App Store economics
Jan 10, 2011
3 minute read

If you follow me on Twitter, you may have noticed last week that I have an app in the new Mac App Store. It’s called Gmail Dock, you can find more info about it here and here, and you can buy it here.

I am an economist, not a programmer, so what am I doing with an app in the App Store? This question got me thinking about the economics of the App Store, and I think I have a satisfactory answer.

As with most things, it begins with Ronald Coase (who turned 100 last month, huzzah!). What are stores? They are mechanisms for reducing transaction costs. Notice that I said “reducing.” Store owners are middlemen, and they take a cut of the proceeds for their trouble. Apple takes 30% of gross sales. Nevertheless, the value of their brokering services exceeds their cut of gross sales, so on net they reduce transaction costs.

When transaction costs are lower, we know from The Nature of the Firm that firms get smaller. They outsource more. More people start firms to which other firms outsource, so there are more entrepreneurs. Most importantly, patterns of specialization change. Instead of doing something for myself, I will be more likely to pay someone else to do it for me.

I wonder what The Nature of the Firm would have said if it had been written today, when so many businesses deal in products, such as software, that are characterized by high fixed costs and low marginal costs. The specialization story changes a little. My own adventures with the App Store are instructive.

I wrote Gmail Dock entirely for my own use almost a year ago. I was tired of desktop email clients like Mac OS X’s Mail that were slow, bloated, and not as useful as the web-based Gmail. So I wrote something that attempted to bridge the gap between desktop email and webmail. I found it useful. But I didn’t try to sell it online because of the difficulty of marketing, distributing, and collecting payment. Giving it away would have made me strictly worse off because of support requests.

The App Store came along, and all of a sudden it was cost-effective to sell my software. I went into business. But the thing that is different from the Coasian story is that my pattern of specialization hasn’t actually changed. I’m still producing the same things that I produced before the store came into the picture. Lower transaction costs plus low marginal costs mean that people’s hobbies, creative outlets, and tinkering will increasingly become profitable side businesses. Who knows, maybe some day I’ll get paid to blog.

Those of us who do not spend all day in front of a TV create real value in our spare time. Lower transaction costs enable us to capture some of that surplus. To me, that is one of the important stories of how the App Store, the Internet, and the world of low marginal cost is changing society.