What are risk profile and profitability of development different Android application types?
I would say there are three kind of applications:
I would say that group 1. is not so risky if one can create a good product. Group 3. is maybe more speculative, one can get rich maybe, or just waste time and money on a useless service/product. I am not much into games but I guess it is a good business for people already knowing how to develop games, and wasted time otherwise.
Please feel free to modify or add new "category".
Monetization in android is a major problem, regardless of the category. Selling an app is a non starter... Angry birds themselves knew that, which is why they went for ads. The only exception is cut the rope, but they had lots of money to spend on advertising.
Ads are also a problem, since it is very hard to get the number of downloads where it makes sense. You can expect to make around 0.4 cents (not dollars) per download, which means that you can have a successful app that makes around $4 a month.
In app purchases work great if you have a game that supports these mechanics, and get critical mass (think zynga games). The game Pah!, which had 202,000 downloads made $200 by making player pay the $0.99 for the game (the different payment platforms they tried just didn't work, and most of the world doesn't use Google checkout).
You can try StartApp which at least promise 5 cents for US downloads (1 cent non US), but that means bundling with their search app (it downloads at the same time, and has a different icon for running it). If that bothers you or your users, then its no good.
The iPhone does have a better market, since you cannot do anything (other then make phone calls) with that device without adding your credit card (they have over 225M cards in their system) so buying is easier. You still need to worry about piracy - Pah! has 600K downloads, sells for $0.99 and they made only $60K (they are still a success).
Its very hard to make money in this business, as most business models don't work. In fact, I am working on a different business model myself, but I won't go into that, since its still in private beta, and this community doesn't appreciate it when people promote their own businesses.
I have tried group 1 and group 3 applications on Android, and mostly agree with what RonGa says. For me , group 3 apps make more money (although it is still peanuts), mostly because of one app which has half a million downloads.
I'd say you should go for group 1 if you have something far better than what already exists, not just something which is just a "good product". If you just want to replicate or improve slightly on existing apps, maybe you should try group 3.
I however have a few pointers on how to extract as much as you can from your apps -
1) Have both free and paid versions, and a popup once in a while in the free version asking to upgrade to the paid one.
2) Use multiple ad networks in the free version.
3) Have multiple entry points like alerts and widgets.
4) Have social integration - like publishing on FB or forwarding via SMS.
Android does have a future - because a lot of people are going to come to Android (0.5 million devices sold daily), but if you have to start Mobile dev, go for iOS !
All of your options have the same risk profile and the same profitability profile.
Making millions is NOT about your product ... product has NOTHING to do with how successful / risky your business is.
The truth people buy just about any junk if you market it right : From McDonalds to substitutes for Brest Milk (don't get me started with that one).
Having a good product helps.... but product is NOT the most important.
What is important? a business system. What's your route to market? Build an app and pray that it's the next Angry Birds? Praying is good too so don't underestimate it, but there are thousands and thousands of developers building the next Angry Birds.
So, anyone of your options can be loss risk / high profitability if it's backed up by the right plan and obeys some fundamental laws of marketing and psychology.