Since the App Store and Google Play launched over a decade ago, advertising has enabled app publishers to offer free, high quality applications. Even when users fail to explicitly pay an app publisher for the use of an app, the publisher can still earn revenue. With 76% of all apps generating revenue from advertising, according to a recent Ad Colony survey, the ad revenue model has been a cornerstone of app monetization—at least until this year.
In 2020, two events have started to impact advertising revenue. First, COVID-19 has driven a large drop in ad spending. eMarketer initially forecasted U.S. mobile ad spending to grow by more than 20% in 2020, but due to COVID-19 ad spending is now instead expected to decline by 10%. Second, at WWDC in June, Apple announced that app publishers will soon be required to gain end-user opt-in for sharing data, which will cause an even larger drop in ad revenue. This requirement goes into effect when iOS 14 launches in September. While the stated reason is user privacy, which Flurry supports, opt-in rates are expected to be so low that Apple’s IDFA, the key identifier used for advertising, will become largely unusable. Think of it as de facto deprecation. With the removal of this identifier from the ecosystem, the IAB estimates that publisher ad revenue will drop by another 52%.
For this study, Flurry looked at what revenue models app developers have been using in 2020 and whether those have been shifting over the course of the year. With ad revenue under siege, we wondered if app developers are showing signs of moving toward more paid models. Flurry Analytics, owned by Verizon Media, is used in over 1 million mobile applications, providing aggregated insights across more than 2 billion mobile devices per month. For this analysis, we identified 3,500 unique applications that use ad revenue, in-app purchase or a combination of both to monetize their applications. We limited the sample to include apps that have a minimum of 10,000 monthly active users. Let’s start by looking at which revenue models were used at the beginning of 2020, before the impact of COVID-19 began.
The side-by-side donut charts above show which revenue models were used by app developers at the beginning of this year for both iOS and Android. We grouped models by Ads only, In-app Purchase (IAP) only or using a combination of Ads & IAP. At a high level, app publishers use IAP more on iOS, and Ads more on Android. 38% of apps use IAP on iOS versus 28% on Android. Likewise, the number of apps that use a combination of IAP and Ads is slightly higher on iOS at 23%, versus 21% on Android. When it comes to monetizing only with advertising, 52% of apps do so on Android versus just 39% on iOS.
We next took a snapshot of revenue models in July and compared that to the January baseline established in the charts above. By then, COVID-19 had deeply impacted advertising spending, by as much as 30% according to eMarketer. Additionally, Apple had made its announcement regarding use of the IDFA in June. While the impact of this announcement might not have been fully understood yet, the news was out.
The chart above shows the percentage point change in revenue models used within applications from January 2020 to July 2020. On the left we show iOS, and on the right we show Android. The total changes within a platform balance out to zero between ‘Ads Only’ versus the sum of ‘Ads & IAP’ and ‘IAP Only.’ For example, on iOS, the percentage points of apps using Ads Only declined by 3%, while the sum of Ads & IAP and IAP Only increased by 3%. On Android, ‘Ads Only’ decreased by 6% where the sum of apps using IAP increased 6% (+2% Ads & IAP and +4% IAP only). What this chart tells us is that app developers are shifting away from using only advertising for monetization on both iOS and Android. To date, we believe the main driver is due to the drop in ad spending as a result of COVID-19. While Apple’s announcement may lead to a larger, longer-term impact to ad revenue viability, the effects are not yet fully understood or realized. It also makes sense that Android is seeing a larger drop in apps that use advertising only to earn revenue since Android is known to be the platform where ad revenue tends to perform better. Google, with its roots in advertising, has invested more in enabling ad revenue generation over transactions such as in-app purchases. Now that we’ve looked at the revenue model shift by platform over time, let’s drill down to see changes at the app category level.
The above chart compares the change in app categories using an advertising only revenue model for monetization between January 2020 and July 2020. In gray, we show the percent of apps within a category using advertising only, and in blue we show the percent of apps using advertising only as of July 2020. And we ranked the categories in descending order based on using advertising only to generate revenue. At the top of the chart, you’ll see that News & Magazines, Education and Business app categories use advertising to generate revenue more than other app categories. By contrast, at the bottom of the chart, you’ll see the categories that rely least on advertising exclusively for revenue. From the bottom up, those are Games, Photo & Video and Social. Note that apps in these categories may still use advertising as a main way of monetizing but that revenue is blended with other models. This chart shows apps that use advertising only, and no other revenue models. For example, around 35% of game apps use advertising only. The rest of game apps use a blend of Ads & IAP, or IAP exclusively.
As app developers face the prospect of declining ad revenue, and in particular from changes brought about by iOS 14, we expect there to be a shift toward paid models. In this future state, developers with a dependency on ad revenue may prioritize their Android apps over iOS, for as long as Android supports advertising. It still remains to be seen whether or when Google might follow Apple to enforce a similar opt-in tracking policy. We’ll continue to monitor which business models are employed by app developers as iOS 14 rolls out and beyond. For the latest mobile insights and to share those insights with others, please consider also following us on Twitter and LinkedIn.