There’s no doubt that the iPhone has fundamentally changed the mobile phone market. Last week, the company launched its iPhone OS 3.0 and announced some significant milestones, including more than 25,000 applications available in the App Store and more than 800 million apps downloaded.

Great traction, but where are the revenues?

It’s a big store with a lot of players.  Say you’re an entertainment content developer.  According to MobClix, there are 3,144 entertainment downloads available in the Apps Store - and of those, more than a thousand are free.  In this vast market, first, how do you get noticed; and second, generate profits?

Take one case study for game app Galaxy Impact developed by Team iBokan.  Launched free-of-charge in iTunes App Store, it has 220,000 downloads in the first two weeks and ranked No 10 in the ‘Top Free Apps’ in the Game category and No 20 in the Top Free Apps overall.  Then, the company moved to charge 99¢ per download.  The result?  Free downloads vs for-fee downloads eked out at 400:1.  For 220,000 downloads, they stated that revenue amounted to $550.  Not great.  They moved to an ad model with the free offering, which increased revenues but in hindsight should have been done from the start.

But is advertising the answer?  To be sustainable as an ad model, the app must be used on a regular basis.  Pinch Media recently noted that generally only 1% of apps are used past the first 30 days.  Ouch.

Another new option recently added to the iPhone 3.0 API is the ability to include in-app transactions, which means that after purchasing a game or other download, users could be hit for additional costs to upgrade features.  Great for developers, but for users?  Adam Frucci of Gizmodo believes in-app transactions will diminish the user experience and in his words, ‘open the floodgates for the sleaziest app behaviors possible.’

Do I hear strains of Crazy Frog, v2.0?

Jim Hopkinson of Wired Magazine offers a good overview of different revenue models for iPhone developers, ranging from free apps featuring advertising through to high-cost apps.  His bets are on paid applications at a low- to mid-range cost targeted to niche markets - with the example of Winepad, a wine journal for those on the go.  This makes sense as you’re able to push it out and promote it on special interest blogs and sites without relying on the Apps Store to get exposure.

Lest we forget, there are other platforms out there.  After all, the iPhone accounts for only 1.5% of the handsets in the USA, according to The Neilson Company (Oct 2008).  Nor does the iPhone appear on Bango’s Top 20 list of handsets navigating to Bango’s mobile payments platform for premium content and ad campaigns.

With other handset vendors moving aggressively to create better mobile internet experiences and mobile network operators weighing more heavily into the game, the mobile content market is about to become increasingly interesting.  The question every developer and business should be asking, however, is ‘where are the revenues?