App Annie: 2017 Mobile App Economy Predictions

2016 is expected to be a big year for the app economy. By the end of December, we expect mobile app store spending to reach $52 billion, and mobile in-app advertising spending to reach $77 billion. Mobile is now a dominant platform, and companies across all industries are relying on mobile channels to increase existing revenue streams and open up new ones.

This year also saw some major shifts in the app economy, many of which we had predicted in our 2016 Top Apps Predictions report; in fact, looking back at the report, we can see that many of our predictions eventually came true. For example, there was a wave of consolidation in business apps and O2O apps in Asia, with the most notable headline being Didi’s acquisition of Uber China to end the subsidy race. We also predicted that Niantic’s Pokémon GO would attract more attention to augmented reality (AR). Of course, we also had some regrets - that is, there were also some important trends that we failed to identify. The most obvious one is that the actual download volume of iPad productivity apps has dropped year-on-year with the release of iPad Pro.

2017 will be another milestone for the app ecosystem. In addition to major platform innovations and the continued growth of mobile-first businesses, more companies in traditional industries are realizing the importance of investing in mobile.

App Annie 2017 Predictions

The State of the App Economy in 2017: Growth Across the Board

We forecast that total mobile app spending (including app store spending and advertising) will reach $166 billion in 2017.

• Total mobile app store spending will reach $65 billion. Gaming apps will continue to dominate this revenue, but dating and streaming app subscription revenue will grow rapidly.
• Total in-app advertising spending will reach $101 billion. Social media, video platforms and games remain the main sources of this revenue. Among the above categories, mobile video advertising has the fastest revenue growth. In addition, brand advertising is also an important source of revenue growth, and its share in total mobile in-app advertising spending will rise to 12.5%.
• In the first three quarters of 2016, the usage time of shopping apps on the global (excluding China) Android mobile phone platform increased by 52% year-on-year, mainly due to the booming mobile commerce. In 2017, due to the impact of mobile applications on the in-store shopping experience, physical retailers are expected to usher in a wave of strong growth trends.
• Total app usage for other brick-and-mortar businesses, particularly banks and fast-food restaurants, will also grow significantly in 2017 as companies begin to leverage mobile platforms in their business operations.

A wave of business mergers sweeps the West

In 2017, we expect to see a surge in business app consolidation in the Western world, as we have seen in Asia this year. Ride-sharing and delivery startups raised a lot of money from venture capital during the innovation and discovery phase to support business development and user acquisition efforts. Discounted pricing is the main way to attract new users, but it also makes unit economics unsustainable. In 2017, as the market matures, we expect consolidation to normalize competition and drive a few dominant companies to eventually IPO.

Short videos are all the rage, and TV faces fierce competition

Over the past few years, Netflix and paid online video services have been widely seen as disruptors of traditional pay TV. However, Netflix positions itself as a single network platform, which means it competes with individual TV stations rather than taking on pay TV across the board. Netflix’s investment in original content reinforces this value proposition. This strategy will also continue to grow subscribers and user engagement as key consumption channels change. However, paid online video services will never be able to replace the existing TV operating model on their own due to limited inventory.

With the growth of short-form and live video on platforms such as YouTube , Facebook , and later Snapchat , we believe that this balance will change in the next few years. In October 2016, the time spent on YouTube alone by Android users in the United States increased by nearly 45%. This number is expected to continue to increase in 2017 as media companies increase their investment in exclusive content. Over time, these companies will truly disrupt the rules, and there is not much time left for terrestrial TV, especially among young people, who are already showing a growing trend of "cord-cutters" and "TV-less people".

Time spent on YouTube is increasing rapidly, an order of magnitude higher than the major paid video apps. As Snapchat focuses more on short-form video services, we expect Snapchat usage time to surpass Netflix mobile app next year.

Chatbots have limited impact, but B2C messaging apps will continue to grow

In 2016, much of the discussion around chatbots was based on the idea of ​​“conversational commerce.” The opposing viewpoints focused on the existence of the on-demand economy. Food delivery and ride-sharing apps exist to reduce friction—replacing conversation with a graphical user interface (GUI). Messaging apps, in contrast, exist to make existing communication channels more efficient, for example, between customers and customer service. With messaging apps like Facebook Messenger and WhatsApp being integrated into Facebook Pages, Facebook is likely to become a leader in this space. Chatbots can have some impact, but the level of artificial intelligence technology in 2017 is not sophisticated enough to provide high-level customer service. Therefore, chatbots are still limited to sending notifications and directing users to manual service processes.

Voice search continues to grow, but struggles to go mainstream

Google has launched Google Assistant, clearly confident in the future of voice-assisted technology. While we believe that Google Assistant can increase the number of voice search queries on mobile, there is still a lack of momentum for large-scale changes in app interaction patterns. In August 2016, we estimated that voice interactions on Android phones accounted for approximately 1.2% of total Android phone usage. Even with significant growth in voice search, we expect voice interactions to still account for less than 2% of total smartphone usage. This is because existing touch-based interaction capabilities are already relatively mature and are unlikely to change significantly at this time. However, on-screen suggestions (derived from the same underlying AI technology) will still receive more attention.

Instant Apps and Distributed Discovery Together Change App Navigation

Instant Apps, a way to access Android apps without downloading them, was one of the biggest announcements at this year’s Google I/O developer conference. In 2017, app developers will gradually start to adopt this strategy, starting with less-used apps, especially in the travel, food delivery, and retail industries. Next will be apps that don’t require a large share of users’ time, such as ride-sharing apps. This phenomenon will become more and more obvious due to a trend we define as “distributed discovery.” For example, apps can be discovered through all of Google’s products, rather than relying on search as a single channel for discovery in the past. Google Maps has become a major source of app discovery with deep links to ride-sharing, hotel reservations, and food delivery services. In addition, Google Nearby can send app tips when users are near local businesses or retail stores. Finally, Google search, Google Now, and Google Assistant recommendations all provide app discovery capabilities to some extent. A similar trend has emerged in the Chinese market, namely WeChat “mini programs.”

Pokémon GO is not afraid of clones, Niantic expands its game portfolio

Every successful mobile game publisher has had to contend with numerous clones over the past few years. Niantic’s games, especially Pokémon GO, are an exception. The location platform that underlies the game is based on valuable technology (based on Google Maps and the Places API) and the location information submitted by millions of users of the previous game Ingress . As a result, Niantic has created the first game business model that is structurally resistant to cloning. We believe that, at least in 2017, new location-based augmented reality (AR) games will only come from Niantic and its partnered IP owners. User engagement for Pokémon GO will gradually normalize, but will still fluctuate greatly during game activity cycles and major feature updates. We also predict that more retailers will sign up with Niantic for AR-based sponsored location programs to drive store traffic.

AR elements based on smartphone platforms penetrate into applications

Soon after the release of Pokémon GO , we pointed out that it was a nice addition to the app ecosystem, but had no real impact on the competitive landscape. AR gaming is not consumer-focused and takes up time away from smartphone screens. Different companies across industries are beginning to use this trend to expand customer relationships, from Sears (retail) and Swissquote (banking) to TBS’s Catch Coco (media and entertainment). In 2017, we predict that more companies will experiment with smartphone AR features, especially traditional businesses that have previously relied on physical stores.

Pokémon GO 's astonishing growth rate is a bright spot in the app economy, but it has little impact on other apps and games.

Virtual reality (VR) technology prefers mobile platforms

Mobile VR accessories (such as Gear VR and Google's Daydream Viewer) will significantly outpace PC-based VR devices such as HTC Vive and Oculus Rift in adoption. This is due to the greatly reduced cost of ownership and the increasing use of 360-degree videos for news, sports, entertainment, and even education - all of which are driving the rapid growth of virtual reality devices. By the end of 2017, we expect the number of mobile VR users to be roughly the same as the number of users who used home voice assistants at the end of 2016.

New platform: Voice assistant products are still niche, and the focus of wearable devices has shifted to the field of glasses

Home Voice Assistant:

Amazon Echo became a hot topic in this market in 2016, attracting a large number of early adopters due to its futuristic design, and its supporting application downloads reached approximately 3.5 million times in November 2016. With the expansion of the product's "skills" and the recent release of Google Home, the number of devices is expected to increase. However, voice assistants are still a niche product in 2017, and the lack of other related home devices has slowed the pace of public adoption of voice assistant technology.

The companion app Amazon Alexa has been downloaded about 3.5 million times from the iOS and Google Play stores combined. Most of the downloads came from the United States.

Wearable devices:

Consumer and developer interest in smartwatches began to decline several years ago. As a result, we believe OEMs and platform owners will shift their investments toward smartglasses, ranging from Snap Spectacles with basic camera capabilities to full-fledged AR platforms such as Microsoft HoloLens. However, 2017 is unlikely to see a landmark commercial success as the underlying technology is not yet mature.