Mobile apps: To charge or not to charge?

Mobile application stores have been one of the biggest trends in wireless this year, but also one of the hardest to monetize. On Apple’s (NASDAQ:APPL) iPhone alone, consumers now have more than 85,000 apps to choose from – the majority of which are free. As new storefronts pop up every day and free news continues to proliferate online, breaking news site CNN is among the companies banking on consumers’ willingness to pay to consume that content on the go.

CNN this week introduced an interactive iPhone app based on its online news Web site. The company has had a mobile Web site since 2000, but this is its first foray into mobile app development under the direction of Louis Gump, who joined CNN Mobile as vice president two months ago after eight years of spearheading The Weather Channel’s mobile efforts. According to Nielsen, CNN is the number one mobile news provider in terms of audience share in total minutes, page views and the most video and mobile usage among current events and global news sites. As such, its business model is attracting attention.  

The new application costs iPhone or iPod Touch owners a one-time fee of $1.99 for access to the news of the day through text, live and on-demand video and photos, as well as breaking news videos, push notification and local content. Users can also capture their own content and upload it to the app through iReport. At launch the app includes logo and banner advertisements from Chevron and Lexus. Gump said CNN is not looking to add more advertisers in the early days of the app and will primarily stick with banner ads, not pre-roll video ads in any of the live news feeds.

“We decided to build a premium application with a dual revenue stream,” Gump said. “It’s a premium app, but we wanted to have it at a very accessible price point. $1.99 is something that most people who either have an iPhone, care about news or both, that doesn’t present much of a practical barrier. The second thing is we know that is an attractive platform for advertisers, so the goal was to build in some ads that work for advertisers, but are fairly unobtrusive in the consumer experience. So, overall, you get the effectiveness, but consumers feel respected.”

Charging for the app is actually good for consumers, because it enables CNN to build a business case that in turn lets it build better and better apps, Gump added, stressing that CNN is dedicated to building a sustainable business, not a marketing effort on mobile. Apple didn’t put restrictions on how much the app could cost, but CNN settled on a low price point to make it a no-brainer.

“In the app world, it is fairly expensive and time intensive to develop one of these,” Gump said. “Putting a reasonable price on the app helps to get ROI and enables us to reinvest in the mobile business as it grows.”

Applications on the iPhone today are split about 75% free to 25% paid, according to Wireless Expertise CEO Anuj Khanna, who believes that new apps will increasingly come at a cost. Other news brands are beginning to take the paid plunge as well in an effort to offset free content on the Web. For example, ESPN offers some of its mobile content for $1.99, and The Wall Street Journal will begin charging a $2 per week subscription fee for its mobile app next month. If consumers also purchase either a WSJ print or online subscription, the mobile app will cost only $1 per month, and if they subscribe to all three outlets, it is free.  

The potential for subscription services like what the WSJ will offer is where things get really interesting for content owners. Mobile – as still somewhat uncharted territory – offers more opportunities for monetization that online where free has become the norm. Gump pointed out that five years ago, pre-app store days, most all mobile apps were based on monthly recurring subscriptions, partly because the cash register functionality wasn’t there. The iPhone and subsequent smartphones changed this model, but subscription services remain attractive for both developers looking to underwrite a new business and for telcos if they have a billing engine in place. Gump said CNN will stick to a one-time fee for now, but just about any business model that balances the needs of the consumer and the provider is up for discussion.

Still, CNN and the WSJ are anomalies amongst their peers. Most news outlets – including NPR, Thomson-Reuters, Time Magazine, Associated Press and the Financial Times – offer their mobile apps free of charge, and – given the competition – it might be a challenge to get consumers to cough up even a few bucks. According to the Associated Press, its own app saw a download rate of less than a tenth of what it usually attracts when it charged $2.99 on BlackBerry. Downloads shot back up when it dropped the price. Mark Donovan, senior vice president of mobile at comScore, classified paid mobile apps as a “nascent market experiment.” Companies are still trying to figure out what works, as demonstrated by CNN and the AP’s opposite trajectories, he said.