Developers face pricing and fragmentation quandaries as app-store bandwagon rolls

Posted by Guillermo Escofet Wednesday, February 25th, 2009

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Application stores are becoming a trend among handset manufacturers and mobile operators, appearing to bode well for application developers, which have traditionally been neglected in the mobile content value chain. But developers are faced with a host of dilemmas regarding pricing and development costs as firms rush to launch their app-store offerings.

The runaway success that has been Apple’s App Store has led some of the mobile industry’s biggest names to jump aboard the mobile-application-store bandwagon, and many made announcements to that effect at the Mobile World Congress (MWC) held earlier this month in Barcelona. Apple recently announced that its store recorded 200 million application downloads in December and January, bringing its total since launch in July past 500 million. These figures demonstrate that there is a market for applications, for companies that put the right ecosystem together.

Some industry observers credit the global downturn in mobile handset shipments for the willingness of mobile operators and handset manufacturers to promote mobile applications, saying that mobile users want to cut spending on new devices in the midst of the credit crunch and that application stores give those launching them a chance to squeeze extra revenues from cash-strapped subscribers. Others say that if a handset vendor’s device can attract high-ARPU mobile users, they can justify charging a higher selling price to mobile operators.

Handset and OS vendors including Nokia, RIM, Samsung and Microsoft underlined their intentions to mimic Apple’s success at MWC, launching offerings similar to the App Store, though most of their offerings have subtle differences from Apple’s (see fig.).

The increase in on-device mobile application stores has given developers more choice in how their products are priced and brought to market.

A developer could theoretically undercut the price of its application on a mobile operator’s portal by reducing the retail price on a rival handset vendor’s application store. On Apple’s App Store, for example, developers have free rein over how much they charge for their applications – from free to thousands of dollars – and there has already been a sharp decline in the average price of applications on the store.

Tyler Lessard, director of developer relations at BlackBerry manufacturer RIM, told Informa Telecoms & Media that the forthcoming BlackBerry Application Storefront, set to launch this month, could provide an opportunity for developers to undercut on-portal prices. “It will be interesting to see how it works out,” he said.

Conscious of potential conflicts with operators, RIM has given developers the option of blocking their application from a given operator’s network if it application is already deployed by that operator.

But the rigid world of content retailing through operators is also changing as some cellcos – such as Orange, Vodafone and O2 – jump on the application-store bandwagon and begin to launch stores of their own.

O2 UK, part of the Telefonica carrier group, unveiled details at MWC of O2 Litmus, which is part developer program, part application store. Launched at the end of last year, Litmus gives developers control over the pricing their applications, albeit within certain parameters: They can choose from 26 prices, the highest of which is £5 (US$7.15), according to James Parton, head of O2 Litmus.

Most handset vendors launching application stores remain tight-lipped about factors such as pricing competition and how application downloads will be billed. Will the operators be cut out of the content-and-applications value chain altogether, as in the case of the iPhone’s App Store, where downloads are billed through Apple’s iTunes platform? Or will operators be given a stake in download revenues by integrating handset-vendor stores with mobile billing systems?

Many handset vendors say their stores will complement operator content portals and that operator billing will be enabled where available.

But there’s also the question of whether operators will want to enable billing for some of these services in the first place. Nokia, for instance, had problems when trying to strike a billing agreement for its Ovi services with carrier group Orange: The operator refused to bill its subscribers for content from the Nokia Music Store, since the service could cannibalize revenues from its own music store. Subsequently, Nokia had to provide separate payment facilities for its music services.

A direct billing relationship with end-users is no doubt what many players in the mobile value chain dream of, since a firm that bills a customer has a strong relationship to him. But getting that relationship started is not easy, especially when the interface with the user is a mobile phone.

Users must first be persuaded to register their debit- or credit-card details with the likes of Nokia, Samsung and Microsoft, which is a tall hurdle, especially if the user doesn’t have a PC at hand and has to input these details on his phone. If content cannot be charged for through a mobile bill, many time-poor users might lose the spur-of-the-moment impetus that led them to make the purchase in the first place.

Apple is in a way an exception to the rule, since it used iTunes and the payment system connected to it as a basis for the App Store. Through iTunes, Apple is one of the biggest retailers of premium digital content on the fixed Web, and many iPhone users were already iTunes users. Those that are not are coaxed to join iTunes, as are those buying an iPod for the first time.

Microsoft, which is scheduled to launch application store Windows Marketplace in 4Q09, is hedging its bets on billing. Tom Bailey, a senior executive in Microsoft’s Live Services division, told Informa that the company has yet to decide how users will be billed on Marketplace but is “exploring a couple of different methods.” As a first option it would rely on mobile billing, in cases where operators have a strong billing relationship with users for content and apps, and as a second option it would resort to direct billing in cases where mobile billing could not be relied upon, he said.

Microsoft could in theory try to emulate Apple’s use of iTunes on the iPhone through its own digital-content businesses in the MP3-player and virtual-console worlds: Zune and Xbox, respectively. The PC-software giant sells music, movies, concert tickets and other entertainment content to Zune and Xbox users in an app-store-type environment and already has billing and authentication systems in place, some of which are a legacy of its MSN ISP business.

No payments have been enabled on Android’s application store – either through the G1-phone launch operator, T-Mobile, or Google – so all downloads from the store have been free.

Some industry observers say carriers will still be able to decide which products their subscribers will be allowed to access on handset makers’ application stores. Operators are the main retailers of phones in most markets, giving them the muscle to object to the preinstallation of certain products on phones if they compete with their own products, they say.

Andrew Fisher, CEO of Shazam – whose music-recognition service is one of the most-downloaded applications on the Apple App Store – acknowledges that there is a shift in the traditional power base toward handset vendors’ stores but says he doubts it will radically diminish carriers’ role in the market.

Speaking to Informa, Fisher said that Shazam traditionally teams up with mobile operators but that it is beginning to view deals with handset vendors as an alternative route to market. But he added that striking deals with mobile operators provides a clearer route to market than forging similar alliances with handset makers, since in many cases operators still expect to be able to decide what is installed on devices sold through them.

On the other hand, Fisher said that working with handset vendors meant that his company was given better technical support to optimize the Shazam application on its devices.

And there is no getting away from the fact that developers have had a rough time in the traditional mobile content value chain – if they’ve been lucky or persistent enough to hook up to the chain in the first place.

In a presentation to journalists and analysts at MWC, O2’s Parton acknowledged that it has traditionally been a “frustrating process” for developers to work with cellcos. But O2 is trying to make amends with Litmus, providing developers the chance to start selling their apps to O2 subscribers within 15 minutes of signing up to the program, rather than the usual six to nine months it takes to deploy an application through an operator. And to make the process as inclusive as possible, it is inviting even O2 customers and employees without software-development skills to contribute their ideas for apps, enabling them to hook up with people who have the coding skills to make them a reality.

As with the iPhone App Store, application providers keep 70% of sales revenues.

Although application developers will probably welcome the renewed enthusiasm of operators to promote applications as a means of generating revenues, they are faced with the obstacle of designing their wares for more platforms.

Some industry sources say handset vendors and mobile operators will fail to learn their lesson from Apple as they rush aboard the app-store bandwagon. The success of Apple’s App Store has been built largely on the fact that developers need to write apps for effectively only one device, offering them a rapid, low-cost route to market. But Ralph de la Vega, CEO of US operator AT&T Mobility, says the existence of too many application stores will add to the technology fragmentation that has traditionally plagued developers trying to adapt or create content and apps for mobile.

Speaking at MWC, he warned that the current app-store craze could create “islands of innovation.” To meet users’ demand for mobile applications, the apps should be made available for all operator networks and platforms, he told delegates. The major challenge facing application developers, handset makers and network operators is to connect customers to applications on any platform or device, he added.

Eager to ease any such fears over fragmentation, Nokia highlighted the suite of developer tools – including self-publishing platform publish.ovi.com – that forms part of its global developer program, Forum Nokia, when unveiling its application store, Ovi Store, at MWC. Forum Nokia provides developers with the tools and technical support necessary to build applications that can eventually be launched on Ovi Store, the vendor said.

One of the functions of publish.ovi.com is to offer developers greater control over pricing policies. Nokia has previously faced criticism from game publishers for not giving them more of a say in how to price their wares on its N-Gage portal. When the Ovi Store opens in May, it is set to offer developers regular feedback on how well their content is selling, the company said in a statement to the press.

Similarly, Samsung is “opening Samsung up a bit more than before” to aid developers in cutting porting costs, with the launch of its Mobile Innovator program, according to Nick Turner-Samuels, head of content at Samsung Electronic UK. The South Korean firm is looking to make its software-development kit “more consistent than before,” Turner-Samuels told Informa. In addition to unveiling plans for an application store, Samsung used MWC to highlight the fact that that it is extending its mobile developer program to support both Java and Windows Mobile devices. Samsung also appears to be taking the initiative in Asia’s application market, as demonstrated by its creation of a dedicated Chinese application-developer forum.

RIM’s Lessard says the firm’s open developer platform has been in place for almost a decade and that its longstanding relationship with application developers means it can provide a low time-to-market and comparatively low porting costs.

Elsewhere, Microsoft is attempting to ease some of the problems associated with handset fragmentation by negotiating with OEMs to introduce a more standardized set of APIs across Windows devices. It also plans to ensure that the Marketplace client on each phone shows users only the applications that are compatible with that device.

Nokia and Samsung, the two largest handset vendors by unit shipments, both say they can boost application developers’ market penetration.

Nokia’s Ovi Store is scheduled for commercial launch in May, though the Finnish company has yet to specify in which territories it will launch. The content available from the store is set to include applications, games, videos, podcasts, location-aware applications and personalization content, such as ring tones and wallpapers, for Nokia Series 40 and S60 devices. The Nokia N97 is set to be the first device to come preloaded with the application store and is slated for launch in June, though the Ovi Store client is set to be available to download to other N-series devices.

The Ovi Store is expected to launch with an addressable customer base of tens of millions of users.

Nokia says mobile users will be able to choose to pay for content with a credit card or through operator billing, which it says provides application developers with access to users in markets where credit cards are not widely available. In his keynote address to MWC delegates, Nokia CEO Olli-Pekka Kallasvaou highlighted the importance that Nokia is giving to targeting the mobile application sector in emerging markets, where most people are connecting to the Internet for the first time through their handsets.

Nokia is taking advantage of its huge market share in developing markets through its Nokia Life Tools offering, which offers educational and other information services to poor communities. If this plan pays off, Nokia might be able to establish a huge lead in the mobile application market in emerging markets – similar to the one Apple holds among image-conscious smartphone users in markets such as the US and UK.

South Korean electronics giant and handset manufacturer Samsung is also aiming to take advantage of its market share, to entice application developers to its Samsung Mobile Applications store. The company has already launched a beta version of the store but has announced few details of how it operates. The store is accessible only through a Web interface. Turner-Samuels says the store was launched in the UK in January in conjunction with software firm PocketGear.

Samsung has yet to publicly release details about how it shares revenues with developers, but Turner-Samuels says prices are set by developers. Samsung says that the store was launched initially to target European smartphone users and that customers can pay only with credit cards during the beta phase. When asked to comment on what billing methods would be available in future, he said that plans had not been finalized but that Samsung was looking to collaborate with carriers as much as possible.

With Nokia and Samsung apparently intent on using their lead in the mass-market handset segment to differentiate themselves from other firms, North America’s Microsoft and RIM are left to wrest market share from Apple in the smartphone segment. Both companies have years of experience in developing enterprise applications for users but seem intent on making inroads into the consumer segment, having seen Apple’s success.

Aaron Woodman, director of Microsoft’s Mobile Communications Business, says Windows Marketplace has been designed to address the difficulty that Windows Mobile users have had in discovering applications made for the operating system.

“There are around 20,000 Windows Mobile apps that have been developed down the years,” he says. Even though most people think that they are largely enterprise-focused applications, about two-thirds are consumer focused, he adds. But discoverability has been a problem. Users have not been aware of these apps or have not known how to get to them, he says.

RIM is less coy, saying that it plans to take on Apple’s store. Users of the BlackBerry Application Storefront can pay for downloads via PayPal or credit card for the “first wave” of applications, and RIM is keeping quiet about the prospect of operator-billing alliances.

Lessard says RIM’s platform has many advantages over Apple’s. “We don’t limit [developers] to a target user base,” he says, meaning that it targets the market with a broad range of devices across all operators, unlike Apple, which has only one device and one operator in each territory.

Another advantage is that the BlackBerry platform supports “always on” applications, he adds, meaning that an application can push information to a user’s home screen even if they are not actively using it.

Whether any of these companies will be successful in emulating the success of the App Store is a matter for conjecture. But none of Apple’s rival retailers has the billing relationship with subscribers that Apple had through iTunes, and it is this relationship with the customer that has been at the core of the App Store’s continuing success.

Add to this the ongoing problems of platform fragmentation, and application developers could be looking at another false dawn. Perhaps it will take another innovation from outside the traditional ecosystem, as Apple has done with its App Store, to make real progress.