[In his new column, writer and designer Ian Bogost looks at Apple's iPhone App Store -- and one of his game purchasers' demands to get his 99c back -- to discuss digital purchases, value, price point, and the 'race to the bottom' for iPhone games.]

Last month I took an early Sunday morning flight from Atlanta to Orlando. I wandered into a newsstand and picked up the May 2009 issue of Popular Science, which featured a cover story about space planes that intrigued me.

The story turned out to be less interesting than the cover suggested, but I rather enjoyed another article about the discomfort of airplane seats. Overall I found the issue to be pretty good, but not good enough to carry along with me, so I left it in the seat pocket. Price paid: $4.99.

Last week I stopped on the way home at the local Krispy Kreme to pick up some doughnuts and grab a coffee. It was the first time this season that the heavy humidity characteristic of Atlanta wafted over the city, so I opted to take my joe on ice.

Once back in the car I realized that the iced coffee was sweetened -- not how I like it. I was disappointed but also thirsty. I managed to enjoy the beverage somewhat. Price paid: $1.49.

A few days ago, I released a new game on the iTunes App Store. It's a bit high concept (a port of an Atari VCS game I made), but I had worked on it carefully and knew it had been polished. I offered a good deal of context and charged the lowest price allowed by the service. Numerous trade and consumer rags picked up the story and said positive things about my effort.

Later in the day of release, I got a disgruntled email from one of my customers: "I want my 99 cents back," he wrote.

Cognitive Dissonance

This made me start to think about small-scale digital purchases in general and the iTunes App Store in particular. When someone spends a dollar on a coffee or drops a fiver on a magazine, certain expectations are set.

The goods to be purchased at such rates are consumables, things that can and will be used up, and quickly. Sure, I could have gone back in and complained about my iced coffee, but sometimes it's not worth sweating the small stuff.

To be honest, I appreciated getting the email; I was able to respond to the private email and talk to the player, I think to his satisfaction. It's harder, if not impossible, to respond to anonymous negative reviews and ratings on the App Store. Indeed, developers have noticed that average app ratings have been dropping since OS 2.2 provided a "rate on delete" feature, inviting users to star a program after having deleted it.

Part of this problem is related to platform design. An ordinary computer has a big hard drive for storing applications and documents and the like.

Programs can sit front and center on the desktop, in the Windows quick launch bar, or on the Apple Dock, or they can be hidden away in the Program Files folder or Applications directory.

Part of the problem is related to expectations. Apple has set up a convoluted application approval process to insure that programs do what they say, but the individual treatment any one app gets varies greatly. The App Store is noisy and many products don't work as promised.

But I'm convinced that a large part of customer and developer dissatisfaction with iPhone games and apps comes from a cognitive dissonance.

Games aren't generally like cups of coffee; they don't get used up. They don't provide immediate gratification, but ongoing challenge and reward. This is part of what Frank Lantz means when he claims that games are not media.

Yet, when we buy something for a very low price, we are conditioned to see it as expendable. What costs a dollar these days? Hardly anything. A cup of coffee. A pack of sticky notes. A Jr. Bacon Cheeseburger. A lottery ticket. Stuff we use up and discard.

A Race to the Bottom

It's hard to reconcile the value expectations of a 99¢ discard with those of a video game. One is supposed to offer single-use expendability, the other is supposed to offer depth and challenge over time.

I contend that iPhone players are not so much dissatisfied as they are confused: should one treat a 99¢ game as a piece of ephemera, or as a potentially rich experience?

But the iTunes App Store has encouraged a race to the bottom among paid applications. Developers want to make money, but consumer response suggests a reticence to spend.

The result so far has been cheaper and cheaper apps: according to the mobile distribution firm Distimo, iPhone app prices have dropped 8% in April alone, with many games settling in at 99¢.

For example, Reflexive Entertainment's Airport Mania, a click-management airline game, cost $19.99 when it was first released for PC and Mac. A year later, it still goes for $9.99 as a downloadable.

When the iPhone version hit the App Store, it was priced at 99¢. In fact, Reflexive even felt compelled to release a free "lite" version of the game.

Apparently 99¢ is a risk worth taking on a cup of coffee, but not on a sophisticated, long-form videogame worth ten times more on another platform.

Indeed, an order of magnitude value loss seems to plague iPhone applications in general. Take Tweetie, an excellent Twitter client by atebits. The Mac OS X version sells for $19.95. The iPhone version, $2.99.

Yet the programs offer exactly the same features with the same quality. One might argue that an iPhone program is more specialized than a desktop one, but in the case of games or Twitter clients, both platforms offer similar types of value, even if that value expresses itself in different circumstances.

Admittedly, giving a game away for free could invite "freeconomic" uses of the sort Wired editor-in-chief Chris Anderson has recently advocated.

But access to the App Store's forthcoming micropayment features still require an initial purchase. A free cup of coffee and a change jar for cream and sugar is quite a bit different from a $1 cup of coffee with a 25¢ add-on for milk.

Mourning the Numbers

One of the emergent results of App Store pricing has to do with its long-term viability for developers. Thanks to a very public Apple promotion, it's well-known that the App Store has enjoyed one billion app downloads since its launch.

A number of effusive stories in the mainstream press have detailed how developers have quit their day jobs in favor of full-time iPhone development thanks to the fat profits reaped from the endless cornucopia that is the App Store.

Ethan Nicholas' iShoot

And indeed, some indie developers are doing pretty well. Cases like iShoot's Ethan Nicholas are rare, but Mark Johnson recently published sales data for his game Hit Tennis, which has netted around $10k since its release six months ago. Not bad, but not an income either.

Consider this: recent estimates suggest that Apple has only taken in $20-$45 million in revenue from App Store sales. If we cross-reference the more generous end of that figure with metrics on total application sales, we can draw more grounded conclusions about the reality of the App Store gold rush.

Some 40,298 apps have been released for the iPhone as of May 18. Presuming revenue somewhere between those two numbers, with total revenues of $108.3 million (if Apple takes 30%), average gross revenue of $2,688 per app. Apple takes 30% of that, leaving the developer $1,881. Deducting the $100 fee Apple charges developers for the right to sell apps in the store annually yields an average net profit of $1,771 per App.

That's just about enough to pay for the iPhone and Mac laptop or desktop you'll need to develop for the platform in the first place. Put more plainly, for the average developer the App Store is a financial wash.

Things get worse if we look more closely at games specifically. Even though almost 20% of the apps available on iTunes are games, the average price of a game is 50% less than that of other apps ($1.44 for games, compared to $2.79 for everything else).

That means that dollar for dollar, games are making 50% less than other applications in the store.

By that logic, an average game developer might be lucky to clear $900 through sales of a single title. Of course, if the $20 million gross sales figure is accurate, then you can reduce things further. On the other hand, some sources think the revenue to Apple could be as high as $90 million.

(But for the average App Store developer, it may also be that it's median revenue, rather than average, that is actually important. With sales tending to cluster around the top titles, median may be startlingly lower than average, though this is very difficult to discern.)

And one more thing: Apple doesn't distribute sales royalties until the totals exceed the equivalent of $250 in each region, so it's possible an average-performing title could result in no distribution whatsoever back to the developer. At that rate, who can afford to update features or create new products to sate the confused consumer who cries, "I want my 99¢ back?"

Too Good To Be True?

If we put these two issues together, a rather dour picture emerges. On the one hand, players are split between the low expectations of a throwaway good and the high expectations of a keepsake. On the other hand, developers are pouring non-trivial effort into the creation of products that risk being neither fish nor fowl.

One result of this collision might be a sort of weeding out of the less serious or lower quality products, as the folks creating them give up on iPhone games and find other creative or commercial outlets. In such a situation, perhaps prices and profits will naturally rise along with quality.

But another result might be an irreparable poisoning of the well. If the race to the bottom persists long-term on the App Store, players' expectations will match it.

Something curious might happen if we consider the problem as one of Nash equilibrium. If everyone selling games doubled or tripled their prices, then the average cost of games for iPhone might rise above the threshold of cognitive dissonance.

No longer would iPhone games register as neither coffee nor Klax, and instead they might telegraph the value they often (but not always) provide. Whether or not such a move is feasible or possible is debatable, perhaps suggesting that the iPoison has already been installed.

Most game consoles are sold at a loss with the intention of making up the difference in game licenses -- the razor blade model. But Apple does things exactly in reverse. $100 million in App Store sales is a drop in the bucket compared to Apple's $30 billion+ in 2008 revenue.

But I'm sure this figure doesn't bother the company; the App Store service is meant to drive their highly profitable iPhone and iPod Touch sales anyway.

Speaking of razor blades, before iPhone game developers embrace Chris Anderson's call to make their products free in the hopes of charging for services atop them, they might want to take note of the counterpoint pop-psychologist Robert Cialdini and his colleagues offer in their recent book 'Yes! 50 Scientifically Proven Ways to Be Persuasive': giving away a product makes it less desirable. It's something worth pondering over a forgettable $1 cup of joe.