your G1 anyway. This is a healthy middle ground for everyone involved; Google doesn't alienate users by destroying entire categories of apps, but isn't forced to come into conflict with carriers because of overly liberal policies. Google has also made their Market more friendly to consumers, with a no-questions 24-hour return policy.

Great! Then why is the App Market so underwhelming? Well, the G1 wasn't exactly a runaway hit, and the store got off to a slow start. Paid apps weren't made available for months after launch, and when they arrived they didn't benefit from the convenience and familiarity of a storefront like iTunes. Moreover, there's no guarantee that things will change that much in the coming months—more handsets from more manufacturers will boost Android's user numbers, but will lead to the WinMo-style toxic fragmentation that Apple so adamantly avoids.

BlackBerry App World
Matt took a dive into the newest mobile app store, and found it agreeable, but not spectacular. RIM's is the beginning of this "secondary" app store concept, and it shows: You'll be hard-pressed to find anything here that wasn't previously available elsewhere. It is simply an aggregator for existing applications.

This was a given, as developers have been cranking out BlackBerry apps for years now. But App World was a great opportunity for RIM to give the lethargic dev community a shot in the arm. Instead of doing that, they've made the store almost hostile to would-be app writers.

Listing your wares in App World costs a hefty $200, which gives you the right to upload 10 apps, but doesn't come with any new SDKs or development tools. The payment system is PayPal, which is clumsy to use and a pain to set up. A minimum non-free price tier of $2.99, probably intended to filter out spammy apps and cover PayPal's transaction fees, discourages developers from even trying to make simple, useful apps, eliminating the $.99-to-$1.99 sweet spot that has been central to Apple's success. App World feels like an afterthought, and a reluctant one. UPDATE: It should be noted that the 70% dev revenue share figure in the chart is incorrect, and has been update to 80%—a marked advantage over the other stores.

Windows Mobile Marketplace
With Windows Mobile 6.5, Microsoft will introduce the Windows Mobile Marketplace. So far, their announcements have shown an awareness of the pitfalls of both Apple's and RIM's approaches: They're emphasizing non-exclusivity and app approval transparency, a 24-hour return policy and wide device support, but also making sure to get big-name app and game developers on board to ensure that users actually have something new to look forward to at launch.

On the developer side, it's a mixed bag. As in every other store, the dev take-home is 70% of each sale, but the listing fees aren't great. $99 gets you five apps a year, but anything beyond that will cost an additional $99. I'm sure this will help vaccinate the Marketplace against the fart app epidemic that Apple has proven so prone to, but it'll do so at the expense of potentially useful free and $0.99 apps—again, a crucial price range. One important factor that's still TBD is the payment system. Microsoft says they'll support both credit card payments and carrier charges, but hasn't yet said how that'll look. In both cases the process will need to be as seamless as possible.

Nokia Ovi Store
You probably haven't heard much about this store, set to debut within a month, but it's kind of a big deal for the 40m+ Symbian S40 and S60 users that it'll serve apps to. It's planned to shoehorn into Nokia's new Ovi app suite, which we were introduced to with the XpressMusic 5800, and provide a go-to source for not just apps, but ringtones, wallpapers, and basically everything else that you might have found in a 2001 vintage carrier WAP store.

There has been a decided lack of fanfare surrounding this launch, probably because there just aren't that many Nokia smartphones in the US. But its success or failure will be informative: It will be the most open of all the app stores. For the time being, there is no developer fee, and app listings are free and unlimited. You can easily publish tons of different kinds of content—Flash Lite apps, Java apps, Native S60 apps, multimedia uploads and others—which will be subject to a vetting process that Nokia has assured will be minimal. As Nokia-averse Americans, we can view the Ovi Store as an experiment in laissez-faire app-mongering—a multi-handset, mixed-media, unfiltered feed of Symbian content.

Palm App Catalog
And finally, we have Palm's App catalog. This is the store we know the least about, but that is already set for a different course than all the others. At launch, the only handset it'll serve will be the Pre—though Palm has indicated that other WebOS handsets are inevitable. It'll be the first—and likely exclusive—source of WebOS apps, and developers will be furnished with a solid, though fundamentally limited, SDK.

Palm's still-vague plan for the App Catalog will no doubt be central to the success or failure of the Pre, but we can make an educated guess at what to expect, assuming that Palm doesn't get taken over by idiots in the next couple months: Palm will vet the apps thoroughly, provide an in-house payment system, and make development simple and cheap (previewed Mojo SDK apps have shown great promise). The end result will probably look something like the iPhone App Store, but with one huge difference: there will be no local natively running apps—the Mojo SDK doesn't provide for that, just for what amount to turbocharged, locally-stored web apps. Granted, these web apps will have privileged access to some of WebOS's core functions, but it's doubtful that high-end gaming, as we've seen on the iPhone, will even be possible on the platform. These limitations (along with WebOS's multitasking advantages) will affect the nature and quality of the apps that are listed in the store much more than the Catalog's policies, though exactly how, we'll have to wait and see.

Still something you still wanna know? Send any questions about app stores, SDKs or the finest in fart-app technology to tips@gizmodo.com, with "Giz Explains" in the subject line.