Pyramid Points - Before and After the App Store: The Changing Fortunes of Mobile Operators
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Before and After the App Store: The Changing Fortunes of Mobile Operators

July 24, 2013

A couple of weeks ago, Apple’s App Store celebrated its fifth anniversary, reminding mobile operators across the world of the good fortune they lost when the application store was launched back in 2008.

Digital content and applications have long been in mobile operators’ sights. Prior to Apple’s launch of the iPhone and then the App Store, mobile content was generally distributed through a mobile operator portal, and the operators’ control over the value chain enabled them to gain very large shares of the revenue, typically 50% or more. They would either aggregate the content themselves or work with specialist aggregators to offer ringtones, games and information services. The mobile application market was then blown open with the launch of Apple’s App Store, and its unique model of taking a 30% cut and insisting on payment through a debit or credit card continues to shape the industry nearly five years on.

As we discuss in more depth in our upcoming report, From Digital Content to M-Wallets: M-Payment Strategies for Operators, the digital content ecosystem is still an important element in operators’ m-payment strategies. Operators participate in the digital content value chain by developing in-house content, by aggregating and distributing content and by processing content billing and payments. The ways in which they address the content opportunity differ significantly and depend on various country-specific factors, such as smartphone penetration, iPhone penetration and availability of local content. It all boils down to the control over device configuration: the more subscriptions are postpaid, the greater control operators have over handset configuration, with the exception of iPhones.

The exhibit below examines the relationship between the percentage of postpaid users and the iPhone penetration rate, identifying four different situations that operators find themselves in: these are labeled A through D in the chart. From this we can draw a conclusion about operators’ digital content strategies: a high postpaid penetration rate coupled with a low ratio of iPhones sales to overall smartphones sales creates fertile land for operators to assume a strong position in the digital content ecosystem.

Postpaid share of subscriptions vs. iPhone share of smartphone unit sales by country, 2012

app store vs operators

Source: Pyramid Research

Situation A: High postpaid penetration and small iPhone market share. MNOs take strong positions in the digital content value chain, often involving content development and ownership. At the extreme is NTT Docomo’s strategy, which is strongly associated with the operator’s firm grip on handset sales for its network: this enables it to preload its own app store and other content channels. Already a relatively large content owner, the operator increased its stake in Tower Records in mid-2012 to over 50%, in part to compete with Apple’s iPhone, which it does not sell, and the associated iTunes Store. It has also created a joint venture in the e-book space with Dai Nippon Printing Co. Content ownership and distribution is so important to Docomo that it does not have carrier billing partnerships with some of the other vendor application stores, such as the Windows Store, although it does offer carrier billing for Google Play, given the dominance of the Android platform. Apart from Safaricom, Docomo is the only operator in our study that doesn’t partner with all major carrier billing aggregators. This highlights its unique position in regard to content ownership. If content is not made available to everyone with a mobile phone — if it is exclusive, for instance — the reduced size of the available market makes a high adoption rate within the operator’s subscriber base more important.

SK Telecom likewise has a strong focus on its own application store, called T-Store. The T-Store is extremely popular in South Korea and is also available on competitors’ networks. SK Telecom initially invested W100bn (nearly $80m) in T-Store, which was officially launched in September 2009. In 2012 it reported cumulative revenue in 2009-2012 of W235bn, equivalent to approximately $208m; growth has been extremely rapid, and we estimate revenue in 2012 alone was $162m. SK Telecom also owns music content, for which it operates a portal but which is also sold through its store. T-Map is another popular application, offering navigation services to compete with Google and Nokia navigation applications, which are largely funded by advertising.

Situation B: Moderate postpaid penetration and a modest iPhone market share. The involvement of MNOs in the digital content value chain is moderate to limited. Instead, MNOs focus on expanding their postpaid subscriber bases, which will ultimately improve their position in the digital content ecosystem too. Telcel and Turkcell, being in markets where iPhone penetration is lower but smartphones make up a significant portion of the operators’ handset bases, have launched their own application stores. Nevertheless, both operators find it challenging to compete with vendor app stores, which have a much greater scale and therefore a larger selection of applications and direct developer relationships. T-Mobile in Poland has not even launched its own app store, and neither does it enable carrier billing for vendor app stores. But within its parent company, Deutsche Telekom, many other subsidiaries have formed such partnerships.

Situation C: Moderate to high postpaid penetration and a large iPhone share of smartphone sales. The role of MNOs in the digital content value chain is limited or has been declining in value with the increase in iPhone users on their networks. AT&T, which has a high portion of iPhones among its smartphone sales, doesn’t even have its own app store today.

Meanwhile, O2 UK, which had iPhone exclusivity in the UK until 2009, initially launched an application store called Litmus, but it has since been made part of another project, BlueVia, Telefónica’s API initiative to open its network capabilities to developers. Both AT&T and O2 UK enable carrier billing to all the major application stores or are planning to offer this soon.

While Orange in France also operates its own application store, it has not been so successful at competing against Apple and Google. Its integrated fixed-mobile approach means it has significant video content available to distribute across different channels, including Ligue 1 and Ligue 2 football rights, a video sharing site, cinema and film sponsorships, TV broadcasting rights and a radio podcast portal. Orange also has an investment in Deezer, a French music streaming service that it bundles in a number of its high-end packages. In order to differentiate its own offerings, Orange has not partnered with Google or BlackBerry to enable carrier billing for their application stores, although it does enable direct billing from Windows Marketplace, where it also has an Orange Selection store within a store.

Situation D: Low postpaid penetration and low iPhone share of smartphone sales. The involvement of MNOs in the digital content value chain is minimal. Markets that are predominantly prepaid, and generally those that are lower-income too, are less suitable to application stores; examples include Kenya and Russia. While the iPhone share of smartphone sales is low in these markets too, their low overall smartphone penetration and the availability of pirated content have a greater effect on the role of operators in the digital content value chain. Safaricom, for instance, offers a very limited range of content services, most of which are network-dependent, such as ringback-tones and SMS information services. MTS in Russia built its own content portal in 2009 and successfully developed it into an online film and video distribution site. Today, however, the portal is operated by its parent company, and MTS does not see itself as a content developer. Indeed, the availability of free content and the extensive use of pirated content in Russia limit the opportunity — iTunes was launched in Russia only at the end of 2012.

— Stela Bokun, Senior Analyst

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