How to purchase an iPhone app

Buy Where To in the App StoreWhen I first came across tap tap tap’s Where To sale offer, I was fascinated and scared as well. Fascinated because it would offer a jump start in the App Store; scared because of the risk involved. And puzzled about all the questions on how to do such a deal: What would be a reasonable price? Can such a transaction really work? — I’ll try to give some answers here.

Why buy an app?

Having strong developer roots, I admit that my first thought was: OK, this app really looks nice but why don’t you develop a similar one on your own? Shouldn’t be that hard. However, my experience at equinux, my former company, taught me that a) most development takes longer than anticipated and b) time-to-market is critical – especially in light of the xmas shopping season.

A second reason in this particular case: Where To is not just a bunch of Objective-C files. It’s a brand that’s well-established in the market and it comes with a really outstanding UI. So buying rather than making-yourself seemed like a good option.

How to value?

This is tough. There is not really any experience how to value an iPhone app. If you offer too much, you’ll never get your return on investment (ROI). If you offer too little, someone else gets the deal.

Sidenote 
As a historical analogy we all witnessed the same inexperience of how to price an iPhone app for the consumer. What is a fair price that still allows the makers a living? Unfortunately both questions are tied together since a future change in the consumer pricing would strongly affect the app’s ROI and valuation.

 
Furthermore, I’m not an investment shark whose daily business is valuing products and companies. So I had to come up with my own ways of evaluating Where To’s value. One traditional model for company valuations is the discounted cash flow (DCF) method where you basically sum up future earnings indefinitely. Future earnings are discounted with an interest rate that takes into account various factors such as the risk and the cost of capital. The problem is that this method heavily relies on reliable forecasts. We didn’t have such forecasts, mainly because the whole App Store market is so fast-paced and on the other hand still in its infancy. So it’s hard to predict even roughly where the whole thing’s heading.

I came up to choose the technique of using EBIT multiples. Of course, I didn’t buy a company but only a product. So I needed to calculate a virtual “product EBIT” first. Given the published numbers and estimated costs for development, marketing, support and various other operating costs, I estimated a yearly EBIT of $45,000-50,000.

My offer

We agreed on my initial offer of $70,000, where a portion of the whole transaction volume goes into services such as training and the development of new features.

This results in a multiple of 1.5 — pretty small at first sight compared to multiples of 52 for Skype and 27 for MySpace (see this summary). However, there are some important differences:

  • Where To is not (yet ;-) ) as big as Skype or MySpace
  • The acquisition is just about a product and no staff
  • as stated before the iPhone market is still immature and future sales unreliable
  • the whole thing lives off the marketing effort which is not part of the acquisition

So if everything works well, the investment will pay off in 18 months from now. To reassure the valuation, I also calculated the opportunity costs to develop a similar app by myself. The interesting thing about this calculation is that you associate the cost of time-to-market with a real number (basically, I summed the development costs and the loss of income and deducted the operational costs for support). This calculation revealed a higher value (~ $110k) than the multiple approach, so I was on the safe side.

Timing

I knew it was critical to relaunch as fast as possible to participate in the christmas shopping season. I heard rumours of anticipated 5-times higher sales volumes as usual. (I’m curious if some other devs could acknowledge this from the preliminary sales numbers – let me know in the comments.)

Still, all the contractual work took some time (especially because our German contract needed to be translated for John). Then we relied on Apple to manage the transfer of Where To into my account. Since this is a completely manual process requiring synchronisation with people from different departments, Apple was unable to transfer the app so far. Also it is not possible to change the company name once an app is live in the App Store (which is weird since the company name can be defined on creation time for each app individually).

The solution was to relaunch Where To under the old account and wait for the transfer hopefully in January. This is the reason why Where To appears in the App Store under the company Tap Tap Tap, the seller Sophia Teutschler (the account name) and the copyright FutureTap (the only thing changeable).

Risks

The whole transaction is not without risk. Will I ever get my return on investment? How long will it take? Numerous iPhone developers complained about shortcomings of the App Store that affect sales of quality software (see for example: Trouble in the (99-cent) App Store and How to Price Your iPhone App out of Existence). Where To is no exception to this problem.

Future plans

Despite the risks I believe in a bright future for Where To. We have some exciting new features in the pipeline. Sophia thankfully commited to stay on board for some time to implement some of them. Plus we plan to extend our internationalisation efforts. German was just the beginning — we plan to add French and Italian in the first step. (Française(s) and Azzurri, contact us at localisation@futuretap.com if you’re willing to localize Where To in your language.) So stay tuned via our news feed or follow us on Twitter… there’s some cool new stuff to come.

Hopefully, this post was useful for some of you. If you’d like to hear more about how the whole transaction went for me, I’m willing to share some details with you. Let me know your thoughts in the comments. And if you think this was useful, please digg it to let others know about it.

Update: We’ve published the 2009 sales numbers.

23 Comments

  • Justin Davey

    wrote on December 16, 2008 at 10:01pm

    It’s been really interesting to watch the process of Where To?’s acquisition. I think most people really appreciate the transparency. All the best to all parties involved!

  • Evan

    wrote on December 16, 2008 at 10:15pm

    Wow, I’m impressed with all the transparency – on your part and Tap Tap Tap. As a non-developer, it’s nice to read about what happens behind the scenes – especially in such a young iPhone App market. I have already purchased Where To but I’ll keep my eye on you and I look forward to supporting your future efforts. Congrats!

  • @PolarBearFarm via Twitter

    wrote on December 17, 2008 at 4:14am

    Interesting Tap Tap Tap’s "Where To?" app sells for $70k http://tinyurl.com/6gzpux

  • Luc Vandal

    wrote on December 17, 2008 at 6:28pm

    Ortwin,

    I was able to change the seller name from my personal name to my company name. Just keep asking Apple. Email me (luc [at] edovia.com) if you need help.

  • Stephen Eyer

    wrote on December 17, 2008 at 11:55pm

    Congratulations on the purchase Ortwin! It’s been interesting following the evolution of Where To? on Tap Tap Tap. I can honestly say that I’ve learned more about iPhone development from John’s blog than just about anything else so far.

    I think you’ll be glad that you purchased an app with some brand recognition. We released our first app called GiftCards this last month and it’s been a struggle to get noticed even though our app is associated with top brands like Macy’s, REI, Barnes&Noble, etc., and we feel (and we’re a bit biased of course) that it’s a quality product. With 10K+ apps out there, owning an app with brand recognition will help you.

    We’re still learning the ropes and look forward to hearing whatever works you. Good luck.

  • @jmtrachy via Twitter

    wrote on December 18, 2008 at 3:07pm

    iPhone app bought for 70K – http://tinyurl.com/6gzpux – have there been many other sales yet?

  • Michael Voltz

    wrote on December 19, 2008 at 1:01am

    Ortwin, congrats to your new project and company.
    Wish you all the best!

  • MartinH

    wrote on December 19, 2008 at 7:03am

    Hi Ortwin, congratulations to your new project. I was following the tap tap tap blog and was surprised that it was you who bought Where To?! I wish you all the best and I hope everything works out for you.

  • Hansi

    wrote on December 19, 2008 at 10:58am

    Hello Ortwin,

    great too see you are still rocking the IT World :) All the best also from me.

    Cheers

  • Vic Berggren

    wrote on December 19, 2008 at 1:44pm

    Congrats, I love this app… been using it for a few months now and looking forward to future releases.

  • @grigs via Twitter

    wrote on December 19, 2008 at 4:33pm

    "How to purchase an iPhone app" Good breakdown on finances, thinking behind buying Where To? app for $70k: http://is.gd/cwwb

  • @ddcp via Twitter

    wrote on December 19, 2008 at 10:34pm

    how sell and buy an iphone app for 70K? http://tinyurl.com/5lyb3m or http://tinyurl.com/6gzpux

  • john smith

    wrote on December 22, 2008 at 4:41am

    think you have seen the sales figures for the past few days… any views on the 70k being a good investment or not? is the market as good as it was before? are you likely to make the 70k back in a year?

  • Ortwin Gentz

    wrote on December 22, 2008 at 2:12pm

    @John, so far it’s too early to tell since Where To is available for only less than one week. At least, it’s (slowly) climbing up the charts. Stay tuned here, I’ll post some stats in the near future.

  • Mark

    wrote on December 24, 2008 at 11:02pm

    Great to see it back. As some of the reviews in the App Store seem to confirm, it would be worth considering a British localisation alongside the others you’re planning, since we have plenty of alternate terminology and are at pains to understand each other’s naming of things at times!

  • Ortwin Gentz

    wrote on December 29, 2008 at 8:18pm

    @Mark, thanks for pointing this out. We do see major benefits of a british localisation and plan to do that for one of the next releases.
    Any volunteers to help with a british localisation? Since only some specific terms need to be changed, it should be much less work than any other language. Let me know at localisation@futuretap.com.

  • johnny

    wrote on December 30, 2008 at 5:52am

    WfBVW3 Thanks for good post

  • Aslam Nathoo

    wrote on December 30, 2008 at 7:39pm

    Ortwin,

    Thank you for continuing John’s tradition of transparency. Because of that, your blog will now be added to my Top Favourites list as John’s was.

    I am not involved in the iPhone software market at all (other than as a consumer). However, I am a Sales and Biz Dev Director for a Managed Service Provider that sells to Mid-Market Businesses which means I face similar challenges as you, albeit in a different space of the market. As such, the information on valuations, sales volumes and how sales and marketing affects those in your market space is very interesting to me. As well the transparency you guys operate with is also very interesting to me. It is not something that has been common (up until now with you and John) but I often times wish it were. I think we could learn a lot more if we shared more and I believe that the cost:benefit is definitely positive.

    Anyways, let me wish you good luck and encourage you to maintain this level of transparency.

    If I can help in any way, please let me know!

    Sincerely,
    Aslam

  • @the_holger via Twitter

    wrote on December 31, 2008 at 7:35pm

    Extremely interesting posting about the sale/purchase of an iPhone app http://tinyurl.com/6gzpux

  • Joel Mueller

    wrote on January 2, 2009 at 6:40pm

    Ortwin,
    Thanks for the post. Writing about how you choose your valuation was interesting.
    -j
    http://www.macupdate.com

  • Ricardo

    wrote on January 2, 2009 at 11:13pm

    Ortwin,

    thanks for sharing your personal business and giving us a glimpse of a new market that i believe in to have a great potential.

    I’ll buy a Where To as soon as i send this comment. Please, let me know if you need any volunteers to help with a Spanish localization.

    Thanks again,
    Ricardo.

  • fulhamelfrieda1963

    wrote on January 4, 2009 at 1:51am

    Thanks for all you ideas! I sure will be back to visit your site again so i can learn more.

  • Joeman67

    wrote on January 5, 2009 at 4:55pm

    This was a wonderful documentation of your plan> it shows that you bring ideas to life.

Comments are closed.