$1.2 Billion For iPhone Apps in 2009. What is Gene Munster Smoking?

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I am as much an iPhone cultist as the next guy, but Piper Jaffray analyst Gene Munster is taking this cult thing a little too far. He estimates that by the end of 2009 there will be 55 million iPhone users and that the iPhone App store alone could be a $1.2 billion business. Whatever he’s smoking, I want some of it.

Now, don’t get me wrong. I think the new iPhone apps will be the single biggest reason to buy a 3G iPhone, but there is no way they are going to pull in $1.2 billion in revenues in 2009. Let’s take a closer look at Munster’s assumptions, which AppleInsider discussed earlier today.

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To be fair, the $1.2 billion is Munster’s most aggressive scenario. The conservative scenario for iPhone App Store revenues is $416 million and the “neutral” case is $777 million. But any way you slice it, his entire analysis lies on two faulty assumptions. The first one is that a certain percentage of “active” iPhone and iPod Touch users will download one free app and buy one $10 app every year from the iPhone App Store.

While this seems reasonable enough at first glance, Munster himself knows it to be bunk. In an informal survey he took of iPhone developers at the recent Apple developer conference, he found out that 70 percent of iPhone apps are likely to be free and that the price of those for sale will quickly drop to $3 or less. Of course, Appleinsider also covered these findings, but failed to note that they contradict the Munster math laid out in the earlier post. If 70 percent of apps are free, then the chances of every active user purchasing at least one of the apps for sale drops considerably.

Let’s take Munster’s neutral case. He estimates 77.7 million active users will get two apps each (155.4 million total). But if 70 percent of those are free, that would bring in only $466.2 million in revenues instead of $777 million. And if the price drops from $10 to $3, that further reduces the revenues to $140 million. For his aggressive scenario (where he is essentially assuming that 121 million apps are sold at $10 each), the total take would drop from $1.2 billion to $364 million.

But wait. We still have not addressed his second major questionable assumption. The total number of Apple iPhons that will be out there by the end of next year. His 55 million “conservative” estimate is anything but. So far, Apple has sold 6 million iPhones since it launched nearly a year ago, and is on track to sell 10 million total by the end of 2008. Munster thinks it will be able to sell 45 million in 2009, or more than seven times what it sold during its first year. Yes, the price cut (if you can call it that) to $199 will spur more sales. But not 7X more sales.

Munster is on the fringe here. As my former business 2.0 colleague Philip Elmer-DeWitt at the Apple 2.0 blog illustrates in the handy chart reproduced below, most other Wall Street analysts put 2009 iPhone sales at less than 25 million. And that’s even with revised numbers after the new pricing was announced. Toni Sacconaghi from Bear Stearns thinks Apple will only sell 10 million. So that could easily cut Munster’s iPhone App Store revenues by half again.

If the iPhone App Store pulls in just $150 million next year, I would still consider it a success. Apple makes plenty of money from the phones and the subscriptions. The more free apps there are, the better, actually. That is just one more reason to buy an iPhone.

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