Application stores are just one content delivery channel of many but they are likely to remain important because they offer consumers a convenient ‘one-stop-shop’ experience, writes Yanli Suo-Saunders 
 
 

The mobile application stores market is becoming increasingly competitive. Major mobile operators began to launch application stores in the second half of 2009 in response to threats posed by stores launched by Apple, BlackBerry and Google.
In order to formulate a successful application store strategy in this ever-more crowded market, it is essential that players identify the potential user segments and understand their needs.
Following the phenomenal success of Apple’s app store, a multitude of players rushed to launch their mobile applications stores in 2009-10. These players included device vendors such as BlackBerry and Nokia, OS platform owners such as Google and Microsoft, operators such as China Mobile and Vodafone, and third-party application providers such as GetJar.
The competition between major operators and device vendors and OS platform owners is intensifying and is likely to be one of the major themes in the mobile content space in the years to come as the players try to control the user experience and seek substantial revenue growth.
Device vendors and OS platform owners have been quick to launch their application stores because they have close relationships with the developer community, which tends to target particular OSs or application platforms. Largely as a response to the threats posed by vendors and platform owners, several tier-one operators launched their own application stores in the second half of 2009.
Varied approaches

China Mobile unveiled its OPhone platform — a Linux-based terminal software platform — in August 2009 in a bid to strengthen its position in China’s emerging mobile internet market. China Mobile’s approach is unique because, in an effort to enhance its control over devices and, ultimately, the user experience, it is the first operator to launch its own OS.
The operator also launched the OPhone Software Development Network in order to encourage the growth of a developer community. There were more than 10,000 OPhone developers by September 2009. Developers can sell applications created for OPhone via China Mobile’s application store and are entitled to 70% of the revenue generated.
Vodafone is adopting a widget approach for its application store, part of its mobile internet service Vodafone 360, which was launched in September 2009, mainly relying on common web technologies such as HTML, CSS and JavaScript rather than an OS platform.
The rationale is that using existing local web browser applications will overcome many of the complications caused by device fragmentation, which has acted as a huge barrier to the development of the mobile application industry for years, resulting in high development costs and inhibiting the proliferation and quality of mobile applications.
Widgets based on a web runtime environment will be able to work across a wide variety of platforms and therefore minimise the risk of fragmentation and gain economies of scale.
Orange has adopted a multi-platform strategy for its application stores. Orange officially launched its Application Shop in December 2009, offering Java, Android, BlackBerry, Symbian and Windows Mobile applications for a wide range of devices.
Fragmentation will be a key obstacle for Orange to overcome as execution over multi-platforms will be more complicated than a single-platform-based application store, and applications will have to be adapted to varied platforms, increasing development costs and potentially lowering direct returns on investment.
Competitive advantage

It remains to be seen whether operators’ stores will gain competitive advantage over vendors’ stores in the long term. However, major operators can capitalise on a number of key assets.
Despite the multinational nature of major operators, their subsidiaries compete and operate at the local market level, and have direct relationships with individual local customers.
Therefore, operators are better placed than most vendors to use their direct customer relationship in order to gain deeper knowledge of local demand, and adapt their applications to suit these local needs. In addition, operators can take advantage of existing billing relationships with their customers.
Operators hold valuable network assets such as billing, messaging, location and other subscriber insights that enable rich interactive applications and offer convenient payment platforms for customers.
For example, Nokia is actively seeking partnerships with operators with the primary aim to be able to use their billing platforms, which can improve the rate at which customers who browse content can be converted into paying customers.
Most major operators are multinational organisations, often with footprints spanning several continents. Although China Mobile is mainly local, it has more than 500 million mobile subscribers, surpassing the total subscriber base of western Europe.
Furthermore, China Mobile, Softbank Mobile, Verizon Wireless and Vodafone are members of the Joint Innovation Lab and aim to deliver a cross-operator widget platform to their combined customer base of one billion subscribers.
Operators will benefit from traffic generated by the downloading and usage of applications in a way that device vendors and OS platform owners cannot. In addition, in the case where an operator gains a new customer because of the compelling nature of their application store offering, then that operator will benefit from the full spend of the new customer, including all voice calls, SMS messages and other data usage.
While device manufacturer application stores may generate additional device sales, the corresponding one-off revenue stream is likely to be significantly smaller — and have a lower margin — than pull-through revenue streams that MNOs might enjoy.
Apple leads but Google challenges

Major device OEMs and OS platform owners have launched application stores in an attempt to capitalise on the increasing consumer demand for mobile content and applications.
Apple is clearly leading the market with the accumulative application downloads surpassing three billion by January 2010.
For device vendors, application stores offer an additional revenue stream but, more importantly, can potentially enhance the desirability of their hardware, therefore leading to increased sales of their devices.
Apple has successfully demonstrated this revenue model while other vendors are eager to replicate it. Apple’s CFO, Peter Oppenheimer, has recently stated that the App Store and the iTunes Store are “running … a bit over break-even, and that hasn’t changed”, suggesting that the primary purpose of the App Store is to drive hardware sales.
Google’s ultimate aim is to populate its Android platform as widely as possible in order to benefit from search-related advertising revenue over a wide range of Android-enabled devices.
It recently launched Nexus One and started to sell the device directly to operators and consumers. Considering the public awareness of Android is relatively low outside the US in comparison with other more-established brands, such as Apple, Google’s move into device retail can potentially increase consumer awareness of Android devices.
However, it should be careful that it does not alienate other OEMs who have committed to support Android platform, such as HTC and Motorola.
Leading device vendors and OS platform developers, particularly Apple, Google, Nokia and potentially Research In Motion, maker of the BlackBerry, could present the strongest competition to major operators in the mobile application store market because of their strong brands, financial and technological resources and experiences in the internet or digital content space.
Operators will need to monitor the device vendor and platform owner space very carefully in order to learn or to co-operate so as to ensure they are not disintermediated from the mobile content value chain.
Third-party application providers such as GetJar have been selling applications over the fixed Internet for years. They may be at a disadvantage when competing with major operators or mobile device vendors because they mainly rely on the sale of applications for revenue growth, while the latter benefit from additional revenue sources enabling them to invest more heavily in application acquisition and the cultivation of a stronger developer community.
By contrast, third-party application providers can focus on particular niche areas — for example, particular content or particular countries — in order to differentiate themselves. In addition, they can also provide white label application stores to operators that do not intend to create their own stores.
User characteristics

Because the number of application stores is increasing, it is important for store providers to identify the potential target audience and understand their needs in order to formulate an effective strategy. The following analysis of potential user segments is based on Analysys Mason’s Connected Consumer survey.
About 93.5% of survey respondents were mobile phone users, and around 4.5% of those indicated that they had used mobile application stores within the past year. Application stores are relatively new and are only available to the users of a limited range of mobile handsets.
Some users may lack access to application stores, but may be willing to use them. As a result, the segments of the population identified in this report as potential users of application stores are indicative and may evolve over time.
Our analysis found that men are more likely than women to use application stores; 5.5% of male mobile phone users surveyed indicated that they have used application stores in the past 12 months, compared with 3.5% of women mobile phone users.
In addition to gender, application store usage varies by age. Those aged between 18 and 34 are more likely than older people to use application stores. This trend is consistent with other findings derived from the Connected Consumer survey that younger people are the main driving force behind various mobile multimedia services such as mobile music, games and TV.
Our survey suggests that MMS users are twice as likely as non-MMS users to use application stores, and mobile email users are almost six times more likely than non-mobile email users to use application stores.
Clearly, part of this relationship is explained by the fact that MMS and email users are more likely to have access to phones that are capable of supporting applications, but application store providers may benefit from actively marketing their products to these segments in order to expand their customer base.
Users of touch-screen phones show a significantly high level of usage of application stores: 12% of touch-screen phone users indicated that they have used application stores during the past 12 months, in contrast with less than 2% of those without.
Games are the most popular paid-for applications in the established application stores, such as those owned by Apple and BlackBerry. Utility and entertainment applications also appeal to subscribers.
Analysys Mason believes that the continued proliferation of such stores will be a significant driver for revenue growth in the mobile games market. In western Europe, mobile games will grow to become the largest mobile content service category in terms of revenue by 2013, when they will generate €1.4 billion in revenue.
Although application stores are only one content delivery channel of many that can be used for consumers to access and consume mobile content and applications, they are likely to remain important because they potentially offer consumers a convenient ‘one-stop-shop’ experience.

Yanli Suo-Saunders is a senior analyst with Analysys Mason