• by Mark Walsh  @markfwal, July 7, 2011

With Apple Thursday announcing more than 15 billion apps have been downloaded from the App Store to date, it's clear apps have become big business. But for developers, one of the dilemmas is whether to charge upfront for mobile apps or offer them free and make money from the small proportion of users who pay for higher-level access or make in-app purchases.

The latter option is better known as the "freemium" model. While the merits of that approach have been debated, new data from Flurry shows that over the last six months, revenue from free-to-play game apps has overtaken that from paid apps. Among the top 100 grossing games in the App Store as of June, more than two-thirds (65%) of the revenue generated came from freemium games and 35% from paid games.

That's nearly opposite the situation from six months ago, when paid game apps accounted for 61% of revenue and free titles, 39%. What's changed since January? Peter Farago, vice president of marketing at Flurry, pointed out that Apple began counting in-app purchases toward app gross revenues at the end of 2010, reflecting the impact of that sales stream in its ranking of top-grossing titles.

The visibility those freemium game apps started gaining in the App Store's top grossing chart in turn helped spur further downloads. As a result, more developers began adopting or expanding the free-to-play approach as a way to monetize their offerings. Another factor has been the growing push of social gaming powerhouse Zynga into mobile, bringing its freemium model built around selling virtual goods to handheld devices.

Other game developers that have found success with the free-to-play approach to date include Pocket Gems, Z2live, The Playforge, Gameview, Capcom, and Kamagames. "A great free-to-play game can have over one million daily active users. At scale, this business model just keeps generating more cash which keeps them in the top grossing charts, and disproportionately earning more revenue," explained Farago.

Overall, about a third of the 425,000 apps in the App Store are free, he said.

But what portion of people who get free apps actually end up spending money in them? It ranges from 0.5% to 6% of users depending on the quality of the game and how each game works, according to Jefferson Valadares, general manager for games at Flurry.

"Although this means that more than 90% of players will not spend a single penny, it also means that players who love your game spend much more than the $0.99 you were considering charging for the app," he wrote in a  blog post today. "And since you gave away the game for free, your 'heavy spender' group can be sizable."

In announcing the 15 billion download milestone Thursday, Apple also said it's paid out $2.5 billion to developers for paid downloads (with the company taking a 30% cut of sales). But if game developers are increasingly willing to forgo charging for apps upfront, how does the freemium model work for non-game apps?

Farago conceded that selling things virtual currency and virtual items are especially well suited to games, where players get hooked and are willing to make in-app purchases to reach new levels.

That's where "gamification" comes in-the trend toward incorporating game mechanics into non-game apps or sites to keep users coming back with a set of activities they can progress through to earn points, badges or other rewards. That, in turn, provides the structure for offering in-app purchases to help users "level up" in apps across different categories.

With that in mind, a future Flurry study might look at how the freemium model is working in non-game apps as well.