Apps: Cheap, cheaper, cheapest.

Really?

If you ve visited the iTunes store recently, you may have noticed the new Top Grossing Apps List, which ranks applications by revenue generated. Among the big-ticket items: a $99.99 in-car navigation product by TomTom that includes turn-by-turn software and technology highlighting the most efficient routes; WolframAlpha, a complicated math app, for $49.99; DieCalc, a cutting-die estimating tool that costs $119.99; and the $39.99 NBA League Pass Mobile for basketball fans.

Does the flurry of pricey apps spell inflation? To find out, SmartMoney approached appshopper.com, a site that tracks app sales. We asked the company to compare the prices of the 100 top selling (paid) apps in October vs. the same month last year. But instead of inflation, it turns out that the average price of the bestsellers has dropped 16%. Last month, the average price was $2.59, down from $3.11 in October 2008. (Compare that with the Consumer Price Index, an inflation indicator, which is down 1.3% from a year ago as of September, the latest month for which data are available.)

A lower average price for the top-selling apps in one month over another doesn t necessarily mean app prices are definitively lower or trending in that direction. And even if you are a so-called top grosser, that doesn t reflect an app s popularity or how many people have them installed on their phones. The more costly apps certainly don t have the broader appeal of, say, I am T-Pain ($2.99), a bestseller that lets users mimic the rapper s trademark Auto-Tuned robotic voice.

Yet a 16% drop even if it s anecdotal -- is notable. It also prompts the question: What accounts for it?

Overall competition

The short answer to the price drop is the growing number of developers writing apps for the iTunes store.

Last week Apple announced that there are now more than 100,000 apps available in the app store, up from more than 3,000 a year ago. The company also says users have downloaded over two billion apps since the store launched in July 2008. (BlackBerry App World currently has more than 3,000 apps.) The platform has proven to be a goldmine for some individual developers and small tech outfits whose applications have hit it big. Now, major brand-name companies like Pizza Hut and Bank of America are getting in on the action too, hoping to reach customers through their smartphones. Prices must be coming down because of competition. If you want to compete, it has to be on price more than anything else, says Nick Holland, a senior analyst at Aite Group, a research and advisory firm.

Last month, Apple announced a rule change that makes it easy for iPhone app developers to sell content or features from within a free app. That means users can download a lite version of an app with limited capability for free, and if they like it, upgrade to the full or expanded version for a price.

For instance, game developer Oasys Mobile offers a free version of its app, Merlin s Legacy (think wizard duels and spell conjuring), but only the full version ($1.99) has all the game s features.

Offering something free initially gives companies the ability to reach a larger audience very quickly, letting developers get their product in front of users and get them interested. It also puts pressure on developers to think carefully about their pricing strategy.

Proliferation of iPhones

App developers might also be lowering their prices because they assume they ve already realized any surplus they could get from the novelty factor of the iPhone. As with a new high-end designer handbag, the well-heeled and fashion-forward are the first to purchase the item. But after the first stage of market penetration, the must-have quality surrounding these smartphones and multitude of applications wears off, says Shiv Bakhshi, founder and principal of Mobile Perspectives, a mobile technology and research firm.

After its initial release in 2007, Apple has continuously lowered the price of the iPhone to make it more affordable. The first phones were priced at $599 and almost immediately lowered to $399; an 8GB iPhone 3G can now be had for $99. As the iPhone gets adopted across a broader user base, buyers are choosing less-expensive apps and dragging overall prices down, Bakhshi says.

The 99-cent benchmark

Since it launched the iTunes store in 2003, Apple priced individual songs at 99 cents. In April, the company shifted to a variable pricing model with three tiers in order to capitalize on best-selling songs: 69 cents, 99 cents and $1.29 (for the latest and most popular hits).

Still, the 99-cent benchmark has stuck in consumers minds as a powerful barrier where so many of the apps for sale are also priced (even though the developers set prices for their products).

Apple has always had this [message of] Let s keep this below 99 cents, which comes back to their song pricing, says Holland. Apple has deliberately set the bar low. They want it to be an impulse purchase.