Pixite lead final 3

As last year began, the app developer Pixite held its company retreat at a converted Old West movie set outside of Palm Springs. They spent a few days dreaming about the future while eating barbecue and sipping whisky in the sun. But 2015 was not a good year, and by last month the company’s dreams had narrowed to survival. This year’s retreat took place at the company’s office in San Diego, a handful of rooms perched above a hair salon. The printer was broken, so the agenda was distributed by email.

"I’m sorry it’s called a retreat and we’re still in the office," says Eugene Kaneko, one of the company’s co-founders, as the daylong meeting begins. The company’s six employees frown at their laptops, where the numbers in a Google Doc chart a steady decline. "If money were better, we’d be in the desert. Unfortunately — that’s not the case."

Since Kaneko founded the company with Scott Sykora in 2009, Pixite has released eight applications dedicated to photo editing and design. Each has been featured by Apple as a Best New App; photo editor Tangent and design tool Assembly won year-end awards from Apple. Between 2013 and 2014, downloads of Pixite apps jumped from 395,472 to 3.1 million, and annual revenue doubled to $943,000. Pixite grew along with its cash flow, expanding from two to six employees as it explored ways to link its apps together and grow a loyal base of customers.

Then the bottom fell out. Last year downloads flattened, and Pixite’s revenues plunged by a third, to $629,000. Suddenly, a company that needed to bring in $2,000 a day to break even found itself making $1,000 or less. Pixite has no reserves of venture capital to fall back on; aside from a $50,000 seed investment from a Carnegie Mellon fund for alumni entrepreneurs, Pixite has funded itself.

This past December, Kaneko emailed me out of the blue. He didn’t know it then, but I’m a fan of the company’s apps: Fragment, which applies prismatic effects to photos, is one of my favorite artistic tools. "As an independent bootstrapped app company, we are struggling," Kaneko wrote. "If things don’t turn around, we’ll need to lay off half of our staff in the next few months." He invited me to come to San Diego and observe the struggle up close. Kaneko would open up Pixite’s books and share every piece of data that I requested while, over the course of two days, his team locked itself in a room and attempted to chart a path forward. Pixite would either figure it out or die.

Pixite office scene

Last month, Apple announced it had paid $40 billion to developers since the App Store opened, saying the store was responsible for "creating and supporting" 1.9 million US jobs. More than half a million iOS developers have created apps; the company’s Worldwide Developer Conference is so popular that tickets have to be distributed via a lottery. "[Apple] made our company," Sykora says. "If Apple didn’t exist, we wouldn’t have a company at all." And the market for apps is growing: between iOS, Android, and smaller platforms, apps could generate $101 billion annually by 2020, according to market research firm App Annie.

But the App Store’s middle class is small and shrinking. And the easy money is gone.

For a time, Pixite was a shining example of the businesses made possible by the app economy. Like thousands of other developers, Pixite’s founders took what had been a side project and turned it into a full-fledged career. But the company’s recent financial problems illustrate a series of powerful shifts in the industry toward consolidation and corporatization.

For all but a few developers, the App Store itself now resembles a lottery: for every breakout hit like Candy Crush, hundreds or even thousands of apps languish in obscurity. Certain segments of the app economy remain vibrant — ludicrously profitable, even. Apps for massive social networks, on-demand services like Uber, and subscription businesses like Netflix and Spotify remain in high demand. Then there’s gaming: Last year, 85 percent of all app revenues went to games, according to App Annie. Supercell, the top-grossing developer of Clash of Clans, reported revenue of $1.7 billion in 2014. (It spent $440 million on marketing.)

But for a large swath of these app developers — particularly those without venture capital and sophisticated marketing tactics — the original App Store model of selling apps for a buck or two looks antiquated. In 2011, 63 percent of apps were paid downloads, selling for an average of $3.64 apiece. By last year, a mere 27 percent of downloads were paid, and the average price had fallen to $1.27. Today, profiting from the App Store most often requires a mix of in-app purchases, subscriptions, and advertising.

Meanwhile, a fatigue is setting in among customers. There are now more than 1.5 million apps in the App Store (Android users have 1.6 million to choose from), but by 2014, the majority of Americans were downloading zero apps per month. And it turns out people simply don’t use most of the apps they do download. According to ComScore, the average person spends 80 percent of their time on mobile devices using only three apps.

Massively profitable new software platforms come around very rarely — but when they do, consumers race to fill them up with utilities, productivity tools, and games. The gold rush only lasts so long, though. "After a while, the saturation of apps catches up to the user growth," says Ryan Sarver, a venture capitalist at Redpoint Ventures. "And people are no longer searching — they’ve got the apps that they need."

Consumer boredom with apps is a key reason that the smart money in Silicon Valley began turning last year to messaging apps and bots, which many observers believe could represent the next phase of the internet. No one can credibly say that the App Store is dying. But the range of opportunities in consumer software has narrowed dramatically — to "a couple of swim lanes," VenRock VC David Pakman told me.

And so as Pixite’s on-site off-site begins, Kaneko leads with grim news. "Our cash reserves are low," he says. "We started out with $300,000 at the beginning of 2015. Now we only have $100,000 in the bank."

Sykora looks at a series of charts of Pixite’s app sales on his laptop. Every chart tells the same story. "All the apps are slowly drifting," Sykora says. "Down, down, down."

Pixite office whiteboard

Both Kaneko, 37, and Sykora, 34, grew up in San Diego before venturing to Northern California to study engineering. Kaneko is short and radiates nervous energy; Sykora is tall and conveys a quiet calm. The duo met while working on freelance web design gigs after coming back to San Diego. A client hired Kaneko to build a website for DJs to sell their beats, and Sykora agreed to help him build it. They’ve worked together ever since.

When the App Store opened in 2008, many internet companies took a wait-and-see approach. Google, Facebook, Amazon, and Pandora all released basic apps, but that left a lot of room for independent development. iPhone owners were hungry in those days for the new experiences enabled by their phones, downloading more than 10 apps a month, according to AdMob, which was later acquired by Google. And they were willing to pay: by July 2009 they were spending a collective $200 million a month.

In the first 12 months of its existence, 65,000 apps were added to the App Store. Many were games, a trend that continues to this day. But quirky independent apps dominated the inaugural list of the year’s most downloaded software: the top seller was a virtual koi pond; the list also included an app that simulated drinking a beer. There was also a booming market for basic utilities: top sellers included a level tool, a spell checker, and a voice recorder.

In October of 2009, sensing an opportunity, Kaneko suggested he and Sykora build an app for browsing pictures stored online. Google-owned Picasa, one of the era’s most popular web-browsing clients, had no native iPhone application, and its mobile web app was slow. In a few months, Kaneko and Sykora built an iPhone app for Picasa using its public API, and sold it in the App Store under the name Web Albums.

The iPhone’s superior camera was spawning a generation of smartphone photographers, and because the iPhone allowed developers to access its camera, photography soon became a popular App Store category. Many of these photo apps offered tools that would eventually became native features in iOS: utilities for cropping, adding flash and HDR effects, and sharing photos over Bluetooth. Another set of utilities focused on sharing your photos to the web: uploading and viewing photos on Flickr, for example.

It was in this last group that Kaneko and Sykora saw their opportunity — and it turned out to be bigger than they imagined. The two hoped their 99-cent app might bring in a few dollars a day while they worked on other projects. Instead, in its first full year in the App Store, Web Albums brought in $130,000. "First it was: ‘Awesome! This is a decent part of my income, I should spend more time on it,’" Sykora says. "Then it got to the point of like: ‘I should probably not take every freelance job.’ Then: ‘I should not take any freelance jobs.’ Then I started getting rid of clients. That was an awesome set of transitions to go through."

Web Albums was a simple utility, but a surprisingly profitable one. It turned out that Picasa’s web app let users view only the first 100 photos in an album; Web Albums had no such limit. The developers had sought only to make a functional client; they accidentally built a superior one. With little competition, Web Albums became the first result in App Store searches for Picasa — an invaluable boost to sales. A simple idea, executed competently but with little flair, was now feeding two families.

Pixite portraits

From left to right: Ben Guerrette, Creative Director; Eugene Kaneko, Product Manager; Scott Sykora, lead developer

It couldn’t last. They knew it couldn’t last. Surely Google had a team of engineers working away on its own version of Web Albums, one that would erase their sales overnight? (In fact, it wouldn’t arrive until mid-2015, in the form of Google Photos.) "We’ll be blown out of the water and we’ll be dead," Kaneko recalls thinking. It put Pixite in a strange position. "Normally in a business you put money back into your main money-maker," Sykora says. "We were in a situation where we were like, ‘We need to stop putting time into this and force ourselves to step away and figure out what the next step is.’" Kaneko and Sykora incorporated Pixite — a portmanteau of "pixel" and "excite" — and set about looking for an answer.

They found it in a San Diego co-working space, in the form of Ben Guerrette. Guerrette, a self-taught designer, developer, and digital artist, had built the sort of creative tool that would come to define Pixite. Deco Sketch let you draw simple shapes and animate them, and while it never made much money, it helped Guerrette build connections to a growing community of iPhone photographers and editors on Instagram. By 2013, Guerrette was working at 3rdSpace, a San Diego co-working "club for the creative" where Pixite had set up shop.

After the launch of Web Albums, Pixite sought to repeat its initial success by making a series of similar photo utilities. Between 2010 and 2012, while the tech world was still catching up to the idea of native apps, Pixite built and sold a variety of unglamorous photo-viewing and uploading tools for Facebook, Flickr, and Dropbox. (In a fit of optimism, in 2011 Pixite also built an app for transferring your Facebook photos to a then-new social network called Google+.)

For the App Store, it was an era of wild expansion — and enormous cultural impact. In 2010 the App Store swelled to 225,000 apps, just as the American Dialect Society named "app" its word of the year. Supercell was founded that year in Helsinki; two years later, its games were generating $2.4 million a day. Uber launched, giving rise to a new category of on-demand services. The next year, the store celebrated its 10 billionth download. Venture capitalists’ interest in the app economy followed accordingly. Kleiner Perkins Caufield Byers, one of the most prestigious VC firms in Silicon Valley, tripled its investment in apps to $300 million in 2011. One of those investments, a three-year-old gaming firm Ngmoco, sold to Japan’s DeNA that year for $400 million.

Pixite’s ambitions were more modest. Web Albums remained the bulk of the company’s business, but revenues were growing: from $130,086 in 2010 to $368,000 two years later. At 3rdSpace, the company’s success had not gone unnoticed. "I was like, these guys are the real deal," Guerrette recalls. "They make money making apps!"

Guerrette pitched Kaneko and Sykora on an app that went beyond viewing and uploading photos to manipulating them creatively. Around that time, a niche community of iPhone photographers had begun layering simple black-and-white geometric designs over their photos to make them pop on Instagram. But it was hard to do: you had to download the images from Dropbox onto your phone, then layer them on top of your images using another app. Guerrette proposed an app that included the designs as filters, letting you manipulate and post them to Instagram directly. Tangent, the app that resulted from Guerrette’s proposal, was finished three months later.

The app was featured in the App Store — a highly valuable free promotion that all developers dream of. It went on to sell 1.3 million copies. Two more creative apps soon followed. At the end of 2013, Apple named Tangent one of the year’s best apps. The company had sold nearly 400,000 units, earning revenues of $461,605.

The revenue told a story of surprising success. But the path that Pixite’s founders took to get there would cost them later. The mistakes appear obvious in hindsight: Pixite was building apps that sat uncomfortably between professional design tools and novelty consumer apps. It failed to create a distinctive brand, instead giving each app a name unrelated to everything that came before. Apart from Web Albums, its apps were hard to find using the App Store’s search tools, and the company never invested in advertising. And Pixite clung to using the one-time purchase business model, which led to a perpetual cycle of boom and bust as each launch generated a single revenue spike followed by a rapid decline.

It didn’t have to be that way. Lightricks is an Israeli company that resembles Pixite in some respects. It also makes photo-editing tools, gives them distinctive names, and sells them for a few dollars apiece. But Lightricks also invested years in building its signature apps, FaceTune and Enlight, and spent heavily on marketing. It wrote software to predict how much it needed to spend on Facebook ads to stay on the bestseller charts, where the added visibility generated additional sales. Its marketing is overseen by a co-founder whose background is in artificial intelligence, and the marketing team is largely made up of engineers who run dozens of campaigns around the world 24 hours a day.

The result: FaceTune, an app for taking better selfies that sells for $3.99, sold more than 3 million copies in its first two years and was the sixth-highest grossing app in the App Store in 2014. Enlight, a comprehensive photo editor that combines a wide variety of filters and effects, saw similar success. By last year Lightricks had hired 45 people, was on pace to earn $10 million in annual revenue, and raised $10 million in venture capital.

Meanwhile, Pixite’s approach exposed it to another risk hiding in the paid app business model — flops. Pixite aimed to release one app a quarter, giving it just three months to design, code, and ship each product. That limited the scope of what its apps could do. And with only four products coming out each year, a misconceived app could be disastrous.

The company learned that lesson in 2014 when it released Shift, a very late-to-market app for applying colored filters to photos. After four months in development, it earned only $24,000 in revenue, covering less than two weeks’ expenses. This despite the fact that it was one of two apps the company invested in porting to Android, an effort that has yet to generate meaningful sales.

Still, Pixite ended 2014 with 3.1 million downloads and nearly $1 million in revenue. It would be the company’s peak.

Pixite pigment

Pigment, Pixite's coloring book app

At this year’s retreat, Kaneko announces some news: Pixite has opened up a line of credit from its bank, letting the company borrow in case it lacked the money to cover expenses.

In 2015, the company produced two more projects that failed to hit. Source, an ambitious effort to build a website for artists to share the work they make with Pixite’s apps, had floundered. Assembly, a vector-based design tool, had struggled as well.

The team hoped Source would promote artists’ work and inspire the next generation of casual photographers to be creative with their own pictures, using Pixite’s apps to do so. But falling sales during the development of Source caused a panic, and work stopped. "We hit $1,000 a day and everyone was like fuck me, what do we do?" Guerrette says. "We had to put that away for a little while. We only make money when we make apps."

The arrival of Google Photos in May 2015 finally drove a dagger into the heart of Web Albums. With about three months of cash in the bank and a new sense of urgency, Pixite poured all of its resources into developing an app meant to capitalize on the current fad of adult coloring books. Pigment, which is free to download and offers a paid subscription for new books, lets users digitally color landscapes, geometrical shapes, and characters using a variety of brushes.

About 740,000 people have downloaded the app to date. The subscription revenue offered the company a temporary reprieve. But by this year’s retreat, downloads were already declining, and a rival named Colorfy was dominating search results. It wasn’t clear how to reverse the slide.

"Why do we have a mission statement?" Guerrette asks. It’s the second day of meetings, and the Pixite team is engaging in the most corporate of exercises: the effort to capture the company’s purpose in a sentence. Unlike most companies, Pixite tends to write a new statement every year. "It’s supposed to give you direction," says Kaneko, who is drawing on the whiteboard. Over the past day, Kaneko has been jotting down Pixite’s priorities for the year. At the top: "Build high-end products that people respect." Just beneath: "Financial stability."

Over the next half-hour, a mission statement emerges. "Build tools that empower artists" evolves, in fits and starts, to "build creative experiences and tools for your inner artist." Kaneko then writes down three main takeaways from the week: Find a sustainable business model for the long term. Focus. Improve marketing.

"Last year we were in a good place financially, so it was very idealistic," says Ryan Harter, the company’s Android developer. "We talked about users a lot more."

"This year we’re maybe a little too focused on keeping the company alive," Sykora adds. "Well … not too focused."

The team laughs nervously.

Pixite whiteboard

Back in San Francisco, I meet with Danielle Levitas, senior vice president of research at App Annie. "I believe in the future of apps," Levitas says. She says that between now and 2020, downloads of non-game apps will quadruple around the world. But those numbers mask a radical shift in the app economy: most of the growth will come from foreign markets. And the app stores are dominated by giants: Facebook and Google make eight of the ten most-used apps, according to ComScore. In the United States, where more than 75 percent of people already own smartphones, apps are approaching the saturation point. Accordingly, the cost of acquiring new users continues to increase. Ads that let users install apps directly can range from $4 to $15 per user. If your app only costs $2 to begin with, ads are a non-starter.

If there’s a path forward for independent developers, it has to begin with a strong sense of purpose. Pixite can seem as if it’s still grasping for it. Underlying the tension is a basic difference of opinion between Pixite’s co-founders. Kaneko wants to focus on building tools for design professionals, while Sykora is convinced there is a much larger audience of consumers seeking tools for creative play. If Pixite’s apps could help to reach and grow that market, Sykora says, it could capture a large part of it for itself.

Outside gaming, the market for apps today values utility above all. Consider the case of Omni Group, a highly respected developer that has been building productivity tools since the days of NeXT. The company’s iOS apps range in price from $30 for a flexible writing app called OmniOutliner, to an unheard-of $75 for OmniPlan, a project manager. Ken Case, its founder and CEO, says iOS is the fastest-growing part of the company’s revenue. "It’s very important strategically to be there," Case says of iOS. "And it’s very important for exposure."

Still, he adds, "it’s not actually where the bulk of our revenue comes from." Desktop software still accounts for the majority of sales. But Case is fundamentally an App Store optimist: selling software has always been hard, he says. "In terms of how much money people are willing to spend, it’s no worse than it ever has been," he says. "The market of people who want to spend money on software and feel like it’s worth it is still out there." (Two things developers say would help their businesses become more sustainable: free trials and paid upgrades.)

Tools we need for work, like the ones OmniGroup makes, will stay on our home screens forever. But other apps are now more faddish than ever before. "It used to be that if you got over 10 million monthly active users, that was an incredible threshold," says Redpoint’s Sarver. "Now you can get 40 or 50 million and still come right back down. … I’ve just become really disheartened about an app’s ability to break above the noise and reach the consumer."

Pixite is trying to focus on the positive: thanks to Pigment, the company is currently bringing in enough to break even. But only two months into 2016, it’s unclear how long users will renew their Pigment subscriptions. The download chart for Pigment looks like the rest of Pixite’s apps: a big spike at launch, followed by gradual decline. To build a sustainable business, the company needs more downloads. "It’s definitely fallen off," Kaneko says. "We feel like we should probably have 10 times as many downloads."

The company recently brought in a business coach to help it refine its mission (again). Kaneko has taken over the company’s marketing efforts, and it plans to advertise for the first time this year. Eventually, the coloring book fad will pass. But if it can help Pixite figure out a subscription business in the meantime, it could serve as the lifeline that sees the company through to the next thing. Just like Web Albums did back in 2009.

Or Pixite could decide to abandon creating apps altogether, shifting gradually to making apps for other people. The market for software supports freelancers and solo entrepreneurs. It supports big venture-backed startups. But bootstrapping a six-person team has never looked harder. "It seems to be aggregating to a smaller set of winners who are getting more of the rewards," Sarver says. "It’s trending to only get harder and harder than it is right now."

Back at the retreat, after dinner at a brew pub, the team sets off in search of more to drink. It is a perfect San Diego evening, cool and breezy, and a sense of optimism prevails. The team has a renewed sense of focus, and something resembling a plan. This year would not be the end of Pixite. But it felt like the end of something. "Let’s keep walking till we hit the ocean," someone says, and they make their way toward the beach.

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Product by Frank Bi

Design by James Bareham

Edited by Michael Zelenko