Original article – Operator billing for third party app stores: changes ahead
There was a rapid rise in billing partnerships between mobile operators and handset and platform vendor app stores in the last five months. There is a strong market need for greater flexibility, and consumer convenience and inclusion in paying for app downloads; in both mature, and particularly in emerging, markets.
Such deals will benefit all parties, with content and app developers set to gain most from this trend. By supporting greater choice and more convenience in payment options for applications, telco billing will aid faster growth in paid-for application downloads, particularly in the emerging markets.
Telcos will get a nice, if not a large, revenue boost from these partnerships. But the move will add to the pressure on telco’s own app store strategies, by making other’s app stores far more attractive than they are today. In effect, third party billing may be counter-productive to realizing telcos own content provider dreams – yet it may well be more profitable upside on the pure ‘bit pipe’ nightmare.
Third party billing a good development move
In the last five months there has been a wave of billing partnerships between device and/or platform vendor app stores and telcos – both in mature and emerging markets. Examples include RIM/Blackberry (with Vodafone), Microsoft (Orange), Nokia (Reliance, UK operators), Google/Android (AT&T).
Many others (for example Opera and Samsung) have publicly announced their intentions to form billing partnerships with operators in multiple markets to support their respective app store strategies. Many telcos harbor strong mobile content ambitions via their own applications stores, so why are telcos making steps that appear to aid competing app store platforms, seemingly at the expense of their own?
The key driver behind this trend is the strong market need for greater consumer convenience and inclusion, which is essential for device and platform vendor app stores. Insisting on credit card payment for apps purchases is a clean, and relatively low cost method. But that leaves out millions of people in the mature markets, and billions in the emerging countries, that don’t have access to a card (or more recently, mobile) payment alternatives. Moreover, some card-owning consumers either have concerns with security, or find the credit card payment process cumbersome. Operator billing, whether postpaid or prepaid, is often an easier and more trusted charging mechanism for consumers. Telco billing can also make the currently holy grails of one-click and in-application charging much more convenient for the consumer.
However, third party app stores will find that telco billing comes at a substantially higher cost than the 2% to 3% charges levied by credit card issuers, even if few details of the revenue sharing arrangements have been publicly disclosed so far. Our research suggests that in emerging markets, this figure is in the 15% to 25% range. This takes into account the higher cost of running the airtime distribution network (i.e. typical 10% dealer airtime commissions), and the higher credit/fraud risk these players face. Mature market telcos with predominantly postpaid customer bases have a lower cost in this respect, but still it would unlikely to be less than 10%.
Content providers benefit, even with a lower revenue share
Content providers stand most to gain from this development. At first sight, the rise of telco billing means that their cut may be lower than the current 70% that they currently get on paid app store downloads. While the 70/30 revenue share model is likely to hold between app stores and content providers, we are aware of arrangements where it applies only on the revenues left after the 10% to 20% telco billing service charge. Hence, a 20% telco billing charge on a $1 (€0.71) application may leave an app developer with $0.56 (70% of $0.80), rather than $0.70.
However, it is interesting to note that in emerging markets, $0.56 to the $1 would be an improvement for many content providers, as many often get less than 50% on telco portal deals (as opposed to 70% on app store). But, by supporting greater choice and more convenience in payment options for applications, telco billing will aid faster growth in paid-for application downloads, particularly in the emerging markets. Hence, while content provider revenue share may not be as high as 70% with credit card billing, telco billing will almost certainly lead to greater volumes of paid-for applications downloads in third party app stores. This in turn, will mean ultimately greater total content revenues for content providers.
Content strategies will come under scrutiny
The number of announced partnerships suggests that telcos clearly find the potential revenues from such deals attractive. It would be an easy, if not exactly a large, revenue stream for individual operators, which requires little investment. But providing billing to third party app stores raises questions about the telco’s own app store strategies. Arguably, such partnerships boost third party app store’s attractiveness and convenience at the expense of telcos, particularly as many (e.g. Apple, Google) have far greater number of applications, and higher download volumes.
We suspect there is a hard calculation at play here. The billing revenues from such deals are on the table today, while fierce downward pressure on ARPU and revenue growth means that there will always be telcos keen to go down this route. Hence, in effect this is no different to the classic wholesale/retail strategy dilemma that telcos have had to face in other areas (e.g. MVNOs).
All said, the rapid acceleration of smartphone penetration, combined with the dominance of the handset and platform vendor’s app stores, and the slow progress of cross-telco app store initiatives (for example. WAC) will continue to put telco content strategies under pressure. By making paying for apps on other app stores more convenient, this move will add to this pressure, regardless of whether telcos acknowledge the fact internally or externally.
In effect, third party billing could be counter-productive to realizing telcos own content provider dreams – but it may well be a nice and more profitable improvement on a pure ‘bit pipe’ nightmare.