Smartphone Ecosystem (Part 9): Applications

By guest author Nalini Kumar Mappala

Part of the success of the iPhone can be attributed to the App store. To its credit, Apple  had the foresight to see the smartphone as what it is – a computing device and not merely a piece of communication equipment – and devise a strategy to sell software that further enhances it. “App store economics,” as it came to be called, is based on the classic principle of economies of scale. In fact, impressed by the success of this strategy, Apple sold Snow Leopard (the latest incarnation of Mac OS X for computers) for an unprecedented $29. However, it might be argued that the reduced pricing was a means to bring more users to the latest OS and thus reduce support expenses in the long run.

Following in Apple’s footsteps, virtually every smartphone OS launched its own application storefront – Android Market, BlackBerry App World, Windows Mobile Marketplace, Palm App Catalog, and the Nokia Ovi store. Even carriers such as Verizon and China Mobile have set up their own app stores. Apple’s App store is the standard against which others are judged. Apple called its storefront the App store, the name stuck, and most others followed. Although app stands for application, every time I hear a competitor name its storefront some kind of app store or use the phrase to describe it, it makes me wonder if they realize how they are playing into the word apple.

Some of the top-selling and top-grossing apps are games. In fact, games have become so popular that Apple claims that the iPhone (or iPod Touch) provides the best portable gaming experience. Sony seems to agree and, seeing this as a threat, plans to release phones built around its PlayStation Portable (PSP) gaming platform.

Of the two leading personal navigation device (PND) makers, Garmin chose to build a handheld device that combined the functionality of a navigation device and a smartphone. By Garmin’s own account, its Nüvi phone has not seen much uptake. TomTom, on the other hand, chose to ride on the popularity of the iPhone and developed an application that turns the smartphone into a navigation device.

Applications such as these add momentum to the ongoing convergence movement. A navigation app on a phone can perform better than a traditional PND by taking advantage of the cellular signals (triangulation method) in addition to satellite signals to learn about its current location faster.

Variety can be a vice at times. Owing to the differences in hardware among phones from various vendors, TomTom’s Navigator software is compatible only with a few Windows Mobile smartphones. On the other hand, an application made for the App store is guaranteed to work seamlessly on all iPhones and iPod Touch models.

Apple’s low barriers to entry and the first-mover advantage have ensured that the number of applications available on its storefront far exceeds that on others. This advantage is akin to people flocking to Microsoft Windows because their favorite software tools were available on it. Although people do not choose one smartphone over another just because the app store has a bigger selection, a better app selection adds to the overall richness of the mobile experience.

According to Gartner, Apple took 99.4% of the $4.2 billion in mobile applications revenue in 2009. When one company has such complete dominance of a market that it invented, its market share is bound to go down as others play catch-up. In 2010, we should thus  see other app stores increase in stature and take a bigger piece of the app revenue pie.

Mobile Application Stores’ Number of Downloads and Revenue, Worldwide

Source: Gartner (December 2009). Numbers are for all apps (free and paid)

Gartner projects mobile app revenue to grow severalfold over the next few years. Any projection three years out in this tumultuous economy is to be taken with a grain of salt. The trend, however, is clear, and it points upwards.

Notice how the average selling price (ASP) of all applications is very small and is projected to fall. Much of this can be attributed to the freemium model. Nothing sells like free, and free stuff brings customers in the door. A majority of the apps sold are offered free in the hope that once users have had a taste of the apps, they can be persuaded to upgrade to feature-rich, paid versions. However, it could be that users are content with free versions and choose not to upgrade, and this, I think, is a major reason why industry observers expect ASP to decline.. This could render some of the app makers economically nonviable.

There is hope for app makers currently giving away their wares free to be economically viable. Although Google has figured out the formula for making billions from PC Web-based advertising, mobile advertising is still a nascent market. Mobile offers the opportunity for more targeted advertisements. Apple acquired Quattro earlier this year and less than three months later announced that advertisements will be offered within apps in the upcoming updated version of iPhone OS. Others will follow suit. Developers giving away their apps free might see some money after all and become economically viable.

Although the App store is at the forefront of Apple’s application marketing, Apple has also been promoting Web apps for iPhone and iPod Touch in a quiet corner of its website ever since its Safari, its Web browser for Mac computers, was empowered to make Web clips to add to the “dashboard” as widgets.

Just as native PC software applications are facing a real threat from Web-based tools, the dominance of applications running native on mobile phones might not last forever. Mobile touch Web is an approach to make Web pages friendly to touch- and gesture-based interfaces found in many smartphones and feature phones sporting touch screens. This feature is built around the richness of HTML5, a Web standard that is still evolving. HTML5 is developed to enable an Internet experience that is more appropriate to the increasingly mobile user.

If Apple is able to dominate smartphones in spite of putting out just one model each year, much of the credit goes to the App store. Courtesy of the apps downloaded to them, an iPhone is as unique as its owner. The uniqueness argument also applies to Droids and BlackBerries.

In the next post, we will look at what is possible in a smartphone and a more powerful class of devices.

This segment is part 9 in the series : Smartphone Ecosystem
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