Smart Phone, Tablet Adoption in Asia is Study in Contrasts

Saturation and unmet need both are parts of the smart phone adoption story in Asia. On one hand,  87 percent adoption in in Singapore and Hong Kong, followed by Malaysia (80 percent), Australia (75 percent) and China (71 percent), shows some markets are nearing saturation.

On the other hand, smart phone adoption in the Philippines stands at 15 percent. In  India penetration is 18 percent, while in Indonesia penetration is 23 percent, according to Nielsen.

In Southeast Asia, smart phone owners spent on average more than three hours per

day on their smart phones in June 2013, with activities such as chat apps, social networking and entertainment activities like games and multimedia driving the highest levels of engagement, Nielsen says.

                       Smartphone penetration, Asia, United States, Western Europe

                                              Tablet Penetration, Asia

What is the Revenue Model for Mobile Apps?

Every Internet or mobile app, operating system or browser, communications or entertainment service available to users without charge has to find a viable business model. For more than a decade, at a high level, the implicit hope, or explicit expectation, was that “advertising” would be the ultimate revenue model.

That implies high end user scale, something it is obvious most apps will not be able to attain. Over the past half decade, though, “commerce” and “transactions” have started to get more traction as a revenue model, and mobile apps are no exception.

Though initially many hoped or expected that apps would create a direct app sales revenue model, that is only partly true. Free apps will account for 91 percent of total mobile app store downloads in 2013, according to Gartner.

"Free apps currently account for about 60 percent and 80 percent of the total available apps in Apple's App Store and Google Play, respectively," said Brian Blau, research director at Gartner.

So what is the revenue model for the 91 percent of “free” apps? In a growing percentage of cases, revenue is generated by “inside the app purchases.”

Gartner estimates that in-app purchases will account for 48 percent of app store revenue by 2017, up from 11 percent in 2012 and 17 percent in 2013.

In other words, mobile apps will be, in most cases, the enabler for a revenue stream (selling things inside the app), not a direct revenue generator.

Mobile app stores will see annual downloads reach 102 billion in 2013, up from 64 billion in 2012, according to Gartner researchers, with total mobile app store revenue in 2013 will reach $26 billion, up from $18 billion in 2012.

As with most other parts of the Internet ecosystem, leadership is, and will be, concentrated. "iOS and Android app stores combined are forecast to account for 90 percent of global downloads in 2017,” said Blau.

Over time, it also is likely that users will stabilize their usage of apps that have the highest value, leading to a lower rate of new app downloads, though the trend might slow only gradually.

Average monthly downloads by  iOS users will decline from 4.9 in 2013 to 3.9 in 2017, while average monthly downloads by Android device users will decline from 6.2 in 2013 to 5.8 in 2017, Gartner predicts, as users develop strong preferences for some apps.

What isn’t so clear yet is the relative importance of tangible goods and services, compared to digital content goods, that will be purchased inside mobile apps. What is clear is that the business model for “free” apps will not be driven mostly by advertising, as might be the case for some Internet apps.

Mobile App Store Downloads, Worldwide, 2010-2016 (Millions of Downloads)

	2012	2013	2014	2014	2016	2017
Free Downloads	57,331	82,876	127,704	167,054	211,313	253,914
Paid-for Downloads	6,654	9,186	11,105	12,574	13,488	14,778
Total Downloads	63,985	102,062	138,809	179,628	224,801	268,692
Free Downloads %	89.6	91.0	92.0	93.0	94.0	94.5

Source: Gartner (September 2013)

Postpaid Wireless Data Revenues Dominate Telecom Revenue Growth

Postpaid mobile data revenues remain the U.S. telecom industry's growth engine, says Atlantic-ACM. Postpaid mobile data revenues will hit $130 billion by 2018.

"In fact, while postpaid revenues represented less than a fifth of the industry in 2012, they'll grow at 11.5 percent annually to represent more than a third of total industry revenues by the end of the forecast period," said  Douglas J. Barnett, Atlantic-ACM senior analyst.

Revenue growth has been lead by mobile data for several years, according to Pyramid Research. 

Even in the event of a dramatic escalation of price competition in the U.S. market, the trend is likely to remain intact, as it is expected voice services will take a revenue haircut as service providers try to maintain data revenue growth while still facing a need to cut prices.

It's the same principle as price discounts for triple-play bundles. When a bundle price is cheaper than buying three services separately, something is being discounted, though the discounting is hidden. 

Since video entertainment prices cannot easily be cut without erasing profit margins, and since mobile data is leading growth, that means the declining voice service is where the actual price declines will mostly fall. 

ISPs Drop Gigabit Service Pricing from $300 a Month to $70 a Month

EPB, the Chattanooga, Tenn. supplier of 1-Gbps service, has dropped its gigabit service rate from $300 a month to $70 a month, a reaction to the price umbrella Google Fiber apparently is creating.

EPB also converted all existing customers with 100 and 250 megabit-per-second services to the the gigabit speed.

Separately, Utopia, which operates a wholesale gigabit network in about 10 Utah cities, also says its retail ISP partners have dropped prices for gigabit access from about $300 a month to $65 a month to $85 a month.

To the extent that Google Fiber intended to influence investment in faster ISP networks, and create new price points, Google Fiber seems to be succeeding.

U.S. Mobile Market Disruption Will Not be Easy

Based on SoftBank's ability to shake up the Japanese mobile market, many observers expect a similar assault in the U.S. market, from a SoftBank-owned Sprint. SoftBank entered the market by buying Vodafone's Japan assets in 2006.

In just one year, Softbank managed to boost its subscriber base from 700,000 in fiscal 2006 to 2.7 million in fiscal 2007.

By the beginning of 2008, Softbank had grabbed 44 percent of Japan’s new mobile subscribers, well ahead of KDDI’s 35 percent and NTT-DoCoMo’s 11 percent.

Softbank’s “White Plan” was important, offering  offering free peak-time calls on SoftBank’s network.  

One key point was SoftBank’s willingness to sacrifice voice average revenue per user  to make market share gains. Back in 2006 to 2008, Softbank was willing to accept a stunning $13 overall ARPU decline.

SoftBank’s exclusive right to sell Apple’s iPhone, obtained in 2008, did not hurt, either.

It won't be as easy the second time, as voice prices are fairly reasonable in the U.S. market, on-network calling circles are common, and there will be no equivalent of the Apple iPhone exclusivity.

SoftBank strategists likely are hard at work trying to find some equivalent value, but the point is that it will not be easy to disrupt the U.S. market, especially when carriers are free to match key offers.

An example can be gleaned from the recent T-Mobile US effort to unbundle device purchases from recurring service charges. The “Jump” program--allowing faster device upgrades-- likewise was intended to differentiate T-Mobile US from its key competitors.

But the advantage is blunted when all the other carriers match the offer.  AT&T launched  its own program "Next," while Verizon launched  "Edge," substantially matching the T-Mobile US offer. Sprint now has followed with One Up, launching Sept. 20, 2013 and allowing Sprint customers to buy a new phone with no money down, paying for devices in installments over two years.

The move by Sprint means all four of the large national carriers offers such a program, and shows how hard it will be for T-Mobile US or  Sprint to truly disrupt the U.S. mobile market.

Some might argue the T-Mobile US campaign now will need to change yet again, allowing T-Mobile US to argue it is forcing the rest of the industry to change, and attempting further changes in retail packaging.

T-Mobile US might argue its competitors still have not truly matched its offers, given remaining price differences, especially between T-Mobile US and Sprint, on one hand, and AT&T and Verizon Wireless on the other hand, at least for single device accounts.

Just how much Sprint might be able to attack retail packaging or pricing levels, until the other carriers (or at least AT&T and Verizon Wireless) are unable to keep matching the offers, remains to be seen. But that is likely to be key to whether Sprint or T-Mobile US are able to significantly and permanently change market share in the U.S. mobile market.

Multi-Sided Markets are Complex, Therefore Slow to Emerge

Single-sided markets are relatively simple: there is just one type of buyer. Internet service providers, mobile service providers and fixed network service providers are examples.

There are other models, though, even in the network services business. Cable TV operators, for example, operate in two-sided markets, earning revenue both from end users and business partners.

Many of the newer markets service providers are entering, or have entered, are much more complicated. Those multi-sided markets require construction of more-complex value chains, and therefore take longer, and are tougher, to successfully create, according to Rajesh Kandaswamy, Gartner analyst.

Many of the hoped-for new businesses, such as any ways network services are exposed to third parties, are two-sided models, where revenue is earned from end users and business partners. That’s a more-complex business, creating multiple required ecosystem connections.

For a service provider hoping to earn revenue from advertising or content delivery network services, for example, service providers must maintain a critical mass of customers that advertisers want to reach, and then entice marketers to pay money to reach those prospects.

Some of the new revenue streams might be even more complicated. A connected car service, for example, could be a one-sided business (where a mobile service provider sells only to a automobile manufacturer), or a two-sided business, where a service provider sells direct to its existing customers, as well as to a partner auto manufacturer.

Mobile payments so far represent the most complicated, multi-sided ventures. The current system already has many participants. Card holders, card issuers (bank), card networks (Visa / MasterCard), merchants, and acquirers (banks and processors) are the primary stakeholders.

By definition, a payment network is multi-sided. Adding mobile payments inserts the mobile service provider into the value chain as well, and may or may not pose a threat of competing with other participants.

Multi-Sided Payment Ecosystem

In the simplest possible implementation of mobile payments, the mobile phone replaces the plastic card.

In a more-disruptive scenario, mobile services actually displace one or more of the existing participants.

But any multi-sided market is more complex to create or modify since it requires agreement of other participants in the value chain, some of which might resist the change, precisely because entry of the mobile payments participant can cannibalize revenue or threaten displacement of an existing provider from a role in the value chain.

That is one reason why mobile payments will take some time to develop as a mass market.

66% of All Mobile Phone Users Use Internet on Their Mobiles