Watchlist: The 100 million club

We ‘ve just launched the 100 million club: the watchlist of software companies whose products have been embedded on more than 100 million mobile handsets.

Despite the apparent opportunity in the one-billion-a-year handset market, there is a multitude of challenges for software vendors who want to make it big: 2+ years technology development, 6+ month OEM sales cycles, 1+ year operator sales cycles, 2+ years for time-to-royalties, diverse OEM and operator requirements across tiers, contrasting regional mobile economics and lack of a common technology substrate.

[update: the latest edition of the 100 million club is here]

As a result very few software companies have managed to overcome the commercial and technical challenges inherent in the mobile industry and reach significant market penetration.


(click for download access)

Just over 20 products have shipped on more that 100 million handsets (incl. feature phones) as of end 2007 : Adobe Flash Lite, Aplix Jblend, Esmertec Jbed, ACCESS Netfront, Openwave Browser, Opera Mobile, Picsel Browser, Ikivo SVG Player, Scalado CAPS, TAT Kastor, Beatnik MobileBAE, Nuance Vsuite, PacketVideo CORE, Red Bend vCurrent, Symbian OS, Nokia S60, Qualcomm BREW, Mentor Graphics Nucleus, ENEA OSE, Nuance T9 and Zi eZiText.

These vendors are listed in the chart segmented into five categories, based on where their products sit alongside the software stack:
– Application execution environments such as Flash Lite and Java
– Browsers, such as Openwave, Opera and Picsel.
– Middleware such as audio and video codecs (Beatnik and PacketVideo), speech recognition (Nuance), graphics engines (Ikivo, Scalado and TAT) and firmware update agents (Red Bend).
– Operating systems such as Symbian, S60, BREW, Nucleus and OSE.
– Text-input engines such as Nuance and Zi.

We have excluded the KVM virtual machine for which Sun did not provide any shipment numbers and Teleca’s Obigo browser which has been discontinued since May 2007.

Based on Morten Grauballe’s original article on which this watchlist has been based, there are several common traits for members of the 100 million unit club.

1. All software solutions have been embedded on the handset pre-load, i.e. before the entire software stack is loaded onto the handset ROM. With the exception of Opera Mini (a downloadable Java application), we are not aware of any other downloadable software that would cross the 100 million mark in terms of downloads. In addition, downloaded applications are much harder to locate and access once on the handset due to long click-distance, which is why we have focused our 100 million watchlist on pre-loaded applications.

2. The vast majority of software vendors have relied on feature phones and the 8-12 leading proprietary operating systems that exist, rather than just smart phones and open OSes. The exceptions are Symbian OS and Nokia’s S60 which have crossed the 100 million mark.

3. The 100 million club members have mastered the complexities of software distribution. Most vendors have a direct relationship with the tier-1 handset manufacturers. Fewer vendors establish relationships with mobile operators for distribution as part of operator handset variants. In general 100 million club members understand the intricacies of the global mobile market, how to do business in operator-led vs manufacturer-led markets and the importance of leadership in standards bodies.

It is worth noting that based on device volume and model data reported by vendors, we estimate that there are 2 million devices shipping per device model. This ratio depends on the accounting model for channel (incl. operator) variants – the number reduces to a 500K if one accounts for operator and regional variants. Moreover, the 2 million figure reduces as the extent of channel customisation increases, which occurs higher up the software stack due to channel customisation requirements.

A note of caution: huge volumes does not mean huge revenues, as is attested by Openwave’s share price tumble, the discontinuation of Obigo browser, Zi’s negative balance sheet, the tiny royalties for RTOSes and Tegic’s valuation at the Nuance acquisition. Yet there exists a sweet spot of market penetration in-between the 100 and 500 million marks where several vendors boast both profitability and rosy revenue prospects.

Warm congratulations to the vendors who have succeeded in crossing the 100 million handset mark and watch this space for the next expanded and extended revision in 6 months time!

– Andreas

Making money on the last mile: Introducing Channel ARPU

[Has the industry been expecting too much from data ARPU? Research Director Andreas Constantinou revisits Channel ARPU as a new way of capturing not just the user’s wallet, but also his attention and heart]

ArrowsThe user has been at the centre of a land-grab frenzy in the mobile industry during the last decade. Network operators have developed a billing relationship with half of the world’s population. Handset manufacturers have developed a brand relationship. Retail stores have developed physical experience relationships. Consumer brands have imbued consumers with lifestyle affinity.

It seems everyone wants to own the user these days. Or to be precise, everyone wants to own the last mile to the user, the ability to grab the user’s attention, heart and wallet.

Mobile operators have been concentrating on the wallet relationship and winning an increasing share of the user’s wallet – which has led to building tens of billions’ worth of network infrastructure and a drive to increase data ARPU. Handset manufacturers have been concentrating on winning the user’s heart with the latest features, the sexiest designs and the simplest user interface. Retailers have tried to grab the user’s attention and guide the purchase decision through the physical shopping experience. Media brands have exploited the user’s brand affinity to establish further inroads into the user’s wallet. Advertisers, the newcomers to the mobile industry have focused on reaching out and attracting the user’s attention through SMS, MMS, in-game, in-video and idle screen ads.

The flaws in data APRU
Traditionally, the industry has been measuring these efforts in terms of data ARPU and voice ARPU; in other words the average user spend on calls, text messages and more sophisticated data services. Particularly, data ARPU has most often dominated discussions about network operator performance. As voice ARPU has been declining in both mature and emerging markets, data ARPU is seen to this date as the main revenue source for network operators.

Yet it seems that the focus on data ARPU is overrated for several reasons. Firstly, data ARPU does not account for how users have multiple relationships with multiple brands besides the operator. These relationships are global, given the worldwide reach of internet brands versus the local reach of the operator. In other words data ARPU accounts for degree of wallet ownership but not wallet share, which is how user-brand relationships manifest.

Secondly, the data ARPU mentality puts the emphasis on technology (e.g. advanced messaging, mobile TV and faster pipes), but not use cases (e.g. communicating to your closest friends, or living the brand experience of your favourite pop star on your phone). Data ARPU is a superficial measure that looks at the result but not the root cause of operator’s revenue and hence likely profitability.

Thirdly, data ARPU describes how good the operator is at grabbing the user’s wallet, but not his attention or his heart. Yet the latter two elements are particularly important in a world of information overload, multiplicity of choices and impulse buying. Win the user’s attention, then his heart and his wallet will follow.

Perhaps most importantly, data ARPU does not address monetisation through the last mile to the user. In other words, the data ARPU notion focuses on revenues derived directly from the user but sidelines a whole range of revenue sources; sources which stem from exploiting access to the user’s attention, heart and wallet.

Introducing Channel ARPU
Both voice and data revenues are derived by billing the end user for anything from calls and texts to mobile TV subscriptions and m-payments. Increasingly however, revenues may be derived from third parties as a fee towards the party facilitating the delivery of mobile services through the last mile to the end user.

Channel revenues are not a new concept; Rental, revenue share or other fees for channelling services, products and promotions to the end user are commonplace in fast-moving consumer goods (FMCG) are well as mainstream media industries.

Increasingly, mobile services can be modelled after the business models prevalent in the FMCG industries, as the margins in manufacturing decrease and the value moves towards defining the customer proposition and controlling the delivery of services through the last mile to the end user.

We ‘ve coined the term Channel ARPU to refer to this new source of revenue, i.e. third parties wishing to channel services to the user. This is for a number of reasons;

– firstly, Channel ARPU is derived from a new part of the pie, i.e. service providers wanting to tap into a share of the consumer’s attention, heart and wallet. Such service providers are really a new source of revenue.

– secondly channel revenues are derived from attracting consumer eyeballs, gaining brand affinity and understanding consumer behaviour, activities which all take place in the last mile to the consumer (or last few inches if you consider the phone screen).

– thirdly, because revenues from service providers are most interesting if seen from a per-user context, particularly as per-user metrics relate best to existing network operator performance metrics.

The many forms of Channel ARPU
Channel ARPU can arise from a number of sources; we have categorised these into a number of distinct types, based on the medium through which the user is reached.

UI inventory leasing: the ability to channel promotions and services throughout the handset user interface (aka real-estate), across the user journey. This is about promoting content, infomercials and ads not only in-SMS, in-video, in-game and on-idle-screen, but throughout every application on the handset, from the start-up screen through to dialler, the inbox and the main menu.

As an example consider Android – a means for Google to massively increase its ad inventory and derive Channel ARPU from advertisers and service providers utilising Google services on top of the operating system. The Blyk MVNO is another good example here, where Channel ARPU is used to subsidise free minute and text bundles and offset customer acquisition costs. In Blyk’s case, the MVNO leases UI inventory in the form of in-MMS ad messages.

Retail sub-leasing: leasing of shelf space to OEMs and service providers through the physical retail shelf space. Today this is often seen as a handset promotion on a stand; however this model hasn’t really been exploited as much as it has been in other FMCG businesses such as supermarket shelf leasing. Yet there are plenty of opportunities for leasing shelf space for promoting services using product-like visual clues (i.e. physical boxes with the branding and conditions of use of the service) – much like what you have in a video club.

Service delivery leasing. Network operators have traditionally made a cut from premium SMS service providers and handset application developers – as much as 70% in many mature markets. These revenues can be accounted for as Channel ARPU, i.e. per-user revenues derived from provided service providers with access to the last mile to the user.
More recently, operators have revenue share deals with handset OEMs, by allowing OEMs to deliver services to the end-user through their network. The example here is the deals that Vodafone, TIM and Telefonica have established with Nokia’s Ovi. These deals involve bundling of Ovi services on a Nokia handset in return for a share of Ovi revenues with the operator. Channel ARPU here is the revenues operators derive from Ovi.

User analytics leasing. Increasingly, efforts like Nokia’s 360 and vendors CarrierIQ, Agilent, m:metrics, mFormation and Nielsen Mobile use a handset software agent to derive a broad range of information on device usage, service usage, user profile, network usage, user social graphs and more. This is an underhyped area of mobile solutions which deliver unprecedented insight into mobile consumer behaviour; an opportunity which may ultimately result in creating a metrics aggregator that is to the mobile industry what Nielsen is to TV. As in every industry, metrics on sales, performance and analytics on consumer behaviour can be a very lucrative business. Channel ARPU therefore includes revenues which operators can source by leasing metrics and analytics to third parties.

Customer access leasing. Apple’s iPhone can command a revenue share for providing network operators with access to high-spending customers. For the operator, this can be accounted for as a negative Channel ARPU, as it flows outbound towards the OEM. In a sense, this is a similar business model to the revenue sharing agreements that retailers practice with mobile operators, for each subscriber that a retailer signs up on behalf of the operator.

Adopting the Channel ARPU mentality
The notion of Channel ARPU focuses on growing wallet share based on collaboration with third parties. This is contrary to the traditional view of voice and data ARPU which is about growing wallet size based on customer ownership and exclusive provision of services to the customer in the all-too-famous one-stop-shop model.

Channel ARPU becomes more relevant as the mobile handset business shifts to resemble the fast moving consumer goods (FMCG) business, where manufacturing costs are low and value comes from using multiple partnerships and channels to access the right consumer at the right moment. Moreover, Channel ARPU better accounts for monetising access not only to the user’s wallet, but also to the user’s attention and brand affinities through the last mile.

Channel ARPU is a refreshing and meaningful approach to viewing per-user revenues derived by leasing access to the consumer through that last mile. However, much like data ARPU, network operators have to formalise and standardise the metrics by which Channel ARPU is calculated, if this new form of measuring ARPU is to be adopted. Perhaps a task for standards bodies such as the OMTP ?

– Andreas