Views on the new media market

Android ups the game

With the latest release of Android devices such as the HTC Hero Android looks increasingly compelling as a platform for mobile consumers as well as being a compelling platform for developers.

A significant challenge to application developers has previously been that Android applications need to be written in Java - which is fine if an application is being developed from scratch, or ported from an existing mobile J2ME platform, but for applications that come from either a desktop, or a mobile RTOS platform the language of choice has long be compiled C code.

By enabling companies to port existing C or C++ libraries and wrap those in Android specific UI's (written in Java) Android have significantly reduced the barrier and cost to developers who are creating applications that run across multiple devices - from desktop through to embedded devices.

As we see more people experimenting with Android on different platforms (netbooks, mobile internet tablets, and I expect to see Android on set top boxes too) I'll expect to see more innovation from application developers.

Will Nokia + Intel be ARMless?

Nokia and Intel made an "industry changing", "joint collaboration", "strategic relationship" yesterday. Undoubtedly a PR coup for the respective marketing teams, as they have this blogger writing about it, I'd expect both teams will be secure in knowing that they have their quarterly bonuses secured.

However when we look underneath the hype, what might this mean?

On the face value it looks like Intel come off better than Nokia out of this deal:

The Intel and Nokia effort includes collaboration in several open source mobile Linux software projects. Intel will also acquire a Nokia HSPA/3G modem IP license for use in future products.

This opens the door for Intel chipsets to integrate 3G modems - so expect to see SIM card slots appearing on notebooks and netbooks. Not good news for Huawei the world leader in 3G dongles. This vertical integration has happened before - those of us who can remember when laptops didn't have integrated modems will recall the market leader in the PCMCIA modem space - one Psion Dacom, the value of their products today is clear.

So this is good for Intel as they will be able to secure their position in the laptop space (there continues to be a threat from ARM in netbooks).

So what do Nokia get out of this? Some "collaboration" on mobile linux - which is a platform that Nokia don't seem to have made a great success from just yet.

I suspect the real value to Nokia here is in the detail of the agreement - the commercial terms on licensing of Intel chips for devices. If Nokia have negotiated good terms here (and I would expect Nokia have "world beating" terms as this involves a cross licensing deal) this could mean that Nokia could have a cost advantage in the manufacture of Intel based laptop devices.

Nokia already have great supply chain, and brand - so the opportunity to take a significant market share in the PC market is there - but how to do it?

To execute fast, I'd expect Nokia to be looking at acquisitions - the most obvious candidate being Acer - with a market capitalisation of around €3bn it's feasible that Nokia could swallow a manufacturer like Acer from it's €6.5bn cash pile. If it has indeed got favourable terms from Intel then it could be earnings increasing without any additional integration work - but combine the experience and supply chain of Nokia with the same from Acer, we could see some increasing innovation in the desktop space.

Who would be Nokia's main target here? The people who are growing market share fastest in the smartphone space - Apple, rather than spend all their time defending the smartphone space against Apple, why not attack Apple at their cash cow market - the MacBook market - with a price advantage, and a strong brand, Nokia could challenge Apple's growth in the laptop market.

I await the NokBook Pro with interest.

Operator application stores - opportunity is marketing, not inventory

In the rush to application stores it seems that everyone is busy trying to replicate the success of Apple's App Store. Few people have looked at the challenge of "how could you make Apple's App Store more successful?" Yet that could be just where the biggest opportunity lies.

In a world where there are 50,000 apps - and a world that can generate revenue from the most niche of applications (an Inflation Calculator is revenue earning) the challenge for consumers is - how do they find the application that they want?

There are two opportunities here - both maximising the return on the hit applications, and also maximising the revenue from the long tail of niche applications.

Operators have an interesting opportunity here - as developers are presented with a challenge of how do they market their applications, operators can offer valuable services enabling developers to reach consumers on their networks.

Instead of trying to "capture value" by creating their own application stores and driving traffic to those stores, how about operators took a strategy of not creating their own store, but offering marketing services to developers who's applications are in platform or OEM stores?

The challenge for an operator is to build an "application marketing" platform that allows

• Targetting of applications to consumers by device type
• Profiling of consumers behaviour based on history and demographics
• A scalable bid system (similar to AdWords) for mobile application marketing

This platform then integrates with OEM and Platform application stores, and enables developers to bid (and pay) for links into those stores.

The business model? A simple mechanism of generating revenue as an affiliate - yet one that can drive massive amounts of mobile consumer traffic to different applications. How the application developer chooses to monetize that (whether via operator billing, advertising or any other method) is up to them.

The best part of this - is the costly business of building and maintaining platforms, and developer support is left to those best suited to that - the platform builders and OEMs - leaving operators free to focus on providing valuable services and applications to their customers - consumer marketing is one area where operators continue to reign supreme.

If my readers know of any far sighted mobile operators who are exploring this strategy let me know - I'd love to talk directly to them. (You can find me on twitter @millarm or via email: matt [at] emillar.com)

Location targetted advertising - not a simple holy grail

There is much excitement in mobile circles about the potential, and risks associated with location based services.

The W3C has a Geolocation API which will appear for the first time in a mobile device on Friday when Apple release mobile Safari 3.0 on the iPhone. Google will then immediately use this in Latitude on the iPhone - a location based application.

Many people are actively seeking interesting and novel ways to use the ever growing number of devices that have location information. Traditionally the main value here has gone to the Portable Navigation Device manufacturers - Garmin, Tom Tom and others. Whenever location is mentioned in mobile it's normally a short time until "advertising" is mentioned.

A simple example is something like:

"Imagine if your local dentist could advertise over internet/mobile to only people in their local area - what would the market potential be?"

This is a seductive concept - however it's exactly the business model that is the stalwart of Yellow Pages, and has been a core market for local newspapers for years.

Local newspapers across the UK are closing and being consolidated into larger areas, and large local advertising businesses such as Yell Group plc have underperformed the market over the last few years.

The reality of both of these businesses is that they are need to sell to very large numbers of small & medium sized local businesses, who will deliver small numbers of adverts to small numbers of people.

The internet has been successful in connecting large numbers of businesses with large numbers of people.

When you consider the options for location based advertising you have to look at the range of advertising opportunities presented to a local business - some simple examples are:

• Poster displays in local sites
• Leafletting local households
• Sponsorship of local events

All of which have more reach than any form of internet or mobile location based advertising.

For location targetted digital advertising to succeed it needs to achieve two key things that traditional forms of advertising have not achieved

1. Significant cost reductions compared to posters/leaflets/classified
2. Time based targetting - a different advert at 10pm to 10am

Neither of these are easy to achieve - as the demise of local newspapers and the challenges facing Classified advertisers has demonstrated.

Application stores and marketing

With the flurry of interest in application stores and mobile application distribution a couple of weeks ago I decided to try an experiment:

Can an iPhone application be designed, developed, tested, and released within 1 day?

(I further set myself a target of no rude noises - which reduced the scope for innovation somewhat)

The answer - yes - as within one day I was able to create the Inflation Calculator and go through the signing/release process within 1 day.

Sure enough 7 days later the application appeared in the Apple App Store - and, much to my surprise, has actually been selling (it's marketed internationally, and at the lowest price point £0.59)

We are now one week further forward, and I'm happy to share with you the statistics from a real application's release.

So far I've sold 12 copies, and in 4 different countries.

So, I've earned approximately £4.30 from application sales. I'll take care not to spend it all at once!

While this application clearly is not the ultimate killer application for a mobile phone - there evidently is some interest in the information. Which raises the next question for mobile application developers - how to effectively market a mobile application?

Apple have made it easy to get an application into the App Store - but how does discovery then work? With over 50,000 applications in the application store this is getting harder - however it's not unusual to have very large numbers of items in stores - Amazon has over 2.3m books in it's online store - so Apple's App Store has just 2.3% of the inventory of Amazon.

Thus the same challenge that faces a book author faces an iPhone App developer - how do I get people to discover my application, and buy it?

Some people think that a "recommendation engine" - similar to Amazon's is the way to go. Others think in application advertising is the route to success. Maybe the successful route will be sponsorship by large aggregators who can afford big marketing budgets.

The reality? It's likely to be all of the above - along with surprise viral hits dreamed up by innovative developers and agencies. Given the simplicity of creating applications today, the challenge in mobile application development and profit is no longer the development skills - it's the combination of those skills with the communication and marketing of the applications to consumers.

Others building application stores would do well to remember this challenge - and consider whether they really want to build their own "application store" - or whether they want to invest in creating innovative ways for developers to communicate and market to consumers. Will there be a "google" of the mobile application market - one company that delivers a better application discovery experience to consumers than others (just as Google delivers a better internet search experience than others)

I'm continuing my experiment with the Inflation calculator - next step? Look at using traditional search advertising on the internet to drive traffic to the app store.

Customer perceptions vs operator perceptions

The launch of the iPhone 3GS has exposed the gap in understanding between customers of mobile networks and the operators of those networks again.

The challenge here is all around the issue of contracts and phone subsidies.

The basic economics here are simple - mobile phone operators work hard to attract new customers to their networks by subsidising phones, and then recoup the cost of this subsidy over the length of the contract.

So back in July 2008 if you upgraded to a £45 per month tariff with O2 you paid just £59 for a 16Gb iPhone with an 18 month commitment.

For comparison a pay as you go (PAYG) (we'll assume with no subsidy) is £390.

So for a 16Gb iPhone you pay £899 on contract, and £390 + call charges on PAYG.

Roll forward 12 months - and Apple, have predictably, launched a new iPhone. Now those same early adopters that moved from 2G to 3G are interested in moving to a new, shinier phone.

Those customers who were on that £45 tariff have now paid £599. Those customers are now being told that to upgrade they have to pay £270 more to "buy out their contract".

Unsurprisingly customers are rather upset at this (as the 3000+ people who have signed a twitter petition).

Now clearly, by the letter of the contract O2 are in the right here - people did agree to an 18 month contract - and presumably, had they chosen to offer a 12 month contract at £45 they would have priced the iPhone at ££329. (though as this is just £61 less than the PAYG option it might have changed the contract vs PAYG sales balance)

While O2 are doing the right thing here from a short term profit maximising perspective - they do risk damaging their long term relationship with their early adopter customers - and while they may be content to maximise profit believing they have no competition due to their iPhone exclusive deal, they should keep an eye out for the iPod Touch - if Apple continue to add features to that device (I'm expecting the speed of 3GS, speakers, microphone, camera and GPS in the next iteration) the incremental value of paying £968 for a 3GS device compared to paying £19.68 for a SIM without a contract to get the same connectivity, and having that in an existing phone and using the iPod Touch.

My recommendation to O2? Offer "early adopters" (those who's contracts expire in Jan/Feb 2010) the ability to upgrade at the same price & contract terms as new customers - invest in those customers and turn the vocal people into O2 advocates and iPhone showoffs - if each incremental iPhone customer is worth nearly £1000 to you, losing £270 in revenue - for every 4 early adopters you treat well need just one incremental iPhone customer as a result of the good publicity.

Mobile applications target market sizes

As mobile application stores continue to appear like wasps flocking to a jam sandwich, with the Ovi launch, being joined by a Java application store from Sun, the Blackberry Application World and the Vodafone App Store joining a market already busy with operator application stores, and independent application stores from people like Handango , GetJar the time couldn't be better for a mobile application developer surely?

A top down analysis of the mobile market normally starts with the following sentence

• There are 3 billion mobile subscribers in the world today, and this number is growing

At which point many executives miss the next 10 minutes as they are spending the time trying to get their heads around what 3 billion people actually is, and engaging in business fantasies along the lines of "if we could get just 1% of this market paying us just €1 per month for our superb product we'd make an extra €360m per year". However looking around at the mobile landscape there are very few application companies making anywhere near that sort of money. Looking at Opera Sofware - who provide browsing functionality for embedded devices, in 2008 they made just €43m revenue from the devices segment. Now this is an awesome performance for a mobile application company, but represents just ¢1.5 for each of those 3 billion mobile subscribers.

So why is there such a big gap between the potential market, and what the best performers are able to capture?

To understand that we have to look at what consumers are buying when they buy a mobile phone. When consumers buy a mobile phone they are buying a product for communications - the primary motivation has been voice, and text messaging - and this is reflected in mobile operators revenues - just 8% of Vodafone Group's overall service revenue comes from data.

This contrasts with the PC market, where when consumers buy a PC they get a "bare bones" machine that can be specialised with software to do what they want - from games, office, email or even web software in the browser. So consumer's expectation on buying a PC is that they will add something to it. The expectation on buying a mobile phone is that they will communicate with it.

So when we look at the total market addressable in mobile for application developers we should include a factor that indicates consumers desire for additional functionality. Let's look at the market with this factor included.

Platform	Units in market	Consumers interested in applications	Actual addressable market
Symbian S60	100m	10%	10m
Apple iPhone + iTouch	30m	50%	15m
Android	1m	30%	300k
Java ME	2,400m	5%	120m

So we see that Java ME is by far the largest market - which is not that surprising as this is where most of the money is made in the mobile application market - by Java games developers. More interesting is the smartphone space - where the numbers indicate that Apple actually has a larger market share than Nokia as far as developers are concerned - this is backed by Apple's continued investment in App Store advertising - increasing the value of their iPhone and iPod Touch devices to consumers, and raising consumer awareness of applications - thus driving success to their developer partners. A virtuous circle. As Apple makes significant margins on the sale of their new devices, and aren't under the same margin pressure as other manufacturers this trend is likely to continue - growing consumer awareness of applications for Apple devices, and growing the overall volume. Developers - you better get onto the Apple store if you want to grow your revenues and market share too.