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. Today‘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.

Ecosystem performance

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 we‘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?

Andreas @pappasandreas

The ‘platformisation’ of basebands

The word “platform” gets used often in the mobile business. It is a heavily loaded term, which gets thrown around a lot, up there with ‘cloud’ and ‘open’ in terms of repeated, overused terms. Despite this linguistic abuse, there is still a lot of value in having an actual platform. Businesses seek to build platforms to create some form of lock-in. Use one platform and it can become hard to move off it, creating repeat business for its owner. A platform can block out competitors, bind customers in and create valuable partnership opportunities.

In the mobile industry, the most widely known platforms are probably the operating systems for smartphones, like iOS and Android, where we commonly speak of ‘platform wars’. However, there is another layer of platforms much further down the phone stack that can cause as much disruption to the smartphone industry as the iOS/Android software platforms.

Basebands are to mobile phones what CPUs were to PCs: the key piece of silicon that end up driving most of the other hardware choices for a device. Technically speaking, a baseband is a modem that controls the communications between the phone and the carriers’ base stations. However, baseband vendors like Broadcom, Qualcomm and Mediatek have pursued an integration strategy for many years. The end result of this is that when phone makers buy a baseband today they are also typically buying that baseband, the radio transceiver and increasingly the applications and graphics processor for their device as well.

The baseband vendors have created a platform from this one product. These vendors now commonly provide tools, testing and help with carrier certification. The transition of mobile basebands from a product business to a platform business took place about ten years ago in mobile, largely coincident with the rise of 3G networks. It was this ‘platformization’ of the business that drove Texas Instruments, once the king of basebands, out of the market. Today, the best known baseband vendor is Qualcomm, who designed and then reaped the benefits of a platform approach to handset silicon.

Prior to Qualcomm’s arrival, much of the software that went into basebands (aka the protocol stack) was written by the handset vendors themselves. This required hundreds if not thousands of engineers, and hundreds of millions of dollars in annual expense. Qualcomm did much of this software work, freeing up its handset customers to deploy capital elsewhere. And went on to become the leading handset baseband vendor for 3G phones by a wide margin.

However, the transition to platforms continues.

The Mediatek phenomenon

While Qualcomm is the best known baseband vendor they may not be the largest anymore. That title arguably goes to Mediatek of Taiwan. As the dominant 2G baseband vendor Mediatek took the platform approach one step further and in doing so created one of the most important forces in mobile today.

Mediatek grew up in the one of the most competitive industrial landscapes there is – the consumer electronics supply chain in Taiwan and China. They sold chips for DVD players and optical drives for many years to low-margin assemblers of PCs and other electronics. Through some trial and error, clever thinking and luck they created a new business model for the cell phone industry. They recognized that their traditional customers had very limited engineering talent. These were typically companies with a few assembly lines capable of putting chips on a board and wrapping that board in plastic. None of these companies had the ability to design cellular phone software or build pretty user interfaces. These companies relied on their chip suppliers to provide basic software like device drivers and user interfaces.

So Mediatek took all that software work and bundled it into a complete package which they called a reference design for mobile phones. These reference designs were essentially blueprints for building a basic, 2G feature phone. Anyone with a 10-engineer team could buy a Mediatek chip and this would come with everything they needed to build a phone.

Mediatek even went a step further than Qualcomm. At the time, in the early 2000’s, most of Qualcomm’s customers were still large handset makers who had the ability and desire to build some of their own pieces of software. Companies like Motorola no longer had to build the protocol stack for their basebands, but they still wanted to customize each device in certain ways. Mediatek’s customers did not even want this much. Mediatek added device drivers, suggested specific components parts and laid this all out. Over time, they also added a huge range of software options that gave their growing customer base some ability to customize phones in certain ways like local languages, color screens, Java licenses or Bluetooth. This was far less customisation than the big handset vendors could produce but required almost no customer engineering.

Mediatek was just looking for a new product to sell to existing customers, but they opened the door for all these small assemblers to begin selling inexpensive phones. This group came to be called the ‘Shanzhai’ or ‘grey market’ or ‘white box’ handset supply chain. Today, we call them branded Chinese handset makers, and they contribute over half of the phones sold each year.
I have greatly simplified the history here but I would refer you to the works of Professor Willy C. Shih of Harvard Business school who has written extensively on the Mediatek phenomenon.

Most mobile industry pundits in the US and Europe still underestimate the size of the Mediatek ecosystem. Mediatek powers over 500 million handset units every year – which means that Mediatek powers more handsets than Samsung makes. By my latest estimate, major third party analyst firms still undercount Mediatek and its competitors by 300 million to 400 million units a year. This is a big number to miss, but it is hard to get an exact count of Mediatek’s customers as the ease-of-use means that the barriers to entry are very low, and there are ample new entrants (and exits) all the time.

Shifting the balance of power in the platform market

Mediatek has not enjoyed this opportunity all alone. In China and Taiwan new competitors have popped up, notably Shanghai-based Spreadtrum and RDA Micro and Taiwan-based M-Star (which is now being acquired by Mediatek). Nor has this lesson been lost on Qualcomm which is actively building its own presence in this market with its own set of Qualcomm Reference Designs (QRD).

There are three important implications of Mediatek’s business model.

First, Mediatek demonstrate that handset vendors do not have to own their own silicon. In the US, the success of Apple and its own A5 line of applications processors has created the impression that successful handset companies need to design their own chips. Apple’s A5 has all kinds of iOS specific functions burned into silicon which gives the iPhone certain performance and probably cost advantages. But Apple is, as always, a special case, as few other vendors have the scale, or the margins, to do this. There are still thousands of Mediatek customers making a good business selling phones using off-the-shelf silicon.

Second, the handset business is now, more than ever, a race between time and innovation. The major handset vendors, other than Apple and Samsung, are generally lacking in profits. There is a yawning low-end tier of handsets. Companies that cannot innovate in some way will be relegated to competing with the Mediatek ecosystem, competitors who have very low labor costs and limited R&D budgets. If you think your business is competitive, imagine competing in a market where the average selling price for a feature phone is $20, retail. This is particularly important now because Mediatek and Spreadtrum both began selling Android reference designs last year. We have seen a corresponding drop in handset prices in many markets and a surge in smartphone adoption globally. This is great for consumers but very challenging for handset vendors. And this is by no means a China-only or emerging markets phenomenon. Mediatek-powered phones are now common in Europe and steadily creeping into the US.

Third, Mediatek’s adoption of Android should be seen as a key shift in the industry’s balance of power. For years, one of the key attractions of a Mediatek reference design were its software and UI capabilities. This brought Java into many new phones, and is probably still a decent piece of licensing business for Oracle’s Sun unit. Mediatek and Spreadtrum adoption of Android gives that OS a virtual lock on the China handset ecosystem. We have witnessed first hand how other OS offerings have dropped this particular ball and now have little hope of fighting their way in. I detailed this effect recently highlighting the growth of low-end Android devices.
In my view, the volume that the China handset ecosystem now brings makes it a hugely important block in determining other, complementary segments of the industry. Mediatek and Spreadtrum, via their reference designs, wield the vote for that entire block in making software decisions going forward. This gives them considerable weight in the industry, but weight which has yet to be fully felt by industry players in the US and Europe.

Mediatek’s rise makes for an important study in how power and economics are shifting in the mobile industry. Mediatek went from shipping 10 million smartphone reference designs in 2011 to 110 million in 2012, with 200 million projected for 2013. But a lot can still change here. Qualcomm looks set to give Mediatek a serious run for the money. More handset vendors, notably Huawei and Samsung, are looking to build their own silicon and may yet succeed. Nonetheless, Mediatek and the whole reference design model is still in early days of reshaping the mobile industry. And reshape it it will.

- Jonathan (@jaygoldberg)

• 72% of developers use Android, 56% use iOS - HTML is the third most popular choice among mobile developers, 50% of whom use the HTML-based set of technologies as a deployment or development platform
• 67% of developers are below the “app poverty line” of $500 per app per month -  BlackBerry and Windows Phone lagging behind in terms of monetisation, but leading platforms also have issues. 61% of iOS and 68% of Android developers are below the poverty line
• 74% of developers use two or more platforms concurrently - Multi-platform offers much better monetisation potential, as developers who use more than one platform have higher revenues than those who just use one
• Advertising is the most popular revenue model, used by 38% of developers – but subscriptions pay more
•  Ad services are reaching mass adoption for developers – 34% are using at least one ad-service tool – 90% of developers use at least one third-party tool or service, with an average of 1.47 tools used concurrently

Want to be part of the next Developer Economics? Our online survey is still live (closes May 6 2013) – have your say and claim one of our great prizes!


(like our infographic? feel free to embed it – see codes below the post)

Smartphone growth has taken the wireless market by storm, having exceeded the one billion mark back in October. The US and western European markets for smartphones are about to saturate, and with those also the related industries of apps, content and mobile Internet connectivity.

Now US carriers are looking for growth outside of US, and Internet heavyweights like Twitter, Google and Facebook are targeting emerging markets where the remaining five billion users are still to connect to apps and the Internet.

In Asia, Africa and Latin America there is a wave of new, aspiring digital natives. They are enabled by $50 smartphones, and the burgeoning second hand smartphone markets, creating a huge demand for Internet services, apps, games, and Internet connectivity.

But there are two important challenges in connecting the next 5 billion smartphone users to the Internet and apps. It’s the business models behind data and handset subsidies, which are in dire need of innovation.

The cultural gap

Smartphone users in the west have been influenced by the services they were exposed to on the fixed Internet. Take for example, the Nordic European youths. They have been the leading mobile innovators for two decades, who grew up with the Internet, and developed strong preferences for what services are used for what. Search often equals Google, mail often equals GMail, and messaging often equals SMS.

In contrast, new smartphone customers in emerging markets are very often “Internet virgins”. In these emerging markets, the barriers to smartphone and Internet growth are very much about price and affordability, but also about understanding cultural differences.

Handset subsidies: Mind the affordability gap

Handset subsidies have been an important factor in getting new users to adopt smartphones in the more mature European and US markets. The subsidy model takes much of the credit for the rapid smartphone growth, not only for handset manufacturers, but also for the connectivity, services and apps industries on top of smartphones.

The handset subsidy model also works in emerging markets, but its efficiency can be improved by adjusting to specific emerging market factors. For example, the affordability gap for different segments is a lot bigger than in classic mature markets. Many international network operators have lost revenues by failing to realise that their market is both a mature market, and an emerging market at the same time – for example, in an emerging market a small percentage of smartphone heavy spenders can be huge in terms of share of customer revenues, but are often underserved.

At the same time, Internet services companies like Facebook and Google have oftentimes underestimated the growth journey from a free rudimentary service (e.g. Facebook Zero) to a paid, fully-featured version of the service, failing to guide customers through to a better experience as affordability and willingness to spend increases. What’s your take on this?

For handset subsidies to adapt well from western markets to emerging ones with higher affordability gaps, a more fine-grained subsidy model is needed. In a typical subsidy agreement between a device manufacturer and a network operator, the subsidies are fixed per customer. This is directly counter-productive, as it doesn’t consider variances in the affordability gap.

Smarter operators implement a scalable strategy for subsidies taking into account not only customer information (individual customer profitability data), but also advanced demographics to diversify subsidy levels based on neighbourhood characteristics. Better estimates for customer profitability (and therefore subsidy levels) can be derived from the key services spend. A more fine-grained subsidy system will benefit the entire ecosystem – device manufacturers, mobile operators and Internet service companies, but will also require better cooperation and coordination between those parties.

Retailing data: fixing the mobile Internet

Mobile data tariffs are another typical example where most users are offered the same price points regardless of the value that data access has to them. For more than a decade, network operators have devised complicated pricing schemes, designed to decrease price transparency and to lure customers on to more profitable plans. The challenge is that these pricing schemes are seldom rooted in increasing value for the customer, and are inflexible by design to avoid cannibalisation of core telco services. That again limits the opportunity to grow with the customer as their value of using the services increases.

The retailing of mobile data access is broken, and there is a substantial opportunity to develop better tools to measure the value of a specific action for each customer, so that discount systems can be applied to better deal with the gaps in affordability and value that we see in emerging markets.

Opera WebPass (an activity I was involved in) is a promising step in the direction of getting retail tools in the hand of network operators, so that they can start to fix their retailing system for mobile data. The tool differentiates itself from the classic “stick” model (such as deep packet inspection) by providing a “carrot” model, i.e. giving users choice. WebPass allows operators to retail mobile data in small increments, and in a way that adds user value – e.g. by charging $1 for 1 hour of Facebook access. It also closely aligns with the app store pay-per-use model already known among smartphone users. Combined with advertising tools it creates opportunities to introduce trade-offs as part of the purchasing process.

Bundles can add further pricing flexibility: for example, an operator that has seen five one-hour passes to Facebook being bought by one user can introduce a 30% discount on a week pass at the next purchase. Moreover, the data provided by Facebook about the user’s social graph could lead to offering a discounted top up messaging pass based on many friends using messaging apps.

More scalable and flexible data retailing, utilising customer value metrics should lead to better pricing, increasing affordability for new customer segments, better tools for developing engagement, better profitability, and better yield management of network resources.

Some network operators are already on this ride, investing heavily in CRM and analytics systems from their trusted vendor partners. The challenge is that these systems are incredible costly, and that local operator deployments limit data harvesting to fewer transactions, leading to both less data for analysis as well as low scalability and high cost.

The Asian culture of micro top-ups

The cultural differences between western and eastern markets also play an important role, especially as the Asian culture has a different view on the future. These cultural differences manifest in people preferring prepaid (top-ups) over post-paid subscription models.

In many Asian countries customers are topping up their accounts on a daily basis, rather than weekly and monthly as you see in western countries. Micro payments and micro top ups require an extensive retail network. Moreover, given the lower credit card use, cash is the only viable purchasing mechanism in many of these societies, which becomes a significant cost in the model.

The smarter operators are reinventing their retail models to focus not only on provision levels for the retailer, but also on how fast cash flows back to the retailer. One of the world’s most advanced retailing systems is run by an Indian Operator, allowing hundreds of thousands of bicycle retailers to sell top ups around the country with a same-day transaction turnaround.

The system minimizes cash transport. Provisions and bonuses are usually awarded electronically to the retailer in the form of top up minutes in the next day morning, and are converted to cash in the pocket of the retailer with his first sales that day. The system incentives retailers to sell the Indian operator’s SIM cards above those competitors, since the bicycle retailer has money to buy food for their family that same day.

The Asian culture of micro top ups represents a challenge for the subsidy model, as it means people tend to shy away from contracts. In the more extreme cases you will find people carrying 5-6 SIM cards, which have a stored value similar to that of credit cards in western markets. It is difficult to sell phones with contract time and expect recurring revenues, as users swap SIM cards in and out, depending what SIM card offers the best rate for what they want to do.

To become the “SIM card of choice”, network operators have been experimenting with two discount pricing models to retain subscribers. Firstly, a classic model where the user receives bonus minutes based on loyalty. Secondly, a more radical model where the user receives discounts during the day requiring the SIM card to be in the phone for them to be received.

Twitter as a discovery service

New models are also being introduced to grow revenues smarter, through basic free offerings like Google Freezone, Twitter Access, or Facebook Zero, combined with top ups on top of those. Twitter is a good example given that as much as 40% of all tweets contain a link. Twitter is, in that case, not content per se, but rather a discovery service. Once available freely, Twitter becomes a shopping window with a continual flow of reasons for the subscriber to get on the Internet.

The challenge in unlocking the potential of this Twitter-as-a-discovery-service model has so far been the legacy operator billing systems. This is a hard landing for the user who clicks a Twitter link and is met by a price point. New billing functionality is required to develop this model further, which can borrow ideas from the advertising industry in converting clicks to transactions. It means presenting the right deal to the right user, monitoring anything from interest to clicks to transactions, and learning who responds to what. It will certainly mean more fine grained use of discounts as well as individualized discounts and offerings.

The paradox of emerging markets

As markets become more saturated, competition between network operators expands from winning user share to winning revenue share. An Asian operator that was bundling WhatsApp in its smartphone offering discovered that the bundle drove increasing revenue share by tapping into a segment of BlackBerry users. BlackBerry users in Asia are high spenders, sometimes spending three times more than average. For those users, BlackBerry messenger became both a messaging and community tool.

When Apple launched, parts of BlackBerry-only user circles “defected” to iPhones. As BlackBerry Messenger was not available for iPhone users, users in BlackBerry circles needed a new messaging tool to reconnect to those defected iPhone users. WhatsApp hit that need and the Asian operator used a WhatsApp bundle to become far more attractive than its peers in that profitable BlackBerry user segment.

The example shows that most emerging markets are both emerging and mature at the same time. The lack of this understanding has led many operators to underserve the higher spending smartphone segments. International operator groups operating in many Asian markets have had a hard time developing products for the more profitable customer segments as they present a small opportunity on a market by market basis. However, if you apply the Internet scale product model, this presents a sizeable revenue opportunity for telcos. The challenge is that telcos do not have products themselves for these segments and therefore rely heavily on partners to serve them well. Moreover, operators partnerships do not scale well across geographies, and so partnerships become messy and inefficient for Internet service companies not setup to deal with hundreds of different operator systems and requirements.

Compensating for network quality

Another dimension to consider is the often poor network quality in emerging markets. This is a consequence of the need to build low-cost networks that must remain profitable with the bottom-of-the-pyramid segments. In addition, there are other infrastructure challenges, like power outages, inefficient frequency and spectrum allocations. This network quality challenge is fundamental, and doesn’t magically go away by adding 3G or 4G.

Opera Mini’s growth to over 200 million active users (50-60 million on Android), has a lot to do with solving issues with unreliable networks in Asian markets. The Opera Mini browser reduces traffic and caches content making network quality issues almost disappear. It goes to show that customer experience needs to be addressed across the chain, not just within the operator CTO domain.

As network capacity increases and usage grows, the gap between peak hour and off peak traffic increases. As such, the cost structure of running a mobile network is very much related to peak capacity, implying that there is a lot of capital that is not working outside of peak. This calls for operators to start thinking better in terms of optimization as well as yield management. Combined with need to use discounts smarter, growing ARPU and developing customer profitability, more dynamic pricing and capacity utilization tools are needed.

The next 5 billion of connected consumers

The key takeaway from emerging markets is that the business model innovation for devices, services and connectivity products, is still is in its early infancy. There is a huge need to remove friction, increase flexibility, and become more analytics-driven in pricing and distribution. Pricing of not just handsets, but also retailing of network connectivity will be a key element in this development going forward.

Companies who understand the barriers to use of mobile services in emerging countries are not only well positioned for future growth, but more importantly positioned to shape user behavior for the future.

Operators and Internet service companies are both important pieces in connecting the next 5 billion smartphone customers. At the same time, they have still not found a lean way of co-producing the right customer experience for these users. In western markets, the global, scale-centric Internet model and the legacy local telco model exist side by side. The business model of almost unlimited data subscriptions avoids the friction between service providers and telcos. Emerging market characteristics challenge this model, increasing the friction, and force the Internet service companies into more integrated business models with telcos.

There is an important open question: How big of an impact will the smartphone growth in BRIC countries – and the resulting behavioural changes in consumers – have on global innovation. The lack of market understanding and sometimes arrogance, might again shift the Mobile Innovation hub from Silicon Valley to Asia, the same way we saw the shift from Northern Europe to Silicon Valley five years ago. US Internet companies are global companies in terms of products, revenues and customers, but the very central western leadership and development structures will need to learn or diversify, to keep up the pace of innovation now accelerating in those emerging markets.

These are not technology questions. They are about market leadership and willingness to change from within how companies like Facebook, Google and Twitter run their service development. They are about how willing are operators to embrace the future opportunities rather than trying to preserve their legacy business models.

The change has just started, and it is about enabling the next 5 billion of smartphone consumers.

- Tom Christian
@tcg1301

Back in November, we looked at which apps make money based on research on how app revenues vary by platform, app category, country and more. In this article we update our analysis on app monetisation based on the latest research from Developer Economics 2013 across 3,400+ app developers, including analysis that did not make it into the report.

We ‘re also proud to launch our very latest Developer Economics survey, which reaches across thousands of app developers and provides the data for our famous state of the developer nation reports. Thanks to the sponsorship by BlackBerry, Mozilla, Intel and Telefonica it possible to provide these reports and additional insights, for free, to the entire mobile community.

Take part in the survey, spread the word and help us drill deeper into the app economy and what makes it tick. We have prizes aplenty for developers, with 7 devices up for grabs (one iPhone 5, two Samsung Galaxy SIII, two Nokia Lumia 920 devices and two BlackBerry Dev Alpha handsets) – plus an AR Drone 2.0, a Nest Learning Thermostat and a Nike Fuel Band for participants who also subscribe to our developer panel. Last, but definitely not least, our friends at Bugsense are giving away one month of free crash reporting to each and every participant.

Developers in North America lead the revenue leaderboard

We’ll start by taking a look at income distribution by the region where app developers are based. Last time we saw that US developers earned almost double the revenue of UK developers. Based on our Developer Economics 2013 data, North America (and particularly the US) is still in the driving seat of the mobile app economy with developers in North America generating about 30% more than their european counterparts, who in turn generate 47% more revenue than developers in Asia. To some extent higher revenues for NA developers are explained by higher consumer spending in the US and higher penetration of iOS, which as we will see later on, still generates higher revenues than other mobile platforms. Note that across this analysis we are restricting our sample to mobile app developers, and have excluded the top 5% of revenue earners in order to minimise the effect of outliers.

While app development activity is booming in Asia, the average app-month revenue is quite lower than in the US and Europe, although developers in Asia develop, on average more apps and use more mobile platforms. As we explained in the previous article, there are multiple reasons for this revenue gap, but the prevailing reason is the fact that paid apps are not popular in most of Asia, the country that drives the Asian app economy. Instead, developers in Asia rely much more on advertising revenue, which, according to our findings is the least profitable revenue model.

iOS still monetising better than other platforms

iOS continues to dominate platform revenues, generating, on average, 30% more revenue per app-month than Android. The revenue gap has reduced by 5 percentage points compared to that reported in our Developer Economics 2012 report in June 2012.

At the same time, Windows Phone has caught up with Android and seems to be doing slightly better. Although the 5% advantage is arguably within the margin of error, Windows Phone has significantly improved its position relative to the figures reported in the Developer Economics 2012 survey, when it generated, on average, about half as much revenue as Android. How has the landscape of platform monetisation changed in Q2 2013? Join the survey and help us track the state of the developer nation.

Multi-platform developers earn more

There is a wide revenue gap between developers/publishers using 6+ platforms and those using 5 or fewer platforms, with those developing for 6+ platforms generating, on average, 75% more revenue. However, only a small part of the developer population (4%) develops on 6+ mobile platforms; these are probably established services with a large footprint that want to ensure that their apps are universally available (e.g. Facebook, Skype etc.) or large software houses with a large enough pool of resources to target multiple platforms for their customers.

Those developers employing just one platform are probably solo, amateur developers or have not yet had the success that warrants (and allows) an expansion onto more platforms. As developers become more successful, they will expand onto new platforms and generate more revenue. So while, expanding on more platforms is not sufficient to generate more revenue on its own, those that do find success are likely to invest in a multi-platform strategy.

Extending apps to new markets is a profitable strategy

We asked app developers how they decided on which apps to develop or work on next and then looked at the way revenues vary depending on their strategy. While most developers will develop apps they want to use themselves (50%), this is apparently the least successful strategy and should not become the sole deciding factor for your next app.

Developers that use some form of market research such as discussing with users, monitoring apps stores or directly buying market research are much better off, generating at least double the revenue of those who just develop the apps they want to use. However, market research is not widely used among the developer population: only 24% of developers discusses with users, highlighting a lack of business maturity and also a gap in frictionless 2-way communication channel between developers and users.

Overall, the most successful developers are those that extend apps to new markets, either to new geographies or different verticals. To some extent, these strategies rely on copying the recipe of an already established and successful business: these are apps that have been tried and proven in at least one market and are generally less risky options or “low hanging fruit” for developers. Why start from the ground up when you can stand on the shoulders of giants?

The most lucrative revenue models are off limits for most developers

When talking app monetisation, there are over 10 different revenue models to chose from. Device royalties and distribution licensing fees are the top-grossing models but are quite rare among app developers due to their high barriers to entry. These models imply deals with device manufacturers and distributors which means long, expensive sales cycles and a successful app to start with. Among the rest of the revenue models, commissioned apps (development for hire) come on top since they come with a low risk and guaranteed income for developers that work under contract.

The next most lucrative revenue model is the subscription-based model but this also comes with caveats: a subscription service implies a significant investment in licensing, and maintaining quality content or services that keeps users engaged on an ongoing basis.

Among the revenue models that are most popular and more accessible to developers, In-app purchases come on top, generating, on average 34% more revenue than Freemium and 43% more revenue than Pay-per-download. In-app purchases and Freemium models are becoming increasingly popular, now being used by a quarter of developers as they seem to be appealing to consumers. We ‘re revisiting the topic of most lucrative revenue models in our latest survey. Join in and help us size the app economy.

Smart developers use smart tools

Finally, we take a look at how developer revenues correlate to the use of third party tools and services. It’s interesting to see how app revenues correlate with usage of performance tracking and management tools like user analytics and crash reporting. Developers using crash reporting and bug-tracking tools such as Crittercism or BugSense generate on average, three times more revenue than developers who don’t use these. Similarly the usage of User Analytics (e.g. Flurry, Apsalar) services is also associated with much higher revenues, with those using user analytics services generating 168% more revenue than those who don’t.

Both user analytics and crash reporting services are used by experienced developers who recognise the importance of optimising for user acquisition, activation and retention, while reducing in-the-field crashes and the resulting user churn.

Track the state of the developer nation

These insights are made possible by our ongoing surveys. Join the latest Developer Economics survey to help us draw deeper insights into monetisation, the size of the app economy and the debate of HTML5 vs. native. In this survey we ‘re focusing on the population of iOS, Android, WP, BlackBerry and HTML5 developers, across countries, app categories and developer types. If your are a developer take the survey, or otherwise spread the word and watch this space for an update on revenues, platforms and the state of the developer nation.

And don’t forget to fire away with those comments, rants, criticism, praise or simply feedback on what you ‘d like to see next.

Andreas

(follow me on twitter @PappasAndreas)

Last week important news came out of Android. Andy Rubin who had founded the company and later ran it after the acquisition by Google announced that he was moving on to unspecified new projects within Google.  The company had very little to say on the matter beyond that, and the void was filled with speculation. Google made several other changes to management and products last week. The company provided a lot more background on these and they quickly took up the headlines.

In the end, we were left with many questions about what exactly is going on at Google. I made several inquiries around the ecosystem but no one else seemed to know what was happening at Android. The new head of Android, Sundar Pichal, will continue to run the Chrome unit as well. This caused the blogosphere to speculate that Chrome and Android would someday be merged.  This is possible, albeit unlikely any time soon. More to the point, it really seems that there is more to this story. We still do not quite understand what took place inside Google, but it seems that this marks a good time to review the Android operating system (OS) and its prospects.

Mr. Rubin is leaving Android in good shape. The company reported that the OS has had 800 million activations to date. Using my (so far accurate) model, this implies daily activations around 1.8 million. A healthy clip, albeit growth may be slowing a bit simply as a result of the numbers getting so big.

Source: Google and D/D estimates

This year will see some important changes in the Android marketplace. By my estimate roughly one third of Android devices that will ship this year will come out of the branded Chinese handset makers (the artists formerly known as the “shanzhai”).  I put the estimates below together based on data from the chip makers, notably Mediatek, Qualcomm and Spreadtrum. I see this figure as a good proxy for “low-end” smartphones, those that retail for less than $150 at retail. I may be undercounting some of the low cost phones sold through prepaid channels in Europe and the US from the major global brands, but that is probably offset by the fraction of China branded phones shipped into those markets.

What should stand out from all this is that these so-called “low-end” phones are growing at much faster rate than the rest of Android. And my guess is that the 2013 estimates for these are probably still a bit too low.

The Android installed base is also growing very quickly. In their Rubin announcement Google noted that Android had already been activated on 750 million phones. The blogosphere commonly mistakes this figure for the installed base. In fact, that number is just the total devices sold to date, but plenty of those phones replaced existing Android devices. By the same model, the actual installed base is currently about 500 million devices, not a bad number. But bear in mind that the comparable figure for iOS is about 400 million, still very close.

Beyond the headlines

Despite these healthy numbers, there are five key vulnerabilities for Android – fragmentation, developer monetization, uneasy partners, security and business models.

We will not get into the fragmentation issue here. It’s been covered extensively in the past, and see no sign of it changing any time soon. Drop me a line if you want more on this.

A big question remains developer monetization. Just about every metric and survey out there shows a continuing discrepancy between the value of an iOS subscriber and that of an Android subscriber. Android users, on average, spend less on apps, view fewer ads, browse less traffic and spend less time on their device. This is not true for every app, but is true, by a wide margin, for the entire ecosystem.

The causes of this are a topic of hot debate within the industry.  Theories include the weakness of the Google Play marketplace, the demographics of Android users, the quality of apps. All of the above play a role, and probably other factors as well. This is an important problem, and one that is still being explored. There are estimates of iOS monetizing anywhere from 2x to 10x better than Android per subscriber. Let’s assume that the number is 3x. That means there need to three times as many Android users than iOS users for the average app to be indifferent between the two platforms. By doing the math, Android does not reach that level until 2016.

Many factors could alter this equation. Android user growth in the next few years is going to be strongest in emerging markets, and monetization rates are much lower there. Tablet usage is growing and here the difference between monetization seems to even more heavily favor iOS. On the other hand, Apple could slow. My calculation above includes some assumptions about iOS growth continuing at a healthy clip. If Apple’s stock price is any indicator, this view is not widely held. Regardless, it will be many years before monetization on Android can approach that on iOS, and on a per user basis it seems unlikely that the gap will ever truly close.

The next concern is how hardware partners feel about Google. There are clear signs of growing unease here. Samsung’s Galaxy S4 launch last week never mentioned Google or Android.  Most of the other Android phone makers are struggling to make any profit. Among the China-branded OEMs it would be tough to say there is a true love for Android. The larger vendors are doing what the carriers ask of them, and the smaller vendors build for whatever their chip suppliers can provide.  Nor have the carriers ever been that fond of Android. They question Google’s long-term objectives and the company’s many side projects like Google Fiber, which are directly competitive. Add to this signs that the government in China could always make building Android phones less palatable for vendors there. The Chinese government and Google have a long-standing conflict, and this leaves Google little leeway to support handset makers there.

A Battle of Models

Nonetheless, the sheer numerical weight of close to 700 million Android phone shipments this year and over a billion next year could wash away most of these problems. Yet there is still one overriding concern that should weigh on the outlook for Android. At heart, Google and Android are not the same thing, and the way things stand now their business models are in many ways in direct competition.

Ask any Google employee in Mountain View and you will find that there is a distinct sense of Android being separate. They have their own buildings and their own cafeteria, which used to be closed to other Googlers. Under new management, this may change, but the sense of difference remains.

Google’s goal is to have as many people use its search as possible.  One of the simplest, most elegant business models on the planet. Android’s model is much less clear. If you want to build an Android phone today, you can download the software, write all the hardware drivers, and you have a phone – but with one big exception. The Android team will not let you link that phone to the Google API – including Gmail, Google Maps and crucially the Google Play marketplace. In a bid to control fragmentation, team Android has used access to the Google API as a key inducement. And getting access to that API is not simple, requiring approval, a contract and various other hoops.

Google wants everyone to have access to that API, Android wants only Android devices to have that access. This explains why the Google apps for iOS are still so good, and why so many Google employees still carry iPhones.  By my estimate, close to half of the ‘mobile revenue’ that Google calls out every quarter comes from searches initiated on iOS devices.

This is not to say Android is a bad idea. When Google launched Android they realized they might face a world in which their search would be hindered on mobile. (Set aside for the moment that when they acquired Android their biggest fear was Windows Mobile.) And clearly their reliance on iOS could have been just as threatening. Launching Android, like Chrome on the browser, was a way to make sure they could maintain a voice in mobile and at the same time lower their traffic acquisition costs for mobile search. No one every really predicted that Android numbers would grow as quickly as they have.

So the company now faces a dilemma from which there is no easy solution. If they open up access to the API the effectively lose control of fragmentation. If they continue to restrict access to the API they limit avenues for other parts of Google’s business.

Of course, there are ways around this. You can buy a $45 Android tablet on the streets of Shenzhen, and it will have access to the full Google API. But if you try to trace back the source of that API key… let’s just say there are many things in China that are not fully clear. And this may be the third approach. Google may officially limit API access, but turn a blind eye to some of the cracks. An unfortunate side effect of this is that it creates some weird new flavors of fragmentation.

(In)Security

Which leads to what I think is going to emerge as a major headache for Android – the vulnerability of Android devices. Android devices have become magnets for spam and malware. There are ample studies both in industry (PDF) and academia (PDF) that point to this. There are many, many stories of apps that track users calls, download their data, and worse.  From my conversations in China, it is clear that many phone manufacturers there are building software into their phones. These are generally benign or even helpful apps, a way for hardware makers to earn a few extra yuan. However, it demonstrates the ease with which a large number of handsets could be infected at a very deep layer.

At Mobile World Congress last month, I spoke to a number of smartphone security vendors.  All of these offer solutions that are much safer than stock Android, but push most of them a bit and they will admit that if someone is really determined to act very badly and very technically, they can ‘root’ Android devices beyond the ability of anyone to detect or curtail.

I do not want to come across as alarmist. There are vulnerabilities in home computers, and work laptops, in industrial systems and probably lots of other places we do not want to consider.  The digital security industry has always been a race between the white and the black hats. Nonetheless, expect to hear a lot more about Android security in coming years.

Post-Script

Finally, I wanted to add a last-minute item to this list. Last week, Google performed another round of spring cleaning and killed off my favorite, most-heavily-used mobile app – Google Reader. You can read about why they did this on many blogs, but it is an important lesson. Free things cannot be relied on.

Would Google ever kill Android? This seems impossible today. One can safely predict with 100% certainty that this will not happen this year. But at some point, people have to ask this question. The handset makers have always questioned Google’s commitment. For most users, the answer is immaterial, they could just find another phone when their contracts are up or their phone dies. For the average app developer, the proverbial two guys in a garage, there is similarly little risk here. But if you are a major company and are investing heavily in mobile platforms, the longevity of a platform bears consideration.

Conclusion

Android is doing well. No question. And will continue to do well for many years. Again, no question.  But that does not mean it is dominant, the way Windows was on the desktop for twenty or so years. There are plenty of vulnerabilities here, and we have not even gotten into the whole Amazon issue. But there is conflict with the relationship between Android and Google.

At heart, I think this conflict is a symptom of something bigger. Talk to most people in software today and they will preach to you the mantra of the web and HTML5. Up until very recently, most people in the industry assumed that HTML5 would someday remove the need for native operating systems. The idea being that web tools are widely used by millions of designers, and that eventually browsers will be good enough to power all apps. This is the underlying assumption behind Firefox OS. While this faith has wavered a bit lately, most people still believe it at some level. For Google, the company upon which so many fundamental web technologies emerge, we have to believe that this is the vision they are aiming for.

In a world in which the phone is just a browser, then Google wins all the search business it ever needs. In that vision, the need for a mobile OS eventually withers away. My sense is that many at Google still believe this is the ultimate outcome. (I used to be in this camp, but my faith, alas, has lapsed of late). And if that is where we are all headed, then Android and iOS and all the rest are merely transitional stages to be borne through, not eternal pillars of the firmament.

- Jonathan (@jaygoldberg)

You can download the full PDF report here.

Turning openness into a competitive advantage

“Open” can mean different things to different people. Standardization and interoperability (a form of openness) were among the key factors that allowed mobile telephony and SMS to scale and achieve ubiquitous cross-carrier capabilities.

As long as telephony and SMS were tightly integrated with telecom networks, interoperability of services between telecom operators meant interoperability of networks. For example, for SMS and MMS to work across operator boundaries, networks of different operators must interoperate at the service layer. The transition to IP made services independent of networks and changed this fundamental assumption. [Tweet this] IP has become a universal interoperability layer between transport networks, while interoperability at the service layer took on a totally new meaning. For example, Whatsapp could displace much of SMS and MMS traffic and achieve huge global reach without the need for interoperability at the service layer between different networks.

Openness is a fundamental characteristic of multi-sided platforms, as explained in our previous blog post, which described the success recipe of digital ecosystems. Such platforms are designed with open APIs to lower barriers to entry and drive acquisition of diverse ranges of partners that produce valuable apps, hardware accessories and other complements to the platform. Successful platforms at the same time are closed (integrated) around core businesses of their owners. In other words, openness is needed to create the ecosystem of complements. Integration or “closed-ness” is needed to capture value by the ecosystem owners. [Tweet this]

For example, Apple is open towards app developers, but very closed around its core business of consumer electronics. Google is open to web developers, but closed around their computing infrastructure and search ranking algorithm. The same holds true for companies like Facebook, Amazon, Netflix, Microsoft, and many other ecosystem owners.

Clear understanding which parts of the value-chain need to be open, and which closed, is an important source of competitive advantage. Companies that make the mistake of being open around their core business end up surrendering their ability for meaningful differentiation, and are forced to compete on price. For example, all the noble speak about “openness” did not help Nokia to make Symbian a viable alternative to iOS and Android. This is because Nokia made Symbian open at the level of the core platform, exactly where Nokia as an OEM needed to be integrated (closed). Nokia needed to focus on making Symbian “open” and attractive to developers, not to other handset makers.

Lack of integration around an ecosystem owner’s core business leads to what Michael Porter calls “competition to the best”, or the granddaddy of all strategy mistakes: going down the same path as everybody else, and thinking that somehow you can achieve better results. This is a hard race to win. Every advantage over competitors is bound to be short-lived.

Integration around the core business is necessary to deliver unique value, elevate barriers to entry and achieve sustained profitability. For example, telco API initiatives better be focused on creating unique value to the telco’s subscribers, thus establishing lock-in and barriers to entry around core telco services.

Key questions telcos need to ask when evaluating innovation investments

• How can you open up your complements; i.e., how can you reduce friction for ecosystem partners in order to create more value in the ecosystem as a whole?
• How can you integrate around your core business of voice data and texting in order to extract value from the ecosystem?
• Which regulations, standards or alliances are forcing you into “competition to the best” scenarios? Therefore, which innovation efforts are likely to lead only to short-term competitive advantages?

Closing thoughts

To succeed, telcos need to learn to play by the rules of the ecosystems.

Reinventing the telco means looking beyond traditional telco business models in the context of the changing telecom value network. This paper introduces new economic thinking that telcos should use to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes.

To succeed, telcos need to learn to play by the rules of the ecosystems described in this paper. Moreover, each operator will need to define their own innovation mix, according to what best suits their local market, assets and financial conditions. Some operators will opt to focus on the utility business, providing price-competitive voice, text and data services (for example, Iliad/Free in France). Others will invest in complementary innovation, to maintain the growth and profitability of their core business (for example, Deutsche Telecom or AT&T). And others, like Smart Philippines, or Telefonica, will aggressively experiment with new business models and markets.

In the words of Harvard Business School Professor Clayton Christensen, in his Business Week article, “Your Strategy Is Not What You Say It Is”, real strategy is defined by the flow of investment decisions companies make to achieve their goals. Despite all the talk about innovation, today many telcos are still putting most of their money into old-school investments like network expansion and device subsidies. [Tweet this] Such investments are only good for driving telco access business.

It is difficult to act based on theory, without first collecting as much data as possible. However, data are always about the past, and their meaning becomes clear only when the game is over, as Harvard Business School Professor Clayton Christensen says. Telcos cannot afford to wait for data before making safe decisions. The time to act is now.

As usual, we are looking forward to your feedback! Please click here to leave us a comment or send us an email to strategy /at/ visionmobile dot com. Don’t forget to download the full Telco Innovation Toolbox report

.- Michael
@mvakulenko

Wi-Fi is now over 10 years old, but a new wave of innovation is leveraging those same technology foundations. Why? Firstly, the smartphone revolution has created 100 of millions of Wi-Fi endpoints. In addition, Wi-Fi has become too ubiquitous to ignore. It’s also unregulated enough to spur new use cases.

FON, a large Wi-Fi sharing community, announced last year that they have 7 million hotspots and the new 5th generation Wi-Fi routers (802.11ac) clock in at data speeds of over 1 Gb/s. Everything from VisualLight, a Wi-Fi enabled light bulb to hotspots for sharing Wi-Fi with strangers has appeared in just the last two years.

Read on to understand how Facebook can be used to grant Wi-Fi access, how FON got 7 million hotspots and how mobile operators in US and France are challenging the incumbents by relying on Wi-Fi.

Wi-Fi: The bad old days

For as long as Wi-Fi has been around people have dreamt of large scale Wi-Fi networks which can provide ubiquitous wireless Internet access.

Many of the first initiatives for free Wi-Fi access were community-driven. “Elektrosmog” in Sweden, dating back to 2001, was one of the earliest, biggest initatives. The movement had hundreds of members that had installed open Wi-Fi routers in as many places as possible. It was in no way unique – similar initiatives existed in almost every major city in the world, many of which still survive.

Skype, initially dubbed “Skyper” (short for “Sky peer-to-peer”) was intended as a way to create a free P2P mesh network. The free voice call aspect was a mere afterthought to lure users into joining the network and the naming change to Skype happened because the domain name Skyper was already taken.

There have also been attempts with “software only” approaches that leverage already deployed home Wi-Fi routers. A good example is Wisher, a software client for OS X and Windows XP that synced Wi-Fi credentials between its users. Unfortunately, it never got a large enough following and disappeared.

The most famous large scale attempt of an open Wi-Fi network is Martin Varsavsky’s FON. The original idea of FON was that users would install FONera routers that shared their own home Wi-Fi network with other FON users, with the upside being that by installing a FON router every user gained access to all other hotspots in the FON network. As in the Wisher case, however, users never ordered enough FONera routers for the network to truly take off. FON is now successfully partnering with fixed line operators to have the FON software included by default on all routers, removing the need of users to buy a separate piece of hardware. This allows FON and the fixed line operators to quickly add millions of hotspots that can offload traffic from 3G networks. Customers include BT, MTC and Softbank.

[UPDATE]: Another company working with fixed line operators is Anyfi. But instead of opening up a hotspot like FON their software tunnels secure Wi-Fi signals over the Internet, giving each subscriber remote access to their home Wi-Fi. Anyfi are said to be in trials with operators but do not yet seem to have any major deployments.

Other initiatives include the Open Wi-Fi Movement, which wants people to open up the guest SSID on their home routers to passers-by, and German-run wifis.org, which has built a popular way for anonymously contacting the owner of a certain Wi-Fi hotspot.

Wi-Fi Innovation vs 3G innovation

EDGE, 3G and LTE have been mostly restricted to phones, tablets and M2M applications. This stands in contrast to Wi-Fi. The freedom of the spectrum that Wi-Fi operates in and the availability of cheap Wi-Fi hardware has fostered an enormous amount of innovation and ingenuity.

For a few years it seemed as though Wi-Fi had been relegated to the back seat while consumers bought mobile data subscriptions, moving the spotlight to mobile broadband. But Wi-Fi innovation has hardly stopped.

In the last year alone we’ve seen several highly successful crowd-funded Wi-Fi projects like Lockitron, a Wi-Fi enabled physical lock,LIFX, a Wi-Fi enabled light bulb, and Twine, a Wi-Fi enabled platform for capturing sensor data. To pundits in the mobile industry it should be worrying that none of these projects are even offering a 3G version. So why aren’t they? According to Cameron Robertson from Lockitron the main reasons for not producing a 3G version was the higher power consumption and the requirement of a mobile data plan.

The proliferation of smartphones has contributed greatly to Wi-Fi innovation. US-based OpenGarden’s app creates an automatic mesh network between all devices running the app using Wi-Fi or Bluetooth. A user running OpenGarden on their smartphone or computer will automatically hop on to the OpenGarden mesh network using any nearby access point. Other good examples are DeviceScape and WeFi that collect open Wi-Fi networks and automatically connect users when one is nearby.

A quick look on Google Play shows plenty of Wi-Fi-related apps in the top 500 hundred lists doing everything from hacking (!) WEP keys to analyzing the optimal configuration for your home Wi-Fi router. The popularity of such apps shows the importance of Wi-Fi in the minds of consumers.

“Social Wi-Fi”

There’s also the concept of “social Wi-Fi,” which as of yet means different things to different people. Socialwifi.net, Wiman.me and even Facebook itself are testing a variety of social mechanisms for granting Wi-Fi access, the most popular requiring a user to like a page on Facebook or check in on Foursquare in exchange for access.

In the US, a new MVNO simply named “Karma” is selling a mobile hotspot connected to the Clearwire WiMAX network. The social part being that users get extra megabytes of data by sharing their mobile hotspot connection with anyone who connects to the hotspot and logs on with Facebook.

Another example is Instabridge (of which I am a co-founder), an app that allows its users to selectively grant Wi-Fi access to Facebook friends or addressbook contacts.

Wi-Fi and mobile operators: friends with benefits

Free Mobile in France offers users a lower cost on their home broadband if they agree to be part of the Free Mobile Wi-Fi network. By combining this network with another network of public hotspots they push users over to Wi-Fi whenever possible and cut prices on mobile data subscriptions. The results speak for themselves: the new entrant took a 5.4% market share in just six months. Bouygues and SFR have been forced to reorganize themselves to compete with Free Mobile. Operators who were not seriously considering working with Wi-Fi before have certainly changed their mind now.

Free Mobile is not the only MVNO using Wi-Fi to lower prices. RepublicWireless in the US have also bet heavily on that users can cover a majority of their data and calling needs with Wi-Fi. RepublicWireless offers an “all you can eat” voice and data plan for just $19 / month without a contract. The catch is that all their phones are preloaded with RepublicWireless’ own VoIP app that routes calls through Wi-Fi whenever possible.

2012 also saw the launch of FreedomPop. Like Karma, they also rely on Clearwire’s WiMAX network. FreedomPop provides a sleeve for iPod touches that allows an iPod touch to be used as a VoIP phone and function as a Wi-Fi hotspot for up to 8 different devices.

Operator-controlled Wi-Fi calling apps have also gained traction. Apart from offloading the network they also help increase indoor coverage. In 2012 many operators started experimenting with Wi-Fi calling, T-Mobile and its Bobsled app being on the forefront.

Incumbent mobile operators are also openly embracing Wi-Fi. Boingo recently announced an offloading deal with the CCA which Dave Hagan, Boingo’s CEO, refers to as their first “true Wi-Fi offloading deal.” Another telling sign of the industry embracing Wi-Fi is that Ericsson finally caved in and accepted Wi-Fi as an important technology after ignoring it for years, by buying BelAir Networks to strengthen it’s non-existing Wi-Fi portfolio. (During my time at Ericsson, Wi-Fi wasn’t seen as neither important or relevant).

New standards and certifications such as Passpoint and Hotspot 2.0 have also been created to help increase Wi-Fi usage. Passpoint certified routers allow devices to check which nearby hotspots they can authenticate towards and automatically connect to them based on pre-defined policies like for example if they belong to a Wi-Fi operator the mobile operator has a roaming agreement with.

In essence, mobile operators are betting on Passpoint to allow them to integrate Wi-Fi in their 3G network, just like any other base station. The first Passpoint-enabled routers were certified by the Wi-Fi alliance last year.

But operator-controlled Wi-Fi is not without controversy. Several analysts have raised concerns over how much control operators should and can have over Wi-Fi. After all, the operators’ main asset is their GSM, 3G and LTE licenses and networks leveraging those licenses. Why should they dabble in other technologies in which they have no strategic advantage?

Fortunately for operators, device manufacturers have been quick to integrate new Wi-Fi related standards on the device side, lending credence to the idea that some of these new standards will actually be used commercially and not just be more paper tigers. EAP-SIM, which allows SIM-based authentication to hotspots has been available on Apple devices since iOS 5. Samsung has made a custom Android implementation in its Samsung Galaxy S3 devices and it should only be a matter of time before it’s included by default on all Android devices.

With smartphones losing their “smarts” as soon as they lose their Internet connection, handset makers of course have a vested interest in enabling easy Wi-Fi access. Apple and Amazon have bet heavily on the importance of Wi-Fi with their latest devices, the Apple iPhone 5 and the Kindle Fire HD. They both list the Wi-Fi speed as one of the top features of their devices.

Wi-Fi innovation in 2013 and beyond

For years, Wi-Fi has been seen as 3G’s cheap and unreliable step brother. But Wi-Fi has improved. New standards and technologies that increase both speed, range and reliability may change consumers’ perception of Wi-Fi. Most people in the mobile industry have not yet realized how mature this technology has become.

Handset makers will be in the driving seat because of their pursuit to create great consumer devices where people expect a reliable Internet connection. Their customers, the end users, will continue to embrace Wi-Fi and use it in more situations.

This will leave us with two winners: any player with access to a large Wi-Fi network, including fixed line operators with large home Wi-Fi deployments, and either completely new MVNOs or operators that combine their 3G and LTE networks with Wi-Fi to provide cheap mobile data and voice plans.

Where will innovation come from next? Let us know your thoughts!

- Niklas
Follow Niklas on Twitter

You can download the full PDF report here.

Keys to successful telco API strategies

It is common for telcos to see developers and content providers as a source of direct revenues, or even push for “redistribution of profits” from OTT companies to telcos. These strategies are destined to fail because of fundamental conflicts with developers’ business models.

For example, Internet business models usually assume free or almost-free distribution: the last-mile bandwidth is paid by the user, and is free to the service provider. Attempts to ask developers pay for the wireless data will not only be faced with natural resistance, but have the potential to render the business models of many mobile and Internet companies unsustainable. Faced with such challenges, developers will quickly find alternatives, as happened with location and authentication, which were once only provided by telcos at a mass scale.

To be successful in API initiatives, telcos need to consider developers as value-added resellers, and therefore design their API propositions for win-win outcomes. In other words, the business models of telco APIs need to be aligned with the business models of developers [Tweet this].

But what is a developer? The reality is that the developer ecosystem is a complex mosaic of large and small companies, communities and individuals. VisionMobile’s developer segmentation model classifies developers into eight categories that differ according to developer motivations and commercial drivers. Some developers are after direct monetisation (e.g. ZeptoLab, the author of popular Cut the Rope game), some are after user reach (e.g. Facebook), and yet others are looking to extend their non-mobile products and services (e.g. Nike, DropBox or FedEx).

There is no such thing as an “average developer”. Telco API business models therefore need to be designed to target one or more specific developer segments. A “one size fits all” approach to telco API business models can severely limit the available market.

Many entrepreneurs, development companies and individual developers operate according to the principles of discovery-driven planning described in Chapter 6. Meanwhile, high barriers to experimentation result from many telco API practices, like up-front payment, extensive legal arrangements, demanding certification requirements or long-term contracts. To reduce friction and help developers discover new user needs and opportunities, telco API business models need to subsidize experimentation and be designed for the ability to fail and retry cheaply. [Tweet this]

More specifically, if developers are charged based on telco API usage, the app’s business model must have a stable, usage-based income stream. This is rarely the case. By allowing free, small-scale usage of the API, telcos permit developers to experiment with multiple business models, including free, until a sustainable, workable business model can be found.

Developers should be offered assistance to scale and deepen their business, by using the correct “business model polarity”, as shown below. Instead of charging developers upfront and creating unnecessary friction to experimentation and API adoption, telcos need to align the business model of the API with those of developers. For example, Facebook and LinkedIn are both social networks. The two, however, are driven by rather different business models. The alignment of API business model with Facebook will mean helping Facebook drive user acquisition and user engagement. The alignment of API business model with LinkedIn will mean helping users make valuable business connections.

Most developers face fierce competition in the platform app stores, and are in dire need of differentiation and competitive advantage. Telcos can attract developers by affording them access to local audiences, through innovation realized by telco APIs in their three business layers: access, services and distribution.

Key questions telcos need to ask when evaluating innovation investments

• Which developer segments are you targeting with your API strategy?
• Are the business models of your telco APIs aligned with the target developer segments? I.e. how the target developer segments build a sustainable business.
• How are you exposing telco assets such as distribution, retailing and voice to help developers cater to new markets and niches?

Freeing voice from telephony

Telephony, as a model for human communications, is essentially based on 19th century technology and user needs. Freeing voice from telephony can be achieved by questioning the deeply ingrained assumptions of the telephony communications model, and experimenting to find use cases and business models that work.

Telephony is considered a declining business, despite globally increasing dependence on communications. There are two reasons for that. First, in many markets, telephony has become “good enough” for most users; i.e., users are not willing to pay significantly more for improvements to voice quality or reliability. This makes telephony a commodity service with little differentiation value beyond price. Second, telephony is a rigid, one-size-fits-all service that does not have the flexibility to cater to thousands of user needs. That makes it less and less competitive with new models of communications, which better suit the new basis of competition: choice and flexibility.

While telephony revenues are in stagnation or decline, people are not talking less. They just attribute less and less value to telephony. [Tweet this] Phones used to be the only way to remotely catch up with a friend, engage a sales prospect, get information about a product, or just flirt. Not any more. Today, many everyday communication needs are better served by innovative alternatives that don’t fall within the narrow definition of telephony.

Telephony, as a model for human communications, is essentially based on 19th century technology and user needs. Significant technological advances made telephony more efficient, accessible and inexpensive, but little was done to challenge the deeply rooted assumptions of this legacy communication model: Dedicated communication links, expensive centralized switching, synchronous communications, dial-talk-hangup cycle, intrusive etiquette (caller decides on the time of the call), and more.

Freeing voice from telephony can grow voice traffic by taking voice services into new communication modes and use cases, creating great value to users, telcos and developers alike. [Tweet this] Freeing voice from telephony can be achieved by questioning the deeply ingrained assumptions of the telephony communications model, and experimenting to find use cases and business models that work. Many successful OTT companies do just that — unlocking the value of voice by innovating around all the components of a voice session, as show in the next figure.

Notwithstanding the buzz around new OTT services, telcos are still considered the primary providers of voice services. That puts them in an excellent position to transform telephony into a thriving ecosystem of services designed for the new basis of competition: choice and flexibility. For example, using telephony APIs to lock enterprises into voice/data plans.

Replicating OTT solutions under the telco roof, or focusing on improving telephony using VoLTE or HD voice will not be enough. [Tweet this] Telcos need to create unique value to users by taking voice into diverse sets areas of new cases and contexts such as web telephony, anonymous calling, permission based calls, group calling, voice messaging, dynamic call routing, do-it-yourself IVRs, call referral tracking, and more. Creating healthy developer ecosystems around voice services that are anchored by telecom operators is the best way to achieve this.

WebRTC is a technology that promises to bring voice and video into the web browser. At the same time, it offers an excellent opportunity for telcos to innovate by extending telecom services into the open web and freeing voice from closed telecom networks. The focus of WebRTC innovation should be not on technology, but on building developer ecosystems for voice services, discovery of new use cases and experimentation with new business models, and not on technology. If telcos won’t do this, competitors will.

Key questions telcos need to ask when evaluating innovation investments

• What voice (not just telephony) use cases can help your enterprise customers to achieve their goals both internally and towards their clients? I.e., How can you offer voice APIs to drive enterprise sales of voice and data plans?
• How can telco APIs be leveraged to free voice from telephony by challenging telephony assumptions?
• How can you structure your voice APIs and services to enable developer ecosystems to uncover more use cases?

As usual, we are looking forward to your feedback! Please click here to leave us a comment or send us an email to strategy /at/ visionmobile dot com. Don’t forget to download the full Telco Innovation Toolbox report.

- Michael
@mvakulenko

You can download the full PDF report here.

Dealing with uncertainty: Discovery-driven planning

High levels of uncertainty require radically different planning methods. Instead of treating blue-sky assumptions as facts, discovery-based planning systematically converts assumptions into knowledge.

Today’s unpredictable mobile environment defies traditional planning methods telcos developed during the golden years of the connectivity business. As we saw previously, conventional planning methods assume that companies can reliably predict the future outcome of investments based on past experience. That worked well for infrastructure investments, for example when upgrading from 2G to 3G and now to LTE, where the focus is on managing execution risks.  But since the basis of competition changed, telcos face a totally new competitive environment where they lack reliable knowledge about new economics and business models.

Competition in the age of ecosystems is shaped by the interaction of a diverse number of players. It is not just uncertain, but fundamentally unpredictable.

Often the new players are too small to show up on a telco’s competitive radar until it’s too late. Whatsapp, Viber, Tango, KakaoTalk, and textPlus are just a few examples of the numerous startups disrupting telco services.

High levels of uncertainty require radically different planning methods. An alternative was suggested back in a 1995 Harvard Business Review paper called “Discovery-Driven Planning” by Rita Gunther McGrath and Ian C. MacMillan.  Discovery-driven planning acknowledges that in uncertain market conditions, very little is known and much is assumed. Instead of treating blue-sky assumptions as facts, this planning tool systematically converts assumptions into knowledge. This is achieved by proactively testing assumptions with minimal costs and as early as possible in the process, while constantly adjusting the action plan based on the new knowledge gained from the market.

In other words, conventional planning methods are optimised for dealing with execution risks, while discovery driven planning is optimised for dealing with market uncertainty. [Tweet this]  The approach works according to a “Learn, Build, Measure” cycle. This approach is also promoted by the Lean Startup movement, which today has become the role model for building a successful startup.

The need to deal with uncertainty might be new in telecoms, but is well understood in other business circles. As shown by Amar Bhide in his book, “Origin and Evolution of new Business”, 93% of companies that became successful abandoned their original strategy.

For example, Instagram, a well-known success story, began life as a very different kind of company. In the words of co-founder Mike Krieger, Instagram was an app that only took 8 weeks to build and ship, but was a result of over a year of work.

The project started with an investment of $500K, and the initial idea to build a location-based HTML5 app. The team has built an HTML5 mobile web app that lets users “check into” locations, make plans and earn points for a number of social activities. By measuring how people used the app, the team discovered that photo sharing drove usage. Learning from the behaviour of real users, the company refocused on photo sharing, and built an iOS app, instead of continuing with HTML5 technology. The company continued to iterate on this build-measure-learn cycle, and was eventually acquired by Facebook in April, 2012 for $1B. As of September, 2012, Instagram had reached 100M active users.

The Learn, Build, Measure cycle ensures that the decision to allocate significant resources is based on facts, rather than on unproven assumptions treated as facts.

Compared to conventional planning methods, the iterative, small-step process of discovery-driven planning may seem counterintuitive. But it makes good sense when dealing with market uncertainty. The fast turnaround process maximizes exposure to upside opportunities (e.g., Instagram photo sharing): the faster you are, the more experiments you can run, and the more chances you have to discover valuable ideas. At the same time, discovery-based planning minimizes the “downside risk” (the cost of failure) by identifying wrong assumptions early in the process (Instagram location-based check-ins, and use of HTML5 technology). Thus, “failing fast and cheap” makes perfect sense when the market is uncertain, and the failure is taken as a source of valuable knowledge.
Before you rush to say, “Yes, we use ‘agile development’ already,” consider that discovery-driven planning is not about fast software development. Instead, it involves systematically dealing with market uncertainty and setting new KPIs to measure business risks, rather than execution risks.

With discovery-driven planning, risk can increase the value of innovation. Telcos need to take ownership of their innovation strategies and experiment with multiple initiatives in order to maximize exposure to unexpected opportunities. They must develop new organisational capabilities. This of course does not mean reckless risk-taking, but rather a systematic and disciplined process of converting assumptions into knowledge.

As an example, WAC was based on three assumptions: a) the need for operator interoperability in the all-IP environment, b) users valuing web technology and c) developers looking for alternatives to native platforms. Instead of creating long-term commitments based on unproven assumptions, the WAC initiative would be much better of if it was operating based on discovery driven planning, i.e., validating assumptions early in the process by learning from the market and being open to discover new opportunities.

Telcos need to clearly distinguish between investments in innovation that aim to improve existing business, and innovation aiming to discover new markets. For targeting existing customers with an existing business model, traditional planning methods work nicely. When targeting new customers, or a new business model, the only proven approach is iterative, discovery-driven planning.

Telco innovation initiatives need to be measured by the speed of learning and validating assumptions, as well as potential to discover new opportunities. This contrasts conventional planning methods that focus on projections of scale and future cash flows, based on unproven assumptions.

Key questions telcos need to ask when evaluating innovation investments

• Do you allow projects to become profitable before prioritising for growth?
• Are you measuring new market innovations by the speed and cost of validating assumptions?
• Are you sufficiently addressing new opportunities by running many innovation initiatives?

Ecosystems as a new distribution channel

Ecosystems are a new distribution channel similar to value added resellers. In the case of telcos, ecosystem partners are the resellers that will push telco services, to new users, new usage models and new market niches.

Direct distribution networks made perfect sense when operators competed based on the reliability and scale of a small set of services.
Competing on choice and flexibility requires solutions that address thousands of user needs for each walk of life. Moreover, user expectations constantly continually evolve, making it practically impossible for a single company to predict and satisfy a wide spectrum of user needs.
In the previous two decades, mobile phone users expected four basic “apps”: voice, text, contacts and camera. Now, they expect availability of hundreds of thousands of apps. Companies like Google, Netflix, Facebook, Amazon and even FedEx realize that the only way to compete on choice and flexibility is to create an ecosystem of tens of thousands of partners around their core product.

For example, Netflix started as a direct mail DVD rental company and expanded into video streaming services. To compete based on choice and flexibility, Netflix created an ecosystem of device partners and developers around its video streaming service. This ecosystem takes Netflix services into over 800 device types and allows 80,000 Netflix Open API developers to add value by experimenting with new discovery methods and use cases.

In effect, ecosystems are a new distribution channel similar to “value added resellers”. In the case of telcos, ecosystem partners are the resellers that will push telco services, to new users, new usage models and new market niches. The key advantages of this newfound distribution channel are the ability to create solutions for many small user niches customization, as well as engage in experimentation to discover new needs and opportunities.

Building an ecosystem amounts to offloading many of the costs and risks of entrepreneurship to value-added resellers. [Tweet this] By doing that, the value of the ecosystem as a whole can grow far beyond what a telco could create on its own. In effect, external partners, be it developers or service providers, become investors in the ecosystem, subsidizing the expansion of the telco business.

Telco APIs are the key technology enablers of this new distribution channel. The goal of telco API programs is to allow developers to take telco services into new niches and use cases, and scale from hundreds to thousands of partners. Some of these new use cases will result in supplemental telco revenue streams, some will facilitate customer acquisition, while others will subsidise ecosystem creation costs.

Telco APIs will always be at a disadvantage versus players with global reach, if telco APIs are positioned in direct competition to native platforms or Internet companies. However, if telcos allow and encourage developers to create locally-relevant differentiation on behalf of their subscribers, their fragmentation disadvantage could transform into the advantage of local presence.

APIs need the flexibility to allow developers to experiment with new use cases, and thus discover and satisfy unmet user needs. The nature of this experimentation is such that many developers will fail, but those who succeed will create differentiation and growth for telco services.

It is important to note that the same ecosystem economics that work for telco APIs and app developers can be applied to other types of partners and service providers, such as Mobile Virtual Network Operators (MVNO) or machine-to-machine (M2M) initiatives. MVNOs can build ecosystems around the distribution business layer. App developers can build ecosystems around the service layer. And M2M companies, meanwhile, can build ecosystems around the connectivity business.

Key questions telcos need to ask when evaluating innovation investments

• Is your API strategy designed to turn developers into value added resellers?
• How do you value the ability of developers to experiment in discovering new user cases?
• Is your API strategy flexible enough to attract a wide spectrum of partners, including mobile and web developers, MVNOs and M2M solution providers?

Next week I’ll talk on the following two topics from Telco Innovation Toolbox: “Ecosystem as a new distribution channel” and “Keys to successful telco API strategies”. Don’t forget to download the full Telco Innovation Toolbox report.

As usual, we are looking forward to your feedback!  Please click here to leave us a comment or send us an email to strategy /at/ visionmobile dot com.

- Michael
@mvakulenko