Jeff Schuster

Inside the App Economy—Beyond the goofy games is a world of useful programs that’s making fortunes and changing the rules of business

It’s easy to shrug off the kooky world of apps. The bite-size software programs people load onto their mobile phones or tap into on the Web seem mostly to be silly games and pointless novelties. But look past the beer-drinking apps and flatulence programs and you’ll see something significant taking shape: a bustling app economy that’s creating new fortunes for entrepreneurs and changing the way business gets done.

It’s happening with dizzying speed. Just two years ago, almost none of this existed. Apple’s (AAPL) App Store, the most popular destination for mobile-phone programs, was launched last summer. Now there are more than a dozen rival stores, and at least 100,000 apps have been created. Some startups that staked their claim in the app economy have become large, lucrative businesses in just a few months. Two-year-old Zynga, which makes popular game apps, is already profitable, with more than $100 million in revenues. By comparison, Google (GOOG) didn’t start making money until its third year—and still had less revenue.

There are serious business tools among the thousands of new apps. Salesforce.com’s (CRM) programs let executives manage customer relationships from an iPhone or BlackBerry. Oracle (ORCL) apps let managers check inventory or get a snapshot of a business unit’s performance. The computing that people used to do at their desks increasingly can be done on devices they can carry anywhere.

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During AT&T’s third-quarter earnings call yesterday, AT&T Mobility and Consumer Markets President and CEO Ralph de la Vega first trumpeted the company’s third-quarter iPhone activations (3.2 million, the highest number ever) and then downplayed the company’s reliance on the iPhone by saying that the iPhone was just one part of the firm’s smartphone portfolio. This mixed message from de la Vega exemplifies AT&T’s tenuous relationship with Apple–on one hand the carrier has benefited greatly from its exclusive Apple relationship, but on the other hand it has suffered tremendously from the network constraints that iPhone users’ demand for data has generated.

But that love/hate relationship between AT&T and Apple may soon be over. De la Vega implied that the carrier’s exclusive deal with Apple to carry the iPhone in the U.S. could end. When asked about the exclusive relationship, de la Vega didn’t provide any specifics, but he did say that if AT&T loses that exclusivity it will still offer a better iPhone 3GS than potential competitors because the device runs on the company’s HSPA 7.2 network. “The iPhone will work better on our network than on anyone else’s network,” he said.

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Nokia is taking Apple to court, alleging that the iPhone infringes on 10 different technology patents owned by Nokia. Nokia is entitled to protect its investments in research and development and its intellectual property, but there is reason to be skeptical of Nokia’s timing and motives.

I had questioned in a previous article why Nokia would wait more than two years to address the issue if Apple has been violating these patents since the original iPhone was released. As one of the comments on that article suggested, Nokia apparently did approach Apple and the two have been in negotiations for some time. The lawsuit is a not-so-subtle sign that there has been a breakdown in the negotiating process.

Nokia claims that there are 40 other tech companies that are paying for the legally-licensed use of these 10 patents and it wants Apple to do the same. Piper Jaffray analyst Gene Munster believes that Nokia may be seeking a royalty on iPhone sales amounting to 1 to 2 percent for each device. Based on the number of iPhones sold thus far, that could amount to around $400 million plus the continuing royalties on future iPhone sales.

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Google Wave Screenshot

Google’s new collaboration tool, Wave, runs smoothly inside the iPhone’s Safari browser and feels like a native App Store program, thanks to the so-called “app mode” that kills Safari’s UI.

Google Wave, the new collaboration service that aims to re-invent email, runs inside the iPhone’s Safari browser in a borderless “app mode” that removes the browser’s UI controls and buttons entirely. As a result, the web-based application feels snappy and natural, almost like the native App Store program.

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Apple has introduced an in-app purchase feature for free iPhone apps that allow you to fulfill transactions within the iPhone applications themselves — no Apple App Store required. The feature was previously available for paid applications.

By enabling in-application transactions, Apple makes life easier for developers who no longer have to make “lite” or teaser versions of applications along with ones that cost iPhone owners money. If you like the free version of Ragdoll Blaster Lite and want to upgrade to the $1.99 full version, now you may have the option to upgrade within the application itself — no App Store needed.

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