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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).

Mobile 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.

- Andreas

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  • http://iablog.sybase.com/tslee tom s.

    Interesting comments. Two questions for you:

    1. I'm not convinced application vendors can make much money from application stores unless they are two-person garage operations, in which case a minor hit can be a nice chunk of change. The success counted by downloads is nice for Apple, but I haven't seen many real mobile application success stories.

    2. how do you see this tilt playing in the Enterprise space? I'm not sure that general purpose app stores work as an enterprise deployment mechanism.

    3. (because no one expects the Spanish Inquisition). Given the slanted playing field that the mobile OS vendors promote, I suspect that 3rd party apps (games aside) will only be the froth on the top of the mobile market. The big apps (navigation, PIM etc) will come from the OS vendors themselves or from their very close friends.

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Tom,

    1. There were a few success stories from developers who came out with good apps for the App Store in the first 2-3 months of launch. However I expect the average App Store developer to be making very little. My argument was not that developers can make more from writing downloadable software than from embedded software. But that the revenue opportunity (future market size) of the embedded software market is shrinking while that of the post-sales market is growing.

    2. Enterprise is a completely different game, simply because the corporate admin makes the purchasing decision for which apps to range, not the end user. As such app sales will continue to take place in large part via system integrators and operating systems with a solid enterprise play (Windows and RIM).

    3. The OS/platform can bundled their preferred apps – in practice the bundled apps are specified by the handset OEM, system integrator or mobile operator. However, with a good enough on-device storefront (easy to discover, flat rate, easy to install and use, wide choice of apps, etc) users will find it as easy to download new apps as to use the embedded ones. Plus with OSes that facilitate core app replacement (only Android for now), anyone can (in theory) replace the contacts, inbox or dialler app with one they downloaded.

    - Andreas

  • http://iablog.sybase.com/tslee/index.php tom s.

    Hi Andreas,

    I agree with what you say except for (3). The mobile OS's (Windows Mobile excepted) put enough limits what third party apps can do that it will be difficult for them to replace embedded ones. On Android, for example, embedded apps can be written in C while third party apps must be written in Dalvik/Java. I don't know much about core app replacement – but surely that would apply only to carriers/device makers and not to the aftermarket vendors?

    Keep up the interesting writing.

    - Tom

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Tom,

    On Android all (incl. core) applications are written in Java and executed on top of Dalvik. The whole Android application framework allows third parties by design to create core apps and replace core apps (nothing to do with the APL license, this is designed into the architecture). Embedded apps can be written in C, but I believe this is used in the case of middleware. But like you say, in practice handset manufacturers and carriers will be limiting this functionality to reduce their liability exposure. See my earlier article on the Darker Side of Android.

    - Andreas

  • http://www.bluecreekmarketing.com Anne Baker

    Andreas, I know you coined the term ODP but do you think that the whole ODP market is going away? Ever since the sale of Action Engine it seems like ODP has become a dirty word. See this article in Telephony Online this week: http://telephonyonline.com/software/news/on_devic

    I know there are the vendors still fighting it out in that category but aren't they really just building standard mobile applications now? Seems like most mobile applications are expected to be delivered with ODP-like features by default. Does ODP really deserve its own category anymore? Just interested in your thoughts.

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Anne,

    When we coined ODP it was used to signify on-device software for browsing, discovering and buying content that was previously locked in the dismal user experience of WAP. Today the ODP term can be (and is) applied far widely for Mobile TV clients, idle screen clients, widget shells, etc. So on-device portals are used more widely than before; but they have also been commoditised, resulting in low (sub $0.10) per unit royalties, or even giving away the ODP software for free in return for per-active-user fees, which is the smarter thing to do.

    Overall, the ODP category and moniker isn't dead, far from it. But the recipe du jour for selling ODP software is to package the client software as part of a service delivery, content delivery or similar offering, rather than standalone.

    - Andreas

  • Yacine

    Andreas

    Thanks for your view on ODP , nevertheless I find your estimation in term of RTU a little bit pessimistic , below 1$ is actually the trend rather 10 cents. Nevertheless I am sharing your point abaout ODP software as part of a service delivery, content delivery .

    Yacine

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Yacine,

    ODP vendors may quote $1 per unit as the asking price on low volume. With decent volume, this number quickly drops to $0.10 for pure-play ODPs. At least that's our experience.

    - Andreas

  • Vinay

    Definitely an interesting read… And all the points that you have recommended make sense from the prespective of the OEM / operator (subsidizing the ODP and making it a loss leader – generating revenue from other content downloads / purchases).

    However, what happens to the pure-play ODP Vendors. We have seen one company go bust (ActionEngine), but what happens to the other 30-40 companies in this space who are still hanging on… Most of these companies are start-ups and if their main product (the ODP solution) is commoditized, how do they manage to keep afloat?

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Vinay,

    Quite a few ODP vendors have transformed into lightweight service delivery platform variants and quite a few have disappeared – as covered in the article. Whereas there were 30 or so pure play ODP vendors at the hype curve climax, only a handful remain today.

    Also to clarify – ODPs and generally service-driven client software tends to be more effectively monetised through a per-active-user model rather than a per-unit model – which is how the loss leader reference applies.

    Andreas

  • Haijin

    Hi Andreas,

    I agree that the commoditization and the barriers in deployment, the embedded software business is becoming tough. However, It is hard for me to see the rising of post-sale software neither. Average PC users get most of their apps or services free online, why would they willing to pay for the apps for their phones ? Not mention that those mobile apps won't give the users the same user experience as the web apps do.

    One way I could think is that those apps being re-packaged into subscription-based services delivery model, as you have pointed out. However, this is also really hard to do either, unless those services are highly customized for the end users.

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Haijin,

    It has generally been considered that getting users to click-n-download apps results in very low conversion rates – circa 1-2%, even if the app is free. However, the success of App Store, followed by BREW, Get Jar and Handango is proof to the contrary; if the application is easy to discover, download and install, the conversion rates are much higher – for example Get Jar records around 17M app downloads per month and increasing by 1M per month (admittedly it's difficult to compare this to a conversion rate though).

    My thesis is that discoverability and transparent download & install process is one key requirement for take up of application downloads. The other is a transparent billing relationship, i.e. a one-click buy which is via CC or operator billing today.

    To address your point, I expect many users sideload their PC apps from friends, but then again the pricing for PC apps is typically upwards of $10, often $100 and up for app suites. On the contrary mobile apps and content are typically priced in the $1-$5 segment. We have seen how users have adopted SMS when pricing has been reduced or bundled, generating 6.5 billions of SMSes per month in the UK alone. One should note that our behaviour (and purchase decisions) when on a mobile phone are different to when using a PC. Spontaneous behaviour and impulse buying is more readily associated with use of a mobile phone than a PC.

    Overall, the user motivations behind app downloading are related to both ease of download/install and the pricing. It is far too complex a subject that would require focus groups and user research to understand in detail. But the examples of App Store followed by BREW, Get Jar and Handango are very encouraging.

    - Andreas

  • Guy

    Hi Andreas

    Very good and thoughtful article. The one point I want to add is that the logical path that is painted by this scenario is that as downloadable SW gets better and discoverability and ease of download improves, perhaps handsets will start shipping as a Vanilla build with only basic features, and then users will download SW as they please to get any functionality they need. This is perhaps how PCs are perceived. However, the Mobile reality is that even if there is pressure on the royalty model, the companies that ship devices differentiate them by more and more built-in and integrated software. So as the quantity and quality of downloadable SW increases, the quantity, size and quality of pre-integrated SW rises in parallel- just check the built in memory growth on all phones. Strategic technologies or applications may start as a downloadable version but if e.g. Nokia thinks an app is strategic, it integrates it into the platform and ensures it is an essential part of the built-in user experience. It seems also that optimized user experience involving interaction of a holistic UI with multiple applications requires pre-ship integration and is more difficult to achieve post-ship by an external party.

    Therefore it seems to me that there will still be increasing demand from device makers to interate the best applications and UIs into the device software. It's just that the business models of how to monetize this value by suppliers will pehaps have to change from royalty that impacts BOM to perhaps on going usage based models and pehaps upsells and upgrades? what do you think?

    Guy

  • Steven@voyager

    excellent post!

    the problem with post-install soft is that…. no killer app found yet

    yes, opera mini reaches 20M unique monthly user, but no other success here(let's not count the web2mobile like mobile msn ,etc)

    iphone/gphone/nokia/rim/ms app store reduces the promotion cost for developer ,let's see if real killer app would come out of it

  • http://visionmobile.com/blog Andreas Constantinou

    Steven,

    There doesn't need to be a killer app – it's enough for each user to find the app that's right for them. That's the difference between the network-centric economy of yesterday and the person-centric economy of today.

    Guy,

    Good point. OEMs will still want to integrate the best applications at the pre-load phase. But I 'm convinced that the revenue model balance is shifting to per-install, per-user or per-use revenues as opposed to pre-load per-device revenues. It's more about when as opposed to where the revenue is made.

    - Andreas

  • satish

    i need a software,by usuing it & connecting the mobile computer ,i can repair the mobile,if it bveing dead.Please help me ,is there having any site from where i can download this software.Thank you.

  • http://www.mobinex.biz Israfil Coskun

    Hi Andreas

    About ODP market; what I see is evolution in positioning, in this process some vendors will survive and some will die as a consequence of survival of the fittest.

    Decrease in the number of vendors( whether its merger&acquisition or bankruptcy) doesnt mean ODP market downsizing but maturazation. High expectations gravitated towards sensible targets, no pain no gain:)

    Here, there is problem of "ODP" term differs for everyone, simply it is not what it was before and still changing.

    Israfil

  • http://visionmobile.com/blog Andreas Constantinou

    Hi Israfil,

    I agree entirely – the ODP market is clearly maturing and commoditising. The value is no longer in simply rendering a portal on-device, but on value-adds like visual voicemail, mobile app stores, customer self care apps, idle-screen based discovery etc.

    It's unfortunate that the term ODP has been stretched to cover many more uses of client software (other than portal use) – but that's natural as on-device software is being used by operators to deliver lots more services and ODP has been a reliable moniker to use from the portal-only era.

    Andreas

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