Distilling market noise into market sense
The VisionMobile blog is a space where VisionMobile analysts and industry insiders exchange views on the fast-changing mobile market and the trends that define the future direction of telecoms.
Mobile software is dead. Long live.. mobile software
[Mobile software has always been a tough business and is getting tougher. Research Director, Andreas Constantinou, explores how the value is migrating from embedded to downloadable software].
OK, I ‘m exaggerating. Mobile software isn’t dead, and it will never be. You need software to turn an expensive brick into a walking talking phone. Mobile software is critical to the function of both the handset itself and the mobile industry as a whole. But the revenue potential of mobile software is changing in a very symmetrical way: it’s migrating from embedded pre-load software, to downloadable, post-sales software.
The business of software
The business of embedded mobile software is a very tough one and it’s getting tougher. There are 100s of vendors that have emerged in the last 10 years offering embedded software like multimedia & graphics engines, operating systems, browsers, middleware and core applications, application environments, on-device portals and active idle screen solutions (see our Mobile Industry Atlas for who’s who). These vendors have based their business on a built-it-and-it-will-scale model. The assumption here is that by shipping your software on millions of handsets the business model of per-unit royalties will easily scale, as in the simple equation.
Revenues $$$ = high-per-unit-royalties * many millions of devices
However, revenue scalability is far harder to come by for two reasons.
1. Embedded software has been commoditising – meaning that handset OEMs are willing to pay less, even though they recognise software as indispensable; much like the FM radio feature in your car. This is the case for operating systems – see Android which is available to license for a price tag of $0 and the effect it had on Nokia’s acquisition of Symbian. Same applies to application environments (Flash Lite will now come with a zero royalty under the OSP project). Web browser royalties have dropped from an estimated $0.75-$1 per unit in 2005 to $0.05 to $0.25 per unit in 2008 in large volumes. WebKit and the tough browser economics have signaled dire consequences for Teleca’s Obigo and Openwave’s browser.
On-device portal vendors are suffering from a similar fate; ODP pure-play software should be selling for $0.10 or less per unit today. A handful of pure-play ODP vendors have survived to late 2008: Cibenix, Communology, Crisp Wireless, INSPRIT IntroMobile, Streamezzo, SurfKitchen and weComm. Most ODP software is offered as a loss-leader, acquired or developed into OEM channels (Nokia Download!), media brand channels (Yahoo! Go), tools companies (Adobe FlashCast), social networking services (Xumii, Reporo), content publishing channels (Cellmania, Handmark, ROK, OnMobile), Service Delivery Platforms (NewBay, Qualcomm uiOne) and software services providers (MobUI). Numerous ODP products have been very quiet, namely Airmedia, Comverse ODP, EveryPoint, Infusio, Tricastmedia and U-Turn.
Only vendors with unique intellectual property (IP) have been able to resist commoditisation – ranging from input technology to graphics acceleration and multimedia software companies. As a result embedded software vendors are now settling for uncapped pre-licensed royalty bundles and NREs (non-recurring engineeering aka professional services fees) in place of running royalties. The smarter vendors are repackaging their assets into a service delivery model where they can charge for the more popular per-active-user model.
2. Deployment challenges: As ironic as it may sound, in a market of 1 billion devices sold per year, it is very difficult for any single software vendor to become embedded on more than 1 million mobile devices. Our 100 million club charts just over 20 companies (out of an estimated 250-300 companies in the inner circle of the mobile industry) which have had any single product embedded on more than 100 million cellular handsets.
Deployment challenges arise as handset OEMs are reluctant to ship 3rd party software on a platform-wide basis, but are rather trying to accomodate specific channel requirements for a relatively small volume of handsets. Moreover, tier-1 operators who in theory can mandate (read: request) that certain software is embedded on the handset have been challenged with time-to-market delays for customised handsets and so are acutely aware of the opportunity cost of deep handset customisation.
Overall, both per-unit-royalties and deployment volumes have been reducing, signalling the down-spiralling revenues of the embedded software business. So what options do embedded software vendors have? Some are favouring professional services fees for software integration, customisation, certification and indemnification (WindRiver is a good example here). Others are repackaging their assets in the form of vertical service delivery platforms, where the embedded software is the loss-leader (see list of ODP vendors earlier).
Pre pre-load to post-sales monetisation
What is most interesting is that as the embedded software market is spiraling downwards, a new mobile software market is being re-ignited, that of downloadable software. In essence, the revenue opportunity is moving from the pre-load phase of the handset lifecycle to the post-sales phase (see our report on Mobile Software Management for definitions and a perspective on the handset lifecycle).
Open OS platforms and application stores have existed at least since Qualcomm’s BREW platform and Shop launched in 2001. Handango reports 140,000 applications on its stores and BREW has generated more than $1B for developers as of March 2007, averaging 80 million downloads per month in 2007. Yet applications sales haven’t really picked due to the *commercial* challenges in connecting developers directly to end users. Outside the BREW ecosystem (accounting for 11-12% of the global device sales), very few application developers have been making money, at least until the advent of Apple’s App Store.
The App Store has near-perfected the five key elements of a direct developer-to-consumer channel: a single marketplace for application submission and testing; centralised billing; global distribution; application provisioning; and on-device storefront. Apple’s App Store has broken down most commercial barriers (save for the stringent application selection criteria) – the success speaks for itself: 100 million application downloads in the first 2 months of launch and $30 million in revenues in the first month.
Google, RIM and Microsoft are launching their own Appstores, while a number additional of Appstore initiatives are under development in stealth mode. We ‘ll compare and contrast Apple’s App Store with Nokia’s Download, Qualcomm’s BREW, GetJar and Handango in a next article.
Update: To clarify, the core argument of this post is that the revenue opportunity (future market size) of the embedded software market is shrinking while the revenue opportunity of the post-sales market is growing – in this sense market value is migrating from pre-load to post-sales. We estimate there are 250-300 software companies active in the pre-load phase of the lifecycle, and about 30,000 developers in the post-sales phase. Naturally, the average 3rd party developer revenue is going to be tiny in the post-sales phase. We should also see increasing importance in the promotional and marketing channels for 3rd party developers and consolidation of such providers.
Comments welcome as always.