Updated: In-App Purchases To Overtake Sales From Paid Apps By 2013

Ingrid Lunden

The consumer draw of free apps over paid apps has been well-documented, and so has the rise of in-app payments as a route to making money from those free apps. New research out today predicts that in-app purchases will, in fact, become the most dominant way that app developers will make money in years ahead.

The report, from its IHS Screen Digest division, notes that in-app purchases accounted for about 39 percent of app revenues in 2011, and it predicts that in 2012 that proportion has gone up to 49 percent. By 2015 it will account for 64 percent of all revenues.

In terms of actual value, IHS says that in-app payments were worth $970 million in 2011, and will be worth $5.6 billion in 2015. (Sound too big to you? Please comment below.)

Update: More on why those revenues will be so big. Ian Fogg, head of mobile for IHS Screen Digest, pointed out to paidContent in an email that the $5.6-billion figure “is driven by the vast numbers of new smartphones that will ship over the next few years. As the number of smart devices is so great, the app market revenues will grow greatly, and hence so will the in-app revenues.” He also noted that many pay-to-download apps also feature in-app purchasing options; that will additionally contribute to the total size of in-app revenues. [original article continues]

This represents a big opportunity for app store operators like Apple (NSDQ:AAPL - News) and Google (NSDQ:GOOG - News), as well as mobile payments companies like Boku, Zong and PayPal to manage these payments.

And it also represents something of a success, too, considering how much opposition there was to in-app billing when it was first launched by Apple with requirements to pay it 30 percent of each transaction.

“Apple has nailed the mobile gaming and mobile app payment business,” noted Wilhelm Taht, marketing director for mobile social media service Flowd, earlier today. “It’s super frictionless.”

Strangely, the report does not take account of mobile advertising as a route to making money from an app. That could be because the only apps that can actually make any significant money from advertising are those that get the very highest amount of traffic—other long-tail apps that lack scale will face a challenge in trying to use advertising as their main business model.

Today, free apps already have significantly more traffic than paid apps: Nielsen last week noted that consumers mainly use a mixture of these, or a free-only selection of apps; those who only opt for paid apps account for low, single-figure percentages in different categories (around two-three percent). Ironically, paid apps today remain the main way that many of the most successful apps (such as games) are making money.

Free-to-download apps that come with in-app purchasing—so-called “freemium” apps—represented 45 percent of all top-grossing iPhone apps, and 31 percent of the highest-earning Android apps in the U.S.

IHS Screen Digest estimates that some 68 percent of all top-grossing apps had at least some form of “additional content or functionality” available through in-app purchase, which could mean features like extra levels in games, virtual currency to continue playing or extra editions of a publication.

Virtual currency, it says, is the most common form of in-app paid content available today, accounting for 63 percent of all revenues made from in-app purchases.

But while we hear a lot about newspapers and magazines, and increasingly video-based apps looking to in-app payments as a way of getting their users to buy mobile content, overall, this represents a very small part of revenues today: in the UK in Q3 2011, publications accounted for only five percent of in-app payment revenues (no figures for the U.S.), while video accounted for only two percent of in-app revenues in the U.S. and none in the UK.

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