The Economics of Application Store (http:www.telecomcircle.com)
Apple Application Store delivered its billionth application to its user on 23rd April. I do not know if Apple is
the first front store to clock a billion downloads but certainly, it is the most talked about application store.
The hype created by Apple around applications has made the phone much more personalized and
useful to the user. Will Apple be able to sustain the hype is yet to be seen but one thing is certain, the
competitive landscape would be very different in this space in the years to come.
Operators and a few third party stores have been offering the applications for a long time now. Most of
the operators have their own content portal from where the users can download the applications.
Vodafone has “Vodafone Live”, NTT DoCoMo has “iAppli” and Airtel has “Airtel Live” as portals from
where applications can also be downloaded. However, after the launch of Apple Application Store, many
other device vendors like Nokia, Palm, RIM and Operating System owners like Google and Microsoft
have announced their own specialized applications store. The strong competition from the new players is
forcing the operators to alter their strategies.
There are essentially three types of stores:
1. Operator Portals, e.g. Vodafone Live – Normally, these type of stores are within the walled
garden of the operator and have an inherent advantage of having the direct billing to consumer
facility. The developers need to tie-up with the operator and the operator takes over the
responsibility of marketing, distribution and billing. However, in most of the cases, barring Japan,
the revenue share is highly skewed in favour of the operator. In Japan, close to 90% of revenues
are shared with the developer which is a big incentive for the developers to develop quality
applications
2. 3rd Party Store Fronts, e.g. GetJar – The users use the open internet to access the 3rd party
application stores which supports a large number of platforms and devices. The developer gets a
high revenue share but marketing and visibility is a concern in this model. Unlike the operator
portal or the device stores, the store does not have direct visibility to the users and hence the
users have to search for these stores
3. Platform Application Stores, e.g. Ovi Store, Android Market – These are the new category of
application stores that are being built by the device vendors and the operating system vendors.
The biggest advantage is that the stores are embedded into the device and hence the discovery
is simple. Moreover, they can target a large user base due to the volumes each device vendor
does. This high volume potential is a big draw for the developers. Apple has also started the
trend of sharing up to 70% of net revenues with the developers which means the developers are
in demand like never before. The platforms can be proprietary (e.g. Apple) or open system (e.g.
Symbian, Android). The trend in the recent times is towards a more open ecosystem
It is important to understand the economics of applications to be able to fully appreciate the recent
competitive intensity in this space. I will use Apple as an example simply because there are more data
points available for Apple. Apple Store has seen downloads of 1 billion applications and if we assume
that iPod users would have downloaded 38% of these applications (out of 37 mn Apple devices, 23 mn
are phones and 14 mn are iPods), then the iPhone users would have downloaded 620 million
applications. Out of these 620 million applications, 75% are free applications (based on a survey by

Wireless Media Lab, Mar’09) and paid applications had an ASP of approximately $1.1 (most downloads
were at 99 cents price point). This means that the iPhone owners paid $171 million as revenues to the
Apple Store since the store was launched in Jul-08. Taking a 30% revenues share for Apple, Apple’s net
revenues were $51 million ($68 million annualized). This may not be a big amount but considering the
pull these applications have, the actual benefit get reflected in the device sales and lower marketing
efforts for Apple. Counting the iPod revenues as well, the total store revenues would be in excess of $80
million for nine months.
According to Strategy Analytics, Apple has currently a 12% market share by volume in the mobile
application market. If Apple iPhone sold 620 million applications in 9 months time and taking its market
share up to 15% by 2009 end, then the annual applications demand in 2009 is likely to be 5.5 billion
which is huge!!! The market ASP on an application is around $1.5 (much higher than Apple as Apple has
75% of its download as free vs. 40% free application downloads for the industry) which means that the
total applications market is worth $8 billion. 67% of all the application downloads happen through the
operator portal or BREW and the rest by other players. Developers get 70% from the device vendor
stores, 60% from 3rd party stores and 50% from the operator portal. This means that the developer’s
share of revenues is 53% on average or $4.3 billion out of a total of $8 billion while the operators earn
$2.8 billion from revenue share apart from the access charges. The non-operator store owners get the
rest of the money i.e. $0.85 billion. The total revenues from applications are expected to double to $16
billion by 2013. Apart from the revenues from the application sales, another stream of revenues is
advertisements which could in fact exceed the revenues from application sales in the years to come.
Apart from the revenues that the application stores can drive, there are other indirect benefits of
promoting application usage. It is a well established perception that Apple users have a much higher
ARPU than the other device users. The Apple users are also likely to be more loyal to their carriers.
Now, that is a game changer for operators. Carriers gain the most from the success of the application
stores irrespective of who owns the stores. However, the operators still have a fear of getting
marginalized and hence are planning to strengthen their own stores and platforms. Vodafone recently
announced its intention to open its network from 3rd party developers. Multi-country operators like
Vodafone with large customer base can afford to develop their own platforms but the smaller single
country carriers would be left with two options – Either “Do Nothing” and still gain from the revenue share
and access charges on account of increased downloads. Alternatively, they can form alliances with other
operators across the world and have common platforms. Vodafone has an alliance with Verizon and
China Mobile, SingTel has an alliance with Telstra, Airtel, Globe and others. These alliances will provide
strength to the carriers in future. Alliances can also be formed with 3rd party storefronts as they may not
pose a huge threat to the operators.
Amongst the device vendors, there are two categories – One that has a huge focus on application stores
like Apple, Nokia, RIM, etc. and others like the Korean vendors who have a “Me Too” strategy for
application stores and would not like to antagonize the operators by focusing on application store.
Operators may want to tie-up with the second category of vendors but the consumer pull may force them
not to ignore the first category of the device vendor. With different ambitions of the entities in the value
chain, the power game is now getting interesting.
(This article is a part of the blog http://www.telecomcircle.com)
http://www.telecomcircle.com/2009/05/the-economics-of-mobile-application-stores/