Is there a future for operators in the app store business?

Flashback to Aircel hoardings or ads from 2010.

M. S. Dhoni smugly showed off apps he downloaded from the Aircel store. "Aur bolo", he kept saying, as he used Aircel Pocket Internet and apps from the Aircel App store to arrange hotel accommodation, see cricket info, transfer money, etc.

Now, App stores are associated with handset OSes like Apple iOS, Google Android, Nokia Store, Blackberry World and Windows Phone Marketplace.

In this light, one wonders - app stores and operators? Aur Bolo?

Operators and Value Added Services (VAS) - a brief history

VAS in India started with wallpaper and music downloads, caller ring back tones, SMS based subscription services (astrology, cricket scores, etc.) and short codes for various services.

Data access was primarily over WAP. Operator portals (or walled gardens) ruled the roost. If you were an Airtel customer, you would get to Airtel Live to discover content; likewise for other operators.

The app industry, barring games, was still nascent. Most phones supported some version of Java (BREW in case of CDMA phones). App developers had to customize their apps for almost every new handset.

Content and app discovery was a huge problem.

Most developers had three means to reach consumers:

1.  get featured on an operator’s WAP portal
2.  get preloaded on a handset or
3.  feature on a web portal that let users search for and download apps

The operator portal was the goto platform. Millions of consumers could see the link to download the app or content when they logged on to their operator WAP site. Since screen sizes were tiny, real estate for listing apps or content was limited. Operators decided who would feature on their page based on number of downloads, utility and revenue share agreements.

Alternately, many apps reached out to handset manufacturers to get preloaded so they could offer an out-of-the box experience for consumers. App discovery was much easier this way, and if the handset sold well, so was reach.

As each handset had limited space for preloading apps, developers got into preload contracts with handset manufacturers. There would be a revenue share agreement or a featured offer for end users. In case of games, for a flat fee that the device manufacturer would pay to preload a game on a series of devices.

However, cycle times were long as the apps had to wait till handsets shipped, which after signing the contract could take anywhere between a few months to a year. Apps also had to content with device market timelines. Once shipped, it was difficult predicting when the handsets would get into consumer hands. A handset would be in use for at least a couple of years. App developers had to plan to support this cycle. There was also limited control on the preloaded app when it shipped - developers could at max have an update option within the app, but not make major changes.

Adventurous handset customers also visited portals to download apps. But this was a relatively small segment.

In this world, operators held the upper hand. They were the only players who could give app developers the means to reach a vast audience easily and quickly.

The smartphone story: Launch of the device app stores

The operator model came under threat with the launch of device app stores.

Starting 2008, many of the leading mobile software players created their own market places for apps, including Apple, Nokia, Google and Microsoft. Click here for the complete list.

These platforms also offered frameworks and device APIs that let developers exploit various device capabilities and build their apps with less effort.

Developers could reach consumers directly on their device through the app stores. Most of the apps were free to consumers; supported by some form of advertising. Payments, when required, were routed through credit card accounts with the app store acting as the clearing house.

This has been the dominant model over the last 5 years.

Since discovery became much easier, consumers began excitedly exploring the app universe. With an environment that supported building and publishing apps, interest in building apps exploded.

There are an estimated 700K+ apps today on the two dominant platforms - iOS and Android. Many large players are also in the game, trying to attract developers to build for their platforms. Read our analysis on how Indian developers see this.

In this scheme, the operator’s role was incidental. They provided the data channel to let apps connect to the internet. In certain cases, they provided for payment through operator billing integration, but this has been limited so far.

Feature phones and the operator fight back attempts in India

While app stores were a big hit for the smartphone platforms, India was (and still is) primarily a feature phone country. Most subscribers owned a basic phone that made calls, sent text messages, played music, and in some cases allowed for basic web browsing. These phones featured some support for Java apps.

Go back a few years, and you’d see that there were a host of operators in India. Each was trying hard to establish what made them different, beyond just the branding and pricing.

Around 2010, phones running Android and iOS cost a lot. They appealed to a small sliver of users in India. That’s when the idea of operator app stores took hold.

Operators could curate apps for user’s devices and create app stores, the thinking went. Customers already paid for music and wallpaper downloads using the operator payment channels, and this could serve as a platform app developers could also leverage. It would also be a great point of differentiation.

In short succession, almost all major operators announced their own stores: Airtel launched App Central with CellMania, Aircel had PocketApps based on Infosys Flypp platform; BSNL, Vodafone, Idea and Reliance each launched their own stores as well.

Why would developers be interested in these stores?

For starters, they touted ease of discovery as they provided a portal for non-smartphone users to explore. They also offered integrated payment options. Most importantly, operators could drive downloads with SMS blasts to consumers about interesting apps, a proposition not to be scorned at. Authentication was tied to the SIM card. Users would not have to sign up for an account before they could download apps.

This approach was not without its risks. Most of the phones sold in India were still basic devices with a 128x176 size screen, which meant no apps would run on them. Operators and their partners had the overhead of testing apps for handsets in the market; a task made onerous with a slew of new phone launches.

Operators also wanted a larger slice of the revenue from apps.

While Apple and other software app stores retained 30% of the app price and let developers have 70%, the operators switched the ratio.

This made building apps for operator stores much less lucrative, as developers had to a lot more work around compatibility for a lesser share of the pie. Despite initial breathless announcements of number of apps on each operator store, operator app stores never really took off.

Operators and app stores - a bleak future?

Of late, operators like Vodafone have changed the revenue share model to give 70% of the revenues to the developer and retain just 30%. But the other problems still persist.

Android phones have slid down the pricing chain. Apps reach consumers through the Google Play store.

Handset manufacturers like Nokia woo developers with newer, easier platforms like HTML based browser app stores and standard Java stores for the lower end Asha phones. They offer a marketplace with Nokia Store as well. (Disclosure: I was leading product management for Nokia Asha's LBS efforts in my last job.)

Operators realized that the sands were shifting. Some launched branded app stores on Android, but these never really took off. After all, what benefit did developers have in loading their apps (.apk files) again to an operator store when it was already available on Android store.

Vodafone announced the shutdown of its AppSelect store in Europe from Jan 2013 (given the huge number of feature phones in India, the store remains operational here).

With OS app stores gaining in prominence, and now offering alternate content like wallpapers, music, etc. in addition to apps, the operators VAS revenues are threatened. The big fear of operators just being dumb pipes seems prophetic.

What should operators do to allay this future?

Fresh thinking and new opportunities

Handset app stores still suffer from a limitation when it comes to paid apps. Not many have credit cards. In countries like India where credit card penetration is low, operator supported billing dramatically increases the scale of users who can pay for apps.

Though they do not control the experience, this still guarantees a revenue stream for operators for some time.

Operators like Airtel took initial steps towards m-commerce with Airtel Money. These could later be integrated with apps if built as a platform.

As of today, the m-commerce play in India is off to a slow start due to the Reserve Bank of India still figuring out the regulations. However, this holds promise for the future.

Vodafone in India has been recently announced developer APIs for billing and location APIs, and offers app developers a 70:30 revenue split. They plan to make the same APIs available globally, so that developers can write apps that can be deployed across Vodafone networks. We still need to see if developers make use of this.

Here are some other suggestions that the operators could try:

a) Offer curated stores of apps

With so many apps on the App stores, local apps have a huge problem with discovery. Often, even the top 100 lists of app store downloads feature very few Indian apps.

Operators could buffet the local ecosystem by curating apps relevant for the market, and offering payment options for paid apps through their billing networks. Instead of hosting apps, they could just deep link to the app on the Google Play store. That way, the developer has to deal with just the Google Play store for hosting, and can use the operator channel for marketing.

Why should operators do this and not any other app? Operators could promote apps through the regular SMS channel to encourage adoption or run a Weekly App roundup. That itself would make discovery much easier.

b) Rent an app offer

Consumers are already conversant with the idea of pre-paid cards. What if they could also rent a series of apps for a few days based on their pre-paid balance? Think of this as a wallet you could carry across apps. Today, you pay for apps (at least some of them) and then may not use them. What if, instead, you could just rent them when required?

The operators could offer a bouquet of apps for download, and customers could choose to buy daily or weekly activation packages for a selection of apps.

With IPL on at the moment, you could download and rent the IPL app for a few weeks for updates. Later, you could transfer the balance to another app and delete the IPL app.

This could also work with in-app purchases, where customers could buy a game level or content for specific days at a lower cost.

The operator could be the single point of authentication for balance and payments. This could be an entirely new model for apps. Friction threshold for downloading paid apps could be lower, as you could just rent it for days that you want the service.

What do you think that operators should try?

The author can be reached at @shrinathv or at [email protected].