Operator Appstores

In the rise of the app economy, one key part of the mobile ecosystem has been underrepresented: mobile operators.  When Apple kicked off the modern era of mobile apps with the iTunes App Store, operators (along with many others) saw the promise of huge revenues in the 30% cut they could grab, and scaled up accordingly, with operators big and small launching their own appstores – along with handset OEMs, third-party providers and more.

Now, some four and a half years after Apple shook things up by launching its App Store, traffic has consolidated around platform app stores like Apple’s, Google Play and BlackBerry App World, with a few notable exceptions such as the Amazon Appstore for Android, and some local players in various markets worldwide. Operators’ efforts have seen little success, and their grand collaboration in the form of the Wholesale Applications Community fizzled out completely.

Why have operator app stores met with so little success, and what can the future hold?

Metrics of success (and failure)

For an appstore to succeed, it must successfully cater to two audiences: developers (to provide applications), and consumers (to download apps).  Failure to attract either one of these means an appstore will fail.

Operators were able to fulfill both sides of this virtuous cycle with their pre-appstore content decks: they had a supply of willing customers ready to pay for content, and content providers were knocking on their door to access them. Many operators acted on the assumption that things would work just the same in an appstore world, that all those customers who happily bought ringtones and J2ME applets would look to their operator for their smartphone apps as well.

But this didn’t happen for a number of reasons. First, operators were playing catch-up from the outset to platform and OEM stores; these stores also generally had more prominent placement on the device and within the OS than an operator store, and tens of thousands (or more) of applications.
 

Second, developers’ first moves were to the platform stores, simply because they offered the quickest and easiest path to market. While large content providers had no issue getting their smartphone apps into the new operator stores, smaller developers resisted, choosing to invest their limited time and resources into getting into the platform stores. They offered the biggest reach and the most frictionless process, compared to the more demanding and time-consuming process of getting content into an operator store.

This means that while operator appstores could be relied upon to find the latest big-name games from major providers, they lacked the depth of the platform stores, turning off many customers.

Third, the marketing operators put behind their own appstores paled in comparison to the amount of marketing platforms stores received through press coverage and the “find it on the App Store” badges included in advertising for apps.

The main effect of these factors was a lack of consumer traffic; this combined with a difficult process for developers (either perceived or real), limited developer interest in operator stores. By attracting neither party, the stores couldn’t succeed.

Lack of user traction

Perhaps the most notable shortcoming of operator stores was the significant disconnect between the scale of the audience they promised developers, and what they were able to actually deliver.

Take, for instance, an operator promising developers access to “100 million customers” (this is a fictitious example). What does that really mean to the developer?

Based on estimates of smartphone penetration in the US market, that number is cut in half immediately to 50 million. Take out iPhone users, which account for another 30 percent, and we are down to 35 million. Of these, approximately 25 million will be Android users, with about 5 million or so on BlackBerry.

Those numbers aren’t to be sniffed at, right? They look great until you consider the reach of Google Play at 480 million (Android’s reported install base) or 100 million of BlackBerry App World.

Also keep in mind those figures are overall reach rather than active users or customers with a strong intent to download or purchase. Further research indicates about 25% of US smartphone users have purchased content on their devices, knocking the effective estimated reach of our mythical operator’s store down to 6.25 million Android users and 1.25 million BlackBerry users – which is quite a difference from 100 million.

Even when applying that 25% figure to the overall Android install base, the scale remains the same: Google Play offers 20x the reach of our operator’s store. Also keep in mind that the customers the operator is offering are also already accessible (in nearly every instance) through Google Play.

Parallel to this was the contention by operators that customers using their appstores offered higher download and conversion rates than those using the platform or other popular stores. Data on this point is hard to come by as it is not generally made public, but it seems highly unlikely that users of operator stores monetize at 20x the rate of overall Google Play users. And keep in mind that for smaller operators, that 20x factor will grow even larger.

Missing the mark with developers

Beyond the calculations of the effective reach of their stores relative to platform stores, operators faced an uphill battle to attract developers for a few reasons.

First, operators have a reputation among experienced mobile developers for not being easy to work with, stretching back to the days of the WAP content deck. This reputation may not be fair in all instances, but it does exist – and is reinforced by the differences in process and time required to publish an app in an operator store versus the process for platform stores. It should also be noted that some of the operational aspects of operator app stores backed this up: long and drawn out sign-up and submission processes, unusual submission requirements (such as odd-sized screenshots), and long payment times and poor terms.

Second, for newer (i.e. post-Apple App Store) developers, operators are seen as largely irrelevant in terms of their ability to drive customers and revenues. Many iOS or iOS-first developers don’t see any reason to work with operators, or see anything they could offer that could help them make money or drive downloads. Their efforts are focused on working with the platform stores and getting prominent placement there, and their marketing efforts point to these stores, rather than to a number of different operator stores.

The good news is that these are both fixable issues of perception; operators have the ability to change them, whether related to appstores, APIs or anything else they offer. But this requires an appreciation of how the mobile ecosystem has changed in the last several years, and a shift in the way operators perceive their role with developers.

Do opportunities still exist?

The key strategic question facing operators is how they can sufficiently differentiate an appstore on both sides of the consumer and developer equation. In order to succeed, they must create an offering that’s compelling to consumers, offering them something of value beyond what already exists in Google Play. They must also satisfy developers by presenting a worthwhile – and realistic – opportunity, as well as a level of satisfaction on operational issues.

In any case, creating me-too appstores that simply take a subset of the platform stores’ audience with no real differentiation is a strategy that’s been tried, and has largely failed. The typical attempt at differentiation came through carrier billing, but that has proved ineffective, especially as Google Play has added support for it in more locations, and the Amazon Appstore makes use of its database of payment accounts.

The above diagram illustrates the appstore landscape across two simple dimensions: a store’s global vs. local positioning, and its profit vs. loss. Operators are in the lower left quadrant, illustrating their local reach and their (generally) poor results. What can be done to move across the middle profit line?

First is operators’ attempt to become more global than local by expanding their reach. Some operators attempt to do their on their own by unifying their approach across the countries in which they operate, but even this strategy has not worked well, as illustrated by Telefonica and Vodafone.

It was also, of course, the strategy behind the first failed attempts of the Wholesale Applications Community. WAC has now been shifted under the aegis of the GSMA, and a second attempt at building a global operator appstore offering is underway. It is not yet clear exactly what will be done differently, but WAC’s experience illustrates how simply trying to achieve parity with a platform store is not a great strategy for success. The push behind WAC was to create a reach that compared favorably to Google Play, with similar financial and commercial terms. Ignoring any operational issues, it should be clear that this reach alone isn’t sufficient to attract developers, since as we noted above, they already have the ability to reach these customers through the Android platform store. Without adding significant differentiation and incentives on top of the parity of scale (and assuming operational parity), it will remain extremely difficult for WAC to attract developers and their apps.

Instead of thinking globally, opportunities remain (in some cases) for operators to work more locally. In the lower right corner of the diagram is an area labeled “app boosters”. This represents app stores who focus on a smaller set of applications – compare a specialized food store to a supermarket. These stores target a niche in the market, whether it’s based on language, location, type of content, or another factor. They don’t try to compete on choice of apps for consumers, and they offer developers a smaller set of users, but a set that should deliver higher conversions than from a general store.

Some examples of these stores are:


  • Androidpit.de, which focuses on the German market and prioritizes German-language apps.

  • MiKandi, which sells adult content, which is not allowed by most other stores.

  • Barnes and Noble’s NOOK Store, which has a curated selection of apps aimed at that device’s users.
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In particular, opportunities exist in markets with language or cultural differences to the “mainstream” of mobile developers. For example, an operator in the Middle East can successfully differentiate by curating a collection of Arabic-language apps or apps with a good cultural fit.

Vision Mobile’s Developer Economics 2012 report dedicated a chapter to “Where the next 10 million apps will come from”, asserting that the next wave of demand for applications will be driven by a global demand for localized applications – for instance, a taxi application connected to local communities, or media apps featuring relevant local brands. Just as there is an opportunity for developers in these areas, there can be an opportunity for appstores to serve these local markets more effectively than general global players.

Operators may be able to accelerate this in some markets by creating a marketplace for localized applications. Instead of focusing on being yet another distribution point for Angry Birds, their appstores can differentiate by curating applications with the best regional, language and cultural fit.

Again, it should be noted this localized approach is not a universal solution. In mature markets where local app needs are largely being met – the US and much of Western Europe, for instance – effective differentiation on this metric will be very difficult.

Conclusion

In the short term, we expect to see more operator appstores shutter or scale back as their red ink grows and economic malaise around the world continues. These stores that do close will be those with no effective differentiation – including those whose only attempt at such is to support carrier billing.

Operators (and other appstore providers) face a two-sided challenge. They must offer something unique and different to consumers; trying to replicate Google Play will not work. Consumers need a differentiated experience that offers them improved access to the content they want.

The other side of the challenge is with developers. Parity on revenue share is not enough, and grand claims about the size of an appstore’s audience ring hollow. Without being able to distill a clear, deliverable advantage to developers, it’s unrealistic to think they’ll join an appstore solely because it’s there. Provable claims are key to making developers believe an additional or different store is worth their time.

While we have largely avoided discussing the operational issues for developers, such as the time required to establish an account, the time it takes apps to get to market, the marketing materials required and so on, these too are important. Just as consumers are attracted to the purchasing channels with the least amount of friction, developers are looking for frictionless interaction with their distribution channels.

One helpful metric to evaluate developer offerings in this space is to think in terms of 70 cents – the typical developer revenue from a 99-cent app. How many 70-cent transactions will have to happen to cover a developer’s investment of time and resources in your appstore?