Diffusion Mobile's David Ross-Tomlin on how operators can deal with app store disruption
Juniper Research estimates that by 2011, the majority of all app‐related revenues will come from apps delivered via app stores, against less than 10 per cent in 2008.
These revenues will be generated by an ever increasing volume of downloaded applications, which is expected to reach nearly 20 billion by 2014, up from just over two billion in 2008.
Here are five ways in which operators are affected by these dramatic changes:
* Under the app store model, the operator is not necessarily the gatekeeper to content. Other players in the mobile ecosystem, most notably handset vendors and OS providers, can join in. Furthermore the providers - under the Apple model - can support far more content than has previously been the norm.
* When an app store is available on a device, it immediately becomes a competing point of purchase to the existing operator portal offering. Customer on‐portal purchases are likely to decline sharply as a result.
* Many app store owners (notably Apple, Google and Nokia) are far more experienced and effective retailers than the operators. Networks sell voice services and (to a lesser extent) messaging. Understandable when, in the UK, voice revenues accounted for 68 per cent of operator‐billed revenues in 2008, and messaging for a further 23 per cent. Of the remaining nine per cent, the vast bulk comes from browsing, rather than premium entertainment downloads. This proportion is similar elsewhere in Western Europe.
* App stores destroy the old rev share model. Operators are used to collecting at least 50 per cent of content revenues from each on‐portal purchase. Many also gain additional revenues from content providers who pay a premium for placement on their decks. For off‐portal purchases, they also gain revenues from the cost of data downloads, which can be even more lucrative. In some cases this is several times the retail value of the content or app downloaded. The app store model transforms this entirely.
In the case of Apple’s iPhone, consumers already have unlimited browsing thrown in, and while a proportion goes to the operator, it's different from the incremental data revenues they have previously accrued. As for downloads they get nothing: 30 per cent goes to Apple and 70 per cent to the distributor (although Google’s model does offer the operator 30 per cent).
* Subscription revenues are also threatened. App stores open up the prospect of providing subscription‐based billing from within the app (and with the point of billing again being the app store), thus removing the need for the operator to become involved in content subscriptions.
The question for operators is – do we emulate the OEMs or partner with them for a smaller rev share of a larger market?
In most cases, the answer is fairly straightforward. As noted above, operators are not content retailers. Revenues from content and services have failed to offset the decline in voice revenues or realise the vast sums expended on 3G licences in 2000.
Within the UK, only 3 UK has covered the initial 3G licence costs. By contrast, Juniper Research estimates that, by the end of 2008, Vodafone UK’s 3G subscribers had generated just over £2.6 billion since the network was launched in 2004. That's 44 per cent of the £6 billion licence fee.
While Orange has launched its own app store, the business model it has adopted is not too far removed from the standard “operator as gatekeeper” model.
Not least in its insistence on a role in setting app prices and the opaque structure of its revenue shares. These both act as disincentives to would‐be app developers; they are not indicative of a well‐thought out retail strategy.
The success of Apple’s App Store is built upon clarity and simplicity. Juniper believes that operators would benefit far more from partnering with such players – and concentrating on their own core competencies, namely network operations and developing the customer relationship as a whole.
There's also the potential to upsell. Having the app sitting on the handset means that if a customer wants to purchase additional content, he or she can do so from within the app without having to launch a browsing session.
Ultimately, there is an opportunity for greater incremental revenues for operators derived from non‐voice/non‐messaging services if they choose to partner with a dedicated retail storefont manager in this way.
David Ross-Tomlin is campaign manager for Diffusion Mobile, a specialist PR and communications consultancy for the mobile industry.
A copy of a whitepaper on 'mobile media in a post app store world' can be downloaded for free here.
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