The debate on the benefits, or otherwise, of being ‘open’ in mobile returns to London on 26–27 May in the form of the Open Mobile Summit. For the last two years, leading industry players have gathered twice a year, once in San Francisco and once in London, to discuss the esoteric (“What do we actually mean by ‘open mobile’?”) and the practical (“How much money are we really going to make?”). At this year’s event, we can expect the debate once again to focus on how the industry creates a truly open, vibrant and financially successful content ecosystem for consumers.
Many proponents of open mobile comment with some concern on the amount of control that Apple exercises over its content ecosystem. However, it is hard to argue that Apple is failing to deliver what consumers and content players want. Last week, Apple reported in its first quarter 2010 results that about USD1.1 billion – 20% of Apple’s total ecosystem revenue – came from content. Major content players, such as News Corporation and The New York Times, are now investing in the development of paid-for services on Apple’s platform with the expectation that resultant revenue will be significant.
Competitive ecosystems, such as Nokia’s Ovi and Android Market, have yet to attract the same level of engagement from content players and consumers. Nokia this week reported that net sales of services (primarily, the Ovi store) fell 12% last quarter to EUR148 million. This is in spite of Ovi’s download numbers reaching 1.5 million per day.
Many factors drive the success of content ecosystems: ease of store discovery, speed of operation, simplicity of search, integration of payment, etc. However, one fundamental issue that is often overlooked – and that lies at the core of the debate over open versus closed devices – is that of fragmentation of device specifications.
The mobile application market is two-sided. On one side are consumers, who are influenced by the range of content on offer, as well as by the factors listed above. On the other side are developers seeking to create the best experience for each device. A developer’s economic success is driven largely by the number of versions (or SKU’s) of an app that must be produced and by the scale of the market addressed by each SKU. Device fragmentation increases the number of versions that a developer must create and reduces the size of the addressable market for each SKU. At the same time, it takes investment away from the content experience itself.
A comparison between Apple’s apps store and Ovi illustrates the problem. Apple’s 84 million iTouches/iPhones are today running one of the three versions of its software that have been released to date. A developer needs three SKUs to address the entire ecosystem and needs to recover the costs of development, bug fixes and enhancements that are made to the apps post launch. The ecosystem offers an addressable market of roughly 28 million handsets per SKU.
Before the arrival of Apple, Nokia was generally acknowledged within the industry to have the most-coherent, least-fragmented software strategy of all the leading OEMs. Based on last week’s results, Ovi currently has around 6 million active users, using one of 163 different models running on nine different software families: an average of 700 000 users per SKU. This means that an Ovi developer has to create and manage three times the number of SKUs to address a market that is one-fourteenth the size of Apple’s.
Open OS is often cited as a means whereby OEMs and operators can innovate more easily to ‘close the competitive gap’. However, in reality, the lack of tight control over the specification of platforms like Android and MeeGo only increases fragmentation and perpetuates sub-scale application ecosystems. It would seem that the mobile industry can either promote competition in device features or competition in content development. It cannot do both.
OEMs arguably have it within their control to reduce device fragmentation by rigorous implementation of control over their software strategies. This is not a short-term solution, but, with the increasing importance of content to users, it would appear to be an essential element of long-term success.
For MNOs, the issue is more challenging. An MNO may wish to impose a well-managed device specification on handsets offered in its market as the foundation of a successful content ecosystem. However, the only lever it has to do so is control of handset distribution. This is something that operators in Japan, Korea and the USA have successfully practised for many years, but MNOs in other markets have tried and, for a variety of reasons, have failed to do. Given the increasing importance of content, and the changing dynamics of the mobile handset market – including the rise of Asian vendors, such as HTC, Foxconn and ZTE – now may be the time to try again.
Mike Grant will be speaking at the Open Mobile Summit. Tickets are available here. By entering the VIP code ANALYSYSMASON, tickets may be purchased for just GBP995 before 7 May (availability is limited).