Garrett W. McIntyre with Phil MacDonald of 24/7 Wall St claims in it’s research that piracy is rampant on App Store Apps due to the lack of security.

In their article of January 13 they say:

Apple (NASDAQ:AAPL) and the companies that sell software for the iPhone and iPod touch at the App Store have lost over $450 million to piracy since the store opened in July 2008 according to an analysis by 24/7 Wall St. There have been over 3 billion applications downloaded since the App program began.  Bernstein analyst, Toni Sacconaghi, estimated that between 13% and 21% of those downloads are from paid applications. According to this analysis, the average price of an application purchased at the App Store is $3.  Sacconaghi estimated that Apple’s revenue from the App Store is between $60 million and $110 million per quarter.  That amount has certainly increased since this research report was published because of the rapid growth of the number of applications. 

However, behind all this success lies an insidious force that has plagued the music, software, and movie industry for decades.  Developers of iPhone applications have reported alarming piracy rates for their software, and the ease with which users may obtain pirated versions of paid applications for free is only increasing.  The total number of applications available at the store, including those which are free and those which require payment, is in excess of 100,000.

The argument goes that many phones have been “jailbroken” to allow the installation of any app and the removal of any Apple restrictions.

While it is difficult to get a firm grasp on exact piracy rates, some developers have put features in their software that prompts it to “phone home” when the phone has been cracked.  Developer testimonials put the figure much higher than many analyst would expect.  Developers Neptune Interactive Inc and Smells Like Donkey Inc have reported piracy rates has high as 90% for their game $1.99 Tap-Fu, and claim that it was available in a pirated version within 40 minutes of its release on the App Store.  Web Scout Inc. reports a 75% piracy rate for its $0.99 iCombat game.  The developer of the $4.99 art program, Layers, reports a piracy rate of 75%, and Fish Labs reports 95% for its $7 Rally Master Pro 3D. Piracy rates almost certainly increase with the cost of an application.  TomTom’s US & Canada GPS product for the iPhone, which retails for $79.99, ranks second in handheld application downloads on piratebay.com, a file-sharing torrent.  The top 100 downloads listed at piratebay.com is littered with expensive TomTom and Garmin GPS products.  A conservative estimate of the average piracy rate is that for every paid application developed and sold at the App Store 3 more are pirated.

So in summary, with some basic assumptions the authors have come up with a nasty close to half billion in losses, mostly on the side of the software developers!

There have been over 3 billion downloads since the inception of the App Store.  Assuming the proportion of those that are paid apps falls in the middle of the Bernstein estimate, 17% or 510 million of these were paid applications.  Based on our review of current information, paid applications have a piracy rate of around 75%.  That supports the figure that for every paid download, there have been 3 pirated downloads.  That puts the number of pirate downloads at 1.53 billion.  If the average price of a paid application is $3, that is $4.59 billion dollars in losses split between Apple and the application developers.  That is, of course, assuming that all of those pirates would have made purchases had the application not been available to them for free.  This is almost certainly not the case.  A fair estimate of the proportion of people who would have used the App Store if they did not use pirated applications is about 10%. This estimate yields about $459 million in lost revenue for Apple and application developers.

Apple, which takes 30% of  the revenue generated by downloads at the App Store has lost about $140 million from piracy. If Apple’s revenue was between $500 million and $700 million from the App Store since its launch, that is a significant loss.  Despite this fact, Apple has been mute on the subject and done nothing to prevent acts of piracy, which is not unlike the stance it has taken on illegal music downloads to iPods.  Even though piracy has caused a big financial loss for Apple, the income from the App Store is dwarfed by sales of iPhones and iPod touches.  As big a problem as $150 million is for Apple, the $310 million cost of piracy to developers really makes it their problem. Apple intends to ignore the piracy of applications and will focus on the tens of billions of dollars that it makes on its hardware.

Much of this could be avoided if Apple implemented some form of stronger security but it looks like they are headed in the opposite direction!

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