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Launching apps to get acquired? Join the queue

While mobile users cannot get enough of applications, this alone does not explain why so many apps are being acquired ? and at eye-popping valuations. Despite an elusive formula for success, developers are increasingly creating new apps in the hopes of making a sale.

Facebook?s $1 billion deal for the Instagram photo sharing app may be the most obvious example but it is just one example of numerous deals in which mobile apps with relatively small teams and untried monetization strategies are attracting big investments. More big-money app deals are likely to take place this year as traditional digital and offline companies look for ways to increase their relevancy in the mobile era.

?We are going to see a lot more of this activity this year,? said Josh Martin, director of app research for the global wireless practice at Strategy Analytics, Newton, MA. ?There are a lot of guys out there that are looking to augment their platforms and for little money, they can improve the visibility of their brand and potentially drive some additional revenue.?

?Honestly, I am surprised by the valuations,? he said. ?Valuations have just gone crazy recently because there are more competitors.

?There are a number of companies that are interested in trying to replicate the Omgpop formula and sell for hundreds of millions of dollars.?

The next big thing
The thought of being able to replicate the success of an Instagram or Omgpop ? which recently sold to Zynga for $180 million ? is what is driving a lot of developers to create apps with the intention of selling.

However, app developers face significant challenges in building their businesses, including rising above the noise in an increasingly crowded space and building user downloads as well as repeat engagements.

Once a certain level of momentum is achieved, being acquired can make sense for some apps.

?We are bullish on continued M&A activity in mobile this year,? said Rajeev Chand, managing director and head of research at Rutberg & Co., San Francisco. ?We have seen a remarkable acceleration over the past year, and we expect it to continue.

?Often, after an initial stage of momentum, the risk/reward tradeoff makes M&A a consideration worth exploring,? he said.

One reason why some apps are being sold for so much is because bigwigs such as Apple, Google and Facebook want to insure they are first to the table for the next big thing.

?Apple, Google and Facebook are competing with each other for the next great idea,? Strategy Analytics? Mr. Martin said. ?This makes them want to go out and buy growing companies for as little as they can but before someone else does.

?This is why Facebook acquired Instagram ? it saw the apps increasing popularity on Android and wanted to grab it first,? he said.

Game on
Much of the consolidation in mobile apps is taking place in the gaming space, as companies that are already active in gaming look for ways to extend their position into mobile. Zynga?s March deal for Omgpop was largely driven by its Draw Something game, which has grown very quickly.

Gaming apps are a growing target for acquisition because the freemium business model appears to be working, with developers increasingly discovering that they can make money if they offer an app for free and then charge for virtual goods within the app.

For example, Storm8 ? which offers mobile games such as iMobsters, World War and Pets LIVE ? reportedly earned $1 million in a single day last year by enabling players to pay for increased features.

?Storm8 saw immediate success after enabling in-app merchandising,? Mr. Martin said. ?It is not like you buy an app once and that is it.

?There are multiple touch points where you can generate revenue over the long term,? he said.

Some apps have also been able to successfully leverage in-app advertising, which is quickly growing as marketers uncover the potential to reach targeted audiences by advertising in the right apps.

Another strategy for generating revenue that has proved successful for Rovio, the maker of the highly successful Angry Birds, is to license the brand for merchandising. There are Angry Birds plush toys, T-shirts and other merchandise.

?Clearly there are a lot of different ways to generate revenue in apps,? Mr. Martin said.

In addition to gaming, social networking apps are also hot right now.

Mobile payments-related apps are also generating interest from investors. For example, Intuit recently acquired mobile shopping app AisleBuyer.

Despite the interest in apps, replicating the success of some of an Instagram or Angry Birds could prove difficult for developers.

?Very rarely do you see what happened with Omgpop, where an app is non-existent one day and then suddenly it turns up and sits at the top of the charts for a while,? Mr. Martin said.