The Economics of Mobile Application Stores

apple-billionApple 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:

  1. 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
  2. 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
  3. 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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15 Comments on "The Economics of Mobile Application Stores"

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Daily News About Apple App Store : A few links about Apple App Store - Sunday, 17 May 2009 01:04
7 years 1 month ago

[…] The Economics of Mobile Application Store | Telecom Circle […]

C. Pintilei
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C. Pintilei
7 years 1 month ago
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… Read more »
SVN Arvind
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SVN Arvind
7 years 1 month ago

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

Mohit Agrawal
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7 years 1 month ago

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

Einar Rosenberg
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Einar Rosenberg
7 years 1 month ago
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… Read more »
SAMEER TIKOO
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7 years 1 month ago
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… Read more »
Mohit Agrawal
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7 years 1 month ago

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

Fred Stein
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7 years 1 month ago
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… Read more »
Rohit Agarwal
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7 years 1 month ago
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… Read more »
Mohit Agrawal
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7 years 1 month ago

Great points Rohit

Ankur Jindal
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7 years 1 month ago
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… Read more »
GS Rao
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GS Rao
7 years 1 month ago
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.… Read more »
jacky allal
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jacky allal
7 years 5 hours ago

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

Brian
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Brian
6 years 11 months ago
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)… Read more »
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[…] all of the garbage available on the iTunes App Store there are real steals as well. Looking at the economics it’s estimated Apple has made about $171 million from mobile applications, with total sales […]

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