The iPhone is 15 years old. With the ecosystem now worth $100BN, app M&A is heating up.
Overview of the App Industry
It’s been 15 years since the iPhone was released and the impact of mobile on our lives is immense. It’s a big industry. They say content is king and this is particularly true in the app universe. We consume more content on mobile than ever before, with people dedicating a third of their waking time to apps.
According to a new report from Data.ai, we’re on track from a record quarter. We collectively installed 37 billion apps and consumer spend is on target for a record $33 Billion for Q2 2022. It’s the iPhone (or iOS platform) that still reigns supreme. Despite fewer downloads, iOS represented nearly $1.80 for every $1 spent on Android.
As you would expect, big tech names and brands dominate. According to SensorTower.com, 80% of all new installs are from just 1% of app publishers. But, for independent and smaller publishers don’t let the stats diminish your excitement, there’s still material upside with apps in the Top 200 earning on average $82,500 daily, and those in the Top 800, earning on average $3500 daily or $1.27M annually.
A look at Flippa’s cohort, the 1230 app publishers who utilized our intelligent valuations engine to value an app, revealed that the average app publisher earned $243,107 annually. As a category and business model, it’s a good money maker for digital entrepreneurs.
With such a burgeoning industry comes a rise in M&A. There’s been a rise in acquisition funds, aggregators and roll-ups specifically looking for app deals. At Flippa, we think it might be the next land grab. In the first half ‘22, Flippa has seen 54 companies register acquisition intent for apps, with a collective acquisition budget in excess of $330MM.
In other words it pays to be in apps. Not only can you earn a good income, you can be confident of building toward an exit.
In this article, we take a look at the app ecosystem, explore the most popular categories, talk through app valuations and reveal what buyers are looking for.
Ecosystem Insights & The Most Popular Categories
There are two ecosystems at play: Android and iOS. Android was first launched in 2008 by Google, and the first version of iOS, owned by Apple, was launched in 2007.
According to key mobile app statistics from buildfire, there are 2.87 million apps available for download on the Google Play Store and 1.96 million apps available for download in the Apple Store.
And, the latest report from Data.ai states that the industry has kept pace with the ‘lockdown-fuelled boom’. The report (available for download here) documents the latest in growth trends but also lifts the lid on consumer habits. As you would expect, games, entertainment and social dominate spend but if you’re looking to invest in growth areas, “the biggest quarter-over-quarter gains were in Comics, Books & Reference and Dating with increases of 46%, 37% and 35% respectively”.
As mentioned, gaming is still the dominant category and we expect this to continue. With 5G leading to higher resolution and faster performance, and the next 4 billion consumers coming online, expect there to be massive gaming adoption.
This is reflected in acquisitions also. When looking at apps sold on Flippa, nearly 70% of all apps sold have been in the gaming space.
The health and fitness industry also experienced a massive shift during the past few years as the world migrated to digital platforms for everything, including the daily yoga class. Two years later though, health and fitness apps are still capitalizing. According to Vantage Market Fitness, the Global Fitness App market is valued at USD 5.1 Billion in 2021 and is projected to attain a value of USD 15.2 Billion by 2028 at a CAGR of 17.6% during the forecast period 2022-28.
Based on the top fitness apps in the market, revenue increased by 84% in 2020.
What does an app publisher look like?
Flippa recently surveyed over 150 app publishers active on the Flippa platform. Here’s what they look like:
They own and operate multiple apps:
- 33% operate Android apps
- 41% operate iOS apps
- 26% operate both iOS and Android apps
The often operate more than one app:
- 33% operate just one app
- 25% operate between 2-5 apps
- 16% operate between 6-10 apps
- 25% operate 10+ apps
In app advertising is the most popular way to make money:
- 54% earn revenue from in app advertising
- 29% earn revenue from in app purchases
- 17% earn revenue as paid apps
As mentioned, it’s the diversity that makes this ecosystem so unique. At last count, there were 88 apps for sale on Flippa, from VPN apps, unique video editing tools and games. The apps currently range in value from just $5,000 to $1.5M and we routinely see apps priced up to $35M and beyond. Only recently, a Singapore based $35MM app portfolio was purchased by an international app publisher. The portfolio was generating $12MM of revenue and growing at ~30% annually with the purchase price including upside payments.
For a look at the latest apps for sale click here. You can create an alert for all apps using the ‘Create Alert’ function.
What buyers are looking for in an app
With the rise of app usage, the M&A market for apps is hotter than ever, from the small to the mega. This trend can be illustrated, for example, by the acquisition of the popular online puzzle game Wordle. It was bought by the New York Times in the low seven figures. Growth through acquisition is a well trodden path but even more so in digital and now with apps. It’s all a matter of increasing overall digital subscriptions and intriguingly the New York Times Games department is a high performing unit within NYT digital.
Similar trends can be seen on Flippa’s marketplace, as apps capitalize on these macro trends. Recent examples include Daily Word Search Puzzle, sold for $140,000, All Stays, a popular travel app, which sold for $4MM, and the aforementioned $35MM portfolio which provided small business owners with key utilities including logo design.
In main street deals (<500k to 2M annual revenue) and the lower middle market (2M to 50M annual revenue) we expect app valuations to increase. This is despite tech valuations falling dramatically in the first half of 2022.
Flippa CEO, Blake Hutchison, says the M&A market is responding to opportunity. “Mobile apps are expected to generate nearly $100BN in revenue by 2023, so it’s no wonder that consolidators and aggregators are sniffing out deals. Multiples are still low as it’s an under-appreciated asset type but competition is increasing – it’s going to get hot.”
App valuations depend on multiple factors. Buyers will consider revenue and underlying profit, daily active usage, category and growth. The below valuations are indicative but right now, growing apps with consistent daily active usage, will trade for the following multiples:
- Sub >500,000 Annual Revenue: 1.2 – 1.8x Revenue Multiple
- $500,000 to $2MM Annual Revenue: 1.8x – 2.5x Revenue Multiple
- $2MM+: Up to 4x Revenue Multiple
For an accurate valuation, check out Flippa’s Online Business and App Valuations tool which takes into consideration historical sales data and existing buyer intent data.
What makes an app acquirable?
Financial Performance
When purchasing an app or a portfolio of apps, buyers are looking for financial health and profitability. An app with a consistent, steady income indicates that it is ahead of the competition and has surpassed the “difficult” part of building an app from the ground up.
Buyers generally stay away from newly-launched apps, as most apps gain their peak downloads in the beginning. Buyers need to understand the long term viability of the app. After all, studies show that an average app’s usage retention drops to just 9% after 3 months, even if it still remains installed on a device.
“The fundamentals are the same in app acquisitions as they are in other deal types,” says Blake. “Buyers are looking for proven financial performance typically assessing growth and looking for a CAGR in excess of 15%. Buyers will also look to understand future opportunities by assessing core operations and marketability of the app.”
Critically for apps it is also about Daily Active Users (DAU’s). There’s little value in an app with millions of downloads but very little repeat usage.
In a highly competitive industry, buyers are looking for full financial data in order to move quickly. Quick and complete responses to due diligence requests are essential, as any delays in response can impact deal confidence, leading the buyer to move on to other hot prospects.“If a publisher wants to sell an app, they need to be organized and ready to move,’’ says Tom Kennedy, Co-founder of Loyal Foundry, an acquirer and publisher in the mobile apps industry. “If apps are listed at 10 times revenue for example, we won’t even engage as it’s too hard to find the right price that works for both parties.”
Reviews and Reputation Management
Buyers will pay a premium for an app with an outstanding review history. Critically though, a prospective buyer will also look at the recency of the reviews.
Build a plan to collect reviews, celebrate your best reviews and take on any feedback where there’s negativity around the app or requests for increased functionality.
Uniqueness
It’s a saturated industry. You are either a market leader in a highly competitive landscape or you have developed something unique.
Although quite a small app, one of the best examples we have seen here at Flippa, is Untitled. It’s a screenwriting app developed by a screenwriter. It reached the Top 10 in the paid productivity section of the app store and given its utility – screenwriting – it had an awesome 11m 10s average session duration. It sold quickly!
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No doubt you agree. It’s a thriving industry. With mobile apps set to represent $100BN in revenue, we expect that the M&A market will heat up. Our prediction is that in 2023 there will be around $150MM in app acquisitions on Flippa. Will you be one of them?Get a valuation for your app by visiting our app business valuation tool here.
