Bangkok--9 May--Frost & Sullivan Thailand
Global Mobile Application Store Update
By Marc Einstein, Industry Manager, Mobile & Wireless Communications, Frost & Sullivan
Synopsis
Well into the year 2011, global smartphone growth continues unabated as global smartphone shipments have increased from 58 million in the first quarter of 2010 to more than 100 million units in the first quarter of 2011. The market for smartphone operating systems remains extremely fragmented and vendor application stores strategies are equally fragmented, ranging from Apple's premium play to Android's open community. While vendor strategies are still very much in the limelight, mobile operators are still stuck on the sidelines. The great debate still rages for them as to whether it is better to sit back and reap the benefits of increased data traffic revenues that smartphone usage brings to them or if there is still a business case for operators to create their own application stores.
Market Impact
Apple continues to build momentum; Android stalls temporarily Smartphones are continuing to grow exponentially; there are a few noticeable developments within the industry worthy of note. Global smartphone sales actually declined slightly from Q4 2010 to Q1 2011, although this is most likely due to seasonality, as the last quarter is always strong globally due to holiday purchasing. The most noticeable smartphone trend in the first quarter of 2011 was that Symbian has seen its share of shipments continue to fall as Nokia continues to struggle in the sector and tries to reconcile its new alliance with Microsoft, a trend that will undoubtedly continue for at least the next few quarters. Android devices held a constant share in the market despite successive quarters of gains, largely due to weaker Motorola sales in the U.S., but this is certainly a temporary situation, especially considering the large movement to Android in Japan. Apple posted the second-largest OS gain globally, driven by CDMA iPhone sales in the U.S. and a strong initialshowing from the iPad 2. Research in Motion held constant as its device strategy becomes increasingly unclear, and Windows Mobile remains in a holding pattern pending its attempted comeback with Nokia. Overall, the market has shown that while a mass-market migration to Android seems all but inevitable, Apple has shown its resilience in the market with a sound overall strategy, while the future for RIM seems less certain and Microsoft is certainly the dark horse in the global smartphone OS race.
Exhibit 1: Smartphone OS Market Share (Global), Q4 2010 & Q1 2011
Source: Frost & Sullivan
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Vendor Application Store Strategies
Through the first quarter of 2011, the global application store race is still largely a two-player game between Apple's App Store and Android Market. Apple still has a large lead in the total number of applications offered and counted more than 333,000 by the end of Q1 2011. Android Market is catching up quickly, however, counting more than 200,000 applications over the same period and may overtake its main rival by the end of 2012. Other operators are also experimenting with new strategies, and while they are not currently making headlines, they may significantly alter the market landscape going forward. We provide an update of vendor application strategies below.
Exhibit 2: Apple App Store vs. Android Market Number of Applications (Global), June 2008 - March 2011
Source: Frost & Sullivan
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Apple - Apple is busy trying to replicate its success in the mobile application store space on both its tablet PC and desktop product platforms. The vendor had roughly 75,000 iPad applications and 3,500 Macbook applications as of March 2011.
Android - While Apple still has 100,000 more applications than Android Market does, the number of free vs. paid applications is a different story, as Android Market actually had roughly 10,000 more free applications vis-?-vis the App Store in March 2011. While this is certainly good news for Android users seeking free applications, it also means that the Android will need to do more to monetize its application store to enable more revenue streams than just mobile search and advertising revenue. In order to move forward, Google has announced the following initiatives to encourage more paid application purchases on Android Market, notable to pursue direct billing relationships with carriers and to facilitate in-application payments.
Nokia - Nokia's Ovi Store, while paling in comparison to its rivals, is currently generating 5 million downloads per day and currently has nearly 30,000 applications available. Nokia has wisely leveraged its relationships with mobile operators across the world to secure direct billing agreements with mobile operators and has secured 112 agreements in 36 markets. Since pursuing this strategy, Nokia claims that its consumer transactions have grown four-fold. That being said, the future of the Ovi Store remains uncertain, given Nokia's recent strategic alliance with Microsoft.
Microsoft - Windows Phone Marketplace, like the Ovi Store, is continuing to grow but again suffers from a lack of applications, having less than 12,000 at the end of Q1 2011. Microsoft is largely focusing on its PC application space, but is also trying to make it easier for developers to port applications from other operating systems, which is wise given that Windows Mobile 7 still suffers from a lack of vendor support. Combining efforts with Nokia could very well bring both companies back to the forefront.
RIM - Research in Motion has largely focused on its upcoming tablet PC, the Playbook, and also on enterprise applications given its large corporate customer base. RIM's application store had nearly 27,000 applications in March 2011, and the vendor would be wise to focus on portability as opposed to taking its larger rivals head-on in the space.
Others - There are a few other players in the market worth mentioning. Amazon entered the application space in early 2011 and will have an interesting opportunity to sell its Kindle content to other devices (not to mention eventual integration with cloud services), but has met tough initial resistance from Apple over the term "appstore." Samsung is also going ahead with its Bada operating system and is even launching it in other markets, but we are not optimistic about its prospects given its multi-OS strategy and the likely trouble it would have in wooing developers given the state of competition in the market.
What should operators do?
With the flurry of vendor initiatives mentioned above, operators have been largely sidelined as Apple, Google, Microsoft and Nokia, and others engage each other head on. Many operators have decided that they are content with being a "pipe" (whether it is a dumb or a smart pipe is a separate debate) and just happily generate income from data traffic incurred as a result of increased smartphone traffic. Despite the headlines made by operators in the USA and Western Europe by stopping unlimited mobile data plans, this has not happened in other regions of the world, even in Japan. However, a world where everyone has an unlimited data plan or perhaps even two or three is no more than five to 10 years away in most developed markets and perhaps double that in emerging ones, so the question if operators should still have a proprietary application store is still a very relevant one.
An operator who got it right: SK Telecom's T-Store One operator who ventured into the mobile application store space is South Korean mobile incumbent, who opened its "T-Store" application store in September 2009. The operator has some fundamental differences compared to those offered by competitors. T-Store allows applications from four different operating systems - Android, Symbian, Java and Windows mobile - and while the 70/30 developer and application store revenue split is the same as most stores, South Korean mobile subscribers can access the T-Store irrespective of their mobile provider (although the country's other mobile providers also have their own application stores). As of March 2011, the T-Store had 6.6 million users, which represented 60 percent of all South Korean smartphone users. The T-Store generated more than US$3.6 million dollars in the first quarter of 2011, and while this is not a large amount of money in the telecom industry, it would represent the same money that an additional 31,000 subscribers wouldhave spent.
Exhibit 3: SK Telecom T-Store Subscribers (South Korea), September 2009 - March 2011
Source: Frost & Sullivan
Finding the operator application store sweet spot There have been other operator-based application stores in other markets, like the Philippines and India, but the largest operator-based initiative to date has been the Wholesale Applications Community (WAC), which is an operator and vendor-based consortium that seeks to create an agnostic platform for developers to provide applications via operator platforms. The WAC started commercial operations in February of 2011 and launched with roughly 12,000 applications. The group has impressive members, including AT&T, NTT DoCoMo, Vodafone, China Mobile and Telefonica among its 28 operator members and myriad vendors as well. The success or failure of the WAC will probably be a significant litmus test for all operators who are currently on the fence concerning operator application stores, but the "sweet spot" depends on a variety of factors:
Content Procurement - Most of the world's user base wants non-English and local content. Mobile operators may already have access to this through relationships or cross-ownership.
Multi-OS Use - Many markets have no clear leader in terms of smartphone OS, and hence operators can fill a clear role by acting as a content aggregator and provide an incentive to developers at the same time.
Existing Agreements - Some operators have data revenue share agreements with vendors, such as Apple, which make some smartphones very low-margin products and are further incentivized to have their own application store.
Of course operators need to balance these potential benefits vs. the production and marketing costs of a proprietary application store, which can be substantial. Operator hesitations concerning application stores are understandable, as some converged media solutions such as mobile TV and IPTV have certainly failed to deliver in the past. However, as previously mentioned, a marketplace where all consumers will have a flat-rate smartphone package is certainly on the horizon, and new technologies such as mobile VoIP are not far behind, and therefore proprietary application stores should be evaluated in order to avoid a very rude awakening going forward.
Conclusion: Where do operators go from here?
The coming growth in smartphone use is undeniable, and at this point it looks like Android will become the dominant mobile operating system, but other vendors such as Apple will continue to reap benefits from its strategy for the foreseeable future. Other players such as Microsoft and Nokia are also refocusing their efforts on the space, realizing the immense opportunity.
Operators have largely been on the sidelines, but some operators such as SK Telecom have proven that users will use operator application stores and that they can provide benefits due to an operator's unique market position. The WAC also offers a platform to tackle this issue at the global level and could be a major game-changer if utilized appropriately.
Operators can always decide to focus on their "core competency" of providing voice and data services, but this is a market which will eventually be a sunset business and go the way that PSTN and ILD have gone today. Operator application stores aren't a silver bullet to this problem but are certainly a start.