iTunes app store shakeout

iamrichThe biggest news about the iPhone 3G release this past July 11, as far as the broader mobile industry is concerned, was easily the launch of the iTunes App Store. The effect this is poised to have on third-party mobile application development—outside of the iPhone and iTunes ecosystem—could be tremendous.

Of course, downloading apps to the phone has been around for years; but the familiarity of the experience on the iPhone will spur handset makers, carriers, and developers to work together to create a more seamless experience on other handsets. Out of this, we’re also likely to see a couple of other marketplaces begin to challenge iTunes: probably standing a better chance than competitive music portals, which by and large have languished or stumbled over business models as iTunes has quietly become the biggest music retailer in the country.

But before any of this happens, there’s still a shakeout coming in the App Store. In fact, it’s already starting to happen—exemplified by the “I Am Rich” app written and launched by Armin Heinrich, retailing for a massive $999.99. Well, to say “written” isn’t really accurate; there’s nothing there. The app doesn’t do anything. Rather, the red icon on your iPhone or iPod touch is there to always remind you (and others when you show it to them) that you were able to afford this.

Naturally, Apple has since taken this down. (And it’s not clear how it managed to squeeze through the vetting process; especially given its conspicuous price point). Notwithstanding, we’re set to see a number of other 1,500+ apps fall by the wayside: very good and functional ones, at that.

Why? Because of what the folks over at TechCrunch are calling the “iPhone network effect”—meaning if you don’t have a strong offline and Web presence outside of the iTunes environment, you’re at a competitive disadvantage versus those brands who are repurposing their functionality and marking their App Store territory.

As Michael Arrington writes, “Without a compelling existing brand or a really innovative product with protectable intellectual property (some of the games fall into this category), the only chance these apps have for long term success is to start thinking about ways to have users interact with each other in order to build network value.”

This is an insightful and important observation. Even if an app outperforms on key functionality, if users aren’t familiar with the brand they’re much more likely to go with the known entity. Plus there are usually a number of free alternatives that can do a comparable job. So the key is to differentiate on features that really take advantage of the connectivity of the iPhone.

Arrington believes the first big breakout will be a multiplayer game that leverages Xbox Live “Halo 3? behavior—where you’re teaming with and against users anywhere with a connection and an account.

Certainly, this type of app has a great shot at it (so to speak). Another is one that allows business users to collaborate more easily on the go, or access real-time information that’s relevant to their needs. And there are likely ad-supported models lurking in these kinds of functional applications; particularly those that begin to gain strong traction.

So, once again, keep your eye—and some early marketing dollars—focused on mobile application development. This is just the start of what’s going to become a game-changing space. Perhaps started with a game itself…