The Economics of Mobile Application Stores
Apple Application Store delivered its billionth application to its user on 23rd April. I do not know if Apple is the first front store to clock a billion downloads but certainly, it is the most talked about application store. The hype created by Apple around applications has made the phone much more personalized and useful to the user. Will Apple be able to sustain the hype is yet to be seen but one thing is certain, the competitive landscape would be very different in this space in the years to come.
Operators and a few third party stores have been offering the applications for a long time now. Most of the operators have their own content portal from where the users can download the applications. Vodafone has “Vodafone Live”, NTT DoCoMo has “iAppli” and Airtel has “Airtel Live” as portals from where applications can also be downloaded. However, after the launch of Apple Application Store, many other device vendors like Nokia, Palm, RIM and Operating System owners like Google and Microsoft have announced their own specialized applications store. The strong competition from the new players is forcing the operators to alter their strategies.
There are essentially three types of stores:
- Operator Portals, e.g. Vodafone Live – Normally, these type of stores are within the walled garden of the operator and have an inherent advantage of having the direct billing to consumer facility. The developers need to tie-up with the operator and the operator takes over the responsibility of marketing, distribution and billing. However, in most of the cases, barring Japan, the revenue share is highly skewed in favour of the operator. In Japan, close to 90% of revenues are shared with the developer which is a big incentive for the developers to develop quality applications
- 3rd Party Store Fronts, e.g. GetJar – The users use the open internet to access the 3rd party application stores which supports a large number of platforms and devices. The developer gets a high revenue share but marketing and visibility is a concern in this model. Unlike the operator portal or the device stores, the store does not have direct visibility to the users and hence the users have to search for these stores
- Platform Application Stores, e.g. Ovi Store, Android Market – These are the new category of application stores that are being built by the device vendors and the operating system vendors. The biggest advantage is that the stores are embedded into the device and hence the discovery is simple. Moreover, they can target a large user base due to the volumes each device vendor does. This high volume potential is a big draw for the developers. Apple has also started the trend of sharing up to 70% of net revenues with the developers which means the developers are in demand like never before. The platforms can be proprietary (e.g. Apple) or open system (e.g. Symbian, Android). The trend in the recent times is towards a more open ecosystem
It is important to understand the economics of applications to be able to fully appreciate the recent competitive intensity in this space. I will use Apple as an example simply because there are more data points available for Apple. Apple Store has seen downloads of 1 billion applications and if we assume that iPod users would have downloaded 38% of these applications (out of 37 mn Apple devices, 23 mn are phones and 14 mn are iPods), then the iPhone users would have downloaded 620 million applications. Out of these 620 million applications, 75% are free applications (based on a survey by Wireless Media Lab, Mar’09) and paid applications had an ASP of approximately $1.1 (most downloads were at 99 cents price point). This means that the iPhone owners paid $171 million as revenues to the Apple Store since the store was launched in Jul-08. Taking a 30% revenues share for Apple, Apple’s net revenues were $51 million ($68 million annualized). This may not be a big amount but considering the pull these applications have, the actual benefit get reflected in the device sales and lower marketing efforts for Apple. Counting the iPod revenues as well, the total store revenues would be in excess of $80 million for nine months.
According to Strategy Analytics, Apple has currently a 12% market share by volume in the mobile application market. If Apple iPhone sold 620 million applications in 9 months time and taking its market share up to 15% by 2009 end, then the annual applications demand in 2009 is likely to be 5.5 billion which is huge!!! The market ASP on an application is around $1.5 (much higher than Apple as Apple has 75% of its download as free vs. 40% free application downloads for the industry) which means that the total applications market is worth $8 billion. 67% of all the application downloads happen through the operator portal or BREW and the rest by other players. Developers get 70% from the device vendor stores, 60% from 3rd party stores and 50% from the operator portal. This means that the developer’s share of revenues is 53% on average or $4.3 billion out of a total of $8 billion while the operators earn $2.8 billion from revenue share apart from the access charges. The non-operator store owners get the rest of the money i.e. $0.85 billion. The total revenues from applications are expected to double to $16 billion by 2013. Apart from the revenues from the application sales, another stream of revenues is advertisements which could in fact exceed the revenues from application sales in the years to come.
Apart from the revenues that the application stores can drive, there are other indirect benefits of promoting application usage. It is a well established perception that Apple users have a much higher ARPU than the other device users. The Apple users are also likely to be more loyal to their carriers. Now, that is a game changer for operators. Carriers gain the most from the success of the application stores irrespective of who owns the stores. However, the operators still have a fear of getting marginalized and hence are planning to strengthen their own stores and platforms. Vodafone recently announced its intention to open its network from 3rd party developers. Multi-country operators like Vodafone with large customer base can afford to develop their own platforms but the smaller single country carriers would be left with two options – Either “Do Nothing” and still gain from the revenue share and access charges on account of increased downloads. Alternatively, they can form alliances with other operators across the world and have common platforms. Vodafone has an alliance with Verizon and China Mobile, SingTel has an alliance with Telstra, Airtel, Globe and others. These alliances will provide strength to the carriers in future. Alliances can also be formed with 3rd party storefronts as they may not pose a huge threat to the operators.
Amongst the device vendors, there are two categories – One that has a huge focus on application stores like Apple, Nokia, RIM, etc. and others like the Korean vendors who have a “Me Too” strategy for application stores and would not like to antagonize the operators by focusing on application store. Operators may want to tie-up with the second category of vendors but the consumer pull may force them not to ignore the first category of the device vendor. The wireless business models are being redifined and with different ambitions of the entities in the value chain, the power game is now getting interesting.
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Hi Mohit,
Very good article. Do you have any insights on what kind of apps are being used in US/WE and what are the ones which are likely to be popular in India.
Arvind
Thanks Arvind for your kind words. In the US, the most popular applications are “Just for Fun” which is a wide category of applications typically applications that cannot be fit in any other category. The other set of popular applications are related to “Dating” and “Social Networking”. “Mobile Utilities” are also getting popular but the downloads per user are still small for this category
Hello Mohit,
Do you have any idea how much download traffic was generated (as data transfer) for the operator since the billion downloads? In the same vein, do you know how much application generated data is being transferred through operator’s pipes? The transfer is still charged by the kB and some of the applications only use the operator’s infrastructure to get updates. Are you ready for video apps on mobiles?
You provided many figures to substantiate your analysis. Will it be possible to provide the links (outside Telecom Circle) to the origin of the data. If you had paid for it, just provide the link where the purchase is possible. I am building an MBA and some of this analysis can come handy to my assessments. You will be given full credit in the notes.
Thanks,
Constantin
Hello Mohit,
It is a pleasure to read your articles. I have a few queries:
1. My understanding is that you have focused on consumer apps here and the economics associated with it. Do you see a role for VAS providers stepping in to develop more consumer apps since they have the domain knowledge to churn out innovative apps?
2. Since VAS providers are kind of “hiding behind the scenes” in the whole mobile ecosystem is it an opportunity for VAS providers to build their own brand and connect directly to the consumers?
3. What kind of impact shall we see on the “mobile app stores” with the introduction of 3G in India (especially b/w hungry apps like gaming, video streaming etc.)? If there is any data available to project the estimated revenue share, increase in market size etc. that will be helpful.
Thanks,
Sameer.
Sameer,
I do believe that there would be a few VAS providers who whould connect directly with the consumers and would use the mobile payment for direct billing. However, since the VAS provider space is fragmented, we are going to see very few successful direct to consumer models.
In terms of 3G, if you are talking specifically about India, I think the 3G spectrum would be used primarily for voice, data cards and to some extent video conferencing. I do not see any killer service or application that would fuel the 3G growth in India
The surge in app stores is the same philosophy that has made IBM successful again. its not about the hardware anymore, its about the uses. there’s an old saying I coined years ago. Hardware is a tool, and software is the use. a tool is useless without uses. as we move forward with mobiles, they are no longer just for voice, they aren’t even just for data access, they are a link to everything from people, places, things, etc. the apps are the future of the carriers because if not, they become dumb pipes, and the same goes for the phone manufacturers who don’t just want to compete on hardware which has a shrinking return on profits. applications can be low in cost to implement and high in profit if they take off. the next step after apps is services, or rather services that create expanded uses on apps. app stores are the future because being able to have the right use can make a carrier or phone model more valuable. with nearly 200 different variations of mobile OS’s, developing an app for every phone is pretty impossible, so getting the right app on one handset on one carrier can also be a barrier and edge over competitors, at least for a few months till the app or service is copied onto others. this is the new evolution and both industry and consumers will benefit from the innovation wars to come in the handset, which is the most ubiquitous device on the planet.
Right now, mobile applications are either just for fun and games, or to access content, but other than that, what lacks in mobile applications is interaction and what we call virtual touch, where NFC gives the interactive, intuitive link between the vitual world and the physical world is something that will take mobile apps to the next level by giving a real world value to retailers, to buildings, to other consumer devices, to conneting to people and things, and so much more. so apps are the future, but having a technology in phones that can allow for intuitive and secure connection to the network and to services makes NFC, the piece of hardware that makes apps truly a value to everyone.
Great work, Mohit.
Mobile Application Stores are part of a major sea change in economics. Phones are no longer a slave to the Service Providers. Applications are no longer prisoners in walled gardens.
The value is shifting to the mobile devices, mobile app developers, and to the SaaS providers.
Apple leads the way. And they lead in the right way, by helping others, the developers of apps and SaaS, grow and prosper.
The analysis of the iPhone’s app revenue is excellent. Let’s revisit this data in a year. I will predict a nice increase in revenue per iPhone/iPod Touch. Many apps are free right now, in what is an extended Beta, which also doubles as a viral marketing business tool. To see a complete picture, we need to count the SaaS revenues, that are enabled by Smart Phone front-ends.
The other part of this economic model is the sustained growth of Smart Phones. This amplifies the business model for Mobile App Stores, Mobile Apps, and Mobile SaaS.
From the onset it looks really interesting that apps may be the next killer application for increasing the revenues. However there are some challenges that I think should be take care of
1. Application Visibility – How will you make the application visible to the end user? I understand there will be a portal from device maker / carrier but with more than 1000+ applications, I don’t know how will the developers make the apps visible or as marketing people say, break through the application clutter. There may be a search engine, but the same problem still remains. Like at the time of Googling, most of the people are interested in first 10 search results etc. This may lead to the scenario where there will be few popular applications which will be highlighted on the front page of the portal and rest of them may get downloaded once or twice. In that case, I don’t know how the ecosystem will work out unless some kind of long tail strategy has beent hought of by the store owners.
2. Payments – How will the end user make te payment? If its throught he operator, than certainly operator will be the biggest beneficiary. Currently many m-payments applications are coming up, but that will need to scale up before the device makers & 3rd party store fronts will gain from applications
3. Developers network – I think there should be a strong developer network like Sun Developer Network for the applications to take off. In this case it will be easier for the device makers for they already have the developer network in place. Telecom operators forming a developer network won’t be an easy thing, for they don’t even have a single platform for installing the apps ( for e.g. I may be carrying a motorola phone and won’t be interested in symbian apps that may be on offer from operator).
4. Self Built Apps – I think this could be one of the hottest area where one can build the apps according to the need. For this there has to be a widget based platform (like yahoo Pipes) that can help a novice to build an app according to the need of the day.
Great points Rohit
HI Mohit,
Very nice analysis done for the Application market.
I would like to add few points:
1. As Rohit pointed to visibility of applications, what I see it is not the marketing alone which can make application successful. It is the “network effect” the application is able to create. Success of sites like facebook, orkut etc are due to fact that they have been able to successfully create the “network effect”. Going to these sites may not be my choice but it is guided by my peer groups preference for it.
2. Payments or money from the applications are again subjective. Emergence of third party payment gateways like credit card, debit card, m-pay etc is increasin. The plastic money is replacing the paper currency at a very high rate, it only provides the independence but also higher paying capacity. The other fact is subscriber might not be paying for using the application directly, but the one may make money thru the end service provider(content provider). Like an application where one is allowed to make reservations for travel on any airline without actually going to an agent, hence actually saving for the airlines in terms of commisions. The airlines can directly pay the application provider for every ticket booked thru them.
What I see is the applications which are more customer centric, able to provide benefit to a community with least direct impact on the wallet are going to rule the mobile internet.
Thankx
Ankur
Late to join the party! But great site and articles.
I did have a slightly different view on your raising the bar of apps at $1.1 now to $1.5 in a year purely based on the premise ‘Apple has 75% of its download as free vs. 40% free application downloads for the industry’ – I guess the huge hit rates they get is due to the high mix of free v/s paid apps and am sure that some of the bigger h/w and s/w players in the industry will try to up the ante with higher skew towards free apps. This would help get higher traction and eventually higher prpensity to consume and pay!
That brings me to the other aspect that posibly needs to be considered i.e. ‘higher data revenue by operators’. While larger operators will have their stores, co-brand the store, have some play of their own, there will be some operators who just sit back and see the likes of Apple, Ovi, Android, BB Stores available for their consumers and just laugh their way to the bank with smart data plans to consume these apps
Excellent article Mohit !
I assume that market share and revenue figures you brilliantly provided above are refering to consumer applications. Do you have any figures or pointers related to enterprise mobility app?
Thanks,
Jacky
Nice analysis Mohit,
One factor that will remain important will be for the industry to arrive at a win-win role for the operator as the abundance of applications grows across the mobile internet ecosystem. 40% of mobile operators saw revenues fall in Q109, even as the uptake in mobile broadband usage grows 40-50% quarterly. With revenues per bit declining, operators are advancing rapidly toward a scenario where the more their mobile data networks are used, the more they lose. Despite any potential operator success gained from jumping into the appstore arena, operators are likely to maintain more relevance (and revenues) from focusing on marketing, user experience development, provisioning, billing, etc. I discuss this more at the Cisco SP Mobility blog at:
https://www.myciscocommunity.com/community/sp/mob...
Comments welcome