IPhone apps: A launch point for a new wave of tech giants?

Scott Lahman was sure he had a hit when his Marina del Rey company developed cellphone software that let people have a text messaging conversation with multiple participants at the same time, like a written conference call on the go.

But for two years Lahman and his team struggled to find a market for it -- that is, until Apple Inc. recently decided to offer the software at its online App Store. Suddenly, Gogii Inc.'s textPlus application had tens of millions of iPhone owners as potential users. Since June, the free app has been downloaded more than 2.3 million times.

“We ran down a lot of dead-end corridors until we were discovered by iPhone users,” Lahman said. “Apple has fundamentally changed our business.”

There are hordes of people writing tens of thousands of apps that transform the iPhone into things as varied as a pinball machine and a flashlight. Some apps become moneymakers. Others go virtually unnoticed and disappear into the backroom of Apple’s App Store, never to be downloaded again.


But some Silicon Valley venture capitalists and start-ups like Gogii see the iPhone as more than a cash machine -- to them, it’s the platform on which to build the next generation of big tech companies.

“I absolutely think there will be large public companies built around this ecosystem,” said Matt Murphy, a partner at Kleiner Perkins Caufield & Byers, the Silicon Valley venture capital firm that has been an early investor in some of the tech industry’s biggest success stories, including Inc., Google Inc. and Netscape Communications.

Murphy runs Kleiner Perkins’ $100-million iFund, which was created in collaboration with Apple to invest in start-ups developing apps for the iPhone and iPod Touch.

Two recent deals signaled the payday potential of the mobile app market. Google acquired mobile advertising company AdMob Inc. for $750 million in stock. And video game publisher Electronic Arts Inc. bought Playfish Inc. -- a start-up that made games for social networks like Facebook as well as for the iPhone -- in a deal valued at up to $400 million. Although AdMob and Playfish did not focus solely on iPhone apps, their acquisition reflected a maturing mobile market, Murphy said.

‘Big Bang moment’

The iFund has invested in seven companies, including Gogii, out of more than 3,000 business plans that were pitched. Murphy estimates there are about 50,000 iPhone application developers.

“It’s much easier now to sort through the mass of companies as it’s much more obvious now what’s working and what’s not, based on 100,000 apps in the App Store,” Murphy said.

About 70% of developers have made only a single app, while 25% are preexisting companies extending their brand to the iPhone, he said.

“The iPhone set off a Big Bang moment for the mobile Internet like Netscape did for the Internet a decade ago,” he said.

The Netscape Navigator browser, which debuted in 1994, was instrumental in the Web’s transformation from a niche tool into a global phenomenon.

Although it’s far too early to tell whether the mobile Internet will spawn new giants like Google, start-ups such as Ngmoco are preparing for the day when everyone carries the Internet in their pockets.

An iPhone gaming company based in San Francisco, Ngmoco is backed by the iFund and run by Neil Young, a veteran of Electronic Arts.

Ngmoco offers more than a dozen games. Some are free to download; upgrades and premium games cost up to $4.99. Young, the company’s chief executive, said Ngmoco games have been installed on 10 million iPhones.

“There is a gold-rush mentality and an incredible number of application developers running to the iPhone,” Young said. “You get more applications than the market can consume, and that plays out in pricing.”

In other words, how do you build a company on free products?

Business models

First thing, Young said: Throw out the rule book.

“It’s radically different,” he said, contrasting the creation of iPhone games with that of video games for the Xbox and PlayStation. “Development cycles are measured in weeks, maybe months. Development budgets are in the tens of thousands of dollars rather than the tens of millions.”

Ngmoco’s goal is not to capture market share for any one app but to increase the sheer number of users and then sell them virtual goods from inside the games.

For instance, it offers a free game called Eliminate Pro that lets players compete against one another on their iPhones over wireless networks. Players can buy “power cells” to energize their virtual weapons and gain an advantage.

And with Ngmoco’s Touch Pets game, animal lovers can play with virtual puppies on their phones, buy gifts for the puppies and connect with other players online.

“The companies that are going to be successful are those that bring the best lessons from traditional video games and the best lessons of social media and leverage them for the device,” Young said. “The device is always in your pocket and you’re always connected to the network. Build on that.”

Future viability

Charlene Li, a tech analyst and founder of consulting firm Altimeter Group, said she expects some big companies to emerge from the iPhone world, but not behemoths.

“Amazon and Google are so pervasive in our lives, and it’s hard to imagine an app having that role,” she said.

The exception, Li said, might be gaming. But she said start-ups would need to move beyond the iPhone and on to other devices, such as phones powered by Google’s Android software.

At iFund-backed Gogii executives said they would probably develop services for other gadgets.

Murphy believes Gogii “has a huge opportunity . . . to be the Skype of text,” referring to the Internet-based telephone and video service.

Founded by veterans of Jamdat Mobile Inc., an early mobile gaming company sold to Electronic Arts in 2005 for $680 million, Gogii recoups the expense of paying wireless carriers the cost of the text messages by running ads that appear in the textPlus app.

Gogii is counting on its texting-obsessed users to appeal to an array of advertisers, and it plans to sell virtual goods and offer paid premium services such as multimedia texting.

But Chief Executive Lahman acknowledges that potential investors want to know whether Gogii can truly build a big company around a single gadget, even one as popular as the iPhone.

Murphy points to Shazam Entertainment Inc., in which the iFund recently invested, as an example of a mobile app company already making money. Shazam’s free app lets people identify a song they’re hearing and then buy it on iTunes. The company takes a cut of the song purchases and also earns money from advertising that runs on the app.

As iPhone apps continue to converge with social networks, Shazam has launched a $4.99 version of its app that lets listeners send songs they’ve “tagged” to Twitter and Facebook. The app also lets people use the phone’s GPS to map the location where they’ve tagged a particular song.

Given the potential of start-ups like Shazam, Murphy said he expected to raise more money for the iFund.

“We’re kind of at a tipping point with the iPhone,” he said. “I see this as a 10-year mega-trend.”