App stores: The logical step for carriers

Vodafone’s plan to launch an online mobile app store marked the beginning of a new trend in the wireless space as we expect more carriers to jump on the bandwagon.
 
The move makes sense for Vodafone as it can leverage its existing relationships with application developers and content providers and would be a win-win situation for both application developers and the carrier.

Application developers would receive 70% revenue share for each application sold, and would have access to Vodafone’s large customer base (some 290 million subscribers globally and potentially close to a billion subscribers through its strategic partnerships). The vendor-led app stores generally don’t share revenue with carriers, which of course is the big incentive for carriers to develop their own.

Vodafone’s decision to enable developers to use its direct billing capabilities rather than credit card payment is set to become a key competitive advantage. Direct billing is consumers’ preferred payment option and the most efficient way to drive content sales.

Nokia, which plans to adopt direct carrier billing to gain the favor of carriers and fuel the adoption of its Ovi’s store, recently said that when the company starts locally with credit card billing and then move to operator billing, it sees a 70% lift in sales.

Direct carrier billing is likely to become a “must have” for app stores developed by carriers as it would allow them to keep control of the pipe.

Moreover, Vodafone’s plan to make available a set of network APIs, which will enable app developers to implement location aware and direct billing capabilities into their services, should be another driving force for the carrier. Ultimately, app developers could use the location information from Vodafone, which would help developers make significant savings.

More likely to follow

After Apple, Google, Nokia, Palm and others, many carriers are likely to make inroads into the mobile app store space. Ultimately, mobile app stores could become a lucrative business for many carriers.

Granted, revenue from mobile app stores will probably represent a small portion of the carrier’s total data revenue compared to messaging services (SMS especially).  Of note, several reports suggest that Apple made just $20-$45 million from its one billion apps.

Mobile app stores should help carriers move their customers away from off-deck portals. Many articles have been written about mobile app stores, but very few have actually addressed one important element: off-deck vs on-deck. With 30% of US downloads sales coming from off-deck portals (vs 70-80% in Europe), off-deck content/apps have experienced good traction in the past few years as carriers continued to open up their walled garden and migrate toward an open-network environment in order to offer a larger variety and more affordable content. Many carriers are likely to create their own app store to move their customers away from off-deck portals, where carriers are bypassed and barely make any money.

Bottom line

Many leading carriers are likely to follow suit as it would allow them to leverage their existing relationships with content providers and application developers, but most importantly move their customers away from off-deck portals, regain control of their “pipe”, and capture a large portion of this growing business.

Carriers’ own mobile app stores could end up being a gift from heaven for many carriers in a time where disruptive applications like Skype are threatening carriers’ voice ARPU and could make them become a dump pipe.

That said, solving cross-mobile app store interoperability issues and content discovery issues (as more content becomes available) will become critical. The battle of power between carriers and companies like Apple, Google, RIM, Nokia, Palm, and other mobile app providers, is set to intensify in the coming years as more carriers launch their own app stores.

At the end of the day, while mobile app store could mean more money for carriers, this could also become a big “headache” for many of them.

Julien Blin is a senior analyst for broadband applications for Maravedis -- [email protected]

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