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A few weeks ago in association with Ericsson we published the Telco Innovation Toolbox paper. The paper introduces ten economics and strategy frameworks that help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. Previous posts published on our blog explained the economics of telco disruption. Today’s and the following posts focus on how telcos need to respond to remain relevant and discover growth opportunities. You can download the [vm_form_download link_text=’full PDF report here’ product_id=’3751′]. Keys to successful telco API strategies It is common for telcos to see developers and content providers as a source of direct revenues, or even push for “redistribution of profits” from OTT companies to telcos. These strategies are destined to fail because of fundamental conflicts with developers’ business models. For example, Internet business models usually assume free or almost-free distribution: the last-mile bandwidth is paid by the user, and is free to the service provider. Attempts to ask developers pay for the wireless data will not only be faced with natural resistance, but have the potential to render the business models of many mobile and Internet companies unsustainable. Faced with such challenges, developers will quickly find alternatives, as happened with location and authentication, which were once only provided by telcos at a mass scale. To be successful in API initiatives, telcos need to consider developers as value-added resellers, and therefore design their API propositions for win-win outcomes. In other words, the business models of telco APIs need to be aligned with the business models of developers [Tweet this]. But what is a developer? The reality is that the developer ecosystem is a complex mosaic of large and small companies, communities and individuals. VisionMobile’s developer segmentation model classifies developers into eight categories that differ according to developer motivations and commercial drivers. Some developers are after direct monetisation (e.g. ZeptoLab, the author of popular Cut the Rope game), some are after user reach (e.g. Facebook), and yet others are looking to extend their non-mobile products and services (e.g. Nike, DropBox or FedEx). There is no such thing as an “average developer”. Telco API business models therefore need to be designed to target one or more specific developer segments. A “one size fits all” approach to telco API business models can severely limit the available market. Many entrepreneurs, development companies and individual developers operate according to the principles of discovery-driven planning described in Chapter 6. Meanwhile, high barriers to experimentation result from many telco API practices, like up-front payment, extensive legal arrangements, demanding certification requirements or long-term contracts. To reduce friction and help developers discover new user needs and opportunities, telco API business models need to subsidize experimentation and be designed for the ability to fail and retry cheaply. [Tweet this] More specifically, if developers are charged based on telco API usage, the app’s business model must have a stable, usage-based income stream. This is rarely the case. By allowing free, small-scale usage of the API, telcos permit developers to experiment with multiple business models, including free, until a sustainable, workable business model can be found. Developers should be offered assistance to scale and deepen their business, by using the correct “business model polarity”, as shown below. Instead of charging developers upfront and creating unnecessary friction to experimentation and API adoption, telcos need to align the business model of the API with those of developers. For example, Facebook and LinkedIn are both social networks. The two, however, are driven by rather different business models. The alignment of API business model with Facebook will mean helping Facebook drive user acquisition and user engagement. The alignment of API business model with LinkedIn will mean helping users make valuable business connections. Most developers face fierce competition in the platform app stores, and are in dire need of differentiation and competitive advantage. Telcos can attract developers by affording them access to local audiences, through innovation realized by telco APIs in their three business layers: access, services and distribution. Key questions telcos need to ask when evaluating innovation investments Which developer segments are you targeting with your API strategy? Are the business models of your telco APIs aligned with the target developer segments? I.e. how the target developer segments build a sustainable business. How are you exposing telco assets such as distribution, retailing and voice to help developers cater to new markets and niches? Freeing voice from telephony Telephony, as a model for human communications, is essentially based on 19th century technology and user needs. Freeing voice from telephony can be achieved by questioning the deeply ingrained assumptions of the telephony communications model, and experimenting to find use cases and business models that work. Telephony is considered a declining business, despite globally increasing dependence on communications. There are two reasons for that. First, in many markets, telephony has become “good enough” for most users; i.e., users are not willing to pay significantly more for improvements to voice quality or reliability. This makes telephony a commodity service with little differentiation value beyond price. Second, telephony is a rigid, one-size-fits-all service that does not have the flexibility to cater to thousands of user needs. That makes it less and less competitive with new models of communications, which better suit the new basis of competition: choice and flexibility. While telephony revenues are in stagnation or decline, people are not talking less. They just attribute less and less value to telephony. [Tweet this] Phones used to be the only way to remotely catch up with a friend, engage a sales prospect, get information about a product, or just flirt. Not any more. Today, many everyday communication needs are better served by innovative alternatives that don’t fall within the narrow definition of telephony. Telephony, as a model for human communications, is essentially based on 19th century technology and user needs. Significant technological advances made telephony more efficient, accessible and inexpensive, but little was done to challenge the deeply rooted assumptions of this legacy communication model: Dedicated communication links, expensive centralized switching, synchronous communications, dial-talk-hangup cycle, intrusive etiquette (caller decides on the time of the call), and more. Freeing voice from telephony can grow voice traffic by taking voice services into new communication modes and use cases, creating great value to users, telcos and developers alike. [Tweet this] Freeing voice from telephony can be achieved by questioning the deeply ingrained assumptions of the telephony communications model, and experimenting to find use cases and business models that work. Many successful OTT companies do just that — unlocking the value of voice by innovating around all the components of a voice session, as show in the next figure. Notwithstanding the buzz around new OTT services, telcos are still considered the primary providers of voice services. That puts them in an excellent position to transform telephony into a thriving ecosystem of services designed for the new basis of competition: choice and flexibility. For example, using telephony APIs to lock enterprises into voice/data plans. Replicating OTT solutions under the telco roof, or focusing on improving telephony using VoLTE or HD voice will not be enough. [Tweet this] Telcos need to create unique value to users by taking voice into diverse sets areas of new cases and contexts such as web telephony, anonymous calling, permission based calls, group calling, voice messaging, dynamic call routing, do-it-yourself IVRs, call referral tracking, and more. Creating healthy developer ecosystems around voice services that are anchored by telecom operators is the best way to achieve this. WebRTC is a technology that promises to bring voice and video into the web browser. At the same time, it offers an excellent opportunity for telcos to innovate by extending telecom services into the open web and freeing voice from closed telecom networks. The focus of WebRTC innovation should be not on technology, but on building developer ecosystems for voice services, discovery of new use cases and experimentation with new business models, and not on technology. If telcos won’t do this, competitors will. Key questions telcos need to ask when evaluating innovation investments What voice (not just telephony) use cases can help your enterprise customers to achieve their goals both internally and towards their clients? I.e., How can you offer voice APIs to drive enterprise sales of voice and data plans? How can telco APIs be leveraged to free voice from telephony by challenging telephony assumptions? How can you structure your voice APIs and services to enable developer ecosystems to uncover more use cases? As usual, we are looking forward to your feedback! Please click here to leave us a comment or send us an email to strategy /at/ visionmobile dot com. Don’t forget to download the [vm_form_download link_text=’full Telco Innovation Toolbox report’ product_id=’3751′]. – Michael @mvakulenko #api #telcoinnovationtoolbox #telcos

A few weeks ago in association with Ericsson we published the Telco Innovation Toolbox paper. The paper introduces ten economics and strategy frameworks that help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. Previous posts published on our blog explained the economics of telco disruption. Today’s and the following posts focus on how telcos need to respond to remain relevant and discover growth opportunities. You can download the [vm_form_download link_text=’full PDF report here’ product_id=’3751′]. Dealing with uncertainty: Discovery-driven planning High levels of uncertainty require radically different planning methods. Instead of treating blue-sky assumptions as facts, discovery-based planning systematically converts assumptions into knowledge. Today’s unpredictable mobile environment defies traditional planning methods telcos developed during the golden years of the connectivity business. As we saw previously, conventional planning methods assume that companies can reliably predict the future outcome of investments based on past experience. That worked well for infrastructure investments, for example when upgrading from 2G to 3G and now to LTE, where the focus is on managing execution risks.  But since the basis of competition changed, telcos face a totally new competitive environment where they lack reliable knowledge about new economics and business models. Competition in the age of ecosystems is shaped by the interaction of a diverse number of players. It is not just uncertain, but fundamentally unpredictable. Often the new players are too small to show up on a telco’s competitive radar until it’s too late. Whatsapp, Viber, Tango, KakaoTalk, and textPlus are just a few examples of the numerous startups disrupting telco services. High levels of uncertainty require radically different planning methods. An alternative was suggested back in a 1995 Harvard Business Review paper called “Discovery-Driven Planning” by Rita Gunther McGrath and Ian C. MacMillan.  Discovery-driven planning acknowledges that in uncertain market conditions, very little is known and much is assumed. Instead of treating blue-sky assumptions as facts, this planning tool systematically converts assumptions into knowledge. This is achieved by proactively testing assumptions with minimal costs and as early as possible in the process, while constantly adjusting the action plan based on the new knowledge gained from the market. In other words, conventional planning methods are optimised for dealing with execution risks, while discovery driven planning is optimised for dealing with market uncertainty. [Tweet this]  The approach works according to a “Learn, Build, Measure” cycle. This approach is also promoted by the Lean Startup movement, which today has become the role model for building a successful startup. The need to deal with uncertainty might be new in telecoms, but is well understood in other business circles. As shown by Amar Bhide in his book, “Origin and Evolution of new Business”, 93% of companies that became successful abandoned their original strategy. For example, Instagram, a well-known success story, began life as a very different kind of company. In the words of co-founder Mike Krieger, Instagram was an app that only took 8 weeks to build and ship, but was a result of over a year of work. The project started with an investment of $500K, and the initial idea to build a location-based HTML5 app. The team has built an HTML5 mobile web app that lets users “check into” locations, make plans and earn points for a number of social activities. By measuring how people used the app, the team discovered that photo sharing drove usage. Learning from the behaviour of real users, the company refocused on photo sharing, and built an iOS app, instead of continuing with HTML5 technology. The company continued to iterate on this build-measure-learn cycle, and was eventually acquired by Facebook in April, 2012 for $1B. As of September, 2012, Instagram had reached 100M active users. The Learn, Build, Measure cycle ensures that the decision to allocate significant resources is based on facts, rather than on unproven assumptions treated as facts. Compared to conventional planning methods, the iterative, small-step process of discovery-driven planning may seem counterintuitive. But it makes good sense when dealing with market uncertainty. The fast turnaround process maximizes exposure to upside opportunities (e.g., Instagram photo sharing): the faster you are, the more experiments you can run, and the more chances you have to discover valuable ideas. At the same time, discovery-based planning minimizes the “downside risk” (the cost of failure) by identifying wrong assumptions early in the process (Instagram location-based check-ins, and use of HTML5 technology). Thus, “failing fast and cheap” makes perfect sense when the market is uncertain, and the failure is taken as a source of valuable knowledge. Before you rush to say, “Yes, we use ‘agile development’ already,” consider that discovery-driven planning is not about fast software development. Instead, it involves systematically dealing with market uncertainty and setting new KPIs to measure business risks, rather than execution risks. With discovery-driven planning, risk can increase the value of innovation. Telcos need to take ownership of their innovation strategies and experiment with multiple initiatives in order to maximize exposure to unexpected opportunities. They must develop new organisational capabilities. This of course does not mean reckless risk-taking, but rather a systematic and disciplined process of converting assumptions into knowledge. As an example, WAC was based on three assumptions: a) the need for operator interoperability in the all-IP environment, b) users valuing web technology and c) developers looking for alternatives to native platforms. Instead of creating long-term commitments based on unproven assumptions, the WAC initiative would be much better of if it was operating based on discovery driven planning, i.e., validating assumptions early in the process by learning from the market and being open to discover new opportunities. Telcos need to clearly distinguish between investments in innovation that aim to improve existing business, and innovation aiming to discover new markets. For targeting existing customers with an existing business model, traditional planning methods work nicely. When targeting new customers, or a new business model, the only proven approach is iterative, discovery-driven planning. Telco innovation initiatives need to be measured by the speed of learning and validating assumptions, as well as potential to discover new opportunities. This contrasts conventional planning methods that focus on projections of scale and future cash flows, based on unproven assumptions. Key questions telcos need to ask when evaluating innovation investments Do you allow projects to become profitable before prioritising for growth? Are you measuring new market innovations by the speed and cost of validating assumptions? Are you sufficiently addressing new opportunities by running many innovation initiatives? Ecosystems as a new distribution channel Ecosystems are a new distribution channel similar to value added resellers. In the case of telcos, ecosystem partners are the resellers that will push telco services, to new users, new usage models and new market niches. Direct distribution networks made perfect sense when operators competed based on the reliability and scale of a small set of services. Competing on choice and flexibility requires solutions that address thousands of user needs for each walk of life. Moreover, user expectations constantly continually evolve, making it practically impossible for a single company to predict and satisfy a wide spectrum of user needs. In the previous two decades, mobile phone users expected four basic “apps”: voice, text, contacts and camera. Now, they expect availability of hundreds of thousands of apps. Companies like Google, Netflix, Facebook, Amazon and even FedEx realize that the only way to compete on choice and flexibility is to create an ecosystem of tens of thousands of partners around their core product. For example, Netflix started as a direct mail DVD rental company and expanded into video streaming services. To compete based on choice and flexibility, Netflix created an ecosystem of device partners and developers around its video streaming service. This ecosystem takes Netflix services into over 800 device types and allows 80,000 Netflix Open API developers to add value by experimenting with new discovery methods and use cases. In effect, ecosystems are a new distribution channel similar to “value added resellers”. In the case of telcos, ecosystem partners are the resellers that will push telco services, to new users, new usage models and new market niches. The key advantages of this newfound distribution channel are the ability to create solutions for many small user niches customization, as well as engage in experimentation to discover new needs and opportunities. Building an ecosystem amounts to offloading many of the costs and risks of entrepreneurship to value-added resellers. [Tweet this] By doing that, the value of the ecosystem as a whole can grow far beyond what a telco could create on its own. In effect, external partners, be it developers or service providers, become investors in the ecosystem, subsidizing the expansion of the telco business. Telco APIs are the key technology enablers of this new distribution channel. The goal of telco API programs is to allow developers to take telco services into new niches and use cases, and scale from hundreds to thousands of partners. Some of these new use cases will result in supplemental telco revenue streams, some will facilitate customer acquisition, while others will subsidise ecosystem creation costs. Telco APIs will always be at a disadvantage versus players with global reach, if telco APIs are positioned in direct competition to native platforms or Internet companies. However, if telcos allow and encourage developers to create locally-relevant differentiation on behalf of their subscribers, their fragmentation disadvantage could transform into the advantage of local presence. APIs need the flexibility to allow developers to experiment with new use cases, and thus discover and satisfy unmet user needs. The nature of this experimentation is such that many developers will fail, but those who succeed will create differentiation and growth for telco services. It is important to note that the same ecosystem economics that work for telco APIs and app developers can be applied to other types of partners and service providers, such as Mobile Virtual Network Operators (MVNO) or machine-to-machine (M2M) initiatives. MVNOs can build ecosystems around the distribution business layer. App developers can build ecosystems around the service layer. And M2M companies, meanwhile, can build ecosystems around the connectivity business. Key questions telcos need to ask when evaluating innovation investments Is your API strategy designed to turn developers into value added resellers? How do you value the ability of developers to experiment in discovering new user cases? Is your API strategy flexible enough to attract a wide spectrum of partners, including mobile and web developers, MVNOs and M2M solution providers? Next week I’ll talk on the following two topics from Telco Innovation Toolbox: “Ecosystem as a new distribution channel” and “Keys to successful telco API strategies”. Don’t forget to download the [vm_form_download link_text=’full Telco Innovation Toolbox report’ product_id=’3751′]. As usual, we are looking forward to your feedback!  Please click here to leave us a comment or send us an email to strategy /at/ visionmobile dot com. – Michael @mvakulenko #ecosystems #mobileoperator

Apigee and VisionMobile are doing a webcast on Telco Innovation, discussing economic models that will help Telcos reinvent themselves, as well as presenting some of the key trends from our recent Toolbox report. Wednesday, February 6th, 10:00am PT / 1:00pm ET (register) Today mobile platforms, OTT disruptors, and thousands of apps encompassing all user needs compete with traditional telco services for a share of wallets. How can telcos manage the disruption and reinvent themselves? How do telcos think about ecosystem engineering? What is the real cost of doing nothing? Join our very own Andreas Constantinou of VisionMobile and Bala Kasiviswanathan of Apigee for a discussion of the economic models Telcos can adopt to evolve their businesses across communications, content, and consumers to stay relevant in today’s economy. [Update] The webcast has been completed – Check out the video and slides below. Economic models for reinventing telco webcast by vision mobile, apigee from VisionMobile

Managing Director Andreas Constantinou will be presenting Developer Economics: State of the Nation on February 7 at the SVForum gathering in San Francisco. Get in touch if you want to meet up.

Managing Director Andreas Constantinou will be presenting ‘Developer Economics: What it means for Android’ on Feb 7 at AppsWorld San Francisco. Let us know if you’d like to meet up.

VisionMobile will be presenting at InfoCom Apps conference on February 6. Product Manager Stijn Schuermans will be keynoting on the app economy: from hype to business. Marketing Manager Matos Kapetanakis will be presenting and moderating smart apps beyond mobile phones. Let us know if you’d like to meet up.

A few weeks ago, in association with Ericsson, we published the Telco Innovation Toolbox discussion paper. It introduces ten economics and strategy frameworks that will help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. Previous four chapters of the paper were published on our blog. Today we are publishing “Asymmetric business models” and “The true value of innovation and the cost of doing nothing” chapters. For previous chapters from the report, go here. You can download the full PDF report [vm_form_download link_text=’here’ product_id=’3751′]. Asymmetric business models As OTT players put increasing pressure on traditional telco profit centers, it is tempting to see them as direct competitors. Yet they don’t compete for profits, but for control of the value chain. Mobile Internet has become an integral part of the digital services and content ecosystem. In that context, mobile operators, Internet companies, handset makers, software vendors and content providers are part of the same value network. As OTT players put increasing pressure on traditional telco profit centers, it is tempting to see them as direct competitors. Yet, OTTs do not compete for telco service revenues; instead, they compete to control key links in the digital value chain, with business models that span consumer electronics, online advertising, software licensing, e-commerce and more. Thus, competition is not symmetrical, because unlike carriers, OTTs do not bear the burden of providing mobile Internet service. Connectivity may be as important to their business model as gas to a car; yet, it’s the telcos who supply it, not the OTTs themselves. This asymmetry makes it difficult for telcos to protect the profitability of some legacy business models. In economic terms, telco connectivity complements OTT business. A complement is a product that is consumed together with another product. Demand for a product increases when the price of its complements decrease. For example, gas and cars are complements. Cheaper gas means people drive more, and car manufacturers see their business grow. Similarly, the common interest of OTT players is to drive commoditisation of the telco connectivity business. Affordable mobile broadband means that more smartphones are sold, more ads viewed, more software sold and more ecommerce sites visited. While there is a symbiotic relationship between telcos and OTTs at the connectivity business layer, the nature of asymmetry is different at the telco services layer. Because connectivity costs are paid by the user, OTT players have great flexibility in their business models. OTTs can monetise ads, downloads, analytics or acquisitions, and are thus able to price their services either free (e.g., Viber),  close to free (e.g., Whatsapp), or even less-than-free (in the case of Google sharing app revenues with operators). The vertically integrated, “all-in-one” telco business model of bundling connectivity and service costs makes it impossible for telcos to compete with free or less-than-free OTT alternatives. Telco core voice and SMS services are suffering “collateral damage” in the wake of successful OTT strategies, rather than suffering as a result of direct competition. Because of the asymmetry in telco and OTT business models, telcos should avoid investing in head-on competition with OTT services. OTTs don’t see telcos as competition, but rather as a complement to their business. More importantly, the telco digital business needs to be measured not by direct revenues, but according to whether it helps to grow and protect core telco business by increasing usage, creating user lock-in and driving subscriber acquisition. Similarly, success of Amazon’s Kindle is not measured by the number of units sold, but by content revenues and the amount of traffic to Amazon e-commerce properties. Instead of copying OTT initiatives, telco innovations should leverage unique advantages, in order to create user value that OTT players cannot match, such as localization, user targeting, privacy controls or MVNO service customization. Key questions telcos need to ask when evaluating innovation investments How does the asymmetry of business models affect your project? Does the project drive the telco core business or does it attempt to compete with OTT players head-on? Does the project incorporate unique aspects of value that OTT players cannot match (e.g., localization, user targeting, privacy controls, or MVNO service customization)? What are the complements to the telco core business (e.g., user identity management API) that if freely given will drive core telco business, attract developers or weaken OTT players? The true value of innovation and the cost of doing nothing Traditional financial tools are designed for stable market environments, but fail predictably when applied to innovation under conditions of uncertainty and rapid change, which characterizes today’s telecom market. Traditional financial tools work well when evaluating investments in capital-intensive telecom infrastructure. In such investments, future costs and revenues can be predicted fairly accurately by using traditional financial forecasting tools like discounted cash flow (DCF) or net present value (NPV). Traditional financial tools are designed for stable market environments, but fail predictably when applied to innovation under conditions of uncertainty and rapid change, which characterizes today’s telecom market. The reason for failure is that traditional financial tools systematically undervalue innovation by disregarding the costs of doing nothing, as explained in Harvard Business Review article “Innovation Killers, How Financial Tools Destroy Your Capacity to Do New Things” by Clayton M. Christensen, Stephen P. Kaufman, and Willy C. Shih. There are two “costs of doing nothing” for telco that escape the attention of traditional financial tools: The risk of non-linear deterioration of the telco business and the missed opportunity to develop new capabilities necessary for the future. Traditional telco financial tools implicitly assume that business is stable and its present state will persist into the future. In other words, if an innovation investment is not made, things will be at least as good as they are today. This is definitely not the case for telcos trying to adapt to the new basis of competition. The commoditization of core telco services and the entry of disruptive OTT players will inevitably result in the decline of the telco business. Therefore, the true value on innovation is not in improving on the status quo, but in preventing future deterioration of the telco business. The second “cost of doing nothing” is the missed opportunity to develop new capabilities critical for future telco competitiveness. It’s a common practice to evaluate investments based on marginal costs and revenues while ignoring sunk and fixed costs. I.e., investments are valued based on their potential to produce valuable goods or services based on current assets. That only makes sense when the market conditions are stable and the current telco assets are expected to retain their competitive value in the future. Let’s take the example of Rich Communication Services–enhanced (RCS-e), which leverages expensive IMS infrastructure. Marginal cost analysis makes it an attractive choice for new presence and messaging services designed according to traditional telco service models. However, according to the new basis for competition, the scalability and interoperability offered by IMS are less important than flexibility. Telcos could be better off investing in new, more flexible infrastructure better suited for experimentation with new services, use cases and business models. Due to the changing basis of competition, future success requires new capabilities that telecom operators are missing today. Marginal cost analysis, however, will systematically undervalue investment in creating such new capabilities. Incremental investments into the existing assets, such as network expansion, will always seem more attractive compared to the full costs of creating new competitive capabilities. For example, Blockbuster saw Netflix developing new models for movie delivery. Marginal cost analysis, however, could not justify building new capabilities, and instead Blockbuster continued investing in its current assets, which soon will become obsolete. Blockbuster’s 2002 press release read: “We have not seen a business model that is financially viable in the long term in this arena. Online rental services are ‘serving a niche market.’ ” Netflix didn’t have this dilemma, and for it the “niche market” looked to be an excellent opportunity. The rest is history, as Clayton Christensen explained in his Harvard Business School article on the Trap of Marginal Thinking. The challenge for telcos isn’t that OTT companies outspend them in innovation. It’s that marginal cost analysis steers telcos towards investments in capabilities that were relevant in the old basis of competition, rather than toward developing new capabilities relevant for the new basis of competition. Telcos need to consider the costs of doing nothing and invest in innovation well before traditional financial analysis shows attractive returns. They must adopt discovery-driven planning methods suited for the prevailing conditions of high uncertainty. We will introduce these methods in the following chapter. It is important to see the biases inherent to traditional financial analysis tools. The true value of innovation investment can only be seen when measured against the real costs of doing nothing, including the likely possibility of deteriorating telco business, and missed opportunities to develop new capabilities and competences. Key questions telcos need to ask when evaluating innovation investments How often do you use NPV/DCF financial tools for evaluating investments in telco innovation? Are you investing enough in developing capabilities relevant for the new basis of competition? How would you build new products for the new basis of competition, if you were a startup starting from scratch today? “Dealing with uncertainty: Discovery-driven planning” and “Ecosystem as a new distribution channel” chapters will follow next week. Don’t forget to download the [vm_form_download link_text=’full report’ product_id=’3751′]. As usual, we are looking forward to your feedback! Please leave a comment below or send us an email to strategy /at/ visionmobile dot com. #businessmodels #mobileoperators #telcoinnovationtoolbox

[We’ve just published Developer Economics 2013: the tools report. This report [vm_form_download link_text='(free download)’ product_id=’3789′]! is based on a large scale survey across 95 countries and 3,460 developers. This is the definitive guide on the app economy packed with facts and figures about the platforms, screens and revenue models that developers are using. In this edition we take a close look into the tools and services that developers use to create, monetise and market their apps, including Ad networks & exchanges, Cross-platform tools and Backend-as-a-Service.] In this article, you’ll find all key insights from the report – please give us your feedback and leave a comment below. Also – keep an eye out for more Developer Economics articles, and don’t forget to visit our newly launched Developer Economics portal! Mobile market duopolies Mobile handset Industry growing at 23% CAGR. Despite the doom and gloom circling many mobile handset makers, the industry has been on a steady growth trajectory achieving a 23% CAGR in revenues since 2009. Underlying this growth are the increasing smartphone sales that now account for over 40% of all handset sales, fuelled by low cost Android devices that are rapidly eating away feature phone market share. A game of duopolies. The 700 million smartphones shipped in 2012 are underpinned by the Google / Apple duopoly in mobile platforms which jointly commands 80% in mobile developer mindshare. This is underscored by the Samsung and Apple handset maker duopoly, which combines a smartphone market share of 46%, and accounts for 98% of handset industry profits across the top-8 handset OEMs. Excluding Apple, total handset industry profits are at 2009 levels, implying that Apple is reaping all of the added value out of the apps-based mobile computing paradigm which it introduced. In this same period, Samsung captured the remaining value by quickly transforming from a feature phone incumbent to a smartphone leader, eating away the profits of the old guard Nokia who was slow to react to the changing basis of competition – from the best phones, to the best apps. Samsung’s profit recipe. As the top-selling handset OEM in 2012, Samsung’s stellar success with Android smartphones is down to three differentiating elements: firstly in-house ownership of the most expensive hardware components, ensuring both earliest availability and lowest bill of materials. Secondly, fastest time to market in launching a new smartphone based on the latest Android software release. Thirdly, a strong Galaxy brand and marketing campaigns that differentiate Samsung from the crowd of tens of Android handset makers. Tablets are still outsold 3 to 1 by PCs, but they are expected to reach parity in the next 1-2 years. This will be a critical inflection point for the PC duopoly of Microsoft and Intel, who are seeing their once-dominant position in computing being severely disrupted by mobility, where Android dominates platforms and ARM licensees Qualcomm and Mediatek dominate chipsets. Looking for more info? Download the [vm_form_download link_text=’full report’ product_id=’3789′]! Platform haves and have nots Developers swarm around iOS/Android but keep looking for viable alternatives. Having established a dominant position in consumer markets, Android continues to lead mobile developer mindshare, with 72% of developers now developing for the platform, a 4 percentage point increase compared to our 2012 survey. iOS shows a 5 percentage point drop in Mindshare, which we attribute mostly to the influx of Asian developers showing a clear preference towards Android. Developer mindshare varies widely by region, with Android leading in Asia and Europe, while North America shows platform parity. The considerable share of mobile developers intending to adopt Windows Phone (47%) and BB10 (15%) indicate that there is still developer interest in a viable third app ecosystem. HTML is the main technology competitor to the Android-iOS duopoly. HTML is the third most popular choice among mobile developers, 50% of whom use the HTML-based set of technologies as a deployment platform (to create mobile web apps) or as a development platform (to create hybrid apps or HTML code translated into native apps). Overall, HTML is much more successful as a technology, not a platform, with Firefox OS (and WebOS before that) being the main web-centric attempts at creating a complete alternative to iOS and Android, including native platform APIs, and a means to distribute and monetise apps. HTML should therefore be seen not as competition, but rather as a complement to native platforms, and one that reduces externalities by lowering barriers to entry and exit from these platforms. Windows Phone: buy it and they will come. Windows Phone remains unchanged in developer mindshare at 21% of developers despite the very high intention to adopt in our previous 2012 survey. Developers seem to be waiting for the right market signals – a critical mass of handsets – before investing in the platform. Despite Windows Phone challenges, Microsoft has positioned Windows 8 as a tablet-too platform, and thanks to strong Windows license renewals, the company is able to reposition mobile market share figures to their advantage. BlackBerry mobile mindshare remains stable at 16%, with developers being on standby mode in anticipation of BB10 sales. Moreover, Intentshare, i.e. developer plans to adopt BlackBerry, has not subsided since our 2012 survey, indicating that the major outreach effort undertaken by RIM during the build-up to BB10 release is having some positive impact. Symbian mindshare, on the other hand, is rapidly and predictably disappearing, as is, Samsung’s Bada, despite outperforming Windows Phone sales in Q3 2012. 74% of developers use 2+ platforms concurrently, but money is concentrated in iOS/Android. At the same time, developer platform choices are now narrowing. On average mobile developers use 2.6 mobile platforms in our latest survey, compared to 2.7 in 2012 and 3.2 in our 2011 survey. 80% of respondents in our sample develop for Android, iOS or both, making them the baseline in any platform mix. Developers that do not develop for one of these two platforms generate, on average, half the revenue of those developers that do, leaving little doubt as to the concentration of power within these two major ecosystems. Most developers are iOS-first. iOS is a clear winner in the shoot-out against Android, with 42% of Apple/Google developers prioritising iOS, against 31% for Android. Several other factors come into play when making a decision on the “lead platform”, such as prior experience or local handset sales patterns, but iOS comes out as a clear winner across all platform competitive points except cost and learning curve. iOS, Android and BlackBerry are lead platforms. In our survey of 3,460 developers, iOS emerged as the highest priority platform, with 48% of iOS developers using it as the lead platform among all others. iOS, Android and BlackBerry constitute lead platforms, which are most often used as a main platform among their developers. Windows Phone and HTML are extension platforms, as they are typically used by developers to extend their app footprint into customer segments or regions not adequately covered by their lead platform. At the tail end of developer preference are Symbian, Qt, Flash and JavaME ,the “gap fillers”, now used to address all remaining market niches. HTML5 needs better native platform APIs, and development environment. HTML5 is becoming a viable alternative to native for developers working on app categories such as Business & Productivity (used by 42% of HTML developers), Enterprise (32%) and Media apps (28%).  To compete with native, HTML5 needs better native API access (35% of HTML developers), a better development environment (34%), better debugging support (22%). More importantly, optimised HTML5 devices were not seen as important as the native API access or dev environment. This leads us to conclude that HTML proponents such as Facebook, Mozilla and Google should focus on cross-platform tools and development environments on at least equal measures as they focus on full platform efforts like Facebook Platform, Firefox OS and Chrome OS. Tablets reaching developer mindshare parity with smartphones, but TVs remain niche. The majority (86%) of 3,460 developers in our survey target smartphones, while a large share of them also develop on tablets, led by iOS developers (76%) indicating the attractiveness of the iPad as a development and monetisation platform. TV development remains niche (6% of Android developers), as the hype cycle around the “Smart TV” experience is yet at a very early stage. More on mobile platforms? Download the [vm_form_download link_text=’full report’ product_id=’3789′]! The revenue haves and have nots The steep learning curve of app entrepreneurship. Developers have a lot to improve in planning their app business. 49% of developers in our sample build apps they want to use themselves, but end up generating the least revenue. The most revenue-generating app planning strategies are those that extend an app either into verticals or different geographies. To some extent, these strategies rely on an already established and successful business: apps that have been tried and proven in at least one market and are generally less risky options or “low hanging fruit” for developers. Advertising is now the most popular revenue model for apps, used by 38% of developers in our global sample. At the same time, it is the monetisation model with the least revenue per app. In-app purchases and Freemium are on the rise, having grown by 50% compared to our 2012 survey and are now used by more than a quarter of the developers in our survey. In-app purchase is now the second most popular revenue model on iOS, with 37% of developers using it, falling slightly behind Pay per download. Lack of customer understanding in lean app development. We find it remarkable that only 24% of developers in our sample plan their apps based on discussions with users, a figure which does not change with development experience or proficiency. This indicates that the bottleneck of the build-measure-learn cycle of lean development is the “measuring”, or understanding customers. This highlights the need for a frictionless two-way feedback channel between developers and users, much like what GetSatisfaction pioneered for web apps, and which now HelpShift is pioneering for mobile apps. The Developer Tools Landscape Over 500 tools for today’s app developers, designers and entrepreneurs. In the last 3 years, developers have moved from being coders, to innovators, designers and makers – and a prized customer for the 100s of firms making up the SDK economy, part of the bigger B2D (business to app developer) market. Developer expectations for tools and services have changed in the recent years due to the flurry of startups, from Appcelerator to Zong, which emerged.  App developers today have over 500 third party tools (APIs, SDKs, components) to choose from, catering to every stage along the developer journey. Developer tools, from ad networks to user analytics SDKs are a core part of the Android and iOS platform economics, and a major platform differentiator. Ad services mainstream, other tools use is fragmented. 90% of the nearly 3,460 developers we surveyed use at least one third-party tool or service, with an average of 1.47 tools used concurrently. Among those developer services that we benchmarked the most popular is ad networks and exchanges (34% of developers), reflecting the widespread popularity of advertising as a revenue model. Advertising is the most popular revenue model, while ads can also act as a promotion channel that facilitates app discovery. User analytics (28%) and cross platform tools (27%) follow in popularity with a longer tail formed by developers of crash analytics, BaaS, cross promotion networks and voice services. Google’s AdMob,  is clearly the dominant mobile ad platform, adopted by 65% of developers that use ad services. AdMob has recently expanded to ad exchange services, a move that aims to counter the threat that ad exchanges pose for Google. Second runners, each used by 12% of developers in our sample, are Inneractive, an ad-exchange/mediation service and InMobi, an ad network growing out of India to become a major player in emerging markets. Apple’s iAd service comes fourth overall with 11%, and despite being quite popular among iOS developers, AdMob is the leading ad service on iOS, used by 66% of iOS developers that we surveyed. PhoneGap and Appcelerator lead developer mindshare across 100+ cross platform tools. PhoneGap tops CPT rankings, used by 34% of developers, followed by Appcelerator and Adobe Air with 21% and 19% developer mindshare respectively. With over 100+ cross platform tools available, the choice for developers can be a challenge. Amidst differentiating features for CPTs are access to native APIs, performance optimisation and the ability to reproduce native UI elements on each platform. The user analytics duopoly: Google (69%) and Flurry (49%) are well ahead of competition. User analytics services are becoming increasingly important as a tool to optimise app engagement and reach, and act as a proxy for user feedback. User analytics services are significantly more important for iOS developers – used by 39% of iOS developers in our survey vs. 28% for Android, 25% for WP and 15% for BlackBerry. Usage of analytics serves as an indicator of the level of competition among developers on different platforms. Parse leads with 28% mindshare in Backend-as-a-Service tools but competition for second spot is heating up as BaaS rises in popularity. As mobile apps become more sophisticated, so the need increases for back-end features like managing users, introducing social features, or synchronizing cloud data. Mindshare leader Parse is followed by enterprise-focused CloudMine (11%). Sencha.io and ACS, both commanding a 10% share among developers using BaaS, are solutions that are well integrated with their corresponding development frameworks (Sencha and Appcelerator) and therefore do not directly compete with services such as Parse or StackMob. The Backend-as-a-service market is in early stages, crowded with over 30 vendors that strive to differentiate by constant innovation and additions to their feature sets – we have yet to see any service dominating the sector to the extent observed in other developer tools sectors, such as ad services or user analytics tools. TapJoy (53%) is the leader in cross-promotion network mindshare, according to our survey of 3,460 developers, with Flurry AppCircle (20%) and Chartboost (18%) following behind. Cross-promotion networks (CPNs) are used by developers both as a means for promoting their apps by means of free traffic exchange across apps, ads paid by cost-per-app-install or in some cases incentivised installs. CPNs are also used as a revenue model, for developer acting as inventory publishers. Voice APIs have not made the transition from web to mobile. While voice services cater to diverse use cases, their mobile developer mindshare is limited to single digits, as voice APIs are still tied to the developer perception of telephony, a long way from the future voice-enabled apps. Voice-enablement leaders Twilio and Voxeo have been much popular within web developer circles, with Twilio rising once in late 2011 to a top-10 API provider ahead of Facebook, as tracked by ProgrammableWeb. Yet these voice services are yet to make a major impact in mobile apps. Skype (telephony URIs) and Microsoft (speech recognition and transcription) are often used, followed by Twilio and Tropo API users who focus on conference calls, inbound/outbound calling and voice portal services. Telcos like AT&T, Verizon, Telefonica and Deutsche Telekom have also released voice APIs in 2012 in a move to extend telephony assets into new revenue-generating voice use cases. The Developer tools universe expands and consolidates. The Business to Developer (B2D) market, has seen a continual expansion in the last three years, with a flurry of B2D startups emerging to address the ever increasing developer needs. For every 1,000 app startups, there is a developer tools startup. In parallel, there is consolidation taking place via organic expansion (e.g. Flurry, Papaya expanding services organically) and via mergers and acquisitions (e.g. Appcelerator acquired Aptana, Cocoafish, Particle Code and Nodeable, Apigee acquired Usergrid and Instaops, Burstly acquired TestFlight and Flurry acquired Trestle). Consolidation to continue to 2015, led by mobile marketing and enterprise. We expect the trend of consolidation of the tools landscape to continue unabated until 2015, six years after the B2D market for apps was born, while expansion will focus only on unaddressed developer tools sectors in the post-launch phase of the developer journey. We expect two main clusters of developer tools to lead the consolidation: firstly, marketing tools, as the discovery bottleneck will only worsen as we go from 1.5M to 10M apps, and while the Apple and Google stores continue to dominate app distribution. Secondly, Enterprise Mobile Services, which are creating revenue demand for vendors to mobilise their intranets, and to allow employees to bring their own device (BYOD) to work. Unlike the consumer apps space, enterprises have a substantial IT budget per employee, and very stringent requirements for data security, identity management, backend systems integration, and support-level agreements. What did you think? Leave us a comment below – and don’t forget to download the [vm_form_download link_text=’full report’ product_id=’3789′]! – Andreas #developereconomics #ios #developertools #crossplatformtools #mobiledeveloper #Android #Blackberry #html

We’ve just published Developer Economics 2013: the tools report. This report  [vm_form_download link_text='(free download)’ product_id=’3789′] is based on a large scale survey across 95 countries and 3,460 developers. This is the definitive guide on the app economy packed with facts and figures about the platforms, screens and revenue models that developers are using. In this edition we take a close look into the tools and services that developers use to create, monetise and market their apps, including Ad networks & exchanges, Cross-platform tools and Backend-as-a-Service. Many thanks to our sponsors, media partners and the developers for making this happen.

Just before the end of 2012 in association with Ericsson we published Telco Innovation Toolbox paper. It introduces ten economics and strategy frameworks that will help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. The first two chapters of the paper were published last week on our blog. Today we are publishing “Ecosystem Engineering” and “The modular telco” chapters. “Asymmetric business models” and “The true value of innovation and the cost of doing nothing” will follow next week.  The list of chapters can be found here. Ecosystem engineering The new basis of competition is defined by ecosystem economics, and technology is just one part of a much more complex puzzle. Platform owners run their ecosystems of users and developers by means of five ingredients and two control points. Innovation in the telecoms industry has traditionally been focused on technology. For decades, GSM, CDMA, WCDMA, HSPA, and LTE defined the competitive landscape of mobile telecommunications. With the basis of competition being scale and reliability, these technologies helped telcos use spectrum more efficiently, within the limited wireless spectrum available to them. In other words, the key competitive characteristics of mobile networks were defined by air interface technologies that increased capacity to transport ever-growing amounts of voice and data traffic through a limited wireless spectrum. The new basis of competition is defined by ecosystem economics, and technology is just one part of a much more complex puzzle. HTML5 is a perfect example of how ecosystems surpass technology. Many operators placed their bets on HTML5 as a chance to regain positions lost to mobile ecosystems. They did so without realizing that HTML5 is an enabling technology that still misses key platform ingredients. Successful application platforms have five key ingredients: Software foundations: a rich set of APIs with managed fragmentation and a toolset for creating apps Community of developers writing to the same set of APIs to spur innovation and cater to diverse use cases Distribution (reach) across handsets, operators and regions A means of monetization, such as ads or micropayments A means of retailing content (discovery, promotion, search and social) The next diagram details the five key ecosystem ingredients, their product success factors and the competences needed to bake each ingredient into the recipe. Platform owners control their ecosystems of users and developers by means of two control points. These points exist at the opposite ends of the value-chain. Firstly, platform owners control content creation by locking developers into a proprietary API. Secondly, platform owners control content distribution by gating how apps are distributed to and discovered by end users. These two control points allow platform owners to amplify the network effects by reducing friction to on-boarding of developers and users. Pitched as a killer of platform walled gardens, HTML5 in reality needs a lot of work before it can transition from an enabling technology to a complete and viable app platform, and compete in the league of Android and iOS ecosystems. HTML5 will not win on technological merit, but by creating pervasive solutions for the three key platform ingredients it currently lacks: distribution, monetization and retailing. Today, only two companies, Facebook and Google, are in a strong position to evolve HTML5 into a full-fledged platform. Both have rich sets of proprietary APIs, vibrant developer ecosystems and solutions for app monetisation, distribution and retailing in the form of Facebook Platform and Chrome Web Store. Mozilla’s Firefox OS (Boot2Gecko), which has the support of telcos, might have the same ambition, but is further behind in terms of its platform ingredients. Telcos need to move their innovation focus from technologies (be it HTML5, NFC, IMS, VoLTE, M2M or RCS-e) to ecosystems. That requires a much better understanding of how ecosystems are engineered, and how ecosystems absorb and amplify innovation This ecosystem view on innovation cannot only help to identify promising innovation opportunities, but equally important, help telcos avoid investments that lack key ecosystem success factors. Key questions telcos need to ask when evaluating innovation investments Is your innovation initiative aimed at creating an ecosystem? If so, what ecosystem ingredients will it need to succeed? How can technology-led innovation play atop of existing ecosystems to create a competitive advantage for telcos? Are all of your current innovation projects designed with the key ingredients for ecosystem success? The modular telco Contrary to Internet players, most telecom operators evolved as “all-in-one” businesses. To better understand the impact of the market disruption to telcos, it helps to visualise mobile operators as an entity comprised of three business layers: connectivity, services and distribution. Each of these business layers is affected differently by the market shift, and face very different operational challenges and competitive pressures. They also offer distinct opportunities for future growth, differentiation and profitability. Contrary to Internet players, most telecom operators evolved as “all-in-one” businesses optimised to compete based on the reliability and scalability of a small set of core services (voice, SMS, data access).  Vertical integration was necessary to provide these services with “five nines” reliability for tens or even hundreds of millions of subscribers. The all-in-one telco spans network operations, telephony, messaging, data access, user identity management, authentication and billing, as well as distribution and retail. As the basis of competition changed to “choice and flexibility”, vertical integration lost its advantage. Moreover, the lack of flexibility inherent to vertical integration has often slowed telco attempts to adjust to new market conditions. It explains why telcos lost out to smartphone and Internet platforms in the areas of location services, authentication, single sign-on, user identity, and billing. To better understand the impact of this market shift on telcos, it helps to visualise mobile operators as an entity comprised of three business layers: Connectivity business: high-speed mobile Internet access and wide area connectivity Services: telephony, SMS, content portals and other value-added services Distribution: physical and digital retail presence, consumer intelligence, customer care, telco own apps, web portals and more These three business layers are affected differently by the market shift, and face very different operational challenges and competitive pressures. They also offer distinct opportunities for future growth, differentiation and profitability. The connectivity layer is boosted by an ever-growing need for “anywhere, anytime” connectivity to billions of devices. It will remain an important part of the digital ecosystem value-chain for the foreseeable future, and is a growth opportunity for telco. The main challenge is how to avoid commoditization, i.e., a lack of meaningful differentiation, which results in competition on price and diminishing profitability. At the service layer, things look very different. The smartphone ecosystem has produced a flood of innovative OTT alternatives that cut into traditional SMS and telephony service revenues. OTT alternatives can often achieve substantial user reach and service scalability based on budgets that are considered small in telco terms. For example, in just two years Viber topped 100M users, Whatsapp has scaled to servicing over 10B text messages a day and Tango, a video-calling app, grew to 23 million subscribers in 190 countries. No less important, the business models of these companies are radically different from those of telcos. While traditional telephony is in stagnation, innovative voice solutions can present attractive opportunities for telco as we explain in later chapters. The OTT communication market continues to evolve at lighting speed. Telcos cannot compete with the pace, risk taking culture, free and freemium business models and global network effects of OTT ecosystems. Telco initiatives like Joyn and before it WAC, which were heralded as the answer to OTT threats, now look outdated and hopelessly behind leading OTT players. At the distribution business layer it is yet another story. Distribution is largely seen as a cost centre, not a new revenue opportunity, despite its strong potential to create new control points and revenue streams for telco. Apple, Google and Facebook have capitalized on the inflexibility of all-in-one telco offerings by gradually replacing key telco assets like location, authentication, single sign-on, user identity, and billing with proprietary solutions. Hindered by internal conflicts between business layers, telcos were late to market with services of their own in these areas. Lured by the promise of attracting higher-ARPU smartphone users, telcos worked hard to flood the market with smartphones at a wide range of price points. This strategy served the short-term goal of boosting the connectivity business, but at the same time jeopardized the long-term competitiveness of the service business by surrendering the customer ownership associated with authentication, user identity management and billing services. For telco innovation to be successful, the three business layers need to operate and be measured independently, each pursuing the most appropriate innovation strategies, KPIs, processes and priorities.  Applying different innovation mixes for their distinct connectivity, service and distribution business layers will enable telcos to succeed in the new basis of competition of choice and flexibility. Key questions telcos need to ask when evaluating innovation investments In which business layers do our digital initiatives operate? Are the right processes and KPIs in place to compete within this/these business layer(s)? Do the KPIs comply with industry best practices for a given layer? (e.g., scale and reliability are not appropriate when experimenting with new offerings at the service layer.) Is the innovation mix optimised for the respective business layers? “Asymmetric business models” and “The true value of innovation and the cost of doing nothing” chapters will follow next week. Don’t forget to download the [vm_form_download link_text=’full report’ product_id=’3751′]. As usual, we are looking forward to your feedback! Please leave a comment below or send us an email to strategy /at/ visionmobile dot com. #mobilestrategy #telcoinnovationtoolbox #telcos

[Chinese handset maker entrant Xiaomi is putting itself in the spotlight with impressive first year sales and innovation across hardware, services, brand and business model. Is this a promising attempt to create a new profitable handset business, following the Apple & Samsung profit recipe? VisionMobile analyst Stijn Schuermans investigates in this retelling of our relevant report.] Xiaomi (pronounced “chow me”), the upstart Chinese handset maker, has put itself in the spotlight with impressive early sales figures in its first year of existence. This article is based on an issue of Mobile Insider, a monthly publication by VisionMobile. that examines under-the-radar and forward-looking trends in mobile. Each issue focuses on a specific topic distilling the insights in an easy-to-digest 5-page format. Mobile Insider is part of Telco Economics, a range of strategy reports and workshops that deliver a 360° view on the new economics of the mobile industry and changing role of telcos in the era of digital ecosystems. The Xiaomi MI-One smartphone was released in August 2011. The second model, the MI-Two, followed in October 2012. Both models were offered at launch for RMB 1,999 (about $315) – pretty modest considering its specs and performance. The phone is mostly sold in batches online, with a pre-ordering system. A batch of several hundred thousand phones typically sells out in a matter of hours; sometimes much faster. In its first year, the MI-One sold over 3.5 million units, according to Xiaomi. A recent Tencent report puts 2012 sales at 7.2 million units and $2B in revenues. Analysts assume it to be profitable. This has led to an investment round in June 2012 where the company was valued at $4B. Xiaomi doesn’t limit its ambitions to China, either. The company has plans to expand to North America in 2014 or 2015, according to Xiaomi spokesperson Li Wanqiang. Business model innovation is a sine qua non The company is entering an extremely competitive market. As we explained in the April 2012 issue of Mobile Insider – Apple and Samsung’s profit recipe – the handset industry is fast approaching non-sustainability. The commoditization pressures instigated by Android and a near profit duopoly by Apple and Samsung (the innovator and the vertically integrated follower respectively) deprive the other OEMs of oxygen for innovation and investment. The emerging Chinese market in which Xiaomi is launching is price sensitive, and the rivalry among handset makers, both local (Shanzhai) and international, is fierce. Smartphones have become easy to copy. Advertising spends for new handsets run into the billions and distribution is mostly locked by powerful and demanding telcos. If Xiaomi were to compete head on with its established rivals, who have deeper pockets, established brands, supply chain power and much more experience, its chances seem pretty bleak. So how has this startup managed to draw attention? We ended the Apple & Samsung Mobile Insider issue on a positive note: a duopoly can be avoided by companies that innovate to create a unique business model. Xiaomi is doing exactly that. It is using similar strategies to the ones described in VisionMobile’s Telco Innovation Toolbox to create a uniquely tailored value chain for its customers. Xiaomi is certainly off to a flying start, at least in sales. Its profitability is still unproven, and since it is a private company, we’re not likely to get confirmation on its profit story any time soon. Its strategic outlook is good, however. In the following paragraphs, we will describe several aspects of its strategy. While none of these elements are new or unique by themselves, as a whole they create a unique value chain, tuned to deliver value to Xiaomi’s target customers. Xiaomi’s strategy dissected Xiaomi is not just a hardware producer. Its products combine the assembly of hardware with software (a custom Android user interface called MUI), services (notably an instant messaging client), a large gamut of accessories and its own online sale channel, through which the majority of phones are sold. Unlike Samsung, Xiaomi focuses on forward, customer-facing integration more than integration over the component supply chain. The fact that most Xiaomi phones are sold online is both rare in the industry and quite important to the company, as it gains direct access to the customer (like Apple achieves with its physical retail stores). By selling directly to the customer, Xiaomi also disintermediates the telco distribution channel (like Dell did with PCs in its early days). While the integration is not yet as extensive as Apple and Samsung, Xiaomi has clearly got the right idea. While handsets are clearly Xiaomi’s core business, they are not the main profit center. Instead, the hardware devices are used as complements for other products and services. Handsets are sold at a low profit; initially even rumoured to be a loss, although recently analysts have refuted this. Meanwhile, Xiaomi creates fertile ground for selling accessories and (messaging) services, which presumably have much higher profit margins. This strategy strongly reminds of Amazon and its Kindle Fire (covered in the October 2011 Mobile Insider: “The Kindelization of Tablets”), or even of Blackberry with BBM in its glory days. As handsets are a complement and not a main part of the value proposition, Xiaomi strives to produce them at low cost, but acceptable quality. Like Apple (but very few others), it has a limited model strategy, which reduces complexity and gives Xiaomi more leverage (through higher volumes) in its supply chain. Xiaomi sells phones in discrete batches, with pre-ordering. When a batch is sold, literally hundreds of thousands of handsets are sold in a matter of minutes. Not only does this create artificial scarcity (which drives demand), it also makes the supply chain process more manageable. It’s not likely that this technique can scale , but at the current low volumes it achieves the same goal of value chain control, without the large investment requirements (Apple owns substantial parts of the supply chain to achieve the same control). Finally, the Dell-like disintermediation offered by the direct-to-consumer, online-only sales model significantly reduces sales costs. Xiaomi phones are also available through more traditional (telco) sales channels, but at a 30% higher price. Xiaomi’s recipe: a tailored value chain According to Harvard professor Michael Porter, a sustainable competitive advantage can be gained if all the activities of the company are tailored to add value to the customer. In Xiaomi’s case, the target group are young, internet-savvy Chinese with a need to profile themselves socially. With this in mind, we can re-examine the strategies outlined so far. Xiaomi produces relatively inexpensive but good enough devices. As they are a complement, this hardware is not the most important part of the equation, so the focus is on simplicity and value for money, achieved by eliminating activities from the supply chain that don’t add value for the target group. This basic hardware can then be customized – an important social goal for youngsters – with a host of accessories, from covers to batteries in different colours. Xiaomi focuses heavily on the social aspect. The marketing is mostly word-of-mouth (and word-of-mouse), adding to a sense of community and belonging. Furthermore, one of the main selling points is a messaging app, further covering the consumer’s social needs. Messaging apps are a dime a dozen and don’t have intrinsic value, but for Xiaomi’s customers they add to the group feeling: the app is one element in a consistent story. Marketing guru Seth Godin explains that the purpose of marketing is not to impose products on uninterested customers, but to stand up as the leader of a group that has formed around an idea. He calls this community a ‘tribe’. Once you lead a tribe ,you will have their permission to sell them souvenirs. It seems that Xiaomi is building a tribe, a loyal community gathered around the brand, similar to the fan base of Apple and earlier Blackberry. This is possibly a sustainable competitive advantage. It certainly has to be built and cannot be bought or copied, and the value of a strong brand has long been acknowledged. Xiaomi’s tribe needs to be sizeable but not huge for the company to become profitable. Xiaomi doesn’t have to sell tens or hundreds of millions of devices like Apple and Samsung, they just need to be differentiated, i.e. have a uniquely tailored value chain. What do you think? Comments are welcome. Also – don’t forget to download the report. – Stijn (@stijnschuermans) #Apple #xiaomi #mobileinsider #handsetmanufacturers #samsung

Just before the end of 2012, in association with Ericsson, we published the Telco Innovation Toolbox paper. It introduces ten economics and strategy frameworks that will help operators to accelerate their “digital” strategies, make the right innovation investments and avoid costly mistakes. The ideas from the paper will be posted on VisionMobile blog in a series of blogs posts. Today we are publishing two opening chapters and the rest of the chapters will follow weekly. The list of chapters can be found here. The full paper in PDF format can be downloaded [vm_form_download link_text=’here’ product_id=’3751′]. A new basis of competition There are no silver-bullet solutions to telco disruption. Rather than focusing on quick fixes, this paper introduces a new way to think about telco innovation, with the aim of helping operators to make the right choices in their innovation investments. Let’s start with the basic question: What is the nature of the telecom transformation? Is it just about new competitors that need to be fended off? Or are there more fundamental forces at play? We think the latter. Telcos are being disrupted because the basis of competition in mobile has fundamentally changed. It has changed from “reliability and scale of networks” to “choice and flexibility of services” driven by the transition from “mobile telephony” to “mobile computing”.  The change in the basis of competition is fundamental and irreversible. Enabled by smartphone platforms and free from go-to-market bottlenecks imposed by telcos, hundreds of thousands of app developers are now able to compete for user attention and wallet share. Today, universal coverage, no dropped calls, voice quality and high-speed data connectivity are almost taken for granted in most mature markets. For more and more users, the availability of apps is becoming a primary consideration when selecting the handset. Signing up for a telco plan is increasingly viewed as a necessary cost for services that only need to be good enough to support the device. It’s like picking the car of our liking, knowing that once in a while we will have to pay at the gas station. This brings us to the conundrum the telecom industry is facing today. Providing undifferentiated voice, text and data services to smartphone users leads to a competition on price and diminishing margins. At the same time, staying in business requires that telcos keep up with ever-growing demand for data and continued investments in building wireless capacity. Investments in networks are still necessary, but they alone are no longer sufficient for profitable growth. What’s next? Harvard Business School professor Clayton Christensen recently said: “I think, as a general rule, most of us are in markets that are booming. They are not in decline. Even the newspaper business is in a growth industry. It’s not in decline. It’s just their way of thinking about the industry that is in decline.” Telecom industry too can greatly benefit from looking at familiar challenges from a new perspective. Telecom is a booming industry with ever-growing demand for mobile data and rising numbers of subscribers. But the basis of competition in mobile has changed putting pressure on legacy telecom business models. Wireless networks alone can no longer guarantee profitable growth for telecom operators. Competing head-on with asymmetric business models of OTT players won’t help either. Instead, seizing the full potential of this booming industry means leveraging mobile digital ecosystems to create meaningful differentiation and lock-in to telco services, as well as incremental revenues. This requires an understanding of ecosystem economics, development of new organisational capabilities and resetting the KPIs for “digital” initiatives. The economic and strategy tools introduced here will guide telcos in their choices on what innovation initiatives they should pursue and how to execute on their choices in fundamentally new market conditions. We describe ecosystem economics in the context of telco business in chapters 1 to 4, discuss the impact of traditional financial tools and the need for new innovation processes and KPI in chapters 5 and 6, and finally suggest how to leverage ecosystems to the benefit of the telco business in chapters 7 to 10. Chapter 1: The superiority of ecosystem economics What gives ecosystems their superior growth economics, and what can telcos do about it? Telcos used to be the center of gravity in the mobile value chain, but no longer. In the new basis of competition, ecosystems like Apple iOS or Google Android have become the focal point for service creation and distribution, ironically with help from telcos in the form of device subsidies. In the space of five years, ecosystems have mushroomed to take control of what took telcos nearly 30 years to build. What gives ecosystems their superior growth economics, and what can telcos do about it? Apple, Google, Facebook, Amazon and many other Internet players are in the center of value networks connecting the core business of the platform owner (e.g., hardware sales for Apple) with an array of complements, such as developers, media, brands and telcos. As such, they are carefully designed to drive the core business of the ecosystem owner. Complements are products that are consumed with and add value to the core product of the ecosystem owner. Ecosystem economics describe how the core product (e.g., iDevices or Google ads) becomes more and more valuable, as the numbers of developers and users around it grow. Ecosystem economics are driven by network effects and lock-in. iPhone apps attract Apple users, who in turn attract more developers, who make more apps, which attract even more users, and so on. This network effect between developers and users drives the explosive growth of the iOS platform. Lock-in creates natural “walled gardens,” as users develop habits around apps, while developers are locked-in by high switching costs created by their investments into the platform. Ecosystem economics are often misperceived as simple two-sided business models, where the telco needs to profit not only from users, but also from developers. This couldn’t be further from the truth. Developers, much like any complement, drive sales of the core product, and as such need to be viewed as partners, not as a source of direct profit. For example, Apple runs a very successful consumer electronics business. About 80% of Apple’s profits in Q3 2012 derived from products running its iOS operating system. Flexibility and choice underpin the iOS value proposition — “There is an app for that,” in the words of Apple advertising. Today, the company lists more than 700,000 apps in the Apple App Store. Given that the app economy has become a multi-billion dollar business, it is tempting to believe that apps are now a lucrative multi-billion dollar content business for Apple. In reality, the company runs the App Store at just above break-even, according to Apple CFO Peter Oppenheimer and CEO Tim Cook. The App Store revenue share is an elegant solution to recover the high costs of running a thriving developer ecosystem. Given 30% revenue and the fact that Apple has paid developers $5.5B dollars, these costs amount to over $2.3B over the lifetime of the Apple App Store (as of July 2012). App Store revenues are used by Apple to subsidise testing and hosting of hundreds thousands of free apps and billions of free app downloads — Over 80% of app downloads are free (including Facebook, Instagram, and many other apps).  In other words, the App Store is not designed to generate profits from content sales, but rather is a key enabler for the app economy that produces critically important complements driving the profits of the wildly successful iPhone and iPad devices. In most developed mobile markets, operators are playing a supporting role within the iOS and Android ecosystems. Operators take on the financial burden of device subsidies, which reduces the cost of acquiring the smartphone users — all in exchange for upselling users into higher-ARPU data plans. While telcos finance the expansion of smartphones, Apple and Google are taking over the customer “ownership” and creating strong user lock-in that surpasses that of operator brands. Ecosystems are much better at delivering choice and flexibility, the new basis of competition. This is due to their global scale and vast developer reach. Despite these adverse effects to the telco business, there is little telcos can do to roll back the clock. The ecosystem genie is out of the bottle. As iOS and Android have reached critical mass, and established well-entrenched market positions, operators need to look for ways to build unique user value atop the platforms rather than competing with OTT players. Such “over-the-platform” innovation can indeed create new revenue streams, but even more importantly it offers opportunity to create unique differentiation relative to local competitors and avoid competition on price. Opportunities for such differentiation exist in the areas where platforms are inherently weak, or have little motivation to compete. These include local presence, user targeting and reach, content recommendations and vertical B2B solutions. Over the longer term, telcos can look for ways to build parallel ecosystems, using pages from the ecosystem economics textbook. An example is M2M. It holds the potential to create a vibrant ecosystem of users and solution providers, thereby establishing strong network effects and lock-in. Telcos can become the central force in this emerging ecosystem if they learn to engineer the ecosystems to their advantage.  By looking at M2M through the lens of ecosystem economics, operators will see opportunities that are much bigger than just selling modems and data connections. Key questions telcos need to ask when evaluating innovation investments Does your initiative compete with the network effects of an established ecosystem or is it leveraging those effects? Does your project aim to add value where platforms are weak or have no motivation to compete? Does your project promise to create a parallel ecosystem where telcos will play the dominant role? Chapter 2 “Ecosystem Engineering” and Chapter 3 “The modular telco” will follow next week. If you can’t wait until then, you can just download the full report in pdf format [vm_form_download link_text=’here’ product_id=’3751′] As usual, we are looking forward to your feedback! Please leave a comment below or send us an email to strategy /at/ visionmobile dot com. #Android #ecosystems #ios #telcos

[This has been a great year for the VisionMobile blog, with tens of great articles, as well as some amazing infographics and reports. As 2012 draws to a close, we’d like to do a roundup of our blog and present the top 10 articles. Hope you enjoy them!] So, without further ado, here are the top 10 articles for 2012: 10. Why some publishers are abandoning apps and betting on the Web 9. Ambient intelligence: how well does your phone know you? 8. 100 Million Club – Top smartphone facts and figures in 2011 7. Cross-Platform Developer Tools 2012 6. The Dead Platform Graveyard: Lessons Learned 5. The Kindelization of Tablets, Part 2: The Silk Strategy 4. [Infographic] The Rise of the New App Economy 3. Fashion Tech: how retailers are accelerating the app phenomenon 2. Which apps make money? 1. [Infographic] The Mobile Industry in Numbers These were the top 10 articles for 2012, hope you enjoyed them! Thank you for helping us make the VisionMobile blog one of the most successful analyst blogs – see you in 2013! Happy Holidays! – Matos (@visionmobile) #ios #ambientintelligence #infographics #Android #mediapublishers #Blackberry

We’ve just published our latest report, the Telco Innovation Toolbox. You can download it for free at: https://www.visionmobile.com/product/telco-innovation-toolbox-report/ Telco Innovation Toolbox showcases 10 economic models on how Telcos can manage disruption and reinvent themselves. This report, produced in association with Ericsson, disseminates critical issues for Telcos, such as the OTT landscape and asymmetric business models, explaining how your company can make the right innovation investments and avoid costly mistakes.