Mobile App Stores for Telecom Operators The Next Battlefield
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Perspective Pierre Péladeau Roman Friedrich Mohssen Toumi Olaf Acker Mobile App Stores for Telecom Operators The Next Battlefield
Contact Information Beirut Mumbai San Francisco Bahjat El-Darwiche Jai Sinha Karla Martin Partner Partner Partner +961-1-985-655 +91-22-2287-2001 +1-415-263-3712 bahjat.eldarwiche@booz.com jai.sinha@booz.com karla.martin@booz.com Hilal Halaoui Munich Shanghai Principal Gregor Harter Edward Tse +961-1-336433 Partner Senior Partner hilal.halaoui@booz.com +49-89-54525-554 +852-3650-6100 gregor.harter@booz.com edward.tse@booz.com Dubai Karim Sabbagh Martin Reitenspiess Sydney Partner Partner Simon Gillies +971-4-390-0260 +49-89-54525-522 Partner karim.sabbagh@booz.com martin.reitenspiess@booz.com +61-3-9221-1903 simon.gillies@booz.com Düsseldorf New York Roman Friedrich Christopher Vollmer Tokyo Partner Partner Paul Duerloo +49-211-3890-165 +1-212-551-6794 Partner roman.friedrich@booz.com christopher.vollmer@booz.com +81-3-6757-8615 paul.duerloo@booz.com Düsseldorf/London Paris Dr. Michael Peterson Pierre Péladeau Partner Partner +49-211-3890-140 +33-1-44-34-3074 michael.peterson@booz.com pierre.peladeau@booz.com Frankfurt Mohssen Toumi Olaf Acker Senior Associate Principal +33-1-44-34-3131 +49-69-97167-453 mohssen.toumi@booz.com olaf.acker@booz.com Booz & Company
EXECUTIVE The mobile applications business has grown exponentially in just the past three years. On the back of the hugely popular SUMMARY iPhone, Apple’s App Store has quickly come to dominate the market, but rivals such as Google, Microsoft, Nokia, and Research in Motion Ltd. (RIM) are betting billions that they can catch up. So far, telecom operators have been late to the game. If they want to avoid the fate of becoming mere pipes for the ever more popular app stores, they must devise and implement strategies that take advantage of the very real assets they possess. Because of their limited customer To capture these benefits, operators bases relative to the massive numbers have three options in building their being put up by Apple and other own app stores: “closed” storefronts operating system vendors, operators offering only apps that they develop playing alone lack the inherent ability or source themselves; “open” store- to attract large numbers of applica- fronts that offer access to third-party tion developers to their own stores, apps and app stores, with which they and they lack experience in manag- share revenue; and app stores for ing open ecosystems of developer phones other than smart phones, pri- communities. What they do have are marily in developing markets through powerful brands, a strong relationship SIM services. Operators are by no with their subscribers, and the ability means limited to any of these options; to monetize that relationship. For rather, they should pick and choose, operators, the key is not to try to reap depending on the OS and device the direct revenues from app sales, providers they partner with, and on but rather to develop a strong apps geography. What is critical is to ensure offering that can help them increase they play a key role as a retailer of average revenue per user (ARPU), apps by devising strategies—and improve customer acquisition, and executing them—now, before it’s reduce churn. too late. Booz & Company 1
The success of Apple’s App Store the increased use of their data services. TELECOM’S has been driven largely by the global While many mobile operators have OPPORTUNITY popularity of its iPhone. With more tried to jump on the mobile apps than 35 million units sold since its bandwagon by opening their own app inception in 2007, the iPhone is the stores, they have not yet gained much linchpin of a entire ecosystem of traction in the market. Are mobile products—from the OS X operat- operators doomed to serve as little ing system to Macintosh hardware more than bit pipes for ever-more- to consumer-friendly applications to powerful manufacturers of smart Here are some numbers sure to Internet services like iTunes. Numbers phones and their operating systems? impress every corporate executive like these are certain to attract com- Mobile operators do indeed face real looking for sources of new growth. petitors, and indeed, the App Store’s challenges in their efforts to partici- Within 10 months of its launch in the numbers have. We expect that more pate in the fast-growing apps busi- summer of 2008, Apple’s App Store than 1 billion smart phones of all ness, but we believe they can compete had reached 1 billion downloads. The kinds will be in use by 2013, driving successfully if they can determine how next billion took five more months; increased usage of data services, with best to position themselves within then, just three months later, in end-users spending as much as $22 the mobile apps ecosystem, develop January 2010, customers had down- billion on mobile apps, not including the right strategies, and execute them loaded yet another billion apps. Apple additional revenues to be gained from carefully. The best strategies must doesn’t break out revenues for its App mobile advertising in apps and games. focus on capturing the customer’s Store, but observers estimate that it attention by becoming the entry point could generate as much as US$3 bil- So far, however, telecom operators into the world of applications, not lion in sales for Apple and its develop- have not benefited from the popularity on capturing revenues from applica- ers in 2010. of mobile apps, other than through tion sales. 2 Booz & Company
SUCCESS What made Apple’s App Store take off? First of all, the company had a geous deals with telecom carriers to offer iPhones, Apple found a way to FACTORS head start—a powerful brand whose monetize its iPhone ecosystem with customers had a strong emotional impressive efficiency. The result: a attachment to its Macintosh comput- retail powerhouse based on key suc- ers and its iPod and iTunes ecosys- cess factors that competitors are find- tem. That degree of loyalty was only ing very difficult to replicate. deepened with the introduction of Apple’s success in the mobile apps the iPhone, thanks to its revolution- Since Apple introduced the App Store, market was by no means predestined. ary design and interface. Attracting lots of competitors have appeared on After the first mobile apps were developers to the App Store proved the scene—other makers of mobile introduced by independent players in easy with a generous revenue-sharing devices, vendors of mobile operat- the late 1990s, any number of smaller agreement and easy-to-use develop- ing systems, telecom operators, and players quickly entered the market. ment tools and technical assistance; independent app stores—with vary- But it wasn’t until Apple entered the the result was an explosion of rich ing degrees of success. No one has mobile app business, a year after the content, more than 140,000 apps in yet come close to rivaling Apple, in introduction of the iPhone, that the less than two years. Finally, by selling part because every competitor has world came to understand its value as apps through its popular iTunes store, to attract two audiences—not just a driver of both revenue and smart- . 7 values with a readily available billing system, customers but also developers—and phone sales (see Exhibit 1). and then in turn using the apps’ few rivals to Apple’s App Store have popularity to help make advanta- succeeded in doing so. 100% 75% 50% 25% lines dots criss- cross Typical Business Strategic Deliverables Objectives 9% Utility bills & services IN THE NEXT 12 MONTHS, I INTEND TO REVERT BACK TO MY PRE-RECESSION BUYING HABITS IN THIS CATEGORY (PERCENTAGE OF RESPONDENTS WHO AGREED) Exhibit 1 The Evolution of Mobile Apps HOW MOBILE APPLICATION STORES HAVE EVOLVED Earlier 2007 2008 Q1/09 Q2/09 Q3/09 Q4/09 Q1/10 Emergence GetJar PocketGear PocketGear Early pioneers, mainly Handango SlideME acquires independent players, Handmark Handango have little to no success MobiHand Mobango Take Off The game changer: Apple linking the device to the apps Android Windows Marketplace Gold Rush Nokia Ovi LG BlackBerry Sprint Palm PlayNow Arena New competitors hurry Samsung Application Store Mobile Market to stake a claim Bouygues Telecom AppliStore Orange China Telecom Verizon Wireless Media Store SK Telecom O 360 Source: Booz & Company Booz & Company 3
THE OPERATOR downloading data. As smart phones become more and more popular, data consumption patterns—though iPhone users are typically high-value custom- ADVANTAGE usage will only increase—and that, in ers, much of the higher ARPU can be turn, will be the source of real revenue attributed to their higher data usage. increases for mobile operators. Reduced churn: As mobile apps But those added revenues will appear become more popular, easy access to only if operators can acquire and attractive app stores will likely help Telecom operators looking to benefit retain the customers most likely to retain customers, especially as they from the popularity of mobile apps use their phones to download mobile become more dependent on their cannot expect to rival Apple in the apps. Here is where the value propo- device interfaces. If an operator with revenue it generates from the App sition for operators can be found— 25 million subscribers and an ARPU Store. Nor should that be where along with the risk. And operators of €35 (US$47.40) can reduce churn operators aim to participate, since the that do succeed in offering customers by just 1 percentage point, it can potential incremental revenues are attractive ways to access mobile apps retain 250,000 subscribers who so small. We expect that in 2013, all will benefit in three ways. generate about €100 million in application store providers worldwide revenue annually. will capture just a 30 percent share Customer acquisition: Easy access to of overall apps revenues, or about $7 attractive app stores can attract new The key for operators is to maintain billion, with the remaining 70 percent customers, as can customizing mobile and strengthen their relationships with going to developers. This is a drop in devices to get customers to app stores customers, more and more of whom the bucket compared with the telecom more directly, through exclusive deals will view access to mobile apps as a industry’s projected overall 2013 linking specific devices to app stores, critical component in choosing and revenues of $1.6 trillion. much like Apple’s deal with AT&T for staying with their operator. Thus, the iPhone. every operator must devise a strategy The real economic value for operators for incorporating mobile apps into lies in the increased revenues to be Higher ARPUs: Customers with smart its offerings; those that do not come captured through the rising use of data phones that can easily access attractive up with a winning strategy risk losing services linked to mobile apps and app stores are significantly more valu- customers to rivals that do. Worse yet the customer loyalty that app usage able to operators. In the U.S., iPhone is the possibility of losing the end- has the potential to generate. Users of users generate 1.63 times the ARPU customer relationship to third-party iPhones use their phones more than of the average customer; in western app stores, which would have poten- other mobile phone users do, and Europe they generate 2.45 times the tially dire consequences for operators’ most of that extra time is devoted to average. The difference lies in varying core business. 4 Booz & Company
ATTRACTING As we have seen, every player, includ- ing operators, looking to build a at Apple’s App Store, for instance, is gaming, but it still constitutes just 17 THE RIGHT successful mobile app store needs to percent of all available apps. AUDIENCES attract two audiences: customers, of course, but also the developers willing Operators are limited in their ability to create the critical mass of applica- to generate the capabilities needed tions needed to attract those custom- to attract and keep a strong devel- ers and keep them coming back for oper community. Although there more (see Exhibit 2). In addition to is nothing holding them back from the sheer number of applications avail- offering developers attractive busi- able, successful app stores need both a ness terms—most app stores allow constant source of popular new apps developers to keep 70 percent or more and a long tail of less popular applica- of the revenue brought in by their tions to maintain consumer interest. apps—other factors are more challeng- The most popular category of apps ing. Managing a thriving developer . 7 values 100% 75% 50% 25% lines dots criss- cross Typical Business Strategic Deliverables Objectives 9% Exhibit 2 The Virtuous Circle in App Stores: A Strong Customer Base Attracts More Developers, and More Apps from Developers Attract More Customers Operators’ Strengths and Challenges in Operators’ Strengths and Challenges in Attracting Developers and Sourcing Apps Making Use of Customer Assets Powerful Brand & Marketing - Operators can benefit from their strong Quality Technical Support brand in their local markets - Managing a developer community is a high-cost business - Operators are not used to the Broad & Diverse Offerings software business -The limited number of developers, fragmented across several platforms, limits the breadth of offerings High Reach & Exposure - But in some markets, operators - Most operators have relatively can leverage local content small subscriber bases, More Developers More Customers compared to the global installed bases of many OEMs Quality Storefront - By managing their networks, operators can improve the quality of their data traffic - Knowing customers’ needs and behavior, Generous Business Model operators can develop friendly, locally - Operators can implement relevant app stores revenue-sharing model similar - But other app stores could also analyze to the market standard customer behavior Easy Monetization Engine - Operators can use subscriber accounts for payment, making the process easy Natural Challenge Natural Strength Neutral for customers Source: Booz & Company Booz & Company 5
community and offering the high- from their strong brands in their local Monetization: Operators’ close quality technical support developers markets and their ability to steer traf- relationship with their customers will need is an expensive operation, and fic to their app stores by customizing allow them to develop simple pay- few operators have experience in the devices to send users there directly. ment tools, including direct debiting software business. And compared with of subscriber accounts and mobile makers of mobile devices or mobile Quality of storefront: Because opera- payment (m-payment) systems. operating systems, few operators have tors have control over their networks, Such tools would promote access to the huge global installed base needed they can provide customers with dif- app stores and smooth the buying to provide enough customers to ferentiated offerings based on quality process—a particularly attractive attract developers, unless they partner of service. High data users could be solution in emerging markets, where with other operators. given the option of paying more for few subscribers have their own bank reliable connections and downloads. accounts. In contrast to their difficulties in By the same token, operators could attracting strong developer communi- leverage their local and operator- Based on these strengths, mobile ties, telecom operators do have the specific capabilities to provide content operators have several levers they can strengths necessary to attract a critical such as mobile TV or telecom-specific pull in devising a strategy to build an mass of customers. apps for uses such as consumption app store (see Exhibit 3). Operators’ tracking and service control. use of these levers will determine their Powerful brands and marketing strategic direction for the future. . 7 values expertise: Operators could benefit 100% 75% 50% 25% lines dots criss- cross Typical Business Strategic Deliverables Objectives 9% Utility bills & services Exhibit 3 Assets and Potential Levers for Operators in the Mobile Apps Market ASSETS STRATEGIC LEVERS Ability to Steer Steer Traffic toward Preferred Stores 1 Traffic - Steer traffic through soft keys or other handset customization levers Provide Own Applications Local/Operator- 2 - Provide apps utilizing operator-specific or local content (e.g., consumption specific Content tracking, TV) Differentiate Service-level Data Packages Control of Network 3 - Create data packages based on partnerships with third-party app stores to Quality guarantee (for a premium) network quality for data-intensive apps Provide Convenient Payment Tools Payment Tools 4 - Be a monetization engine for third parties’ app stores through simple m-payment systems Source: Booz & Company 6 Booz & Company
An App Store Consortium One solution to the problem of attracting developers might be for operators to band together, and two separate initiatives are intended to do just that. A group of four mobile operators—China Mobile, SoftBank, Verizon Wireless, and Vodafone—has made plans to create the Joint Innovation Lab (JIL). By bundling all of its customers into one large audience, the JIL hopes to persuade developers to create rich content of all kinds. The second effort involves a consortium of 24 mobile operators, called the Wholesale Applications Community (WAC), to allow developers to distribute applications across a number of delivery platforms through a single point of entry. As with any consortium, the challenge will be to coordinate the WAC’s numerous partners and their many, sometimes competing initiatives; if the WAC can overcome that, it will have created a very substantial audience with which to attract developers. Both initiatives are supported by a number of handset manufacturers, including LG Electronics, RIM, Samsung Electronics, and Sony Ericsson. Telecom operators have the strengths necessary to attract a critical mass of customers. Booz & Company 7
WORKING Despite the many considerable assets operators possess in their efforts to integration with Apple’s own App Store and controlling stake in the WITH THE OS compete in the mobile apps markets, market, the iPhone offers little in the perhaps the most serious challenge way of opportunities for operators they face is their lack of control to benefit. Operators that have over the many mobile operating made deals with Apple to offer the systems running on the vast number iPhone have certainly seen increases of different devices available to in subscribers. Other possibilities, consumers. No matter what app store however, may be limited to developing strategy they devise, operators must iPhone-specific applications that are take this diversity—and the different close to operators’ core business, market dynamics of each OS—into such as mobile TV for subscribers, or account, pulling different levers devising differentiated service-level depending on the OS. plans for iPhone users who consume lots of data. iPhones: Despite accounting for 11 percent of the mobile device market BlackBerrys: The popular BlackBerry in 2009, the iPhone accounted offers more opportunities for for two-thirds of the mobile operators. As with the iPhone, apps downloaded. Given its tight operators could develop their No matter what app store strategy operators devise, they must take into account the vast number of different devices available to consumers. 8 Booz & Company
own subscriber-specific apps, and forms. The simplest form would Mobile, with more than 500 million differentiate traffic from applications provide subscribers with access to the subscribers, is planning to launch its or subscribers by service levels. They thousands of apps offered at other own smart phone equipped with a could also offer their monetization stores, perhaps including tools to customized OS to be supplemented by engines to the BlackBerry store, smooth the purchasing process. the operator’s own app store. although we believe it could be more appropriate for them to include Operators could also build their Non-smart phones: Mobile devices BlackBerry apps in their own app own stores, offering apps developed that don’t offer the latest Web-surfing stores in order to retain customer for a variety of systems, as well and apps capabilities of smart phones ownership. as subscriber-specific apps for provide a further opportunity for local content or data consumption operators, especially in emerging Other operating systems: The app management. Ambitious operators markets, where their use is most stores landscape in other operating could also build a niche for themselves common. Smart phones make up no systems, including Android, Symbian, by providing differentiated content more than 10 percent of all mobile and Windows Mobile, is more through customized apps targeted to devices in these markets. In addition, fragmented, with many players— specific customer segments. end-users may see little need to pay equipment manufacturers, operators, for entertainment apps, given the and independents—having their own The most complex option would prevalence of piracy. However, users app stores, although the OS owners involve an integrated strategy, in do see the high value that certain have the richest ones at the moment. which an operator would offer its practical apps—such as e-government This fragmentation potentially gives own smart phone, and partner with (perhaps funded by local governments operators more freedom of movement the maker of the phone’s OS to themselves), health, and education in the mobile apps space. In this case, develop its own app store, and the services—can bring to them. operators could potentially have a apps to go with it. The success of this Operators could also leverage the right to win by building their own option would depend on generating increasing development and spread of app storefront, provided they can the critical mass of apps needed to m-payment services in these markets feed it with apps from developers. attract more developers and, in turn, to monetize their applications. This storefront could take several more customers. For instance, China Booz & Company 9
Closed storefront: The first possibility keys and other links, and revenues THREE is to build a closed storefront that would be shared with the third-party STRATEGIES offers only applications developed partners. An open arrangement or sourced by the operator, and would allow operators to provide competes head-on with third-party their subscribers with access to the app stores; examples include Orange large and diverse catalogs of apps and Telefónica. These storefronts available on a variety of OS and Setting the iPhone juggernaut aside, could be integrated with a specific device platforms, while avoiding the the world of mobile apps is highly device, like the iTunes App Store with challenge of building a developer fragmented, with no app store the iPhone. In this case they would community on their own. yet owning a significant share of depend on the creation of a mobile the market. That presents a real device in combination with dedicated SIM app store: Finally, operators opportunity for mobile operators apps; both Vodafone and China could build a SIM app store for looking to get into the business. Mobile have taken this approach. The phones other than smart phones. Operators can leverage their storefronts could also be tailored to This strategy is especially attractive relationships with subscribers by niche markets, dedicated to a specific for operators that want to gain a following one of several strategies, all handset, OS, or customer segment, competitive edge in emerging markets of which are designed to aggregate, to such as teenagers. by offering attractive apps along with varying degrees, the quickly growing workable m-payment solutions. An number of third-party apps already Closed storefronts might also contain added bonus: These markets are not available. Each of these strategies special areas featuring apps for which yet on the radar screen of the large depends on one or more of the assets developers pay a premium for greater independent app stores, since more that operators can leverage in pursuit visibility or apps being promoted to than 80 percent of the world’s smart of an app store play, and they can be particular user segments, as identified phones are located in developed tailored to the device and operating through customer intelligence. And markets. system under consideration. It is they would also offer convenient conceivable that all of them could be purchase models via customer No matter which strategy an operator carried out simultaneously, depending accounts or instant m-payment chooses, the key is to offer subscribers on device and geography. solutions. a quality storefront they will be happy to return to, and to build into the In every case, the key for operators Open storefront: An open storefront storefront the features that will help is to maintain the relationship with would offer access to third-party app the operator maintain its relationship end-users if they want to avoid being stores, in addition to the features and with subscribers and generate relegated to a mere bit pipe. components of a closed storefront. An incremental revenue at the same time easy interface would facilitate access (see “Components of a Successful App to third-party stores through soft Storefront”). 10 Booz & Company
Components of a Successful App Storefront Local content: Apps and other services designed for subscribers in particular geographies served by the operator. Examples include mobile TV, news, and information. Local content may be especially successful as part of SIM-based app stores in developing markets. Operator-specific apps: Apps intended to help subscribers manage their relationship with the operator, including account management; billing; and voice, message, and data consumption, as well as services such as mobile TV. Premium apps: Apps that are given premium placement on the storefront in exchange for payment by their owners. Apps catalog: A collection of apps sourced through partnerships with developers and companies promoting apps, which could be paid for through revenue-sharing agreements. Payment: Tools that allow users to pay for apps and services through convenient m-payment solutions or through their mobile accounts. Mobile advertising: Space on app storefronts or within apps themselves, sold by operators to advertisers, with content often keyed to the current interests and browsing habits of subscribers. Gateways to third parties: Links to other app stores owned by third-party apps developers, OS owners, device makers, and independents— redirecting traffic to cobranded spaces in third-party stores, for example. Booz & Company 11
CONCLUSION As the competition to provide consumers with more and better ARPU, and improved subscriber acquisition. Succeeding in this arena mobile apps heats up, telecom requires operators to master the operators run the risk of becoming business of retailing mobile apps mere conduits to the successful and getting access to a large network app stores of others. To avoid that of developers or partners, in order fate, operators must play the game, to feed their subscribers with large, building storefronts attractive enough regularly renewable catalogs of apps. to maintain the critical relationship with their subscribers. The real upside The mobile apps business is moving for operators, beyond targeting and evolving quickly. Operators that additional revenues from selling act now stand to reap significant apps, is churn reduction, increased advantage. 12 Booz & Company
About the Authors Roman Friedrich is a Olaf Acker is a Booz & Company partner Booz & Company principal based in Düsseldorf and based in Frankfurt. He focuses Stockholm. He leads the on technology strategy for communications, media, communications, media, and and technology practice in technology companies. Europe, and specializes in the strategic transformation Mohssen Toumi is a of fixed-line and mobile Booz & Company senior communications, technology- associate based in Paris. based transformation, and He works primarily with sales and marketing in the high-tech companies communications, media, and and telecommunications technology industries. operators. His focus areas include growth, innovation, Pierre Péladeau is a sales and marketing, and the Booz & Company development of technologies partner based in Paris. in emerging countries. He works primarily in the telecommunications, media, and high-technology industries. His focus areas include strategic transformations, operating models, growth, innovation, sales and marketing, and technology strategies. Booz & Company 13
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