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Operator strategies - Mobile application stores: what’s the operator opportunity?

posted 17 Jul 2010, 01:26 by Ramy Caspi

Jerome Buvat, Global Head of Capgemini's TME (Telecom, Media and Entertainment) Strategy

Lab explains why there should be no delay in operators positioning themselves in the app store space

Application stores have gained considerable attention in recent years, and are emerging as an important channel for distribution of mobile content. While application Stores have been in existence for almost a decade, the category received a shot-in-the-arm only after the entry of Apple's App Store.

The advent of Apple's App Store has resulted in a paradigm shift in how mobile applications are created and distributed. The success of Apple's App Store was followed by a spate of announcements from various players around their decisions for entering the space. Device vendors such as Nokia and Research in Motion (RIM, maker of Blackberry smartphones); OS vendors Microsoft and Google; and telecom players, have all forayed into the applications store market. Most leading mobile operators have launched their own application stores or have announced their intent to launch one in the near future. The launch strategies range from creating proprietary solutions to embracing third-party hosted application stores. While application stores are an important key growth area within the mobile data market, telcos are faced with the question of whether they should launch application stores at all, and if yes, how they should position themselves in a space dominated by device players.

Application stores are emerging as a key distribution channel for mobile content. Research recently carried out by Capgemini has found that total revenues from paid mobile application downloads during 2009 are estimated at around US$ 3.8 billion. However, changes taking place across the ecosystem are likely to result in both demand side pull as well as supply side push, ultimately resulting in growth of the segment. Increasing customer base forms a key demand-side driver, while improved device capabilities are expected to be the primary supply-side driver. These drivers are expected to boost adoption of mobile application services with the market expected to reach US$ 8.6 billion by 2013, growing at a CAGR of 30% between 2010 and 2013.

Launching an application store will provide operators with an opportunity to augment their existing data services revenue. There are going to be primarily four revenue streams for operators, viz. revenue share from the sale of applications, mobile advertising revenue, incremental data usage revenue and payment gateway revenue. Relying on these revenue streams, our analysis indicates that a typical operator (based in Western Europe with a subscriber base of 50 million) can expect a data revenue uplift of 11% by 2013. Additionally, if an operator is successfully able to implement a strategy wherein they are able to push web-based applications which result in greater data consumption, the revenue upside can be as much as 17% with over 30%-40% of this uplift coming from increased data usage.

In addition to augmenting current data revenues, applications storefronts can also be instrumental in attracting and retaining subscribers with high-spend on mobile data services. High-value customers exhibit a greater proclivity to download and use mobile applications. Moreover, application stores are becoming increasingly important for operators to build and maintain a robust content ecosystem, something that is essential in today's economic climate and competitive landscape.

Operators are threatened by the prospect of being rendered "bit-carriers" due to the expansion of online and device players across the value chain. The emergence of application stores as primary channels for mobile content distribution can further impact operators' positioning in the value chain. Consequently, inaction in this space would not only undermine the competitive positioning of operators vis-à-vis other players who actively launch application Stores, but also the ability to drive data consumption amongst existing consumers.

Key challenges 
Amongst the device manufacturers, Apple, with its existing dominant position in the market and access to the early adopters of technology with a tendency to spend on mobile services is likely to continue as the dominant application store. RIM, with access to a niche, enterprise audience is also likely to be a strong contender in this segment. Nokia can leverage its large base of existing users and its strength in the emerging markets across Europe. One of the consequences of multiplicity of platforms, devices and application stores will be that developers will align themselves with particular storefronts. Since the success of a storefront is intricately linked to the quality of applications available on it, the competition for retaining the best developers on the major stores is going to be intense. Driven by the proliferation of free and mass market applications, the average selling price (ASP) for applications is likely to drop - analyst estimates indicate a value of US$ 1.72 by 2014, as compared to US$ 3.83 in 2009.

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Capgemini believes that mobile operators can shore up their position in the mobile applications space by taking a series of definitive measures. Operators need to decide on the extent of activities that they would want to undertake in the application store segment. While global players with a large captive customer base might want to build end-to-end capabilities in the space, smaller players might decide to undertake only select activities in-house, relying extensively on third-parties for the technology platform.

A critical component of operator strategy to compete in the space would be their support of device-agnostic platforms. This will allow operators to support a much wider device portfolio through their storefront, while simultaneously reducing porting efforts, and hence costs and time-to-market for the developers. Additionally, platform-agnostic applications will allow a distinct positioning option for operators, thereby avoiding direct competition with vendor partners. Another option available to operators looking to encourage device-agnostic application creation would be to actively promote web-based applications.

Since the quality and reliability of the applications available on a storefront will be dependent on the strength of the developer community, it is imperative that operators provide the necessary incentives for the creation of exclusive applications for their storefronts. We believe that aggressive revenue share arrangements, wherein operators allow developers to retain a higher share of the application revenues when compared to other storefronts, can help operators play the role of ‘disruptor' and corner a higher market share. While a revenue share of at least 75% for the developers will be necessary to remain competitive, analysis indicates that by increasing developer share to 80%, operators can get incremental revenue uplift of around 11% points, resulting primarily from a greater market share of application downloads.

Operators should strive to develop pricing models which are optimized based on the nature of the application, with popularity, market potential and stickiness of an application being the defining criteria. For instance, typically applications in categories such as medical and finance are highly customized, resulting in a limited number of such applications. However, because of the utilitarian nature of these applications, the consumer willingness to pay is fairly high. As a result, these applications are very suitable for subscription pricing. Operators should also play an active role in formulating the monetization strategies of applications, to ensure the greatest returns from their storefronts.

Capgemini believes operators should launch application stores to retain their prominent position in mobile content distribution, as well as to benefit from new revenue streams through the sale of applications, provision of access services and rendering of additional services such as integrated billing and access to networks that application interfaces are supported on. While application stores provide operators with an opportunity to re-establish their position in the mobile content value chain, the opportunity requires a strong operational strategy for success. Operators need to leverage existing capabilities in this space so as to be able to create a robust offering for the consumers. The opportunity should be looked at from the perspective of a strategic imperative to reverse the present trend of disintermediation from the content ecosystem, rather than a pure revenue enhancement exercise. It can't be left to Apple to pave the way anymore in the application store market. There is plenty of room for more.

About the author

Jerome Buvat is the Global Head of Capgemini's TME (Telecom, Media and Entertainment) Strategy Lab 

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