In the science lab of application development, Xtreme Labs is the petri dish.
Located in the heart of downtown Toronto, the smart-phone applications maker isn't very high profile, but its products are. The 45-person operation, part of the venture capital firm Extreme Venture Partners, has designed apps ranging from the restaurant-finder UrbanSpoon to Dictionary.com.
Xtreme Labs also functions as a sort of testing ground - a place where programmers and designers can throw ideas at the wall and see what sticks.
"It's an incubation chamber for [intellectual property]" says Farhan Thawar, Xtreme Labs' vice-president of engineering. "We're doing things that have not been done before."
The company is designed to function as a team environment. Employees work in pairs on the same code, the idea being that if one person gets stuck, the other person can help. (And, with two sets of eyes on the same computer screen, it's more difficult to waste time on Facebook.) The company also functions in close proximity to EVP's other startups, and the various companies spend a lot of time working together.
But perhaps more significant than Xtreme Labs' early success is the company's place in the transformation of the software industry.
Quietly, Canada is becoming one of the leading smart-phone application development hubs in the world. As more users switch from traditional cellphones to mobile devices such as the iPhone and the BlackBerry, there's a rush to develop content for the (very) small screen. Indeed, tech powerhouses such as Microsoft and Google have focused much of their new research and development work on mobile computing.
While mobile apps may be relatively small, their revenue projections are not. Mr. Thawar describes expectations for a successful app in terms of millions of downloads and millions of dollars in revenue. And the timeline for such expectations is often measured in months.
He points to iShoot, a tank artillery game that costs $2.99 to download and netted its developer, Ethan Nicholas, $37,000 in a single day, and $600,000 in a single month. Mr. Nicholas has since quit his day job to develop more games.
In addition, major content producers are spending billions to put their content on smart phones. That has fuelled the growth of companies such as Polar Mobile, a Toronto-based developer that has designed apps for Time Magazine, Sports Illustrated and the Food Network, among others, and Markham, Ont.-based Marketcircle, which designs business software for Apple's Mac and iPhone, and will likely see a new market once the iPad tablet computer goes on sale.
More than anyone, the smart phone revolution has benefited developers of small applications. Where tech startups once required millions of dollars to get off the ground, a flood of smaller businesses are popping up at a fraction of the startup cost.
That shift couldn't come at a more appropriate time. According to Canada's Venture Capital & Private Equity Association, venture capital investment in Canada last year reached its lowest level in 13 years, dropping to just $1-billion, a 27-per-cent tumble from 2008.
"The nationwide statistics demonstrate the lack of capital in the venture capital industry," the group's president, Gregory Smith, said in a statement. "The availability of VC dollars has been eroding for years. We are failing to capitalize on the potential of our entrepreneurs and small growth companies, which have traditionally been vital drivers of jobs and prosperity for Canadians."
According to independent technology analyst Carmi Levy, the shortage of cash makes smart phone development - where an idea can become a prototype over the course of a weekend - all the more attractive.
"The timing could not be better because the barriers to entry for smart phone developers is significantly lower than for conventional software developers."
As the money dries up, some VC firms are looking more closely at app-development companies that run on few employees and little cash. The BlackBerry Partners Fund, for example, takes such an approach, focusing mostly on small developers who tailor their apps to Research In Motion's smart phones.
Indeed, RIM is a major catalyst in the Canadian smart phone app revolution. One of the reasons UrbanSpoon turned to Xtreme Labs to develop its BlackBerry app is because, unlike development for Apple's iPhone, BlackBerry apps must be designed for several versions of the device, with entirely different software and hardware constraints. Xtreme, which also designs apps for other smart phones, often supplements its staff with co-op students from Waterloo, Ont., arguably Canada's technology capital.
Over time, the mobile application market may experience the same shift as the video game industry: As devices become more powerful and developers take advantage of that, the cost of building new applications steadily rises. As Mr. Levy points out, the average cost of producing a game for Sony's Playstation 3, for example, is considerably more than for the original Playstation. With the coming launch of the iPad tablet and similar mobile devices later this year, application development may follow a similar curve.
But that doesn't necessarily mean Canada - where the first BlackBerrys ushered in the smart phone revolution - will lose its mobile development edge.
"A lot of the core technology was developed here - smart phone technology really came of age in Canada," Mr. Levy says.
"For a country of our size, we really do have an advanced wireless environment, and development goes hand in hand with that."