Carriers struggle to cash in on app store success

Whatever else you can say about 2010, it was a huge year for mobile apps, and not just for Apple. According to app store analytics firm Distimo, prices are going down but the volume of new apps is growing phenomenally. Apple doubled its app count in 2010, while Android Market's volumes grew sixfold, and BlackBerry App World and Nokia's Ovi Store each showed triple digit growth (see sidebar, "Apps away!").

But while that's good news for Apple, Google, RIM and Nokia, as well as apps developers, the question, as usual, is what it all means for cellcos apart from extra data traffic. 

Cellcos have been struggling with this question since Apple launched the App Store in 2008, and the question has grown more pertinent as other mobile OS storefronts have taken off since then - where do operators fit in an OTT apps-driven market that doesn't require their direct participation?

That question was at the forefront of last November's Mobile Asia Congress, and the question itself is complicated further by the likelihood that it's not only a matter of smartphones growing more popular - which they are, according to analyst projections that expect them to outnumber feature phones in the next five years - but also the ways they influence the evolution of user behavior. 

"The growth of wireless connectivity, social networking and broader access to the Internet via mobile will change the way people interact and be entertained, and will create new commerce opportunities," HTC chief Peter Chou remarked onstage during the opening MAC keynotes. 

"The smartphone of the future will be your most intimate companion, your main device for communication and information - it will be your content portal, your physician, your wallet," said Chou. "The computing paradigm is shifting from the PC-based desktop to a new era of mobile Internet that is more self-defined and socially driven." 

That paradigm shift has spurred industry leaders to call for a more "open-minded" approach to mobile services. 

"Applications are changing the mobile ecology. We need to be open-minded to explore new fields, new business models, and cooperation with new partners," said China Mobile president Li Yue

Of course, how a given cellco distills that into an actual strategy will inevitably vary. China Mobile, for example, is banking on a combination of media apps and "daily life" apps that focus on transforming the smartphone into a daily productivity tool (i.e. a smartcard that pays your bus fare and opens your front-door lock). 

But a key theme that has emerged is the importance of focusing on the cellco's key strengths - namely their billing relationships with the customers and their network assets - to add value where OTT competitors can't. 

That's starting to happen now, but it's not just stopping there. Cellcos have also been busy developing a horizontal apps ecosystem that will see fruition early this year, and could not only make cellcos a relevant force in the overall apps game, but also do so in a way that keeps their existing business models more or less intact.

Enterprise play

The fear of becoming a "dumb pipe" has already driven many cellcos to think of ways to leverage their network assets as a differentiator. Ryudi Yamada, president and CEO of NTT DoCoMo, cites it as a key element of the company's business transformation strategy. 

"The most important aspect of business transformation is to provide unique and competitive services, to include offering value added functions that can only be offered by operators, such as authentication and billing," he said at MAC. "Carriers can offer unique value to customers and avoid the risk of becoming a dumb pipe."

More to the point, cellcos have an opportunity to target enterprise customers with that unique value-add, says Sharat Sinha, managing director for the managed and cloud services division at Cisco Systems, in part because much of the opportunity in the consumer segment has already been commandeered by the mobile OS vendors and other OTT content providers. 

"In the consumer segment, most of the major OTT players have already taken control - Apple and Google and the likes of them -because of the end device and the application in the cloud connection," Sinha told Wireless Asia. "Telcos can make use of their network characteristics for specific apps around electronic banking, for example, but that is limited in scope, because all the major OTT players have taken up a significant part of the value chain."

As such, he says, there is a significant opportunity for cellcos to target enterprises, particularly SMBs, with apps and services that leverage their ability to create a hosted and secured cloud environment, from software-as-a-service to platform-as-a-service and even infrastructure-as-a-service.

"When you look at hosting and collaboration services on top of a data center, telcos control about 80% of that value chain," he says.

Targeting enterprises also makes sense because they tend to look for the kinds of security guarantees and SLAs that operators can offer, Sinha adds. "On the consumer side, if the link breaks a couple of times or there's a little delay there's not much of an impact. But for enterprises, they want security and some level of privacy for content, and telcos are in a position to provide that, as well as things like bandwidth control and scalability. Telcos can do that better than OTT players."

Ironically, this advantage also enables operators to partner with OTT content/service providers who need that kind of secure value-add, Sinha notes.

"Companies like SAP and Oracle have been coming out with on-demand services, and when they do they typically tie up with telcos to deliver those services, whether it's purely white-labeled or joint-branded," he says. "Apps are usually either mission-critical or handle the core functions of that SMB, therefore there's a level of SLA that needs to be provided that's closely tied to bandwidth and network availability."

Security value-add

Security could also prove to be an attractive value-add for consumers as smartphones become more prevalent. Last October, Juniper Networks made just such a pitch with its Junos Pulse mobile security solution, which enables cellcos to provide antivirus, personal firewall, device monitoring/control, anti-spam and loss/theft protection to smartphones. While the solution is aimed mainly at enterprises, cellcos can also use it to target consumers who are unaware of just how much personal data they store on their smartphones (from email and text messages to photos and even health and financial data) until their devices get lost or stolen. 

Mark Bauhaus, executive vice president and general manager for the service layer technologies business group at Juniper Networks, explains that while the solution involves a client on the smartphone continuously scanning for spyware, malware, viruses, spam, etc, and monitoring the phone to enable data backup and remote commands such as locating it when it's lost, wiping data if it can't be found and restoring data if/when it is found, "all of that has to be connected to the service provider headend, which may be a managed service offered by the service provider, or it may be self-management where the consumer goes in and says please find my phone, wipe it, those kinds of things. But it's that connection to the service provider that's high value-add that the service provider can monetize."

Bauhaus adds that he has seen cases "where people would be willing to pay between $15 and $30 a month just to find a lost phone, let alone the other 95% of what this solution does. There are also what I'd call secure communities of interest - think about your company, financial services and healthcare. Each of those is an opportunity either for the consumer to pay a VAS fee, or a company or supplier." 

For operators with quad-play assets, another way they can leverage their network chops - at least in the future - is providing a seamless multiscreen experience from one device to another, says Sinha of Cisco

"The idea there is that if you're watching a program on television and you leave your home, you can continue watching that program on a small device," he explains. "That requires someone storing your session and your identity, and that can't be provided by someone over the top because the telco knows how much bandwidth need to be provided to the end device and knows the characteristics of that device. That's not reality yet, though."
Going horizontal

While the above examples are ways cellcos can chase VAS revenues outside of the apps ecosystem as it currently exists, that's not to say cellcos have no role to play in the apps game. Operators have already banded together under several different initiatives in order to assert their role in the overall apps development space. 

Two initiatives have been driven by the GSM Association - OneAPI, which aims to help cellcos open their billing assets to apps developers in a standardized way, and the Wholesale Application Community (WAC), which is working to establish a neutral wholesale framework for apps developers. WAC - which released its first SDK last year - is building a widget framework based on specs already developed by JIL (Joint Innovation Lab) and OMTP (via its BONDI standard). WAC's specs will allow developers to create web apps and widgets with richer functionality, and via a single entity that allows them to bypass the headaches of writing for various OSs. More to the point, WAC - combined with OneAPI - also gives cellcos a way to participate more directly in the apps ecosystem not only by offering WAC widgets, but also adding differentiated value to them via their own APIs. 

A third initiative - and one that's been around for a couple of years - is the LiMo Foundation, an operator-led group that counts NTT DoCoMo and Vodafone among its founders that is developing an open-source Linux-based OS for handsets intended as a neutral alternative to vendor OSs from Apple, Google and Microsoft. 

All of this - LiMo, WAC and OneAPI - is the result of operators "collaborating in order to establish a strong horizontal ecosystem to compete with or at least counter-balance the strong vertical ecosystem from Apple and the elaborate ecosystem Google is establishing around Android," says LiMo Foundation executive director Morgan Gilles. 

"The neutral device platform  enables the operators to have freedom of choice in terms of which application environments and which app stores they deploy in conjunction with the handset," Gilles told Wireless Asia. "Android is obviously tied in with Google, so it's a channel to market for Google apps and advertising, whereas in the LiMo case, operators have freedom to deploy their own app stores and work closely with the WAC infrastructure and establish their own value."

Practically speaking, he adds, "These platforms are knitted together through APIs, that determine the flow of added value through apps and content into the core business model of the operators. So you have a marrying of business strategy and technology strategy."

What all this means in terms of the bottom line is, of course, too early to tell. WAC was scheduled to open for business at the Mobile World Congress in February as we went to press, and while the LiMo Foundation says 65 handsets are on the market running LiMo, that's from just four handset makers - NEC, Panasonic, Samsung and Motorola (with the first two accounting for most of that figure). Gilles says more devices will becoming out with the latest version of the LiMo platform in the second half of this year. 

One thing it won't mean, Gilles insists, is a fundamental change in the cellco business model. 

"The traditional business models are still pretty much intact for operators - the core platform and core technology is the network, and the revenue stream is pretty much still ARPU-based," he says. "The additional activities are really intended to extend that core technology platform and augment the value provided to users." 

Gilles illustrates the point by comparing the relationship between cellcos and WAC with the relationship between Google and Android. 

"Google's core platform is search and advertising, and Android itself doesn't generate much revenue, but it does put Google search and advertising in the hands of mobile users, and offers Android apps make it more attractive to users," he says. "From an operator's perspective, WAC apps delivered via an operator's own app store makes the operator's network more attractive to consumers, but the main revenue stream is still the traditional one."

If nothing else, DoCoMo chief Ryudi Yamada certainly sees it that way. At a time when cellcos have been wondering how to get by as data ARPUs aren't growing enough to offset the decline in voice ARPUs, Yamada says the current smartphone/apps trend can actually reverse declining ARPUs - with the right strategy. 

Yamada says DoCoMo's various content initiatives from i-mode and i-appli to push services like i-concier and i-channel have boosted packet data revenues to account for nearly 50% of ARPU already.

"We have set a target to increase that to over 50% of ARPU this fiscal year, and to halt the decline of aggregate ARPU in FY2011, and then help it to recover and grow in FY2012," he said. "We're well positioned to achieve that with apps and smartphones."

Apps away!

Apple's rivals are gaining fast in the app race

Apple finally started facing some real competition in the app store market in 2010, with its upstart rivals outpacing it by growth in percentage of apps offered, according to Distimo.

While the Apple App Store grew the most in terms of volume of applications, doubling its total during the year to nearly 300,000, its competitors showed signs of catching up quickly in terms of developer support.

Android Market's volumes grew sixfold to almost 130,000, while BlackBerry App World and Nokia's Ovi Store each showed triple digit growth to a respective 18,000 and 25,000 apps, the app store analytics firm's 2010 report shows.

The proportion of free apps increased across all four platforms, and the average price of apps also almost universally declined, in a trend Distimo said indicated a shift towards monetization methods other than charging for app purchases.

The challengers benefited the most from this trend, with the number of free apps on the Ovi Store growing by nearly 900% in 2010 ?compared to around 260% for paid apps. The disparity may also be down to the unavailability of operator billing for a number of Ovi Store users, Distimo said.

Prices for apps across all four platforms also fell more in line over the year, as the market became more standardized.

Broken down by category, Apple's store saw a trend towards more business and productivity apps while BlackBerry App World had more growth in entertainment-themed products - despite RIM's reputation as a business-focused handset maker.

The offerings on Android Market and Ovi were more evenly balanced between business and pleasure. 
- Dylan Bushell-Embling

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