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.

Unfortunately, it doesn't look like the Twitter revolution is going to die out as soon as I'd like—there are reports that the "Twitpocalypse" rumor was started as a joke, although some individual clients, including the iPhone app Twitterific and Mac's Tweetie, are down. Several other Twitter clients are announcing that they'll be just fine, so it looks like the Twitpocalypse is definitely real, but avoidable. The number of tweets has now passed the crucial 2,147,483,647 mark mostly unscathed, so it looks like things in the Twitterverse are about as bad as they're going to get, which is, unfortunately, not that bad. [Gawker]

The original Twitterific was designed around reading—so that's what it was (and still is) good at. Twitterific 2 takes that core and layers stuff on top of it. In order to keep things looking clean, it hides everything behind buttons, so it feels like there's a lot of drilling down every time you want to do something, which ironically makes the otherwise exceptionally eye-pleasing app feel cluttered and busy.

But feature parity is finally here: You can now do basically anything you can with Tweetie or other full-featured apps, like actually follow and unfollow people, split the timeline up between your regular one and replies, drill down into threads, search—though it's stuck in an odd place—check trends, see people nearby, etc. Two awesome, unique features: Marking tweets is like favorites, except it's private, it has a compressor that shortens both URLs and text, which squeezing the most you can out of 140 characters.

It's still the best reading experience of any Twitter app, strictly from an eyeball point of view, but I wish it managed to add all of the new features without losing some of the focused, streamlined feel of the original. The free version is a decent alternative to Twitterfon, but if you're debating between spending $3 on Tweetie or $4 on the paid version of Twitterific, Tweetie wins. [Twitterific]

The Quicklist
• Best Overall: Tweetie
• Best Paid: Tweetie
• Best Free: Twitterfon
• Most Powerful: Twittelator Pro
• Best Tweet-Only: Tweeter
• Worst Twitter App Ever in the History of Twitter Ever: Tweetion
• Creepiest: Twittervision

GPSTwit
A tweet-only application (meaning you can't read other people's tweets, just post quickly) that distinguishes itself from the other minimalist one-way apps by adding GPS (with a link to your position on Google maps) and pictures to the equation.
Pros: It has as much versatility as you'd want to pack into a single-function Twitter app.
Cons: Not as beautifully simple as a single function app should be, and slow, which is fatal for an app that's supposed to blindingly fast. Annoying ads.
Price: Free
Grade: D+

iTweets
iTweets is basic Twitter app that aims for simplicity, merging all of your incoming tweets into a single, color-coded timeline.
Pros: It has really pretty colors and a bemusing sense of single-mindedness.
Cons: It blends all of your incoming tweets—from people you follow, @replies and direct messages—into a single sticky stream of goop that's unmanageable because of the way it's laid out—no icons means it's hard to tell who the tweet is coming from. And it's a buck! Boo.
Price: $1
Grade: D+

LaTwit
LaTwit is a pretty standard Twitter app that gives you all of the core functions, with a few useful customizations for easier reading.
Pros: It lets you have tons of accounts and aggregate them into a single feed and gives you control over little things, like font sizes, and URL copy and pasting, that might make it endearing to you.
Cons: Kinda ugly. It's buggy—goes catatonic often in the settings menu. It puts the public timeline front and center (when I check Twitter from my mobile on a tiny screen, I wanna see what my friends are up to, not the whole world). Missing deep features, like search. Not worth three bucks.
Price: $3
Grade: D

Nambu
Nambu is a hydra, pulling in your Twitter, FriendFeed and Ping.fm accounts so you can social network and read what your friends are up to until your eyes and fingers bleed.
Pros: The real selling point is that it combines three major microblogging-or-whatever-you-want-to-call-them services in one app. The reading UI is decent, clearly ripped from Twitterific, down to the color scheme. And uh, well, multiple social networking accounts in a single app!
Cons: It feels like beta software: One of the five main buttons is for feedback. Limited screen real estate shouldn't be gobbled up by something like that. Despite ripping the UI from Twitterific, it's a little messier, with tiny, unintelligible buttons up top and not quite the same fit and finish.
it's not immediately apparent what some of the buttons do. Robert Scoble might love this for $2, but if you're just looking for that one great Twitter client, this ain't it.
Price: $2
Grade: C-

NatsuLion
Another generic Twitter app, it does all of the basic things you want in a Twitter application, but there's nothing really special about it.
Pros: It has a separate section for unread tweets, which makes managing them easy. The lion is adorable!
Cons: Too much text crammed into each box (which need to be more cleanly differentiated themselves), which makes it hard to read. Blends direct messages and @replies into a single timeline, which might annoy some people. Skips out on features like search, and even picture uploading, which is typically taken for granted.
Price: Free
Grade: C-

Tweeter:
It's a no-reading, just-tweeting one-trick pony.
Pros: It's really fast for firing off tweets instantly.
Cons: It's tweet-only.
Price: Free
Grade: C+

Tweetie
Tweetie is a powerful Twitter app with every feature you'd want, from multiple accounts to a landscape keyboard, packaged in a really well-designed UI that makes it a joy to use.
Pros: Feature-packed, with bonuses, even, like flashlight and fart apps—in a UI that's never messy or scrambled by feature overload. It does the best job of squishing a full-featured app into a mobile one with a user experience comes that comes closest to what you'd imagine the perfect iPhone Twitter app would feel like. Totally worth $3.
Cons: It doesn't cache tweets, meaning you lose your reading list as soon as you close the app. Some more theme choices would be nice—iChat bubble and "simple" doesn't quite cut it. Not quite as superpowered as Twittelator Pro.
Price: $3
Grade: A

Tweetion
Tweetion wants to be a Twitter search app more than anything else, since that's the first thing that pops up when you open it. It, uh, tries to do a lot of stuff too. Tries being the operative word.
Pros: It archives all of your tweets from ever ever ago. It's like a trainwreck in your pocket that you can look at whenever you want for just $5.
Cons: Takes forever to load. Ugly interface that's like a flashback to Geocities circa 1999. Animations are slow and choppy. Awkward button placement—one of them is dedicated solely to your profile picture, no joke—while most of the actual Twitter functions are buried in a more menu. Settings menu is a scrolling, choppy, confusing mess that awkwardly mixes buttons, text entries and the slot machine list UI. Couldn't figure out the Facebook deal. It's buggy and froze a lot too. Clearly, no one used this before they put it out. A genuine atrocity.
Price: $5
Grade: F-

Tweetsville
Tweetsville's designers it seems weren't quite sure what they wanted it to do, so it does a little bit of everything, but it's not particularly great to use.
Pros: It has every major Twitter function, solid search capabilities and in tweets, makes it abundantly clear who it's going to. That's about it.Update: You can customize the main buttons along the bottom, which makes it a lot more usable than the default layout, since you can tailor it to what's important to you.
Cons: It's hard to immediately find core functions when you first open it up—a no-no on an app designed to be used on the go. By default, half the buttons on the bottom are dedicated to search and trend-tracking, while your @replies, which I think should be front and center, are buried under a "more" menu, until you change them around. (Which it isn't immediately apparent you can do.) The UI is also inconsistent from function to function, and there's just not a major reason to pay $4 for this when free or cheaper apps that are better.
Price: $4
Grade: D C+

Twinkle
Twinkle had a lot of fanfare early on for its cutesy speech bubbles and location features that let you see what people are tweeting around you, which it was the first to do.
Pros: One of best clients right after the App Store launch because it was one of the first with deep location features, it still has strengths there, like a landscape view map of real-time tweets. The stars and bubbles theme is... unique.
Cons: Its future development is questionable because of internal strife at developer studio Tapulous. It also requires a separate Tapulous account, which is really aggravating. In our view, Twitter apps shouldn't need anything more than our Twitter username and pass so you can start using them instantly.
Grade: C

Twittelator
Twittelator's free app gives you more functionality than most free Twitter apps in a pretty solid little package.
Pros: It's one of the better free Twitter apps, retaining Twittelator Pro's core functions—picture upload, search, GPS, friends list—though it doesn't stack up to its pay-for-it-dammit bigger brother. Less prone to freeze-ups than Twittelator Pro.
Cons: You lose all of Twittelator Pro's more powerful functions—not just themes, but multiple accounts, nearby tweets, in-tweet photo display, deeper profile diving and more—but you're using the UI designed for the feature-packed version, with a kind of ugly skin, too. The emergency tweet button is weird, and in an awkward place (dead center).
Grade: B-

Twittelator Pro
The big daddy of Twitter apps, it has more features than any other app we tried and it'll let you do just about anything—search, check nearby tweets and trends, create custom sub-groups of people you follow, multiple accounts and more
Pros: The most powerful Twitter client with lots of customization like multiple skins, and little touches like a friends list that makes it easy to @reply or direct message someone on the fly.
Cons: The listicle-style menu for all the features is a tad bland, though it gets the job done. When it's trying to do something, it can be annoyingly unresponsive. The UI isn't the cleanest, either (admittedly, because it's trying to do so much) and some of the buttons are hard to hit. Pricey.
Price: $5
Grade: A-

Twitfire
Twitfire is another one-way application that just lets you send tweets, not read them.
Pros: Hrmmmm... It makes it easy to send messages to your friends—which the other one-way apps don't do.
Cons: Another post-only app that wants to be essential, but is just confusing. Do I push the button before I type? After? What's that button?
Price: Free
Grade: D+

Twitterfon
The most straightforward full-featured Twitter app, it has every major function you'd want—search, profile diving, picture uploads—presented in the simplest way in possible.
Pros: It's incredibly lean and loads a zillion tweets way faster than any other Twitter app in a simple, easy to read layout. It caches them too, meaning you can flick it on to do a tweet dump before you hop in the subway. The best free all-round Twitter app.
Cons: Missing some power-user functions, like multiple accounts and themes (the baby blue does get on my nerves), and an option for a larger font size would be nice.
Price: Free
Grade: A-

Twitterific
Twitterific is designed around the reading experience more than anything, presenting all of your incoming tweets—from friends, @replies and direct messages—in a single stream with a fantastic UI.
Pros: It's a great reading experience—it launches straight into the timeline and uses massive, readable-from-two-feet away fonts on top of a an essentialized user interface that's single-hand-friendly. Caches tweets so you can read your backlog even without a signal, which is great if you catch up on Twitter in the subway (like me). The free version and $10 one are essentially exactly the same—the free one has ads and is just missing an extra theme.
Cons: It was clearly designed for reading more than doing, so it's stripped of features like search, nearby users and more in-depth profile probing that makes it feel a bit shallower than other apps, especially if you pay $10 for the premium version, which is the most expensive standalone Twitter app in the App Store. Also, everything's in a single timeline—your friends' tweets, direct messages and @replies—so there's no digging back for an older direct message or anything remotely tweet management.
Price: Free or $10
Grade: B-

Twittervision
Rather than check out what the people you're following are up to, it bounces you around the world, following random, geo-located tweets in real time, or you can see who's tweeting near you in creepy detail. All to give you a "sense of the global zeitgeist."
Pros: It's neat.
Cons: The amount of detail in local tweets, with a Google Map pin and all, is kinda creepy! You can't read what the people you're following are doing (granted, that's not the point).
Price: Free
Grade: B-

Craig Hockenberry of Iconfactory, developers of Frenzic and Twitterific, started things off with a post lamenting the difficulties of rising above the iPhone app's endless sea of 99-cent mediocrity (a sea I have spent plenty of often painful time wading through for our Week in iPhone Apps column). In his post, he worries about being damned to endlessly producing 99-cent so-called "ringtone" apps rather than well-designed and innovative apps that take more resources to develop.

Hockenberry's "Dear Steve" states that an iPhone dev's life would be a lot easier if they could accurately track who exactly is downloading their apps (and which ads/links they clicked on to get to the store), and the ability to offer free demo version of apps that expire after a given time, prompting people to buy the full app.

After setting off quite a ruckus of folks accusing Hockenberry of groundless complaining, the folks at Appcubby came to the rescue with a full monty on their financial records, showing, down to the dollar, what goes into keeping food on the table for an iPhone app developer (wherein we learned just how much Jason's post on Gas Cubby spurred sales). The Cubby folks backed up the call for free demos and more ad-tracking capabilities as two things that would greatly help the situation.

Both posts are really interesting reads if you're into knowing how the delicious iPhone app sausage gets made. [Furbo Blog, App Cubby Blog]

Twinkle's UI isn't quite as info rich (like when you click on someone's tweet) as Twitterific's, and you can't check out a tweet someone is replying to like you can in Twitterific. But, it doesn't seem as prone to slowdown (Twitterific can absolutely drag if you're scrolling through a lot of tweets), and I dig the easy-to-digest convo bubble layout. Also, there's no ads for the free (and only) version of Twinkle. But it's the location stuff that really put it over the top. [iTunes, Tapulous]