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What’s the deal about app stores?

No doubt the AppStore on iTunes has awakened the non-wireless industry to the potential of mobile content.  It has caused a flurry of announcement from companies entering the space, from mobile operators such as Vodafone and giant tech companies such as Microsoft (hey Amazon, where are you?).

But lately, the concept of app stores have gotten a bit of a trashing by industry experts, such as Tomi Ahonen and Mark Jaffe.  Tomi points out that app stores are as irrelevant to mobile telecoms as Segway is to cars.  He makes a strong case pointing to the fact that simple ringtones (the old style ones) earn 14 times more revenue than all app stores combined.  In fact, non messaging premium content (music, games, ringtones, etc) globally is worth $85 billion, while the estimated app store revenues for 2009 was $343 million (i.e. app stores are 1/250th in size of the overall premium content market, when you exclude messaging). Mark Jaffe disses app stores because they are too clunky and hard to navigate.  He feels that specialized stores need to pop-up, or it will never really hit mass market.

Both authors are right in that app stores are not the answer to everything, and in fact, since few have managed to do it well, all these new app stores simply means there are more chances to screw up a user experience.

I’ll add some interesting facts here: There was a similar hype about mobile games some time ago (almost 10 years ago, when there was 1 handset that could download and install anything – the Motorola A008). Naturally given the “snake” hysteria, the expectations was that everyone would become mobile gamers.

Alas, stats have shown that only about 4-6% of non-3G users, and app 10-20% of 3G handset owners ever bother to download a game. Yet, 25%+ of handset owners have played a game. This indicates that there is a problem in discovery and a problem in perhaps the value proposition of mobile games to the consumer.

The point is though, there is still only a small % of the population which will download and pay for mobile games – which is the #1 category for downloaded apps. That means all other categories of content have a % much less than that. And this has been stable for nearly 10 years! Mobile operators have pushed games for a long time now, but I think most have come to the realization that if you reach 10% of the user base you have done an ok job.

My company ran a promo with our mobile operator partner and managed a 25% user penetration, which is staggering. However, most of the promo was based on giving away a game. Once users had to pay, it gravitated towards the 10-12% mark again.

Advertising helps, but is expensive when you are retailing items worth $0.99-$5 (and especially when you only keep 50% which is the case when mobile billing is used). But if you stop advertising, sales will fall.  The economics simply are not there to make mobile games (and apps) any bigger than this small % of users.

What the iTunes app store has done though is opening up to the general non-techie/geeky population that you can download stuff to your phone other than ringtones. What are some of the tricks to get it right when selling on a small screen? Well, I don’t want to give away all of my secrets, but really it comes down to being a good retailer.  Some of the things we did in my old company for instance, sound simple because they were – but they were very effective:

  • We launched new games every Friday, which 1) times with the weekend when downloads are the highest and 2) trained our users to check in on our site that day
  • We randomized display of games, so that each time you came in, except for the new titles, you would see different games.  We also did not display items you had already purchased, which like the previous example both served to minimize the time it would take you to browse new content.  On a small screen the cost of time is huge, and anything you can do to help ease discovery helps
  • We introduced viral recommendation, which you can read about in the report “Sharing on a small screen“.
  • … and many other small tricks which together made our games portal one of the biggest successes in Europe

What remains to be seen if other players than Apple and the likes of Sony Ericsson manage to do a good job of launching app stores.  If not, getting the non-early adopters to continue to download apps may be set back for years, as getting it right is hard and the number of failed app stores are likely to be many.

Lastly: If you are a mobile games developer, or know a lot about the industry, feel free to take this poll about whether you are dropping J2ME in favor of iPhone + Android: [polldaddy poll=”2479129″]

Posted in Mobile Entertainment, The Business of Mobile.

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Wedbush predicting trouble for mobile operator networks

While the industry seems to be coming off the holiday break with a passionate anticipation for Google’s first phone which is to be called Nexus One (seriously people, it is just one phone. It doesn’t mean that much) – and while newsletters, bloggers and analysts are busy positioning themselves as the lead gurus in predicting trends for 2010, it is worth taking a step back to Wedbush Securities wireless data report which was released in late December.

Wireless data grew 29% in 2009 (largely driven by a huge increase in both picture and text messaging), which is close to the growth of 32% achieved in 2008.  Smartphones have now become a mainstay and in fact are expected to be roughly 18% of all phones shipped this year, compared to about 12% in 2008:

Smartphone and handset shipmentsWith the growth in smartphones comes the increased usage of video, which is what lays the heaviest burden on networks (+ of course laptops etc using wireless access for email and more). While video has shown tremendous growth, essentially doubling from 8m to 16m over 6 quarters, one has to wonder whether this is driven by a small class of really heavy users vs all smartphone owners:

Mobile video growthHowever, if you are a mobile network operator, you already have a problem despite this heavy user group not getting that much larger – because networks are already strained. Ask anyone who have tried to watch a live sports game on their mobile, especially in the city where one of the teams hail from. Nearly impossible. The heavy usage of video by certain users coupled with business users increased access to email when on the move is already creating a bad user experience, which could destroy a newbie smartphone owner’s desire to ever get a data plan (unless you are forced into it by your operator, which is ridiculous when the quality of service is so poor).

3G is expected to still be the main bearer of data, but it is also important to note that a large part of shipments will still be 2,5G handsets:

Handset Shipments (Millions) by Generation

Handset shipments by generation(Source: Wedbush and IDC)

Why is this important?  Well, from a mobile marketers perspective or a media company’s perspective, you cannot ignore this segment of the market.  Granted, it is logical to assume that the shipment of 2,5G handsets may be skewed towards poorer countries, but given that replacement cycles have taken a hit in the economic downturn, 2,5G phones still matter and are likely to matter for some time.  Apps are cool but wap is not dead – by any means.

There is one other note worthy point in Wedbush’s report, which has to do with the estimation of the market share of smartphones. The current estimates seem to indicate that Android’s share will be quite small in the next 3 years:

Smartphone Shipments by OS

Smartphone shipments by OSSource: (Wedbush and IDC)

Given that Motorola is now focusing exclusively on Android (and Verizon backing the flag ship device with a $100m campaign), and announcements from SonyEricsson and Samsung about further Android devices, this seems extremely under estimated, especially since there will be plenty of lower priced Android devices. (Note: if you have an interest  in learning more on smartphones and market share, please read my article on this subject and vote!).

Posted in The Business of Mobile.

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Poll 1: The price of device ownership

Figuring out device cost is not easy, because mobile operators frequently subsidize the devices towards their subscribers in order to lock in long term contracts. Total cost of ownership certainly include the costs you pay for data in addition to other services, and the total length of contract etc. Several attempts have been made to calculate these costs, but plans change all the time and having a relevant up-to-date comparison is difficult.  You could also look at actual production costs of devices with various OS built in from the likes of iSuppli, but even those analysis may not hold over time, as manufacturers come up with different models for the same OS.  Android may have an advantage here because it is not only a free platform, but developers can tailor it towards the lower end of the scale just as well as the high-end, evidence by Motorola’s strategy with Android focusing on the lower end. The amount of subsidies also matters, where for instance the iPhone is heavily subsidized towards the end users. Symbian, Windows Mobile and BlackBerry devices are often sold at high prices (although Symbian has made recent announcements about supporting mid-range devices).

Next comes service cost, which includes cost of data plans and price of applications and services.  Interestingly, high priced applications may actually serve as a lock-in if portability is not included (for instance, if you fork up $150 as I did for TomTom, you will think twice about changing OS and incur those costs again).  A smooth integration of wifi even matters here, as it serves to reduce data charges (Apple has to date done this much better than Windows Mobile, as anyone who has tried both will testify to that).  The trend for data plans, to deal with this portion first, is certainly that they will eventually become standard for all platforms, and prices will come down.  However, it is likely to take years before you see this across the board, thus the devices who are now sold almost exclusively with data plans, such as iPhones and BlackBerry’s may have a lead here. As for service and application costs, with the amazing number of free apps available, Apple certainly has a huge lead.  Given that Android is open source, it may catch up.  Windows Mobile apps may be higher priced and fewer due to the nature of the Windows eco-system, and the same likely applies for BlackBerry. Symbian may try to ride the coat tails of Java here, but really, what matters is native Symbian apps, and they are arguably all playing catch-up to Apple. Palm with their new Web OS may have attractive properties to develop for, but the question remains whether they will achieve enough distribution to attract enough developers.

The next aspect to look at is the Convenience Cost.  The first aspect, Ease of Use, is contentious.  The iPhone arguably made the smartphone a device for everyone, and the G1, Android’s first foray into the market, could surely appeal to nobody but techies.  However, take a look at HTC’s new Hero device you will see that capabilities for custom UI can produce amazing results.  Windows has understood this, and WM6.0 allowed for some nice implementations (again with HTC taking the lead. No surprise they claim to be the leaders in design).

An often overlooked aspect of ease of use is actually how easy it is to upgrade (both apps and OS). With iTunes, Apple has made it dead simple to upgrade. Microsoft leaves it completely up to the manufacturer on how to do this (I am a very frustrated Samsung i780 owner, who have had to learn how to modify the ROM myself in order to get the new Window Mobile updates.

In terms of Discoverability, it is one of the most difficult areas in mobile to get right, especially if you do not control the eco system. Mobile portals have generally been terrible, and most research has shown that unless you are on page 1 of a wap site, your content does not sell. Apple again may have taken the lead here with iTunes and the AppStore, and the question becomes now that the “secret is out”, is it just a matter of copying? Well, early attempts at this seem to indicate it is not.  AppStore’s are difficult to launch, and no doubt many of them will fail.  The Android camp may have made a major mistake by not providing a good web experience for their app store, despite it being evident that iTunes is one of the key success criteria behind the iPhone.  Symbian (mainly through Ovi), BlackBerry, Palm and Microsoft have all launched app stores, but they are way behind the curve.  And it is not just about building and app store, you have to make users come there. In the case of the iTunes AppStore, there is no other viable alternative, whereas with all other app stores, there will likely be a multitude of choices for the user, all implemented in a different way, which most likely will hurt the overall consumer experience because some users will have poor experiences with the app store of their choosing (or the app store forced upon them by the mobile operator or handset manufacturer).

Lastly, in mobile you cannot ignore the convenience of how you actually pay for a service.  SMS billing may be easy for the user, but has struggled for years with poor revenue models, and works less well for higher priced purchases. iTunes had a huge installed base with credit cards already being used, and currently has a clear advantage here.  Other players, who try to build an installed base purely on mobile content sales may struggle, as it will take time to build up volume and convince people to establish yet another digital wallet with your service.  Vodafone may help the Symbian camp with their app store, but it remains to be seen.

Please make sure that you take the poll to voice your opinion on the ranking of the smartphone OS in terms of the Cost equation of the value proposition:

Read Part 2: Defining the Benefits and take the second poll

Posted in The Business of Mobile.

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