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.
A Game of Ecosystems: Measuring ecosystem performance
[How do ecosystem economics shape the mobile competitive landscape? What are the key performance indicators and how should app ecosystem stakeholders evaluate opportunities? Andreas Pappas seeks answers to these not-so-trivial questions in this, first post, in a series of blog-posts on ecosystem economics.]
Measuring ecosystem performance
Since 2008 we have witnessed the rise of mobile app ecosystems – iOS, Android, BlackBerry and Windows Phone giving rise to millions of apps and billions of smartphones. We have also witnessed the collapse of legacy mobile platforms – Symbian, Java ME and BREW. This has led to this shift in mobile platforms, and the rapid growth of smartphones.
The cause of this upheaval in the mobile and software industry had less to do with the openness of Android or the user experience of Apple and more to do with a change of business models. Legacy mobile operating systems (e.g. Symbian) were designed around handset makers’ business models. As such, they were optimised to improve supply efficiencies in terms of cost and performance.
In contrast, new mobile app ecosystems (e.g. Android) are being designed around developers’ business models. As such, iOS, Android and Windows Phone are optimised to create and sustain demand from both users and developers.
The triumph of iOS and Android is a testament to the superiority of ecosystems economics over legacy business models.
The demand-led growth of app ecosystems has led to a non-linear growth of smartphone shipments that surpassed feature phone shipments for the first time in history. In addition, the winner-takes-all property of ecosystem economics has led to the Apple-Google duopoly. Todayâ€˜s platform landscape resembles the desktop OS market of the 90s which was dominated by a single platform, Microsoft Windows.
The elusive nature of ecosystem economics
The economics and business models of app ecosystems are based on network effects. By connecting users to developers, ecosystems create network effects, that is, they drive demand between users and developers: the more users, the more handsets, and therefore the more developers, the more apps and so more users. It’s a positive feedback loop that gives non-linear growth properties that outcompete traditional linear economies of scale. Network effects take place not just between users and developers, but also between all four sides of app ecosystems, including handset manufacturers, and network operators. The next chart shows the network effects at play within the iOS ecosystem, and the value added and captured, by each side.
Network effects are just the foundations of ecosystem economics. There are many more properties of ecosystem economics such as external subsidies, exit barriers (lock-in), stored value, non-linear growth, winner-takes-all effects, and many more. We will examine ecosystem economics as part of a future research paper – any comments on what we should include?
Because of their non-linear growth, ecosystem economics lead to winner-takes-all outcomes and highly concentrated markets. The first players in the market are able to inhibit the growth of latecomers by having disproportionately fast growth, but also by introducing exit barriers.
Today’s iOS and Android duopoly, and the difficulty that followers like Windows Phone, BlackBerry, Bada, Tizen, and Firefox OS face in catching up with the leaders, is a direct result of the economics driving mobile ecosystems. The only way to compete with Apple and Google is not head on, but by changing the basis of competition or by diluting the control points. How can this be achieved? We will expand on these options in a future post.
While we are convinced that ecosystem economics dictate the power play in mobile app ecosystems, the nature and the mechanics of such economics are not well understood. We all talk about ecosystems and network effects but rarely see these outlined, explained and quantified. Understanding and quantifying ecosystems economics is the key to understanding the competitive landscape of today’s app economy, assessing the value of an ecosystem and making informed decisions regarding the long term viability of platforms and the investment opportunity for developers, enterprises, handset OEMs, network operators and consumers.
We have developed a unique understanding of mobile ecosystems by modeling ecosystem economics and measuring developer economics. In our effort to improve our understanding and our ability to assess the success or failure of an ecosystem, we are building a model that takes into account a variety of hard data and perceptions to determine an ecosystem performance index. The aim is to capture in a metric, the relative performance of each ecosystem against each other, in a way that also conveys information about its long-term viability and the size of the investment opportunity for developers, enterprises, handset makers, network operators and consumers alike.
There is an abundance of data out there that points to the relative strength of each platform: every once in a while Apple and Google announce app-store data such as apps available, downloads, activations and money paid to developers to highlight their dominant position in the market. Analytics firms publish metrics around user engagement, monetization or eCPM for each of the platforms they monitor. VisionMobile measures the Developer Mindshare Index and developer revenues via our Developer Economics research and benchmarks ecosystem characteristics through our Market Sonar service.
Such metrics provide a glimpse of ecosystem performance and provide a great service as marketing messages for headline generation. But how important is all this data to ecosystem stakeholders? How are we to assess whether platform A is in a better position than platform B and what momentum each platform carries going forward? In other words, if an enterprise were to invest in one of these ecosystems, how would they go about evaluating them and reaching an investment decision from the perspective of users, partners or developers?
Ecosystem value is an indicator of the capacity of an ecosystem to create value for its stakeholders. The stakeholders of a platform include all those that capture and add value to an ecosystem, including consumers, enterprises, developers and businesses investing in or supporting the ecosystem (e.g. handset makers, operators, platform vendors). In order to measure this value we first need to understand how value is added to and captured from an ecosystem and to define performance indicators that are linked to the value of an ecosystem. In the following sections we will look at each stakeholder group separately in order to determine the performance KPIs that matter to each group.
Ecosystem value to users
Back in the day of the feature phone, consumer choice focused on which phone was best in serving four use cases: making phone calls, sending texts, taking photos and storing contacts. Differentiation across these use cases was quite limited among devices so other factors such as cost, design, carrier tariffs and coolness factor weighted much more on users’ decision process. With smartphones it’s not just about creating value around these four use cases, but more about the number and the value of use cases that an apps ecosystem creates for the user.
Nowadays phones are more like tools: flashlights, compasses and spirit levels. Phones are also media players, TVs and game consoles using via apps/services such as iTunes, YouTube and Angry Birds. Users now select a phone based on thousands of use cases that are realized via a million apps. It is not just the app count that matters, but also the quality, diversity, reliability, robustness of the apps and the ecosystem. The right mix of these ingredients is the key to creating user value and tapping into the new type of ecosystem economics.
At the same time, enterprise users value a different set of features and ecosystem metrics with security and separation of business/personal accounts featuring high on the list. Total cost of ownership is also important to enterprises that use a mobile platform to optimise their business processes.
The diversity of handset price points is also a significant ecosystem metric. Android has achieved wide adoption partly due to the availability of Android handsets from $50 to $500 points, while iOS covers mostly the top range. In western countries, operator subsidies can have a significant impact on consumer choice as they make devices more affordable to consumers at the cost of a contract lock-in. At the same time, in the price-sensitive, emerging markets that now drive smartphone growth, subsidies rarely apply.
Regional variations may have a significant impact on the overall value of a platform to users; availability of apps and services in local markets varies and therefore the utility of a platform may also very accordingly. In China, for example, Android is usually stripped of most or all Google services such as access to Google Play, thus diluting the value proposition of Android in this market.
Apart from the factors that attract users to a platform there are also inhibitors that prevent consumers from switching to a new platform. These relate to user investment in a platform – including the experience adaptation tax (i.e. the cost of adapting to a new UI), the cost of repurchasing apps on that platform, the need to seek alternatives where apps don’t exist.
Ecosystem value to developers
Our Developer Economics research has found that when selecting a platform, the most important consideration for developers is user reach, which is an indicator of the addressable market for developers. It is important to note that not all developers capture value in the same way; so other factors such as familiarity with the development environment, learning curve and cost of development are also important criteria for developers when selecting a platform. Ultimately, though, app development is a business and monetisation is critical to the mid- to long-term success of this business.
The number of enterprises and verticals that adopt a platform is also a key source of developer value as enterprises and verticals that commission apps on a platform create business for developers.
Moreover, availability of developer tools and services can act as attractors for developers as they minimise onboarding friction and facilitate development, marketing and monetisation: Cross Platform Tools are a special case here, allowing developers to work across platforms and therefore damping the effect of platform switching costs; however, lack of support for a platform among popular CPTs may have an adverse effect on developer onboarding.
Discovery, distribution and monetisation services have also become essential elements of mobile app ecosystems because they reduce friction points between developers and users. At the same time, absence of such mechanisms (as in the case of mobile web apps) can be detrimental to the future prospects of a platform.
However there are also several inhibitors for developers. For example, capital investment (e.g. as required for iOS development), high development costs, poor local reach of a platform and insufficient monetisation opportunities will deter developers from adopting a new platform or will drive them away from one platform in favour of another. Development costs are a key element of the ROI equation and keeping these under control is a priority among developers as indicated through our Developer Economics surveys. Development costs may creep because of additional quality controls, marketing spend etc.
Deriving platform value
The analysis presented above touches on just a few of the indicators that determine the performance and value of a platform and is by no means complete. In our effort to model platform performance, we’ve identified around 40 KPIs, i.e. indicators relating to how platform stakeholders derive value from a platform. Building a model for platform value that takes into account all these indicators is of course non-trivial as not all KPIs are readily available or easily measurable and the weight of each KPI on the overall platform value is difficult to establish.
So, to start with we’ve identified six KPIs that we consider important to the health and viability of an ecosystem and scored the two major platforms across these KPIs. While these numbers are important to different stakeholders in the app ecosystem, it is not obvious how much each of these contributes to the overall value of a platform. So while monetisation is better on iOS, developer mindshare is higher on Android, suggesting that reach is more important than revenue. At the same time, developers on iOS earn $7.4 per million users while developers on Android earn just $2.11 per million users, suggesting that developer value increases much faster on iOS than for Android for each new user added.
This is an active area of research that weâ€˜ll continue reporting on. Meanwhile, do let us know your thoughts and which factors you think are most important when considering platform value. What have we got right? What have we missed?