The European App Economy 2014: Europe is losing ground to Asia

We have just published a research note with an update to last year’s an European App Economy Research Note. The good news is that Europe’s app economy still accounts for 19% of global revenues and is growing strongly at a 12% annual rate. The bad news is that the rest of the world, particularly Asia, is growing much faster. The global app economy is growing at 27% annually and the share of revenues captured by developers in the EU is falling. We estimate that [tweetable]around 1 million European jobs have been created by the app economy so far[/tweetable]. If policymakers want to see this job creation continue then there’s a lot more they could do to support developers attempting to create businesses.

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A $16.5 billion market

In our App Economy Forecasts 2013-2016 report we estimated that apps and app related products and services would generate $86 billion in revenues globally in 2014. The 19% share of this generated by European developers will contribute $16.5 billion to EU GDP this year. This is many times more revenue than is generated directly in the app stores. However, the EU is home to the top 2 app store earners globally in Supercell (Finland) and King (UK) – masters of the Free-to-Play games market. At the same time, European policymakers are some of the most vocal in attempts to enhance consumer protection with respect to the Free-to-Play model. So far there is only strong encouragement to reform practices around cost transparency but this could (justifiably) lead to regulation if insufficient voluntary action is taken. Significant changes in this area would undoubtedly impact the revenues of Europe’s most high profile app market success stories.

1 million jobs

We estimate that the number of direct European app economy jobs is up 26% from 2013 to 667,000, this breaks down as 406,000 professional developers and 261,000 non-technical roles in app-related business. Using a conservative multiplier we also estimate another 333,000 jobs have been created indirectly by the app economy in the European Union for a total of 1 million jobs. A large fraction of these jobs are in software services companies taking the low risk route to profitability building apps on a contract basis. [tweetable]Contract software development is the most popular revenue model in Europe, favoured by 31% of developers[/tweetable]. This may be partially due to the relative lack of seed capital for startup ventures in the region along with a relatively high cost of living versus most global competitors, making bootstrapping products more difficult.

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Slower growth

Although the European app economy is growing at less than half the global rate, some loss of share was unavoidable. Europe was very quick to reach high levels of smartphone penetration and most of the device sales growth is in developing markets. A significant fraction of demand for apps will always be filled by local developers with better market knowledge. As smartphone penetration increases in developing countries their local app economies are growing rapidly. European developers are well placed to export to English-speaking markets and South America but it’s not so easy for them to succeed in Asia. It’s likely that developers based in the EU will need specialist support or local partners to maximise app export opportunities in some of the fastest growing markets.

The enterprise opportunity

As smartphones reach saturation, businesses will play an increasing role in the growth of the app economy in Europe. In our Business and Productivity Apps report we forecast that this sector would experience rapid growth, reaching $58 billion globally by 2016. We have identified 5 areas where app developers and startups can add value in the business & enterprise app sector:

  • Vertical market specialisation
  • Productivity/BYO apps
  • Mobile SaaS
  • Bespoke enterprise apps
  • Mobile application and device management

While European developers are well placed to win bespoke enterprise app development business, they may struggle to compete with better funded rivals from other regions for the larger opportunities. Starting a technology business has never required less capital but scaling an enterprise software business is incredibly expensive to do quickly. The biggest mobile SaaS, application management and vertical market opportunities are likely to be venture capital fuelled land grabs. To ensure that Europe makes maximum gains from the future growth of the app economy, policymakers need to do all they can to keep app entrepreneurs from relocating to Silicon Valley in order to access the expertise and capital they need to compete.

Waking the Dragon: The Rise of Android in China

[Android is leading the smartphone revolution in Western Markets. But what about China, the country with the biggest mobile user base? Guest author Hong Wu analyses the state of Android in China – from chipset vendors to software developers – and how the dragon is waking up.]
The article is also available in Chinese.

The Rise of Android in China

HuaQiang Road, ShenZhen, GuangDong, China, an ordinary weekend.

At 10 o’clock in the morning, there are few pedestrians around. Sanitation workers are cleaning up hundreds of deserted mobile phone packages and plastic bags near mobile phone supermarkets, along with bundles upon bundles of mobile phone manuals, and even a few dozens of broken CDs, with labels showing clearly the words “HTC” or “SonyEricsson”.

Clerks in more than a dozen bank branches on HuaQiang Road and ZhenHua Road are busy refilling cash into their ATMs. In the next 5 hours or so, those bank clerks and ATMs will be responsible for hundreds of millions of Yuan in cash transactions. Yes, cash and stock products are the rules of transaction here. This commercial business district, often called as “HuaQiangBei” (or north of HuaQiang), is the strike-it-rich spot for many poor grassroots classes in ShenZhen. This neighbourhood has become the global hub for consumer electronics.

Android has recently become the hot topic within HuaQiangBei district. Sales figures of Android phones have been climbing on a daily basis at YuanWang Digital City. Most of these Android phones use Qualcomm’s chipset, while only a few of them run a chipset that’s made in China.

Nearby, at MingTong Digital City, one can find heaps of ShanZhai (山寨) mobile phones on sale (ShanZhai refers to Chinese imitation and pirated brands and goods, particularly electronics). There only a few Android phone models on display, but customers keep coming back asking for more. In the meantime, the software engine that powers ShanZhai smartphones has shifted from Windows Mobile to Android, and most of they are using chipsets that are made in China.

A 15-minute drive from HuaQiangBei business district, at CheGongMiao business district, are the headquarters of dozens of mobile phone design companies, who are in the midst of the mobile food chain. On a daily basis, engineers here crank out some very exotic prototype phones using MediaTek’s chipset solutions. Since 2009 when Android caught fire, sales guys from MediaTek, HiSilicon, Rockchip, Actions-Semi, and other chipset vendors are arriving day after day, hoping to sell their solutions and get a piece of the pie from the Android revolution.

Once an Android-based white label design is out, the phones will be manufactured in factories at Bao’An ShenZhen and LongGang districts. The plastics are then stamped with the right retail brand stickers, and put on the shelf at the consumer electronics crossroads that is HuaQiangBei.

The MediaTek powerhouse

MediaTek (MTK) sells between 300 to 400 million chipsets a year for 2G handsets, and is the predominant force behind low cost phones in China. MTK’s foray into the smartphone market began in February 2009 when they released the MT6516 design, at that time based on Windows Mobile 6.5 OS. MT6516 is a dual core solution; the application processor is an ARM 9 running at 416MHz, while the baseband processor is an ARM 7, running at 280MHz, supporting 2G (GSM/EDGE). This solution suffers somewhat in terms of performance when compared to the Qualcomm’s MSM7200, but its BOM is lower.

One step up, the MT6516 deluxe version includes a 2.8” QVGA resistive touch screen, 2MP camera, GPS, WiFi, and Bluetooth silicon, with a quoted wholesale price of $90. The basic MT6516 version with no touch screen or camera is quoted at $60. Note that approximately $10 of that quote goes towards the Windows Mobile license fee. In other words, expect prices to go down considerable with an Android design.

Despite its market mussle, MediaTek didn’t anticipate that the Android revolution would arrive so soon. For example, MediaTek didn’t join OHA until 2010 while the first MTK Android handsets are just making their first steps into the Chinese market (there is a rumour that a leading Android OEM had earlier veto’ed MTK’s entry into the OHA to avoid price competition).

TongXinDa in ShenZhen has been the first ODM to release an Android phone based on MTK’s MT6516 solution, the “TongXinDa TOPS-A1”. The phone boasts unique features such as dual SIM cards (both GSM and CDMA, and both at active states), a dual boot system (Windows Mobile 6.5 and Android 1.6 both stored in ROM) with 256MB RAM and ROM, and a 400×240 screen resolution. The phone ad is shown below (note that the HTC logo is a fake).

But these are just the first steps of Android as it awakes the Chinese dragon. The full MTK Android 2.1 solution won’t be out in mass production until the end of 2010.

More competition at low-cost Android phones

Rockchip, a design vendor based in FuZhou, China, showed its RK28 solution at HongKong Electronics Show in 2010, focusing on Android tablets and smartphones.

Rockchip is a homegrown chipset design company which conquered the market of MP3 portable media players with its RK26 and RK27 series. In 2009 Rockchip announced its foray into smartphone business with the RK2808 Android solution, but was not widely adopted due to chip heating problems and performance issues.

In a second effort at the smartphone market, Rockchip released its RK2816 solution in 2010, running on an ARM 9 application process at 600Mhz and an NXP baseband chip. The RK28 series is not as tightly integrated as MTK’s MT6516. MTK put both applications and baseband into one single chip, while RK28 used Infineon for their baseband. RK28 series’ advantage lies at its inheritance of multimedia technologies from Rockchip, with hardware decoding of 720p H.264 video.

Rockchip’s RK28 design has been taken up by Ramos (Blue Devil) to power an smartphone device under the model name W7. The device runs Android 1.5, sports a 4.8” 800×480 resistive touch screen, and is intended as competitor to iPod Touch, with a focus on video media playback features. BuBuGao is another OEM planning to deliver cheap smartphones using the RK28 solution.

In the tablet space, Actions-Semi has been designing a new chipset based on the mISP 74K kernel, running Android 2.1. Marketed under the EBOX moniker, the company aims to head-to-head competition with the iPad with support for H.264, MPEG-4, DivX and Xvid hardware decoding at up to 1080p resolution. Such specs are unheard of among current Android solutions.

Around five years ago, phones based on MTK chipset shook up Chinese cellphone market that was dominated by Nokia, Motorola, Samsung and other local brands like Bird, TCL and XiaXin. MTK enabled phones to be sold at very low prices while still boasting advanced features, including exotic ones like eight stereo speakers or 365 days of standby battery life.

Today, most local brands are gone, and the remaining few have reverted to using MTK chipsets for their phones. International OEM brands have to slash prices on their mid-end to low-end phones in order to compete in this fierce cellphone market. MTK’s entry into high end smartphones using Android may certainly repeat the history we witnessed five years ago. Android phones running FroYo selling for under $100? Maybe just a few months away.

Android Developers in high demand

With such a rapid growth of Android-related activities, Android developers are in hot demand today in China. A 2-year Android pro can command up to 20,000 Yuan (close to $3,000) per month; whereas a 10-year J2EE veteran makes probably the same salary if not less. Companies, big and small, are busy scouting for Android talent, but challenged due to the small pool of qualified engineers.

At ifanr.com we recently conducted a survey, with the help of the China Android Dev group (over 1,400 members, 18,000 messages, the largest and most active discussion group for Chinese Android developers) to capture the demographics of Android developers in China. Our survey received over 500 valid responses with some revealing insights into the state of Android developers in China:

In terms of demographics, over 80% of respondents are between 20 to 30 years old, while another 10% is between 31 to 35 years. These are pretty young and dynamic groups of developers.

When asked about how many years of mobile development experience they have, close to 40% are just getting started. And another close to 50% of respondents are within 0-2 years of experience, which is to be expected, given that Android is a two-year-old platform.

In terms of their role in Android development, 37% of survey respondents are part time developers, while over 40% are professional developers. Only 10% are students while about 15% are still holding out to see how Android progresses.

It’s also worth pointing out that over 60% of respondents are individual developers, a.k.a. one-man teams, while over 90% work in teams made up of less than 50 developers. There are companies with more than 100 developers, mostly likely big telecoms like China Mobile, as well as handset manufacturers and design houses.

Given that we targeted Android developers, almost 80% of respondents have developed on Android. We also see healthy shares of iOS, J2ME, Windows Mobile, and Symbian. Based on current trends, we can foresee Android and iOS commanding larger market share going forward, while J2ME, Windows Mobile and Symbian share will shrink further.

Over 45% of respondents have not yet published apps on Google’s Android Market. This is mostly because Android Market and Google Checkout do not yet support Chinese regions. This is a well known issue; there is a large number of developers in China wanting to publish apps onto the Market who can’t; for example many of them have to set up an overseas bank account in order to register and pay for the Market registration fee. It’s a major hassle for individual developers, and where hopefully Google has a mitigation to offer in the near future (PayPal integration perhaps?).

In terms of revenue models, about two thirds of paid apps are using ad banners, while the other one third are using pay-per-download according to the results of our survey. As for the types of ad networks used, Google AdSense comes out on top with nearly 50% of votes. AdMob comes in second with nearly 30% votes. Wooboo, Youmi, and Casee, ad networks from China, are also making strides here.

The level of satisfaction from app revenues is evenly distributed, with 20% of respondents saying they are not doing well and losing money, and 18% saying they are extremely satisfied and doing well or optimistic about the future (the rest 60% is for people who do not make money from apps).

In terms of go-to-market channels, Google’s Android Market tops with more than half of the share. China Mobile’s Mobile Market (MM) is also popular among developers. MOTO SHOP4APPS is surprisingly getting 5% (or 10% among the ones submitted).

Overall, Android has seen explosive growth in China. More and more developers are joining the ranks daily. However, due to the limitations of Android Market and Google Checkout in China, many developers are turning to alternative markets and payment gateways.

In the operator camp, China Mobile is making a big splash trying to woo developers onto its Android-variant, the OMS/OPhone platform. HTC and Motorola are also pushing their own app store agenda.

The Android ecosystem in China is still a sleeping dragon, but is waking up day by day. There will be more ad networks, more app stores, and more payment gateways coming out in the foreseeable future before consolidation moves in. Android in China is probably at its most exciting stage right now.

– Hong

[Hong Wu is a seasoned mobile app developer based in Silicon Valley, US. He’s currently building an awesome product that hopes will make TVs enjoyable again. He’s also a core member of ifanr.com, the leading new media blog site in China that focuses on mobile Internet industry, smartphones, gadgets, and exciting startups in China. You can contact Hong at lordhong /at/ gmail.com or follow @lordhong on Twitter.]

The many faces of Android fragmentation

[Android fragmentation is only getting started. Research Director Andreas Constantinou breaks down the 3 dimensions of Android fragmentation and argues how Android will become a victim of its own success]
The article is also available in Chinese.

There’s been plenty of talk of Android fragmentation, but little analysis of its meaning and impacts.

As far as definitions go, the best way to look at fragmentation is not from an API viewpoint, but from an application viewpoint; if you take the top-10,000  (free and paid) apps on Android, how many of these run on all the Android-powered phones?

For Google’s Android team, fragmentation is what keeps them up at night. Fragmentation reduces the addressable market of applications, increases the cost of development and could ultimately break the developer story around Android as we ‘ll see.

Google’s CTS (compatibility test spec) is predicated on ensuring that Market apps run on every Android phone. Android handsets have to pass CTS in order to get access to private codelines, the Market or the Android trademark as we covered in our earlier analysis of Google’s 8 control points – and yes, Google controls what partners do with Android, contrary to the Engadget story.

The 3 dimensions of Android fragmentation
Many observers would point to fragmentation arising as a result of the open source (APL2) license attached to the Android public source code. Reality however is much more complex. There are 3 dimensions of Android fragmentation:

1. Codebase fragmentation. Very few companies have taken the approach of forking the public Android codebase, as permitted under the APL2 license; Google innovates so fast (5 major versions in 12 months) that once you fork, the costs of keeping up-to-date with Google’s tip-of-tree are increasing prohibitively over time (Nokia found out the hard way by forking WebKit and then regretting it).

The main fork of the Android codebase is by China Mobile (the world’s biggest operator with over 500M subscribers) who has outsourced Android development to software company Borqs. China Mobile cares less about keeping up-to-date with the latest Android features as the China market operates as an island where cheap, fake (Shanzai) handsets are predominant. Mediatek, a leading vendor of chipsets shipping in 200-300 million handsets per year plans to make Android available, which could mean another major fork. Cyanogen and GeeksPhone also fork the Android public codeline, but they are designed for a niche of tech-savvy Android fans.

2. Release fragmentation. Google has released 5 major updates to Android in 12 months (1.5, 1.6, 2.0, 2.1 and recently 2.2), all of which introduce major features and often API breaks. You may notice how accessing the Android Market from a 1.6 versus a 2.1 handset gives you a different set of apps. So much for forward compatibility. AndroidFragmentation.com (a community project) has documented several cases of release fragmentation arising from releases which break APIs (e.g. 2.0 SDK breaks older contact apps) or from inconsistent OEM implementations (e.g. receiving multicast messages over WiFi is disabled for most HTC devices).

Release fragmentation is the victim of Google’s own speed of innovation – and Andy Rubin has hinted there’s more major releases coming out in the next 6 months. It’s clearly a sign of how young, agile Internet companies know how to develop software much better that companies with a mobile legacy; major Symbian versions take 12-18 months to release.

Release fragmentation is particularly acute due to the lack limited availability of an automatic update mechanism much like that found on the iPhone. We call the phenomenon ‘runtime aging’ and it is directly responsible for increasing the cost of developing applications. Tier-1 network operators see handsets in their installed base with browsers which are 1-6 years old – that’s how hairy it can get for mobile content (and software) development companies. [update: we understand that certain Android handsets come with a firmware update (FOTA) solution available from Google and other FOTA vendors, but it is installed reactively (i.e. to avoid handset recalls) rather than proactively (i.e. to update all handsets to the latest OS flavour)].

Google itself reports that the Android installed base is split between devices running 1.5, 1.6 and 2.1 versions (or at least for those devices accessing the Android Market). The detailed breakdown as of mid May 2010 is as follows:

Release fragmentation is also arises out of Google’s elitist treatment of its OEM partners. Google will pick and choose which private codeline is available to which OEM based on commercial criteria (contrary to Michael Gartenberg’s story). Take for example how Sony Ericsson’s X10 (running on Android 1.6) came to market after the Nexus One (running on Android 2.1). Ironically, both handsets were made by HTC. [correction: the X10 was developed by Sony Ericsson Japan]

3. Profile fragmentation. Android was designed for volume smartphones. But it arrived at an opportune time – just after the iPhone launch and just as consumer electronics manufacturers were looking at how to develop connected devices. This resulted in two effects that Google hadn’t planned for:

– Android was taken up by all tier-1 (and many tier-2) operators/carriers hoping to develop iPhone-like devices at cheaper prices (i.e. lower subsidies) and greater differentiation. That meant that while operators funded Android’s adolescent years (2008-2010), they niched Android handsets to high-end features and smartphone price points.

– Android is now being taken up by 10s of consumer electronics manufacturers, from car displays and set-top boxes to tablets, DECT phones and picture frames. The Archos internet tablet was just the beginning. Each of these devices has very different requirements and therefore results in different platform profiles.

The timing of Android’s entry into the market has therefore resulted in two implications related to fragmentation.

Firstly, Android’s official codebase isn’t suited for mass-market handsets (think ARM9 or ARM11, 200-500MHz). To get to really large volumes (100M+ annually), Google will need to sanction a second Android profile for mass-market devices. This is a Catch-22, as a second profile is needed to hit large volumes, but it would also break the Android developer story.

Secondly, every new platform profile designed for different form factors (in-car, set-top box, tablet, etc) will create API variations that will be hard to manage. That’s one of the key reasons behind the Google TV initiative and the Open Embedded Software Foundation. However even Google can’t move fast enough to coordinate (manage?) the 10s of use cases and form factors emerging for Android.

All in all, Android fragmentation is going to get far worse, as Android becomes a victim of its own success.But hey, would you expect to have a single app (and a single codebase) that runs on your TV, phone and car?

And there the opportunity lies for tools vendors to provide app porting tools, compatibility test tools and SDKs to help bridge the gap across the eventual jungle of Android fragmentation. And for those looking to better understand the Android commercials we offer a half-day training course on the commercial dynamics behind Android.

What do readers think? Do you have any fragmentation stories to share?

– Andreas
you should follow me on twitter: @andreascon

An X-ray of Mobile Software: The 11 vital organs of mobile

[Sales of mobile phones remain healthy, but can the same be said of the software designed for them? Guest author Morten Grauballe offers a biological metaphor to check the pulse and visualise the evolution of the mobile software business.]

The app store “Long Tail” has recently dominated strategy discussions in the mobile industry. The Long Tail is a captivating and inspiring notion that challenges companies to think beyond mass production and mass retailing. The mobile software market is, however, far from mass production and mass retailing. Tight coupling of software and hardware, combined with platform fragmentation, have created a mass market for mobile phones, but not for mobile software. Hence, the tail is wagging the dog (and its organs) in the mobile software strategy discussion.

I ‘d like to use a biological metaphor – the notion of the 11-Organ System – to represent the core value-adding elements in mobile software and discuss how Apple, China Mobile, DoCoMo, Google, Nokia and RIM have utilised these core organs to their benefit. The 11 Organs interact to create the mobile software.

The Long Tail App Store
The Long Tail concept was coined in a 2004 article by Wired Magazine editor Chris Anderson to describe the notion that a large share of consumer needs rest within the tail of a statistical normal distribution. From a marketer’s perspective, this means you need to sell large quantities of unique items – each in small quantities – often combined with large quantities of a few very popular items.

The idea was coined to describe phenomena in online retailing where companies such as Amazon for books and eBay for auctions were able to cater – profitably – to very small, unique segments of the market. The digital economy allows these retailers to decouple stock from purchase. Later, the notion was proven to apply to some of the most successful business models today, namely Apple’s iTunes music store and Google’s search advertising model.

Lately, the Long Tail has been used to describe and propagate one of the biggest hype waves in the mobile market, namely the app store. Apple recently passed 200,000 applications in its store; fanning the enthusiasm for all major players to develop their own app store strategy.

Whereas books, auctions, music, and to some extent search are well-understood businesses with relatively straight-forward Long Tail effects, the essence of the mobile software business is generally not well understood and analyzed. So, before we pin the app store Long Tail on Eeyore, it is worth taking off the blindfold in an attempt to understand the essence of mobile software.

The Organ Systems of Mobile Software
Like biological systems, the software on mobile phones has value-creating subsystems. The Long Tail app store is like the tail on mammals. It does not have a function without being attached to a healthy body full of strong and interconnected value-creating systems. Apple knows this. Google knows this. Nokia knows this. DoCoMo knows this. They all have strategies in place for these value-creating systems.

Mammals generally have 11 organ systems (see note at the end of the article for a biology refresh). To stay true to my metaphor, I break down the most advanced smartphones into 11 organ systems – five core infrastructure systems and six application level systems. There are of course many more ways these systems can be broken down (see VisionMobile’s Industry Atlas for examples).

The five infrastructure core systems are:

  • Operating system: On a high level, the key value of an operating system is to be found in the abstraction of the hardware into a set of APIs against which applications can be written. More fundamentally, this process of abstraction has a significant impact on the characteristics of the system, including usability, battery life and privacy. There is a long discussion taking place within the industry as to whether the OS is a commodity or not – I believe not, but I ‘ll leave that debate is for future article. Let’s instead list the current choices available in the mobile market: Android, Bada, Blackberry OS, Brew Mobile Platform (BMP), iPhone OS, LiMo, Maemo, MediaTek OS, Nucleus, Series 40, STE OS, Symbian, Web OS and Windows Phone OS.
  • Application Execution Environments (AEEs): Most phones have one or more AEEs that attract developers and hence enhance the ability to “wag the tail”. The list of AEEs is long, but should include Java, Flash, widget and and web runtimes. AEEs and operating systems are generally complementary, but as the recent spat between Adobe and Apple has shown, these value-creating systems do not always coexist peacefully.
  • Software Management System: From a strategy analysis perspective, this is probably one of the fastest developing value-creating subsystems. Software management addresses two ‘bodily functions’:
    • The in-the-hands user experience. Apple has made 22 versions available for its phones since June 29, 2007. That is one release every 6 weeks. Most of the features released have addressed the user experience by enhancing features or the usage of features. In the end, this generates revenue and builds an ongoing relationship with the user.
    • Repair and correction. The ability to protect the phone depends on the strength of the security system (see below), but also on the system’s ability to respond to issues in the system, whether malware or not. Software Management allows us to respond with new pieces of software when needed.
  • Security System: The security system is very similar to the integumentary and lymphatic systems in humans. It protects the system from external threats. Parts of the security system should be built into the operating system, but other parts are application-level components, such as lock and wipe of the device.
  • Business Intelligence System: Similar to the nervous system, the business intelligence system allows you to understand what is going on in the entire organism. This ranges from understanding usability issues over performance problems to actual defects in the system. You want to know what works and what does not work for the particular user, which apps are used the most, which services work and which not, how does service usage vary across devices, etc.

The six core application systems are:

  • Peer-to-Peer Communication: Voice communication is often overlooked in strategy discussions of mobile software, but it is one of the most used applications on any mobile phone. It might be a baseline feature, but it needs to be done well. Integration with other value-adding subsystems is quite important too.
  • Peer-to-Peer Messaging: This includes everything from SMS over instant messaging to push e-mail applications. Similar to peer-to-peer communication, it is generally not considered sexy at this stage of the market. It is however the second largest revenue generator after voice communication and thus should not be disregarded.
  • Search: Most phones already have Web search functions. However, the future of search is in the location-based services (LBS) area, where digital search is combined with the physical presence of the user. Advertising is a part of this subsystem as it connects sellers with buyers of products and services.
  • Content Creation: The biggest craze in the market is social networking. Every new phone has social networking capabilities galore closely integrated into the contact manager. Content creation, however, also includes pictures, video and other types of media produced by the consumer. Most of the data produced by the consumer needs to be shared somehow. That is where the key value creation of the mobile phone comes in.. sharing!
  • Content Consumption: Compared to creation, content consumption is so yesterday. The consumer expects easy access to a catalogue of games, music, video, etc.
  • Browsing: This is such a crucial application that I have classified it as a system of its own. The browser is used as the basis of many of the other systems. Actually, most of the other applications can run via the browser and hence it is even possible to classify the browsing subsystem as an infrastructure subsystem.

Choose your Organs before Pinning on the Long Tail
There is no need to have the perfect business model for each of the mobile software organ systems above, but you need to have considered all of them and, if possible, have three or four strong organs to support an independent software strategy that can then carry a Long Tail app store. Let’s consider a few examples:

  • Apple has been the most aggressive on the OS side, publishing native APIs to developers and building a large developer community. Apple’s software management strategy is well-synced with its OS development and is a real strength. With iTunes Apple also is very well placed in media consumption. Apple’s weaknesses are in the areas of AEEs and search.
  • China Mobile has recently put its weight behind the OPhone, which is running a completely customized branch of Android. The OPhone version of Android is managed by a company called Borqs. At launch, handsets were available from Dell, HTC and Lenovo with plans for further handset models from Samsung, ZTE, Phillips, Motorola and LG. By having Borqs in between Google and themselves, CMCC achieves greater ownership of the operating system and its APIs. This is, of course, expensive as Borqs need to track new versions of Android and migrate China Mobile-specific changes across to the new versions of the OPhone OS.
  • DoCoMo has traditionally been focused on content-consumption and browsing with its i-mode services. i-mode nicely mixes Java, Browsing, Flash and e-mail into a very strong application suite. Customers know what they are getting. These services are built on top of two different operating systems, namely Linux and Symbian. So far, DoCoMo has not exposed native APIs to developers, but has focused on Java. The content market is therefore very strong in Japan, but the software application market is not well developed. Recently, DoCoMo has released its first Android handset, the Sony Ericsson Xperia X10, which gives it access to the Android market. This is the company’s first experience with an application market.
  • Google has combined the introduction of the Android operating with a strong suite of applications (Gmail, Google Maps, GTalk and Android market). While on the surface Android is an open source project, you only get access to the application suite if you agree to Google’s commercial terms.  There is no surprise that Google’s strengths come from its applications – it has less control of the core infrastructure components.
  • RIM has full control of its OS and has used Java as the AEE to create a third-party community of developers. The real strength in the RIM offering, however, is peer-to-peer messaging and this is the subsystem that ties RIM to its users. Over the last three years, RIM has made improvements to the subsystems that are more focused on mass-market consumers, such as content consumption/creation, but it is not considered to be its strength.
  • Nokia is active in all the subsystems above. Focus is probably one of the weaknesses of the Nokia offering. Traditionally, Nokia has been focused on peer-to-peer messaging and communication, but recently it has moved aggressively into search and content consumption, which are emerging as their new areas of strength.

Taking inspiration from Blue Ocean Strategy, it is possible to create an Organ Map. I have included an example below. (Each area included in this map warrants its own discussion, so please take it as an educated view rather than a universal statement of truth).

Getting started on your own Organ Map
Any serious player looking at the app store Long Tail needs to look at the organ system above and decide how to build a serious software strategy first. Some companies, like HP with their Palm acquisition, are at a cross-road and should make tough choices up-front. Others are in the middle of executing on their software strategy and need to evaluate progress. In both cases, key questions to answer are:

–        Which organ systems are the focus of my strategy?

–        What is the right mix of core organs to application organs?

–        What level of control do you want to exert over each organ system?

–        How will the chosen organ system allow me to build a relationship with my customer?

–        How do the organ systems interact to realize value for the customer?

–        How are my organ systems mapping against the competition?

Through the discussion around these questions, you should document the criteria by which you and your organizations determine the scoring of each organ system. That will answer questions like, what is a high-end offering in the browser space and who is offering this in the market.

To have a truly independent strategy, the choice of organ systems need to include at least one core organ system over which you can exert a high-degree of control. This does not have to be complete ownership of the organ system, but you should be able to determine the roadmap and direction of the organ system.

The Long Tail as a Greenhouse for New Organ Systems
Once you have a nice set of organ systems up and running, the real point of the Long Tail app store is to act as a greenhouse for new organ systems. By monitoring the sales statistics and trends on your app store, you get a very good view (from your business intelligence system) as to what the next organ system might be.

It is no coincidence Apple just added iAd to iPhone OS v4. They are on top of their business intelligence game and have been tracking advertising in their app store for a while. As apps or features develop into viable businesses, they get promoted from the tail to the body. They become new organ systems for the value-creation machine called Apple.

What are your own thoughts on strategy as a biology metaphor? What other examples of use of software-based organ systems have you come across? What Organ Systems does HP currently have that would render Palm as successful business? Which new ones should they build?

– Morten

[Morten Grauballe is EVP Marketing at Red Bend and ex VP Product Management at Symbian, and has been in the mobile industry long enough to boast both scars and medals]

Note 1: The 11 major organ systems of the body are:

(1) The integumentary system is the organ system that protects the body from damage – it includes nails, skin, hair, fat, etc. This is the largest system making up ~16% of the human body.

(2) The skeletal system is the structural support system with bones, cartilage, ligaments and tendons.

(3) The muscular system is the anatomical system of a species that allows it to move.

(4) The nervous system is an organ system containing a network of specialized cells called neurons that coordinate the actions of an animal and transmit signals between different parts of its body

(5) The endocrine system is a system of glands, each of which secretes a type of hormone to regulate the body. The endocrine system is an information signal system much like the nervous system. Hormones regulate many functions of an organism, including mood, growth and development, tissue function, and metabolism.

(6) The circulatory system is an organ system that passes nutrients (such as amino acids and electrolytes), gases, hormones, blood cells, etc. to and from cells in the body

(7) The lymphatic system in vertebrates is a network of conduits that carry a clear fluid called lymph. It is used to fight diseases and transport fluids from the cells.

(8) The respiratory system’s function is to allow oxygen exchange through all parts of the body.

(9) The digestive system is the organ system responsible for the mechanical and chemical breaking down of food into smaller components that can be absorbed into the blood stream.

(10) The urinary system is the organ system that produces, stores, and eliminates urine.

(11) The reproductive system is a system of organs within an organism that work together for the purpose of reproduction.

Breaking the 500 million barrier of mobile software

[Which are the most ubiquitous mobile software products out there? Marketing Manager Matos Kapetanakis opens up our 5th edition of the 100 Million Club, the watchlist of embedded software products and talks about the really big numbers of mobile software.]

Welcome to the H2 2009 edition of the 100 Million Club, the semi-annual watchlist of mobile software products that have been embedded in more than 100 million mobile devices since their release. Despite the apparent opportunity in the one-billion-a-year handset market, very few software companies have managed to overcome the commercial and technical challenges inherent in the mobile industry.

Key highlights in this H2 2009 edition:

– “The cumulative number of shipments of all the 100 Million Club software products up to the end of 2009 is 24.6 billion – an 11% increase since the previous half”

– “The estimated 250 million cumulative shipments for Apple’s WebKit show that it is fast becoming a de facto browser platform.”

– “BlackBerry is the next smartphone platform, after Symbian, that will break through the 100 million shipments barrier.”

What’s new in H2 2009?
So, what major changes have we seen since our previous update?

First off we’re happy to welcome three new entrants to the Club: ARM, Mimer and Numonyx have joined, adding three new middleware products to our watchlist. Mimer has just broken the 100 million barrier with its SQL database engine, while ARM brings us Mali-JSR184, a 3D graphics engine for wireless devices. The Flash Data Integrator by Numonyx is already ahead of the game, having been shipped in more than 900 million devices.

We have also had to remove three software products that have long been part of the Club. For different reasons, Mobile BAE by Beatnik and Picsel’s File Viewer are no longer part of the 100 Million Club, while Nokia’s Series 60 OS has been incorporated in the Symbian OS.

(click to download)

Growth in the 100 Million Club
The H2 2009 edition of the 100 Million Club is comprised of 30 software products by 26 companies. The total number of shipments of all 30 products, up to the end of 2009, comes to 24.6 billion – an 11% increase since the previous half.

In the previous edition, the Club featured 15 software products that exceeded 500 million shipments, 6 of which had also broken through the 1 billion barrier. The H2 2009 edition features 17 products with more than 500 million sales, 7 of which have surpassed 1 billion shipments. In other words, for the first time the majority of the products featured in the 100 Million Club have over 500 million shipments.

In the second half of 2009, CAPS by Scalado and OKL4 by Open Kernel Labs managed to break through the 500 million barrier, while Myriad Group’s messaging client and Nokia’s Series 40 OS now have more than 1 billion shipments each.

Category leaders: apps, browsers, middleware and operating systems
Quickoffice wins by default in the embedded applications category, since it’s the only embedded application featured in the 100 Million Club.

Adobe is still number one in the application environments category, with Flash/Flash Lite having been embedded in more than 1.3 billion devices up to the end of 2009. The growth of Flash Lite has decelerated significantly from 43% (1H09) to 15% (2H09) as share of devices sold with the software embedded; however the pace should be picking up pace again with Flash shipments later in 2010.

Myriad Group, whose browser has almost twice as many shipments as the other category products combined, dominates the browser market.

In the middleware category things are not that clear, due to the diversity of products. In absolute numbers, the messaging client by Myriad Group has the most shipments (1.2B) and vRapid Mobile by Red Bend shows the highest of growth over the second half of 2009. UI software is also highly penetrated within mobile devices, led by graphics engines by Ikivo, Scalado and The Astonishing Tribe which are at or around the 500 million mark.

The operating system market features 6 products that have been embedded in more than 1 billion devices. It’s worth noting that mass-appeal operating systems like OSE, Nucleus and recently Series 40 have cumulative shipments numbering in the billions, while BREW has just broken past the 500 million mark. In contrast, most major smartphone platforms – Android, OSX, Windows Mobile, BlackBerry – apart from Symbian have yet to reach 100 million shipments.

Finally, the input engines category features two products, both by Nuance inherited from the past acquisitions of Tegic and Zi Corp. As is evident in the chart, T9/XT9 is by far the most prominent, having been embedded in a staggering 4.8 billion mobile devices up to the end of the second half of 2009.

100 Million Club facts and trends

Two companies account for 38% of shipments: Only two companies have multiple software products included in the 100 Million Club, each company featuring three products. The cumulative number of shipments of these two companies is 9.5 billion, representing 38% of all 100 Million Club products’ shipments up to the end of H2 2009. The software products are Myriad Group’s Browser, messaging client and Jbed and Nuance’s T9/XT9, eZiText and VSuite.

WebKit on the rise: We estimate that up to the end of 2009 WebKit, the open source browser engine, has been embedded in more than 250 million devices. WebKit owes most of its market penetration to Nokia (Symbian shipments with the Series 40 contribution picking up), while its recent adoption by RIM can only accelerate its market penetration.

Top revenue models: In this edition, we asked the 100 Million Club members to provide us with the top two revenue models for their products. The responses revealed that the most common revenue models for embedded software are per-unit royalties,followed by NRE (non-recurring engineering fees) for product integration or customisation. Despite the tight profit margins, handset OEMs and network operators are still paying for software on a per-unit basis, with the ‘paradigm shift’ to per-active user revenue models taking longer than most would have expected.

What’s in stock for the 100 Million Club
Our watchlist continues to grow, as more products make it past 100 million shipments. Blackberry should be entering the Club in the next edition (H1 2010), with OSX, Windows Mobile and the much younger Android lagging a further 6-18 months behind.

The bigger picture of mobile software is very different than the industry hype would have us think.

– Matos

Is Android Evil?

[Is Android really open? Research Director Andreas Constantinou uncovers the many control points behind Android and explains why Android might be the most closed system in the history of open source].
The article is also available in Chinese and
Greek.

You thought Android was open? The Android governance model consists of an elaborate set of control points that allows Google to bundle its own services and control the exact software and hardware make-up on every handset. All this while touting the openness rhetoric that is founded on the Apache permissive license used in the Android SDK.

[updated in response to reader comments]: Whereas Android is completely open for the software developer ecosystem, it’s completely closed for the handset OEM (pre-load) ecosystem. There is no other platform which is so asymmetrical in terms of its governance structures.

Indeed, Google’s mobile platform is the smartest implementation of open source designed for driving commercial agendas. But before we dig into why, it’s worth discussing why Android’s success has very little to do with open source.

What makes Android tick
Despite early skepticism, Google’s Android operating system has been unequivocally supported by the mobile industry, including more network operators and handset manufacturers than one can count – with the stubborn exception of Nokia. Android managed to ramp from 1 handset model in 2008 to 50+ models announced for 2010 launch, leaving most industry observers in awe.

The Android success has nothing to do with open source; it’s owed to three key factors:

Apple. As strange as it might seem, Android owes much of its success to one of its arch-rivals. Let me explain. With the unprecedented success of the iPhone and the take-it-or-leave-it terms dictated by Apple to network operators, the carriers have been eagerly looking for cheaper alternatives; as such the tier-1 operators have been embarking on Android projects to produce iPhones for people who can’t afford the iPhone and more importantly, without forking out the 300EUR+ subsidy needed to remain competitive in an iPhone market.

Network operators/carriers around the world are eager to differentiate. Android provides the allure of a unified software platform supporting operator differentiation at a low cost (3 months instead of 12+ months offered by SavaJe, which was also aimed at the MNO customisation market). For larger operators with a software strategy, Android also presents a safe investment, as the mainstream option for bringing down the cost of smartphones. That’s why most Android handset projects are backed by a commercial bipoles of operator + OEM deals, with purchase commitments and NRE fees coming from the operator.

Qualcomm. The $10B chipset vendor has been paramount to Android’s ramp up; manufacturers can take Qualcomm’s hardware reference design which is pre-integrated with Android and can go to market within an estimated 9-12 months (down from 16 months for the Motorola Cliq handset and 24+ months for the HTC G1). Besides Qualcomm we should also mention TI’s OMAP3 platform (on which Moto Droid is based) and ST Ericsson and Broadcom who are ramping up to offer chipsets with out-of-the-box support for Android.

In other words, in an Android handset, most of the OEM budget goes into differentiation; compare that to Symbian where most of the OEM budget goes into baseporting (radio and functional integration of hardware) due to historical choices made by Symbian in 2001. All-in-all, Android allows OEMs to reduce their R&D budgets and invest in differentiation, which is mana from heaven to manufacturers.

We should also not forget the ‘free factor’ (technically zero per-unit royalties for the public SDK) which stirred the emotional hype around Android handsets.

All in all, the ‘open source’ marketing moniker has been very successful at triggering major industry disruption – incl. Nokia ‘s acquisition of Symbian and the derailment of Windows Mobile. Perhaps more importantly, the openness rhetoric and the Google aura has attracted thousands of developers on the platform, at a time when the money equation is sub-par; consider that – compared to the Apple devices – Android handsets are around 9x less in volume and paid-for apps are available in 6x fewer countries.

Behind the Open Source facade
What’s even more fascinating is how closed Android is, despite Google’s old do-no-evil don’t be evil mantra and the permissive Apache 2 license which Android SDK source code is under. Paraphrasing a famous line from Henry Ford’s book on the Model-T, anyone can have Android in their own colour as long as it’s black. Android is the best example of how a company can use open source to build up interest and community participation, while running a very tight commercial model. [updated in response to reader comments:] Again I ‘ll emphasize that the closed aspects of Android apply to the handset OEM (pre-load) ecosystem, not the software developer (post-load) ecosystem (see the comments section for a deep dive into pre-load vs post-load].

How does Google control what services, software and hardware ships in Android handsets? The search giant has built an elaborate system of control points around Android handsets.

To dig deeper we spent two months talking to industry sources close to Android commercials – and the reality has been startling. From a high level, Google uses 8 control points to manage the make-up of Android handsets:

1. Private branches. There are multiple, private codelines available to selected partners (typically the OEM working on an Android project) on a need-to-know basis only. The private codelines are an estimated 6+ months ahead of the public SDK and therefore essential for an OEM to stay competitive. The main motivation for the public SDK and source code is to introduce the latest features (those stemming from private branches) into third party apps.

2.  Closed review process. All code reviewers work for Google, meaning that Google is the only authority that can accept or reject a code submission from the community. There is also a rampant NIH (not invented here) culture inside Google that assumes code written by Googlers is second to none. Ask anyone who’s tried to contribute a patch to Android and you hear the same story: very few contributions get in and often no reason is offered on rejection.

3. Speed of evolution. Google innovates the Android platform at a speed that’s unprecedented for the mobile industry, releasing 4 major updates (1.6  to 2.1) in 18 months. OEMs wanting to build on Android have no choice but to stay close to Google so as not to lose on new features/bug fixes released. The Nexus One, Motorola Droid, HTC G1 and other Experience handsets serve the purpose of innovation testbeds for Google.

4. Incomplete software. The public SDK source code is by no means sufficient to build a handset. Key building blocks missing are radio integration, international language packs, operator packs – and of course Google’s closed source apps like Market, Gmail and GTalk. There are a few custom ROM builders with a full Android stack like the Cyanogen distribution, but these use binaries that are not licensed for distribution in commercial handsets.

5. Gated developer community. Android Market is the exclusive distribution and discovery channel for the 40,000+ apps created by developers; and is available to phone manufacturers on separate agreement. This is one of the strongest control points as no OEM would dare produce a handset that doesn’t tap into the Android Market (perhaps with the exception of DECT phones, picture frames, in-car terminals or other exotic uses of Android). However, one should acknowledge that Android’s acceptance process for Market apps is liberal as it gets – and the complete antithesis of the Apple vetting process for apps.

6. Anti-fragmentation agreement. Little is known about the anti-fragmentation agreement signed by OHA members but we understand it’s a commitment to not release handsets which are not CTS compliant (more on CTS later).

7. Private roadmap. The visibility offered into Android’s roadmap is pathetic. At the time of writing, the roadmap published publicly is a year out of date (Q1 2009). To get a sneak peak into the private roadmap you need Google’s blessing.

8. Android trademark. Google holds the trademark to the Android name; as a manufacturer you can only leverage on the Android branding with approval from Google, much like how you need Sun’s approval to claim your handset is Java-powered.

In short, it’s either the Google way or the highway. If you want to branch off Android you ‘re completely on your own and you need resources of the size of China Mobile (see their OMS effort) to make it viable (hint: China Mobile is the biggest network operator bar none).

The Open Handset Alliance is another myth; since Google managed to attract sufficient industry interest in 2008, the OHA is simply a set of signatures with membership serving only as a VIP Club badge.

Another big chapter in the Android saga is the CTS (compatibility test suite) which is the formal testing process by which a handset passes Google requirements. According to our sources, CTS extends significantly beyond API compliance, and into performance testing, hardware features, device design, UI specs and bundled services. CTS is based on the principle of ensuring baseline compliance, so it’s ok to add features, but it’s not ok to detract; compare this with Apple’s no-Flash policy. Note that beyond CTS compliance, there are additional commercial licensing agreements that OEMs have to sign for Google services and private line access.

CTS hampers Android’s progress as well, as it precludes OEMs from creating stripped-down versions of Android that would fit on mass-market phones – those shipping in the 10s of millions. CTS – and forward compatibility to the pool of 40,000+ apps – is Google’s main challenge for hitting a 2-digit market share in the smartphone market. These restrictions – and frienemy relationship between Google and its OEM partners – have stirred up discussions of an ‘Android foundation‘ within OEM circles

The Google Endgame
With Android, Google aims to deliver a consistent platform to its own revenue-generating services. For now, this is the ad business. But in the future, Google is aiming at voice (reaching the billions who don’t have a data connection) and Checkout (i.e. becoming the Visa of mobile).

Yet whatever the endgame, it’s worth realising that [from the manufacturer perspective] Android is no more open – and no less closed – than [licensable operating systems like] Windows Mobile, Apple OSX or PalmOS, Symbian and BREW; it’s the smartest implementation of open source aimed at driving commercial agendas. Android is much less about the do-no-evil rhetoric that the PR spinners in Mountain View would like us to think.

[Updated in response to readers’ comments:] so, is Android evil? No, it isn’t. It has done no harm – quite the contrary, Android has boosted the level of innovation on mobile software. The point of the article is not to vilify Google or concoct visions of Darth Vader; but to balance the level of openness hysteria with a reality check on the commercial dynamics of mobile open source.

– Andreas
you should follow me on twitter: @andreascon

[we are running on-site business workshops for companies who want to understand the commercials behind Android and OHA. Contact us if you ‘re interested. Or, if you are a mobile developer, voice out your views on Android and other mobile platforms in the biggest mobile developer survey to date. Join in at visionmobile.com/developers]