[Report] The Netphone: behind the first WAC phone

[The Netphone is a bold attempt by Smart Communications – one of the top 20 MNOs globally – to bring telco services to the mass market But will the Netphone’s blend of WAC and Android succeed?  Research Director Andreas Constantinou goes behind the scenes into the Netphone project to find out, as part of our latest case study, sponsored by Red Bend Software – click here for a free download]

VisionMobile-The Netphone: behind the first WAC phone

Smart Communications: sophisticated services in an unsophisticated market

Smart Communications – the telco behind the first WAC phone – has over 50% market share in the Philippines with 46M wireless subscriptions, which puts them within the top-20 operators globally.

Smart has a record of service innovation that is akin to what operators in North America and Europe have achieved in more developed markets. Smart has one of the widest service portfolios among global mobile operators, including mobile payments, mobile banking, money transfer, mobile streaming TV, maps, push email and propositions for niche segments (e.g. MomsClub). Data services currently make up just over 50% of Smart revenues, as of Q1 2011, with the majority coming from the one billion SMS texts being sent each day. Smart Money, a service that allows users to pay for goods by transferring money from their bank account, was launched in 2001, and counts more than 8.5 million customers.

However, like many operators in developing economies, Smart is in a low-ARPU, pre-paid market. Some 99% of Smart subscriptions are pre-paid, with the blended, pre-paid ARPU reported at just 169 pesos ($3.9 USD) in Q1 2011.

Faced with decreasing ARPU in a competitive market, Smart has embarked on a handset-led strategy to increase its revenues by bringing over-the-top services to the mass market of pre-paid customers.

An Introduction to Netphone: The first WAC phone

The Smart Netphone presents a new series of mobile phones and tablets developed by Smart, aimed at bringing smart devices and services to the mass market.

The first device – expected to launch in July, 2011 – is a rebranded, revamped ZTE Blade. This is the same handset that has been rebranded by Orange UK as the San Francisco and priced at 99 GBP (around $160) without contract, and not dissimilar to the Vodafone Smart handset by Huawei priced at 90 EUR (around $130).

Netphone

Although Smart has not announced pricing, we expect its Netphones to target image-conscious, affluent Filipinos willing to spend an estimated $120-$140.

The Netphone comes with a suite of widget-like applications on the phone’s home screen that provide access to Smart and partner services:

Balance Check for prepaid users, which comprise 99% of Smart’s subscription base

Unified Chat, allowing users to message their contacts with emoticons and video animations. Chat integrates with Yahoo Messenger and Facebook

Sender Pays Email, which follows the SMS cost paradigm, but adds richer emoticons and video expressions to the messages

Connected Address Book, which integrates the user’s address book with Gmail and Facebook contacts

Global Directory, which integrates local Yellow Pages, and lists all users who use the Netphone (subject to privacy settings)

Social radio, which lets users share an FM station with a friend and tune into it in parallel

Smart Money, a service that allows users to pay for goods directly from their bank account or credit card

Emergency app, which offers one button calling to a doctor or other contact that can be assigned by the user

Partner apps like Jollibee (the number one fast-food chain in the Philippines), which allows users to browse the food menu, check out special offers, and order and pay for food delivery, directly from their phone.

Behind the scenes: the making of Netphone

The Netphone is not just an experiment for Smart. It represents a major effort for the operator, with a team 300 staff developing the phone series over the last 18 months, together with an array of tens of partners across six countries.

As a phone series, the Netphone hits several firsts: it’s the first phone to be based on WAC widget specifications (see next section); it’s the first fully customized handset from a mobile operator in an emerging economy; and, along with the Orange San Francisco and Vodafone Smart, it’s one of the first attempts to sell smartphones to prepaid users.

The Netphone has been designed with tangible revenue goals. Besides increasing own service revenues for Smart, the Netphone generates revenues by enabling partner transactions. For example, Smart gets a percentage of the revenue from every Jollibee fast food delivery transaction.

Smart lined up several partners to realize the Netphone concept, including ZTE and Huawei (handsets), Qualcomm (Android chipset platform), IBM, Oracle, Huawei (back-end integration) and Red Bend Software (software management over the air).

According to Smart, a key design decision has been using a software update technology that allows the Netphone platform and applications to be updated continually over the air (OTA).

With the OTA update technology, Smart can minimize the runtime age of the WAC-based platform runtime, ensuring that its Netphone applications run on the latest version of the platform. This addresses a common challenge faced by mobile application developers, who must port new applications to older runtimes. For example, about 25% of active Android handsets run on platform versions that are more than 18 months out of date, according to Google data released in May 2011. Similarly, 20% of existing Apple 3GS devices had not yet been upgraded to the latest platform version two months after the introduction of iOS4, according to app analytics firm Localytics.

Building on WAC technology

The Netphone series includes the first phones based on specifications defined by the Wholesale Applications Community (WAC). Launched in February 2010, WAC is a cross-operator initiative aiming to develop a cross-device platform and app store framework to drive operator services. Since its foundation, WAC has amassed 34 operator members and 39 other partners, bringing in a total of over $10 million in annual funding. Smart has a seat on the board of directors of WAC, alongside Vodafone, AT&T, China Mobile, NTT DoCoMo and other major telcos. The Netphone represents an important breakthrough for an industry initiative that has been criticized for its slow device rollout.

For Smart, WAC represents an industry-endorsed software platform on top of which its partners can build HTML-based applications (also known as widgets). Moreover, widgets are familiar to a broad base of web developers, who are accustomed to HTML or JavaScript development.

On top of the WAC widget specifications, Smart has layered its Looking Glass, a device and network technology umbrella that implements the array of Smart services on the Netphone.

On the device side, Looking Glass includes technology that WAC does not yet cover, such as over-the-air software updating (based on OMA DM SCOMO standard) and additional access into device capabilities like FM radio. On the network side, the Looking Glass technology umbrella provides access into Smart’s services, such as connected address book, advanced messaging, email integration, location-based services and Smart Money. Smart’s network APIs extend the GSMA One API specifications by adding XMPP for advanced messaging, billing & payment, and SIM-encrypted (DUKPT) transactions.

The agile telco: What other operators can learn from Smart

Many telcos have ventured into the world of handset software to deliver their own services and differentiated user experience. The most well-known examples are Vodafone (Live!, VFX, VSCL, 360), Orange, Verizon and, of course, DoCoMo. Smart also has had a tradition of developing services in-house, including Smart Money and its own airtime pre-loading solution.

Yet, Smart has taken a different approach from most operators. That approach offers three important lessons for the operator community.

Short tail. First, rather than deploying own-brand services exclusively, the operator has focused squarely on business partners with established consumer brands. It has allowed brands to deliver local consumer differentiation, and to share revenue on transactions. In so doing, it has provided brands with an additional channel to consumers.

Agile development. Second, the operator has used an agile development process. Rather than set specifications in stone at the beginning of the project, Smart’s featured Netphone applications have been iterating continually through a cycle of development, testing and user feedback. Moreover, rather than use the traditional RFI/RFQ ‘waterfall’ software procurement process, Smart has established joint operational and R&D teams with its many suppliers for Netphone, and has adapted the software specifications during the course of the Netphone project.

The project has already cycled through four iterations, averaging once every 3 months. Another iteration is planned before launch. “An RFP or waterfall development process clearly wouldn’t work here,” comments Ibasco, who has been a key proponent of the Netphone project since its inception.

Ongoing updates. Third, the over-the-air software update mechanism allows Smart to deploy new features and updates throughout the lifetime of the device. It also allows Smart to extend its addressable market for new services to the entire base of deployed Netphones, not just the most recent line-up of handsets shipped.

The future of the Netphone

Initial rollout goals are modest, with Smart planning to sell 200,000 Netphones by the end of 2011. Assuming Smart can hit sub-$100 price points in early 2012, it has a chance to rapidly ramp up these volumes, and address a substantial portion of its 46M subscriptions base.

For now, the operator community is looking at the Smart initiative with anticipation; Netphone marks the latest telco attempt at innovating in the era of software, by building on both the telco (WAC) and software (Android) worlds.

Read the full case study and tell us what you think.

– Andreas

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