The joys of disintermediation: why operators should embrace the application store
Mobile operators have long been concerned by disintermediation: the intrusion by third parties into the originally closed relationship between operators and their customers.
Operators have frowned upon, and in some cases countered, what they perceive as interference from third parties. Companies that have directly targeted operators' customers have been sternly warned away34. Content providers have been encouraged to offer content only via operators' portals35.
They may therefore become vexed by one likely development in 2009: the proliferation of mobile applications sourced from third parties36.
In 2009, mobile phone users are expected to download over 10 billion applications to their mobile phones. The majority of applications are likely to be sourced from sites managed by mobile device manufacturers, consumer electronics firms and software houses37.
Although a few operators may launch their own application stores38, the majority are likely to see no alternative to allowing their customers to access third parties' stores39.
Operators are not likely to earn any direct revenue from application downloads. Any subscription or license income is likely to be shared between the application store and the application's authors.
Customers on flat-rate mobile data subscriptions are expected to generate additional revenues from application usage only if resultant traffic volumes are so high that usage caps are breached and additional charges are levied. But these cases are likely to be exceptional.
However, as consumer awareness of mobile applications increases, the number of voice subscribers that add data subscriptions may well rise, boosting revenues40.
Not all customers will want to commit to a data subscription. But this may be even better news, if previously voice-only customers start to purchase data on an ad-hoc basis and download occasional applications. Ad-hoc usage is typically billed by the megabyte and may be more profitable for operators than 'all-you-can-eat' monthly tariffs.
Thus the growth of application stores in 2009 could have a positive impact on operators, even though they displace operators' direct billing relationships with users. If must-have applications emerge that encourage the majority of mobile customers to start using data, operators can only benefit. So far, aside from text messaging, only a minority of mobile users use their phones for data41.
The malign nature of disintermediation is likely to remain a common theme at most telecommunications industry conferences in 2009. But even as attendees deplore their seemingly inexorable destiny as 'dumb pipes', the margins and cash-generating potential of mobile operators are likely to remain the envy of many outside the sector.
Bottom line
Operators' concerns about third-party application stores may prove unfounded. Indeed their proliferation might well be a positive for operators.
Applications could also be used to drive operator loyalty and reduce retention costs. Operators could manage the transfer of applications from one handset to another. They could also offer device back up, which could become an additional revenue stream. Consumers could be offered applications as a reward for loyalty, sometimes in lieu of a handset upgrade. The upgrade cycle may lengthen, and costs fall, if consumers are regularly offered new functions on their phones.
Operators could generate revenues, in addition to data charges, from services offered to third-party stores. For example, charging application purchases to subscribers' phone bills could streamline the payment process. Credit card payment may be offputting to some potential customers, and processing charges for retailers can be high. Operators may also be able to earn revenues from developers and consumers by adding presence and location sensitivity to services.
Some operators may be in a good position to launch their own application stores. It may be more profitable to leave third parties to shoulder the costs. Evaluations of the merits of opening an application store should consider all the costs involved, ranging from application testing to hosting and from settlement to support. Operators should also estimate potential revenues in light of the fact that millions of the applications downloaded so far have been free.
Application store operators should carefully manage the portfolio of software on offer. Frivolous applications of little value are plentiful and these could degrade the overall perception of the store. Additionally, store operators should rigorously check applications for malware and viruses.
Developers should note the mobile phone market's heterogeneity. There are significant differences between the most basic phones in the market and the most advanced. Developers should determine whether they want to build complex applications that may run only on smart phones or focus on mass market applications.
Consumers should be aware of possible risks from third-party downloads, which could include viruses. Even clean files may diminish the mobile phone's performance. Applications that constantly run background processes can cause other applications to run slowly and drain the batteries.
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