(SOUNDBITE OF ARCHIVED RECORDING)
TIM COOK: Most importantly, iPhone provides an integrated customer experience from iOS 4 to iTunes, to the incredible app store with over 300,000 apps, all designed to seamlessly work together.
(SOUNDBITE OF PHANTOGRAM SONG, "MAKE A FIST")
ALEX BLUMBERG, HOST:
Hello, and welcome to PLANET MONEY. I'm Alex Blumberg.
JACOB GOLDSTEIN, HOST:
And I'm Jacob Goldstein. Today's Tuesday, January 31. And that was Apple CEO Tim Cook you heard at the top.
BLUMBERG: Today on the program - how a small side hobby turns into a one-man mini-empire and also a parable for how the Apple App Store is revolutionizing the Internet economy.
GOLDSTEIN: This revolution, it's allowing people to do on the Internet something that mankind has been doing in the real world for thousands of years.
BLUMBERG: That's all coming up. But first - the indicator, with you, Jacob Goldstein.
GOLDSTEIN: Today's PLANET MONEY indicator - 3.7. U.S. home prices fell by 3.7 percent in the year through November. That's according to the latest Case-Shiller numbers, which came out today.
BLUMBERG: Fell by 3.7 percent.
GOLDSTEIN: (Laughter) Down.
BLUMBERG: Down - this is, like, a retro number. This is straight out of 2009. And it's really striking now because, like, for a while now - for the last couple of months, you've been giving basically good indicators, indicators of improvement. The economy's growing, jobless numbers are going down, and more people are getting hired. What's going on?
GOLDSTEIN: Well, I mean, it does seem like there is this sort of broad story that the economy - yes, it's still bad, but it's slowly getting better except for housing.
BLUMBERG: A big except.
GOLDSTEIN: It's a huge except. Let - and let me just read a line here from today's Case-Shiller report. It goes, quote, "the trend is down, and there are few, if any, signs in the numbers that a turning point is close at hand."
BLUMBERG: Wow. They just come out and say what they want, right?
GOLDSTEIN: 2009, right? This is bad. And, you know, in simple terms, there are still millions of people who are underwater on their mortgages, who owe more than their home is worth and who cannot afford to make their mortgage payments. And so we're almost certainly going to see millions more foreclosures before the housing market gets back to normal.
BLUMBERG: Man, it is taking a long time, isn't it?
GOLDSTEIN: Yeah, and it's going to take a lot longer.
BLUMBERG: All right. Well, after that pretty bleak indicator, let's go on to a happier subject, today's podcast - success on the Internet. One word for you - Instapaper.
GOLDSTEIN: Instapaper - it's an app. You can buy it in the app store. Full disclosure - I have it on my phone. I like it. I use it basically every day.
BLUMBERG: And to explain how it works - it'll help to understand the podcast if you know how it works - basically, it just allows you to save things that you're reading on the Internet - save them for later. So, for example, I'm just going to go to a website here. All right, here I am. I'm on espn.com, their blog "TrueHoop." All right, and let's see. There's an article about Blake Griffin. All right.
GOLDSTEIN: This is a basketball player, I presume?
BLUMBERG: He's an exciting, young basketball player. He's in all the highlight films. But I don't have time to read it right now. I'm at work.
GOLDSTEIN: And so here's the way Instapaper works. When you sign up for Instapaper, you add this special thing to your browser. It says read later, right? So you come onto this article about this basketball player. You don't have time to read it now. So you use your read later bookmark.
BLUMBERG: I'm going to click it right now. Click read later - click. And then something magic happens. I now - later, I open up my iPhone. Here, I'm going to open it up right now, get it out of my pocket. OK, I click my Instapaper app. And there - right there - is the article that I was reading at work, the article on Blake Griffin. That's Instapaper.
GOLDSTEIN: Super simple in a way, right? It's not doing that much. It's just sort of saving this article to your phone so you can read it later. But the story of how Instapaper became a little business is really interesting.
BLUMBERG: Yeah, and the guy who invented Instapaper is named Marco Arment. And we sat down and talked to Marco about the story behind his app. And he said he'd actually never planned it to be a business. Marco is a software engineer. He co-founded the blogging platform Tumblr. And he'd originally written Instapaper for his own personal use, just as a little side hobby. Originally, it wasn't even an app. It was just this website.
GOLDSTEIN: He told some friends about his website, got a few write-ups in the tech press. And after a little while, he had thousands of people who'd registered for an account. And so he put an ad on this Instapaper website. And the revenue from the ad - you know, it wasn't great, but it was a few hundred bucks a month.
BLUMBERG: Now, Apple around this time had been telling software engineers like Marco, hey, we have this exciting new thing, this app store, coming; make us an app; put it in the store. And so Marco was like, OK, I'll turn Instapaper into an app. His app was up the second day the app store was open for business.
MARCO ARMENT: The app store turned out being a much bigger success than I think anybody thought it would, including Apple. I got a huge influx of users just by being a decent app available on the app store at the beginning. The user base very quickly doubled, probably within weeks.
GOLDSTEIN: So initially, at this time, he was actually giving away the app. But, you know, it's doing so well. It's growing, he figures. I can sell this thing. So he makes a few improvements and starts charging people for the Instapaper app.
ARMENT: I decided to charge $10.
GOLDSTEIN: Was it actually $9.99 because everything is something 99 on the app store?
ARMENT: Yeah, it has to be.
GOLDSTEIN: Does it? Is that a rule? Is that...
ARMENT: Yeah, it's - you just basically select the first digit.
GOLDSTEIN: Oh, and then the next two are 99?
GOLDSTEIN: And how did $9.99 work out?
ARMENT: It worked out OK, but it was not selling anywhere near the volume that I wanted. So a year later, I realized - what made me realize it was it - somebody else's app that I really respect was $10. And I went to go buy it, and I liked this guy. He was a nice guy, a smart guy, smart developer. And I went to go buy his app, and I saw the price. And I kind of hesitated. I'm like, ooh, $10? And then I'm like, wait a minute.
ARMENT: This is not good. So it was at that point I decided, I have to lower my price. So that's when I changed the price to $5. And it turns out I was right that people will buy that in volume, and the sales more than doubled from that point.
GOLDSTEIN: By a factor of what did they go up?
ARMENT: I don't know exactly offhand, probably by a factor of four or five.
BLUMBERG: All right, some quick math - if you cut your price in half, but your sales go up by four or five times, you're making more than twice what you made before. By cutting his price in half, he more than doubled his revenue.
GOLDSTEIN: And things just kept getting better from there. The iPad came out, which meant millions more potential customers for him. And by the fall of 2010, Marco Arment is selling so many of these apps at just five bucks a pop that he's bringing in enough money to quit his day job.
BLUMBERG: And this is where the, dare I say, revolutionary aspect of the story comes in.
BLUMBERG: So before the app store comes along, Marco was doing the basic, Internet-101 business plan, right? He had a bunch of users, and then he was able to sell an ad on his site based on those users, and that generates a little bit of income. But the way he makes his money is through the ad. After the app store, he is actually selling his product to the people who use it.
ARMENT: And one of the reasons why selling ads on websites is so often the business model for websites is because it's really easy. And your customers - well, rather, your users, at that point - don't need to do anything. They just need to show up to the website. And everyone who just shows up, which takes no effort except the one click - everyone who shows up makes you a penny or two, where, if you want - if you were trying to sell something directly to customers for money on the web, they had to go through payment gateways. They had to type in all their address and billing information, type in their credit card number. They might not trust you with their credit card number. It was a big deal.
You know, the more barriers you put up there, the more people will just say, ah, never mind. And they'll abandon buying your product. So what changed with the App Store is that Apple already had everyone's billing information from iTunes. So they already - if you used an iPhone, chances were good that you already had a credit card hooked up to iTunes. And so you could buy things just by typing in your password.
And Apple made it even more of an even playing field in that whether you buy a free app or a paid app, it's the same process. You type in your password either way. So buying a paid app over a free one is no additional effort. And that changed everything. That, for the first time, brought very, very easy payment to the modern software world. And that, more than anything, is why there is a business for paid apps of any reasonable size.
BLUMBERG: And that's the reason that you're able to leave your old job at Tumblr and make a decent living doing what you're doing now.
BLUMBERG: Can we talk about the scope of your decent living? (Laughter). I don't want to put you on the spot, but just - can you just - can you lay out - like, what are we talking about when we're talking about - decent living means different things to different people. What - can you just put some numbers on that?
ARMENT: Sure. I mean, it depends a lot on what app you sell. If you do really well, you can easily make six figures a year. If you do moderately well, you can easily make a good five figures a year and have that be either your primary or maybe a side income. Even if you put very little effort into it and have an app that almost nobody buys, it turns out there was, like, 300 million people looking for apps. So even if a small trickle of them buys yours, you might still make a few hundred bucks a month.
BLUMBERG: And where are you in that - five figure, six figure - if you can say?
ARMENT: I've done well.
ARMENT: Whatever I say the business makes is pretty much what I make.
GOLDSTEIN: And that's somewhere comfortably into the six figures.
GOLDSTEIN: And is it right that you are still the only employee of Instapaper?
ARMENT: That's right.
GOLDSTEIN: ...And that you have never taken any venture capital or anything like that for Instapaper?
GOLDSTEIN: So Instapaper is a small business. You're a small businessman.
ARMENT: Exactly. I never needed any venture capital money. The only reason I would need venture capital is - well, there'd be two reasons. If I stopped making sales of the app happen at any reasonable volume - although that would show negative growth, which VCs wouldn't like very much. So it would be difficult to raise money. Or if I wanted to expand very quickly with a lot of employees and a lot of resources. But that - you know, I've seen that before. That's what Tumblr was. I know that business. I've been there. And there is certainly a place for it, but I just did that for four years before this. I didn't want to do it so quickly again. I wanted to try the simple way of, charge money for a product, and spend less than you make, and see what you can do with that.
GOLDSTEIN: Basically, have a business - like, a normal business (laughter).
ARMENT: Right. People always ask what my business model is, and it's really - it's very disappointingly simple to them. It's, I sell something for money.
GOLDSTEIN: For five bucks - I sell this thing for five bucks.
GOLDSTEIN: It's like selling gum or something.
ARMENT: It's - and, you know, the tech press looks at that as some kind of oddity. They're like, well, when are you going to make it a business and get VC funding? I'm like, what?
BLUMBERG: How many people are now using Instapaper?
ARMENT: The service total with the web and app combined is about 2 million.
ARMENT: But, you know, it's a hard number to give because it's 2 million accounts that have been created, but, you know, whenever a web service tells you a number like that, it's usually BS.
GOLDSTEIN: You're saying I shouldn't believe you.
ARMENT: No, well, I'm saying...
GOLDSTEIN: (Laughter) How many people have bought the paid app?
ARMENT: Oh, that I won't tell you.
GOLDSTEIN: Easy - that's an easy one.
ARMENT: Whenever a web company tells you like, here's how many users we have, that's how many user accounts they have. That doesn't mean that's how many people are actively using it every day.
GOLDSTEIN: That means some guy signed up two years ago, and never came back and never gave them any money again.
ARMENT: Right, exactly, or, like, you know - or somebody created two accounts by mistake, and then, you know, they abandoned one of them. So any - and there's no agreed-upon definition of what an active user is, so any number people give you like that is - you know, take it with a grain of salt.
GOLDSTEIN: So you make a nice living selling apps for $5 at a time.
GOLDSTEIN: I feel like there are lots of ways that could go wrong. I feel like there are lots of ways your sales could go way down.
GOLDSTEIN: One of the reason a lot of small software companies want to take venture capital and get big fast is because they think, if we're little, and we have a good idea, and we stay little, someone else will just essentially copy us and trample all over us. So is that a risk you face? And is it right? Did Apple itself introduce recently some kind of a reader that sort does some of what Instapaper does?
ARMENT: Yeah, Apple is now one of my competitors. And it comes built into the OS for free.
GOLDSTEIN: I mean, is that terrifying?
ARMENT: Here's how I think about it. You know, if you want to be the biggest player and dominate a whole industry, then maybe you have to do the VC route and get big quickly before someone else does. All of my competitors that I know of are VC-funded or are Apple (laughter) so.
GOLDSTEIN: Or have a $100 billion in the bank waiting to crush you with it.
ARMENT: Right. So that's one way to do it if that's your goal - is to dominate the market. My goal has never been to dominate the market. My goal has always been to just make a living for myself. And I don't really care if someone else is bigger than me. If I can keep running my business, I'm fine. And this is a really, really big pool of people we're talking about in the customers. It's a huge customer base.
BLUMBERG: People who read online.
GOLDSTEIN: People who have iPads and...
GOLDSTEIN: ...Or iPhones or Android phones and want to read.
BLUMBERG: And read stuff on the Internet.
ARMENT: Right. So it's a huge customer base. Back in an earlier job, I worked for a company that had their own search engine. And the search engine - at the time, Google was very popular - but they had this search engine that had some miniscule portion of the market. But it didn't matter because it paid for itself and made a profit. And it was enough to support the people who were working on it.
And I would get emails from customers who use the search engine saying, I use this instead of Google because it's blue or I - the logo better or I don't like what Google did in China or something. You know, they're - when the market is that big of everybody who uses the Internet, any little differentiator can get you enough of a customer base to support yourself and a few other people.
BLUMBERG: One of the reasons that I'm - that we're interested in talking to you is what you represent - a new and interesting chapter of making money on the Internet, an interesting business that didn't exist, you know, two years ago. Where are we in that evolution? Like, how many more views are there going to be in the future?
ARMENT: Probably a lot. I mean, if you look at the web - funding things with advertising - that's been around for over a decade and has done quite well during that time. And we're still seeing different things being built on free web services with advertising. What this world has done, especially the Apple world with the ease of payment, is it's created a different way to fund things that - you know, it's a very old way of funding things that on the Internet, though, is very new. And...
GOLDSTEIN: Which is selling them.
ARMENT: Right - which is just selling them to people for a small amount of money.
GOLDSTEIN: ...Selling to people who use them.
ARMENT: It's much simpler. You know, anytime somebody says that they're exploring business models that probably means that the user, about to be sold out in some way - it's - like, you never want to hear from a service that you're using that they're exploring business models. That's never a good thing for you as the user. But what this does is this - you know, Apple and the iOS ecosystem and, I'm sure, future ecosystems that are similarly built give people a way to pay for things easily. And so your option isn't just advertising or selling people out.
Now you have other options. And so you can run a very, very kind of pure or simple business. Now, on the Internet, which was previously very difficult because of the difficulty of payment, and now it's a whole different world. So you can indeed have lots of businesses built this way, where you charge a small amount of money for things, and that's it. You're done. You don't need to go seek out VC money. You don't need to sell out your users' privacy. Like, they're not even your users. They're your customers for the first time in a decade. It's great.
(SOUNDBITE OF SONG, "MAKE A FIST")
PHANTOGRAM: (Singing) Make a fist. You don't have to be this. You don't have to do this now.
GOLDSTEIN: We did ask Marco, you know, what happens when everybody who wants Instapaper has already bought it. And, you know, that's it. They spend their five bucks; they get their app forever. And you got to go out of business at that point. And he said he's actually experimenting with this new subscription model. Basically, you've already bought the app, but if you really like Instapaper, you can subscribe. You can pay a dollar a month. But he said - and he says this to his customers. For your extra dollar a month for your subscription, you get basically nothing.
BLUMBERG: You can keep using the product, but you can just pay if you want to. That sounds familiar.
(SOUNDBITE OF SONG, "MAKE A FIST")
PHANTOGRAM: (Singing) Is this the future? This is the future. This is the future. This is the future. This is the future. This is the future. This is the future. This is the future. This is the future.
BLUMBERG: As always, we want to hear what you thought of today's show. Send us your comments, questions, feedback - firstname.lastname@example.org.
GOLDSTEIN: You can also visit our blog at npr.org/money. Visit us on Twitter. You can visit us on Facebook. I'm Jacob Goldstein.
BLUMBERG: And I'm Alex Blumberg. Thanks for listening.
(SOUNDBITE OF SONG, "MAKE A FIST")
PHANTOGRAM: (Singing) ...On the ground around. I relate to things I hate - don't know why. Is this the future? This is the future. This is the future. This is the future.
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