Mobile App Stores: The Next Two Years

[In this state-of-the-nation article, Research Director Andreas Constantinou analyses the App Store status quo, the key building blocks and the dime-a-dozen future for App Stores]

In the last 12 months Mobile Application Stores have evolved from hype to mass-adoption and even to currency; building an App Store marketing story can increase your valuation, even if no-one agrees what an App Store is. The mobile industry, from CEOs to developers, is engulfed in an app store hysteria such that everyone (operators, OEMs, and platform wannabees) wants to build one.

Yet the long-term reality will be very different; App Stores will become a dime-a-dozen and smart players will need to seek out where they can add and extract the most value, not what app store recipe they can photocopy the fastest. In this article we ‘ll review the present state of the market, the key App Store building blocks and where will the market be heading in two years.


What’s in a name?
What IS an App Store after all? Is it a developer channel, an on-device apps storefront, a way to deploy applications, or an attempt to copy Apple’s model to the last detail?

To understand what App Stores mean we need to trace back into mobile history; BREW, Symbian, Windows Mobile and Palm have long opened APIs to their software platforms, since 2001-2 in fact.. And while technical openness was established 7 years ago, what was lacking all these years was commercial openness; the funnel between external developers and in-market handsets was so thin that very few software players could pass through. It took Symbian six years to reach 10,000 applications, while it took Apple only 6 months (see our earlier analysis). In the first year of operation, Apple’s App Store brought in 65,000+ apps, 100,000 registered developers, 1.5Billion application downloads and availability to consumers across 77 countries through 40 million iPhone and iPod Touch devices sold.

What Apple figured is that streamlining the commercial route to market was more important than opening up APIs in a friendly language – and as part of that taking out the middlemen (operators, content aggregators and content retailers) who were eating 60% or more of the retail price. BREW and GetJar have been following along, too, although somewhat limited in terms of operator certification hurdles (in the case of BREW) and lack of on-device integration (in the case of GetJar).

In this historical context, it is easy to see that App Stores are a developer-to-consumer merchandising channel; a go-to-market vehicle for allowing developers to distribute and retail their applications directly to the end-consumers, while taking out the middlemen from distribution and retailing. In this sense, mobile app stores are the equivalent of JVC (or any other audio equipment manufacturer) allowing musicians to sell direct to consumers, bypassing labels, distributors and online retailers altogether. Sadly, the music business is more complex that mobile.

State of the market – supply and demand
Most of the hype today is focused on the short head of the most successful app stores. Below we have profiled the five most prominent app stores today and analysed them in terms of distribution model, installed base, downloads, applications and revenues, which makes for an interesting comparative reading. Note that our Apple app store revenue estimates are at $700M/year, in-between the conservative estimates from Bernstein and the optimistic (statistically-skewed) Admob estimates. [updated: we understand that Handango effectively gives only 30-40% revenue share developers, a figure which has dwindle from the 60-70% that was 3 years ago].


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The long tail of app store launches is even more interesting. There is no self-respecting mobile player that hasn’t announced their plans to build an app store, across operators/carriers, OEMs, platform and chipset vendors.
– operators/carriers: Vodafone, Orange, Telefonica/O2, TIM, T-Mobile, Verizon, Sprint, China Telecom, China Mobile, SK Telecom, KT.
– handset OEMs: Apple, Nokia, Sony Ericsson, Samsung, LG, RIM, Palm
– platform vendors: Android, Windows Mobile, S60 (Ovi Store)
– chipset vendors: Qualcomm, Intel, Mediatek

For a slightly deeper dive into the details behind these deployments, Distimo maintains the most extensive comparative table of App Store launches.

Naturally, a diverse range of white label app store providers have emerged to cover the demand. We track 19 App Store vendors so far as part of our industry Atlas: Amdocs, Cellmania, Comverse, Ericsson, Everypoint, GetJar, Handango, Handmark, Ideaworks 3D, Javaground, Mobango, PocketGear, Ondeego, OnMobile, Qualcomm, SlideME, Sun Microsystems and Tanla. Specialised vendors are already emerging with Ondeego offering an App Store for enterprise IT and Tanla offering application license management.

One of the most integrated offering is from Mediatek – a chipset vendor powering more than 300 million (!) phones shipped each year – which has launched its own App Store powered by Vogins and SkyMobi. This is a white label app store offered as part of the chipset package and where the revenue is shared among the OEM (30-40%), Mediatek, developers and the operator, according to our sources. In a sense this copies the Qualcomm BREW model (chipset + software + services), but in a very different market where the one-stop-shop hardware+software+app has allowed 10-person OEMs to fill the market with knock-off (‘shanzhai’) phones, selling for 1/5th of Nokia prices.

Key building blocks
To understand the future of app stores one must look not only in their historical evolution, but also in their genetic make-up.

We first analysed the key ingredients for building an app store a year ago – and the receipe still stands. In the next diagram we analyse the five key elements of an App Store and their evolution to the next two years.


(click to enlarge)

As we mentioned, an App store is a developer-to-consumer merchandising channel. As such an App Store is made up of five key building blocks:

1. Developer Market: a process for submission, certification, targeting and pricing of applications. Pre- App Stores, developers had to deal with complex, undocumented & fragmented approaches for app certification and pricing. The developer market, was one of the most important elements introduced with the iTunes Store and the BREW Mobile Shop, in the form of a single website where developers could go for submission, certification, targeting and pricing of their applications.

What’s next: we see 10s of developer markets emerge in the next two years. Not only one app store for each OEM, platform and operator consortium (Android, LiMo, OHA, JIL), but App Stores for different consumer segments (enterprise, fashion, kids, elderly, sports, etc). As such we expect the emergence of App Store aggregators, ie entities which will undertake submission and testing of an app against multiple App Store marketplaces.

2. Billing and Settlement: a mechanism for billing, settlement and reporting of application sales. Pre- App Stores, developers had to set up their own billing or use premium SMS with only 10%-50% of the retail price going to developer. Settlement of application revenues used to take weeks or months. App Stores introduced credit-card billing, fast time-to-settlement and a 70% revenue share as the norm.

What’s next: we see operator revenue shares harmonizing to the 70% norm towards the developer, and a multitude of revenue models emerging like subscription, gifting/begging and cross-app billing (where the credit paid through one app is valid for use in another app). The harmonization of operator billing will be critical to the adoption of app stores, removing the last consumer hurdle for mass app adoption.

3. Distribution surface: the size of the addressable market for an App Store across handset OEMs, operators/carriers and geographical regions. Pre-App Stores, developers had to distribute apps on region-by-region AND on a handset-by-handset basis – a true fragmentation nightmare. iTunes Store, Ovi Store and the RIM App Center introduced global distribution on a per-platform and per-OEM basis, offering plenty of room for continual growth of app downloads (and second-order growth in the case of Apple). Already the Ovi Store sees traffic from 180+ countries on a daily basis, and this is via user downloads of the Ovi Store with pre-loads on S60 and selected S40 models coming in 4Q09.

What’s next: With operator consortia like JIL muscling into to claim App Store territory, we will see global distribution across operators as well as across platforms and OEMs.

4. Delivery & in-life management: the mechanism for app download, silent install, in-place access, app licensing and in-life app management. App delivery is one of the most underestimated building blocks for an App Store, as it’s all about the ‘magic’ happening in the background. Pre-App Stores, users had to download a ringtone or an app, then figure out under which menu this was saved on the handset. Naturally, there was no ability to update the application or apply any rights management to it, leading to rampant side-loading and gradual decline of content value.

What’s next: we see application delivery extend beyond B2C towards B2B apps and middleware that can be background- downloaded & installed. This presents opportunities for App Store owners who can monetise on a per-activation/per-unit basis for remote installing of apps, features or bug fixes on behalf of operators, OEMs or enterprise customers.

5. Retailing & Merchandising: application discovery, promotion, as well as premium placement, search and recommendations for applications. Pre- App Stores, developers had to buy and market complex shortcodes or scattered website ads. iTunes et al introduced in-store app discovery, 1-click purchase, in-store promotions and automated recommendations.

What’s next: as with all fast moving consumer goods (from detergent to mobile phones), retailing and merchandising is the most important segment of the product lifecycle. As applications become ubiquitous, we see specialized app stores with segment-specific retailing of apps, inventory leasing for app promotions (CPC or per week rental as already seen in the Ovi Store and RIM App Center), social recommendations (your friends bought this app, so you should buy it too) and developer back-channels (allowing the developer to reach out to their customers via App Store facilities).

Outlook for App Stores: What the next two years hold
We spoke to George Linardos, Nokia’s VP of Product Development for Media and Games who sees the App Store market evolving to the state of the US television networks; i.e. the emergence of a few major cross-regional App Stores followed by 10s or 100s of localized and specialized stores.

This a natural evolution in a crowded, commoditizing market and addresses a very important challenge. “Today’s app stores throw the high value apps together with the low value ones into the same pool. The top-10 listings are based on number of downloads in most cases. There needs to be better segmentation, so that high-quality applications can be seen as quality applications”, notes Sebastian-Justus Schmidt, CEO of SPB Software, a software house which makes 6 of the top-10 best selling applications in the Windows Mobile space and has the best selling product across all platforms according to Handango.

Indeed, the iTunes Store practice of dividing and conquering among application developers does not create, but destroys value – as can be seen from the continual decline in average app price. Schmitt continues “If you expect to get apps for 1 dollar you will get the quality of 1 dollar”. This observation confirms the necessary emergence of specialized stores; from the cheap & cheerful everything-you-buy-is-1-dollar Store, to the premium Store with perpetual updates and 24 hour customer support for each and every app.

Beyond specialized app stores, recommendations will also play a crucial role in merchandising. ‘People who bought this also bought that’ (aka collaborative filtering) and social endorsement (aka social graph mining) will become key to App Store performance, which is why Nokia has hired some of the brightest minds to work on Ovi Store recommendations. Linardos expects to see major new merchandising and recommendation features appear on the Ovi Store in the next 6 months (perhaps in time for MWC 2010?) and sees Nokia’s global marketing machine as one of the key differentiators in Ovi Store.

Beyond specialisation in App Stores, we expect to also see co-existence of multiple App Stores within the same handset. This is not just a hypothesis. Already LG and Samsung phones shipping in 4Q09 come with four (!) App Stores co-existing within the same handset; one from the OEM, one from the platform provider (Windows Mobile) and two from the operator (SKT – who has their own device- and web- application stores). In this dime-a-dozen picture of the future App Store market, retailing and merchandising becomes an even more strategic element; where the value is in selecting the ‘best’ apps from each application store and auctioning promotion space (paid-for widget real estate) for these apps on the idle screen. This is where JIL and operators should be focusing, rather than trying to photocopy the Apple recipe.

[update:] In response to the many comments, here’s a list of companies who are offering merchandising and recommendations platforms for apps: ApppopularAppolicious, Appsfire, ChorusI use thisMplayit and Yappler.


Comments welcome as always.

– Andreas
follow me on Twitter: @andreascon

Who’s behind the VisionMobile Community? We‘ve got results!

01humanpyramidWe hope everyone has had a good start to the Autumn as we have. We asked our readers to take part in our blog survey throughout September to help us understand who You, our readers, are; what you thought of this blog and how we improve it going forward. We would like to thank all of you who participated, especially for the open and honest feedback.

And? The survey brought out some very interesting findings – some quite flattering and some honest critique and suggestions to take on board.

And as promised, we ‘re announcing 10 participants at the end of this post who have been drawn to each win an Atlas wallchart 🙂

What did you think of VisionMobile?
Over 75% of participants found our blog insightful, analytical, thought provoking, original and innovative – which was rewarding to hear. Fortunately no one went for boring, overhyped or outdated being the other options 🙂


Furthermore, we were very happy to hear that over 91% of participants would recommend our blog to others. Thanks everyone!

We are hoping that after turning the feedback constructively into action, we will be able to convince even the almost 9% group of Maybe. No pressure though 🙂


Out of the 56 readers who took part in the survey, the majority (over 90%) work within the Mobile Industry with mobile software vendors being the biggest community (almost 45%). In terms of job profiles, most participants work as Product Managers (around 28%), Engineers/Developers (around 26%), as well as in Business Consulting, Business Development and R&D positions (16%). 10% work in the Top Management positions like CTOs/Strategists, CEOs/VPs.

In terms of employer profiles, over 25% of participants are in small start-ups; middle sized companies and over 16% in blue-chip organizations.


Most importantly, you shared your feedback with us about our articles and gave us plenty of inspiring suggestions…

You suggested we write about “how to make money in the mobile software”, identify the “Trendsetters, Thought Leaders and Thinkers” and introduce the “new kids on the block of the Mobile Industry – exciting new Mobile Tech Start Ups”. Exploring the emerging mobile markets in developing countries is another popular request. All points taken on board, and we hope to be launching at least one of these shortly.

In terms of mobile technology and innovation, we received some interesting suggestions on topics such as network technologies, Chrome OS, Palm OS, Digital Content Market and Content Transcoding as well as innovation in the low-end handset segment, to name but a few.

There is definitely a lot of exciting articles to look forward to! 🙂

And finally! The 10 winners drawn out of the survey participants are JS, Colin P., Igal P., Tom S., Sven K., Carsten S., J Helmig, Andrew G., Jarmo P., Alexandre B. You will receive a separate email from us regarding further steps to arrange the delivery of the Atlas wallcharts.

All the best and keep the thoughts coming!

– Jana and the VisionMobile team
follow us on twitter: @visionmobile

Why mobile can bring back the value to the Internet

[Mobile payments hold great potential far beyond what we have seen today. Research Director, Andreas Constantinou, looks at why has the Internet lost its value historically and argues that mobile payments stand to bring this lost value back to the Internet]


The debate over reversing the loss of value in Internet-based media is long standing. Most observers argue that the Internet has disintermediated the traditional distribution channels, including music labels, news publishers and books. In other words, the Internet bulldozed what was previously the long and bumpy silk road between content publishers and content consumers – and at the same time allowed everyone to become a content producer in what Wired aptly called nanopublishing.

At the same time, a more fundamental change has occured. The tsunami of nano and mega content has arrived via the Internet (ie the PC screen), not via the traditional channels like retail stores, music megastores, bookstores, news kiosks or the 7-Eleven across the street. This has had a fundamental impact to the value of the Internet, due to the fact that there is no convenient, ubiquitous payment mechanism to use on the Internet.

Let me explain why. To pay for goods like news, information, music or books you go to a retail store, hand over the cash, get your change back, and presto in the equivalent of two clicks you re’ done. Same with a credit card; hand out your VISA, sign here and walk away. All it takes is two clicks.

On the contrary, to pay for content arriving via the Internet you need 10s of clicks. Take your credit card, type your name, address (30+ clicks), now enter the 16 (s-i-x-t-e-e-n) digits of your card, don’t forget your expiry date (another f-o-u-r digits), oh and your CVC2 number (another t-h-r-e-e digits). Now let me check all this. And oops by the way your password provided doesn’t match so you have to enter all this again. Not to mention: do I trust this website with my credit card details? The sad truth is, that for any small amount, or as much as you ‘d pay for a newspaper, a magazine or a music CD,  60+ clicks are not worth the bother.

In the attention economy of today, each click churns customers. I would argue that its the lack of 1-click, convenient micropayment mechanisms that the Internet lost its value, not ‘pirated’ music, neither the democratisation of publishing. The poor adoption rates of paid-for content incentivised content producers (both the nano- and the mega-) to reduce their price to zero and thus establish a perception that everything accessed on the Internet is free.

Yet people are willing to pay for perceived value, not matter how small. Value can be created through convenience, choice, flexibility or customisation, as long as payment mechanism does not stand in the way.  iTunes, Spotify, and the array of paid-for music sites have combined convenience and choice with effortless payment; Spotify brings in around 35% of the digital music sales in Sweden, while 80% of Spotify users said they stopped filesharing.

So what does mobile have to do with all this?
Here’s the paradox. When applications are freeware or shareware on the Internet, why are people willing to pay $2.5 on average per iPhone application by the bucket-loads bringing Apple’s an estimated $2.4 Billion a year? Why are ringtones costing upwards of $1 when you can Google the same song for free? Why are people willing to pay over 1Euro for texting their vote to the Eurovision song contest or fork out $0.80 for virtual ice cubes on Flirtomatic?

Value exists in mobile, but not because mobile operators still run the game; walled gardens have fallen long ago. It’s because mobile phones offer a 1-click convenient way to pay for goods delivered over the mobile channel; applications, ringtones, competitions and social networking services included. And it’s all charged to your mobile phone bill. How more convenient could that be?

That’s the part where operators proudly claim that they own the downstream billing relationship to the user. But what they seem to ignore, is that they do NOT own the upstream billing relationship to the millions of content providers, nor the millions of goods providers that operator through non-mobile channels (retail, mail-order, web, etc). This is because mobile operators, sitting comfortably in their ivory castles have imposed extortionate revenue shares (typically 30%-60% of total revenues) with upstream content providers that can be justified not in terms of the value they add, but of the near-monopolistic exclusivity on payments charged to the users’ phone bill. Compare this 30-60% commission with the 2%-4% rates that credit cards charge. Mobile operators have so far failed to seize the upstream billing relationship as they only understand the value of the short head (as opposed to the long tail).

How mobile can bring back the value to the Internet
Mobile payments are making a big buzz in the industry, especially in developing countries like many parts of the African continent, where traditional banking infrastructure does not exist and mobiles offer an extremely fast and convenient way to exchange money between individuals in rural areas. But mobile payments have an equally important potential in the developed world, in extending upstream billing to content distributed over the Internet.

The most visible efforts to extend mobile payments to the Internet are those from iTunes, Google Checkout and Paypal (for purchases through an on-device storefront), and recently Amazon Mobile Payments (for purchases via a web page). All of these efforts are quite limited in terms of both their downstream addressable market and their upstream range of content publishers they have so far integrated with.

Mobile operators have a unique and unexploited potential in this game. Think of Internet payments which are authorised by entering your mobile number below the ‘buy now’ button. You get an SMS confirming the amount and the seller, you reply and bingo – in 3-4 ‘clicks’ you ‘re done. Such a payment mechanism is both trusted and ubiquitous. The only element missing from the recipe is reasonable commission rates of the order of 2%-4% charged by credit cards. Indeed, operators can reach where VISA cannot. Vodafone’s Vittorio Colao recently remarked how “mobile accounts are a fantastic payment platform for all digital goods”.

There’s a second, slightly more exotic scenario. Consider that Nokia with near-40% handset market share decides to equip all of its mobile phones with NFC capabiliies (NFC chipsets cost $2-$2.5 today and are expected to drop to $1 in 2013 according to this report). If Nokia decides to invest in deploying PC NFC readers under subsidy to Nokia phone buyers, then it has a chance to become a trusted provider of Internet micropayments. Or as Stefan Constantinescu (a Nokia connoisseur) argues in an open letter, Nokia should invest in creating a wireless payment infrastructure in retail stores starting with western and northern Europe, much like DoCoMo did in Japan.

Whatever the next 2-3 years hold, mobile payments have great potential for bringing back the lost value to the Internet.

Comments welcome as always,

– Andreas
follow me on twitter