The FuTure oF Web Apps

Mobile Applications and Their Delivery Platforms Marcelo Nogueira Cortimiglia, Federal University of Rio Grande do Sul Antonio Ghezzi and Filippo Renga, Politecnico di Milano

Mobile applications are a multibillion-dollar business. Understanding the business strategies behind them and the characteristics of their distinct delivery platform—the mobile app store—provides a glimpse into the emerging convergence of mobile-Web applications.

T

he Web 2.0 phenomenon that emerged less than a decade ago is now a major factor in defining how people communicate, collaborate, socialize, and conduct business. Key Web 2.0 characteristics include its democratic and collaborative nature, its potential for enabling user-generated content and for harnessing collective intelligence, and its profound impact on business activities. However, the hardware and software independence of its services and applications is the object of both academic and practitioner attention as the convergence between Web and wireless technologies accelerates. According to a Pew Research Center report, two in five Americans access the Internet through their mobile phones.1 Moreover, IDC reported a 74.4 percent increase in smartphone sales worldwide in 2010,2 and Nielsen reported that smartphones optimized for mobile Internet access accounted for 28 percent of mobile phones

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in the US.3 It’s only natural that the boundary between Web and mobile apps will shrink as mobile broadband access and the adoption of highend mobile devices further expand worldwide. In an effort to prepare for future developments in the design and distribution of such apps, we discuss the business strategies behind this US$15 billion market4 and examine its distinct delivery platform—the mobile app store.

Smartphones Drive Demand Mobile phones became popular in Western countries with the diffusion of mobile networks in the 1990s. With the advent of secondgeneration networks, which enabled phones to access data, the next step was to add features that enhanced usability and consumer value, such as push-email and Internet-access capabilities (1998), the clamshell design (1999), color displays (1999), digital cameras (2000), Java technology (2000), and high-quality music (2002).5

Published by the IEEE Computer Society

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The Future of Web Apps Table 1. Smartphone operating system market share estimations. 6 Market share* (%) Operating system

2011

2015

Android

38.9

43.8

BlackBerry OS

14.2

13.4

Symbian

20.6

0.1

iOS

18.2

16.9

Windows Phone 7/Mobile

3.8

20.3

Others

4.3

5.5

100.0

100.0

Total

Device and network innovations that increased data-transfer and handling capacity created a market for mobile content and services. Meanwhile, the continuous evolution of mobile phones’ processing power, storage, and software, along with the evolution of PDAs’ computing power, resulted in smartphones—perhaps the most influential driver of mobile apps. Smartphones represent the fastest growing segment of mobile devices. Total sales of smartphones in 2010 amounted to approximately 302.6 million units, a 74.4 percent year-over-year increase, and sales are expected to grow another 55 percent in 2011.2 Global smartphone producers include Apple, BlackBerry, Nokia, Palm, Samsung, Sony Ericsson, LG, and Motorola. The latest-generation smartphones—including Apple’s iPhone 4, Palm’s Pre, Motorola’s Droid, and Google/HTC’s Nexus One—are poised to realize truly portable multimedia computing devices. Furthermore, users will be able to enrich and customize these devices with mobile apps. Table 1 shows projected market shares for the leading mobile operating systems in 2011 and 2015.6

Businesses Monetize Mobile Apps We can tentatively classify today’s mobile apps as either business-to-business (B2B) or businessto-consumer (B2C). B2B apps support a firm’s internal business processes, such as warehouse management, sales-force automation, or customerrelationship management. B2C apps fulfill individual consumers’ needs and can be further classified as content-, marketing-, or serviceoriented: • Content-oriented apps fulfill individual needs for information, entertainment, communication, 52

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productivity, and socialization and include Twitter, instant messaging, email, and social network clients for mobile phones. • Marketing-oriented apps are mostly used by companies for brand advertising or promotion. For example, the Italian fashion store Gucci launched an iPhone app that lets users browse Gucci’s collections and locate the nearest shop with its products. • Service-oriented apps let users perform tasks— for example, check a train schedule, book theater tickets, or shop at a mobile commerce platform. There are many options for monetizing B2C apps. In the most straightforward model, deve­ lopers charge a fixed amount for the app. Some developers offer reduced-function versions of their apps, so users can experiment with them before buying them. Alternatively, developers can employ a freemium strategy, in which users can download a simpler version of the app for free, but they’re charged for improved functionalities through in-app billing mechanisms. Companies can also sell premium content through apps. For example, with games, players can purchase additional levels or scenarios. In news-oriented apps, readers can purchase an additional magazine or newspaper. Advertising is another option for monetizing mobile apps. In this model, ad space is sold in free apps that reach a large user base. Initially, specialized companies, such as AdMob, placed and managed ads. Recently, however, alternative solutions have emerged, such as Apple’s iAd platform. Furthermore, the trend in ads is changing from simplistic displays to more complex and potentially value-added contextual and customized ads based on user segmentation and profiling.

Apple Changes the Distribution Model Before the recent mobile app surge, mobile network operators (MNOs) dominated the distribution of mobile content and services. They employed a mobile-portal paradigm in which they owned (or branded) portals that represented interfaces through which customers could access content and services. MNOs leveraged their extensive customer base, network infrastructure, and billing systems. However, Apple challenged this model with a new distribution paradigm.

The Mobile App Store In creating its App Store distribution platform, Apple leveraged its strong reputation, its marketchanging iPhone, and its successful iTunes platform and linked its mobile business proposition to its iTunes content distribution and billing mechanism. Furthermore, it followed the business model of the Japanese MNO, NTT DoCoMo, whose i-Mode environment had long been an example of success in mobile content distribution. NTT DoCoMo launched the i-Mode in 1999 as a semiclosed distribution system for mobile content that featured third-party independence and revenue-sharing mechanisms favorable to content developers.7 Its immediate success was never completely replicated by Western MNOs, mostly because of standardization issues with multiple device types.8 Apple, however, had the advantage of working with a single device type and could thus guarantee high-quality standards for content even as it opened up development for third parties. Apple’s model differs from the traditional mobile-portal distribution paradigm in several ways. Mobile context. From a technological viewpoint, the app store doesn’t constitute a radical innovation; it’s quite similar to software libraries or marketplaces controlled by Web-based software distributors such as Handango, Handster, PocketGear, and GetJar. The innovation lies in translating the computer-based, Web-oriented model for a mobile context. The app store exploits smartphone features and capabilities, can be accessed from different networks (mobile, Wi-Fi, or fixed), and has high-quality user interfaces. It lets users easily classify, search for, and discover apps. Direct billing. From a business viewpoint, by relying on the widespread PC-based iTunes system, Apple was able to migrate a large PC customer base toward the mobile channel. Moreover, the iTunes purchase process employs a direct-billing model based on payment channels (credit card, Paypal, and bank transfer) capable of leapfrogging mobile-billing architectures, thus removing the MNO from the buying equation and making the acquisition process more user-friendly. Open access. The underlying idea behind app creation and distribution is to give third parties



access and independence, following the selfpublishing model. This approach gives third parties easy-to-use, widely interoperable, and inexpensive tools to create an app, publish it in the store, and govern its pricing and presentation. Publishers receive a share of the revenues crea­ ted (approximately 70 percent) and have tools at their disposal for monitoring and analyzing sales performance. This self-publishing model can lead to an “open garden” approach that minimizes the platform owner’s interference with the offered content and services and with the business relationships established between the content provider and consumers. This contrasts with the preferred model for mobile portals—the “walled-garden” or closed-access model, which implies controlling content offered both downstream (toward the customer) and upstream (toward business third parties like mobile content service providers). The open-garden approach lets businesses explore opportunities (to boost sales or improve customer loyalty, for example) arising from longtail effects—that is, from an increased variety of low-sales-volume, high-distribution digital products or from products tailored to niche consumers.9 At the same time, the approach helps maintain overall quality through its strict control of the device, software development kit (SDK) available to application developers, and rules for publishing apps in the platform. Innovative ads and marketing. The store’s Web-oriented nature pairs traditional mobile content and services (such as SMS-based subscription services and ringtone downloads) with Internet-based software apps that offer more sophisticated purchase methods (such as in-app billing) and innovative ad-based services. Apple’s mobile app store avoids convoluted marketing solutions that could lead to customers making adverse selections. One example is opportunistic behaviors due to information asymmetries between content providers and end users, such as a content seller poorly or deliberately marketing a service such that customers think they’re buying a ringtone for their mobile phone when in fact they’re subscribing to a service that lets them download a ringtone weekly— for a weekly fee. Such marketing can also lead to customer distrust when businesses pay a fee to

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The Future of Web Apps Table 2. Players from the mobile business environment offering mobile app stores. Mobile business

Application store

Mobile network operators

AT&T’s Media Mall China Mobile’s Media Mall O2’s Limus Orange’s Application Shop Sprint Nextel’s Software Store Verizon Wireless’ VZAppZone Vodafone’s 360°

Device manufacturers

Nokia’s Ovi Store LG’s Application Store Palm’s Software Store RIM’s Blackberry App World Samsung’s Applications Store Sony Ericsson’s PlayNow Arena

Mobile platform and operating system vendors

Google’s Android Marketplace Microsoft’s Windows Marketplace for Mobile Symbian’s Horizon

Software developers

AppsLib GetJar Handmark Mobihand SlideMe

have their content or services “pushed” or bran­ ded on store pages. This can also lead to poor presentation quality and constrained accessibi­ lity for niche apps.

The Benefits Adopting the mobile-app-store distribution model can create new revenue streams through a new app offer, extending the mature mobile content offer delivered through a channel parallel with the traditional mobile portal. In other words, a customer might buy a certain device merely to gain access to a store (and its newer products) that’s offered only through that device. The model can also improve SDKs, lowering design and creation costs and benefiting both store owners outsourcing such activities to external developers and the developers themselves. App developers benefit from lower delivery and marketing costs. Adopting a mobile-app-store paradigm also brings intangible benefits through improved customer service and reduced time-to-market. So stores that sell their apps through an app store are gaining a reputation for being an innovative business. Finally, this approach supports 54

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increased strategic flexibility and a wider range of business opportunities for the players involved, since such a paradigm urges store owners to develop and adopt flexible, farsighted, and open business models based on the codevelopment of business with a wide set of partners.

New Players Enter the Market Mobile app stores are becoming a bandwagon that countless players are eager to jump on (see Table 2). This is understandable, given that 17.7 billion downloads from mobile app stores are expected in 2011 (117 percent more than last year), with revenues expected to surpass $15.1 billion, up from $5.2 billion in 2010.4 At the end of 2010, the number of apps available at the largest store (Apple’s) was around 300,000, while more than 160,000 were available at Google’s Android Marketplace.10

Mobile Network Operators MNOs are striving to maintain their role as “gatekeepers” of value-added services, but the push for free or advertising-based models might leave them behind. Some MNOs are trying to exploit their large cross-device, cross-OS customer base by developing a hybrid model where the mobile portal and store coexist. For example, Vodafone is leaving mature content (such as ringtones, logos, and wallpapers) and third parties’ links on its portal and is dedicating its store to Internet, W3C-standard-based apps. Similarly, H3G Italy plans to separate its traditional content from apps, setting differentiated revenue-sharing models and avoiding potential Trojan horses—that is, fake apps linking to off-portal third-party sites. Moreover, H3G intends to stick with the more diffused mobile billing (using premium text messages for charging users or phone prepaid bill deduction) instead of direct billing. However, by embracing the new paradigm, MNOs risk cannibalizing their tightly controlled traditional source of data revenues—the mobile portal. Their main challenge is enabling user satis­ faction despite the cross-device nature of their user base.

Device Manufacturers Device manufacturers hope to leverage their customer base and enter the mobile app market in

a more direct fashion—by pre-installing their stores on their devices. This sidesteps customers’ resistance to change. Furthermore, it blocks access to competing stores. However, the mobile app market could present treacherous ground for device manufacturers, as evidenced by the slow takeoff of Nokia’s Ovi Store. Device manufacturers might overextend their positioning, getting too far from their core business in a segment they have neither the resources nor the know-how to ope­ rate in.

Platform/OS Vendors and Software Distributors Mobile platform and OS vendors and software distributors can exploit the growing importance of OSs on a cross-device, cross-operator basis. Software and Web-originated companies such as Microsoft and Google can take advantage of a large customer base, which they could encourage to migrate from other business to the mobile environment—for example, Web business for Google, or software or games business for Microsoft. Eventually, compatibility with highquality apps could influence the battle for OS market control. However, these players must interact and establish agreements with both MNOs and device manufacturers to grant accessibility of their stores through the MNOs’ SIM cards and the manufacturers’ devices. Such agreements could be difficult to establish given the competition in an increasingly populated market.

T

he main unresolved issues for mobile app store owners and developers are the barriers to adoption and to direct billing system registration. Credit-card-based payment mechanisms are often perceived as more complex than traditional mobile billing and could reduce the number of impulsive buys. Still, from the developers perspective, the impact of excessive fragmentation caused by the proliferation of mobile app stores includes higher porting costs, a longer time-to-market (because apps must be designed for multiple platforms), lower profits, and a shortening of the long tail. As a whole, the extreme segmentation of user groups and available apps according to the device used and the MNO subscribed to could lead to different prices for the same app in different stores. There are also user-related issues to consider. The main one is the increase in privacy concerns—in particular, from coupling ads with user-profile and app-use information, mobile

By embracing the new paradigm, MNOs risk cannibalizing their tightly controlled traditional source of data revenues—the mobile portal. navigation habits, and user location enabled by GPS-equipped devices. However, several MNOs are working to solve such issues through the common and simple “opt-in” solution.

Application Developers

References

App developers look anxiously at market democratization based on openness, independence, and revenue-sharing schemes. In fact, the 70-30 revenue share rate typical among most app stores is much better than the usual 50-50 rate most MNOs practice with content and service providers in the mobile portal distribution model. Still, the proliferation of proprietary stores based on different operator-device-OS combinations can increase app creation, design, and porting costs and also lengthen the time-tomarket. Moreover, raging competition can lower prices and profits and shrink the customer pool.

1. A. Smith, Mobile Access 2010, Pew Research Center Report, July 2010. 2. “Android Rises, Symbian^3 and Windows Phone 7 Launch as Worldwide Smartphone Shipments Increase 87.2% Year Over Year, According to IDC,” IDC Press Release, 7 Feb. 2011; www.idc.com/getdoc. jsp?containerId=prUS22689111. 3. “Mobile Snapshot: Sma r tphones Now 28% of U.S. Cellphone Market,” NielsenWire, 1 Nov. 2010; http://blog.nielsen.com/nielsenwire/online_mobile/ mobile-snapshot-smar tphones-now-28-of-u-scellphone-market. 4. S. Baghdassarian and C. Milanesi, Forecast: Mobile Application Stores, Worldwide, 2008–2014, Gartner Report, Dec. 2010.



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The Future of Web Apps

5. M. Bernabo et al., “Technological Convergence throughout the Eras: Part 2—Cellular and Computers,” Business Strategy Series, vol. 10, no. 1, 2009, pp. 12–18. 6. “Worldwide Smartphone Market Expected to Grow 55% in 2011 and Approach Shipments of One Billion in 2015, According to IDC,” IDC Press Release, 9 Jun. 2011; www.idc.com/getdoc.jsp?containerId= prUS22871611. 7. W. Lemstra and V. Hayes, “License-Exempt: Wi-Fi Complement to 3G,” Telematics and Informatics, vol. 26, no. 3, 2009, pp. 227–239. 8. T. Dunnewijk and S. Hultèn, “A Brief History of Mobile Communication in Europe,” Telematics and Informatics, vol. 24, no. 3, 2007, pp. 164–179. 9. C. Anderson, The Long Tail: Why the Future of Business is Selling Less for More, Hyperion, 2006. 10. Distimo Report—Full Year 2010, Distimo Report, Jan. 2011; www.distimo.com/publications.

Marcelo Nogueira Cortimiglia is a postdoctoral research fellow in the Industrial Engineering Department at the Federal University of Rio Grande do Sul, Brazil. His main research interests include strategic technology management, focusing on the convergent wireless-Internet

scenario, innovation management, and knowledge management. Cortimiglia received his PhD in management engineering from Politecnico di Milano. Contact him at [email protected]. Antonio Ghezzi is a lecturer in the Department of Manag­ ement, Economics and Industrial Engineering at Politecnico di Milano, Italy. His main research field is strategic management applied to information and communication technology industries, with a focus on the mobile market. Ghezzi received his PhD in management engineering from Politecnico di Milano. Contact him at antonio1.ghezzi@ polimi.it. Filippo Renga is the research manager of the ICT & Management Observatories (mobile area) and is an external faculty member in the Department of Management, Economics and Industrial Engineering at Politecnico di Milano, Italy. Renga received his PhD in management engineering from Politecnico di Milano. Contact him at filippo. [email protected].



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