All About Apps: Part 5. Branded Apps

Apple opened its App Store in July 2008. Three years later, nearly half a million apps have been developed for its iOS platform. About half as many apps have also been developed for its rival Android platform. Independent developers are not the only one building apps for these two platforms. In their companion are businesses and other organizations that see mobile devices, from smartphones to tablets, as an increasingly important communication channel and mobile apps as a new and exciting opportunity to communicate directly with consumers and the public, and to do so in a more meaningful manner. Their participation has led to a growing number of what is commonly referred to as branded apps.

What Are Branded Apps?

Branded apps are distributed by organizations, often businesses, for marketing purposes whether to connect consumers with their brands (e.g., Audi A4 Driving Challenge, iFood Assistant by Kraft and Trailhead by North Face) or to help them search and shop for products and services (e.g., Zillow Real Estate, Kayak HD, eBay Mobile and Chipotle Ordering). As such, each is visibly associated with a specific brand. Branded apps fall broadly into 2 types: entertainment and utilities. Either way, they are about providing an emotional connection with a brand through an entertaining experience and/or some useful services.

Branded Entertainment Apps

These are time-killer, using a characterization by Deloitte Consulting (2011). They are mostly games. They provide a one-off promotion effect that can deliver huge spikes in customer engagement and hence lead to a significantly large number of downloads. Below are some examples.

  • Audi A4 Driving Challenge is a free iPhone app that lets users imagine themselves driving an Audi. It offers users five simulated race tracks of varying difficulty. Users can control the Audi by using its accelerator and brake pedals shown on screen, and steer left and right by turning the iPhone. The game keeps track of elapsed time and, as users improve their performance, lets them drive more powerful models of the A4.
  • Zippo Lighter is another free iPhone app that lets users customize the look of their virtual lighters and simulate the reactions an actual Zippo would have to movements and conditions. Jerk the iPhone to the left to open the Zippo; shift it to the right to close it; and flick on the Zippo to light it. The app can even recreate flame movement by recognizing bursts of air blowing into the microphone. It is popular with young concert goers who would hold up a virtual Zippo lighter appearing on the iPhone, instead of a real lighter, for those so-called Zippo moments.
  • Barclaycard Waterslide Extreme is also a free app. It piggybacks on a BarcllayCard TV commercial for its contact-less payment technology in which an office worker rides a water slide through the city and back to his home (instead of using the bus or a subway like other workers); along the way, he slides through a grocery store, picks up a banana and pays by swiping his contact-less Barclaycard and then pays for his subway ticket just by swiping the card again. In the app, game players experience the extreme water slide, gliding through cool modern cityscape as day turns into night, collecting objects and avoiding obstacles, and earning more points as they gain speed. The game app has become so popular that Barclaycard follows up with a roller coaster version of it.

Branded Apps: Audi A4 Driving Challenge, Zippo Lighter and Barclaycard Waterslide Extreme

Branded game apps face certain challenges. Firstly, they have to rely on their intrinsic entertainment value, rather than the underlying brand, to drive downloads (Deloitte, 2011). It can be difficult to ascertain whether users are even aware of the brand when interacting with these game-type branded apps. So, brand recall can be an issue. One study finds game apps less successful than informational apps in focusing user attention on the brand, encouraging personal connections with it and thus shifting user purchase intention (Bellman et als, 2011). Secondly, user interest tends to fade quickly when the novelty of a game wears off. It can therefore be difficult for a branded game app to sustain on-going interactions between targeted consumers and the brand. Thirdly, keep in mind that games make up the largest category of apps. It can be quite a challenge for any app to get noticed in such a crowded segment.

Branded Utility Apps

These apps are designed to simplify specific routines or tasks such that they can get done as effortlessly as possible and in some interesting fashion to consumers. The latter characteristic means some elements of entertainment can be present and useful even though the entertainment experience these apps offer is not as intense as that of pure entertainment or game apps. Utility apps tend to be evergreen apps. Lacking the excitement normally found in entertainment apps, they often take more time to build a large user base but once there their popularity and usage can be sustained much longer. Below are some examples.

Branded Utility Apps: Kraft iFood Assistant, Nike+ GPS and Chipotle Ordering

  • iFood Assistant is a branded app from Kraft – a confectionery, foods and beverage conglomerate. Originally available for iPhone in 2008 for $0.99, the app is now also available for Blackberry, Windows Phone 7 and Android devices, plus a Lite version (free) for iPhone. It reaches out to a broader consumer base beyond Kraft’s traditional audience of women. It gives users access to a library of instructional cooking videos, 7,000+ recipes, which can be browsed by category and occasion, lets them add the ingredients (many of them made by Kraft) to a shopping list, and helps them find nearby stores carrying Kraft products with a store locator. The app also includes CRM registration options, fully integrated with kraftfoods.com, that let users create, share and save their recipes and shopping lists.
  • Nike+ GPS is an iPhone app for $1.99. Using GPS and accelerometer, it enables users to visually map their run and monitor the time, pace, distance and calories burned. It comes with a “Challenge Me” feature, whereby users can challenge themselves to increase their pace or distance, relatively to their previous runs. Through a platform on the Nike+ website, users can share their run history with friends via the site, Twitter, or Facebook,and connect with other runners in a community of 3 million members.
  • Chipotle Ordering is a branded app, which is available for free on Apple App Store. Using location-based technologies, it enables customers to select a nearby Chipotle Mexican Grill restaurant, customize their items, enter payment details and pick up their orders, all from their iPhone. It also offers customers the convenience of saving their favorite Chipotle meals online and those of friends, family or coworkers.
  • Liberty Mutual Mobile-Claims is a free app available for both iOS and Android platforms. It guides customers through a streamlined claim process for an automotive accident, which may include collecting contact and insurance information from the other driver, taking a photo of the damage, mapping the location via GPS and sending the report. It also lets customers conveniently access Liberty Mutual’s Mobile eService website and manage their policy directly from mobile devices.

  • ZipCar is a free app, available for both iOS and Android platforms, from the company that offers its members quick, cheap and hassle-free car rental on short notice. The app amplifies the ease of Zipcar’s rental process. It guides users through the reservation process, locates nearby cars, and contacts customer support. It does even more with capabilities like remote locking, unlocking and honking the horn when a user needs to find a Zipcar car in a parking lot.

The main challenge for branded utility apps is how to evolve continuously to stay fresh while maintaining a delicate balance between utility (“getting things done effortlessly”) and entertainment (“in an interesting fashion”). Competing with hundreds of thousands of other apps for user attention and download is also a challenge. While non-game app categories are not as crowded as game category, they are still very crowded nevertheless.

How Are Branded Apps Doing?

Data indicates a receptive audience for branded apps. Among iPhone users, 70 percent have downloaded an app from a well-known brand; 26 percent would download an app from a well-known brand they like if it is introduced and another 34 percent would strongly consider doing so; only 7 percent would definitely or probably not download it. An overwhelming majority of users download branded apps from the App Store directly onto their iPhones and only 7 percent go through iTunes to download apps (AdMob, 2009). Some branded apps have become mega hits, e.g., Audi A4 Challenge got 3.5 million downloads (early 2010), Barclaycard Waterslide Extreme and Zippo Lighter 10 million each (January and June 2011, respectively).

Downloading Branded Apps -- Findings from

Unfortunately, users’ experience with branded apps in general has fall short of their expectations. According to a survey by EffectiveUI, 38 percent of mobile app users are not satisfied with most of the apps available from their favorite brands. Nearly 70 percent agree that a branded app can give them a negative perception about the brand if it is not useful, helpful or easy to use. In fact 13 percent have avoided downloading apps from a brand due to a previous bad experience with another app offered by that brand (Brand Apps Today, 2010). The result is that very few apps have gained enough market traction to have meaningful marketing impacts. Going by the number of downloads, 80 percent of the apps by consumer and health care brands in a study were downloaded less than 1,000 times while less than 1 percent of them had more than a million downloads (Deloitte, 2011). Successes, if measured by downloads, are relatively few.

The Question Is Mostly “How”, Not “Whether”

Despite a generally disappointing record to date, being shied away from having a branded app may not be an option for many companies. More than three-quarters of mobile app users expect all brand name companies to have a mobile app to make interactions with the brand easier (eMarketer, 11/22/2010). In retailing business, an overwhelming percentage of users consider mobile apps as useful for shopping activities such as getting money-off coupons, viewing current in-store specials, getting driving directions to the nearest store, and scanning product bar codes for information (eMarketer, 12/15/2010). The question for most businesses is therefore not whether (to have a branded app) but how (to use one or more branded apps effectively).

Utility, not novelty

It has been documented that novelty (as product, process and even business model innovations) can be a source of value creation (Amit and Zott, 2001) and hence user attraction. However, with more than half a million apps currently available, they can hardly be considered as a novelty, not any longer. They must stand on their own merits.

A branded app must be designed to offer some real utility, e.g., solving a problem for users (e.g., creating a shopping list with Kraft iFood Assistant, or filing an insurance claim via Liberty Mutual Mobile Claims) or providing genuinely meaningful features (e.g., waving a virtual lighter with Zippo Lighter, mapping and monitoring a run, and connecting with friends and the runner community with Nike+ GPS app, or remotely locking, unlocking and honking a ZipCar car). This applies to entertainment-type branded apps as well as utility-type apps. After all, even game apps are not intended to entertain users for the sake of entertainment but rather to capitalize on the intense and engaging atmosphere of a game to foster users’ deep connections with the brand (e.g., Zippo, with more than 500 million lighters sold to date, as an American cultural icon going back to wartime Germany and Vietnam).

Usage, not just downloads

User connections to a brand will not materialize without frequent usage of an app long after it is downloaded. Yes, the number of downloads is important. Nothing else can happen without an app being downloaded first. But this is only the starting point in building user connections to a brand. Whether users come back to an app time after time is a more accurate indicator as to whether they actually like it and are having a positive brand experience.

Statistics show that only 20 percent of users return to a free app after the first day of download, however; after 30 days, only 5 percent of them are still using the app; the fall-off rate is slightly steeper for paid apps (Northcott, 2010). Quite disappointing to say the least. Contrast that to successful Kraft iFood Assistant – more than 60 percent of users who have downloaded the app since 2008 are still interacting with it today. In marketing jargon, branded apps are about both customer acquisition and retention, not the former alone.

Mobile apps, not mobile websites.

Apps are for mobile devices with relatively limited computing power, screen size, storage capacity and connection speed. Mobile device users, being on the go, are not interested in surfing the Web; rather, they like to get a task at hand done rapidly, conveniently and in some enjoyable manner. There are certain tasks for which they prefer using mobile apps, and there are others for which browsing the web would be a preferable alternative.

In the retail environment, for example, users find it useful to have mobile apps for getting money-off coupons, viewing current in-store specials, getting directions to the nearest store, scanning product bar code for information and registering loyalty ID at checkout (eMarketer 12/15/2010). On the other hand, they prefer using a web browser to mobile apps for researching products, comparative shopping, reading customer ratings and reviews, and searching for products with key words (eMarkketer, 11/22/2010). Companies must not make the mistake of designing their branded apps to replicate their corporate websites. Instead, they should prioritize and be very selective about which content and functionalities each branded app should have.

Apps in general, not just branded apps, are a relatively new phenomenon. Little is understood about their usefulness in business and marketing, e.g., how consumers actually think about and use branded apps. Some trials and errors are inevitable in figuring out the right content and functionalities for a branded app.

Unique hardware features

Smartphones, tablets and some other mobile devices (e.g., iPod Touch) have several hardware features that are not commonly available on personal computers. Besides being highly portable, they are typically equipped with touch screen, video and still-picture cameras (often on both front and back of the device), speakers and microphone, GPS, digital compass, accelerometer, proximity and ambient light sensors, wi-fi connectivity and, with some exceptions, cellular phone capability. Mobile apps can therefore deliver many functionalities that make them particularly useful and/or engaging. Liberty Mutual Mobile Claims app utilizes GPS to let users report the location of an accident, camera to take pictures of damages, and cellular capability to submit a claim on the spot, all from their smartphone. Chipotle Ordering and ZipCar apps use GPS to help users locate nearby restaurants or cars. Zippo Lighter app simulates virtual flame movement by detecting the air being blown into the microphone. Nike+ GPS app makes use of the iPhone’s accelerometer to measure the user’s running distance and its GPS to map the route. A report by Deloitte (2011) indicates intensive use of some unique functionalities is likely to give a branded app significantly higher likelihood of success (77 percent for accelerometer, 61 percent for GPS and 59 percent for camera).

Promotion absolutely essential

All the investments in time, efforts and money to develop a branded app will not pay off unless consumers are aware of its existence and become interested in its utility and entertainment value. With hundred thousands of apps out there, this will not happen without a plan to promote it.

Consider this: consumers find non-branded apps by searching the app store from their mobile devices (58 percent) or through their friends and family members (45 percent); for branded apps, they rely much less on these channels (21 and 28 percent, respectively). Promotion undoubtedly needs to take on a more important role in spreading in getting consumers to know about branded apps.

Appvertising for a branded app can be placed in other popular apps. AutoWeek did that with its app on 3,000+ apps through AdMob network in November 2009 to move the app’s ranking into the 10th position in the news category for iPhone (O’Leary, 2010). Capitalizing on other promotional campaigns already in place can give a branded app some needed visibility. BarclayCard’s Waterslide Extreme app piggybacks on its TV commercial that features a worker using a Barclay card while riding down a water slide. Although it is not that unique from a game perspective, it becomes an immediate hit (over 10 million downloads and 16 million engagement minutes) with app users by reminding them popular TV ad. Besides these, more “traditional” channels (e.g., PR and corporate website) can also be used.

In brief, while the future of mobile business and marketing looks bright and that of branded apps appears promising, a well thought out game plan for these apps is a must for any chance of success.

All About Apps: Part 4. “Where’s the Money?”

This is Part 4 in the series “All About Apps”.

With all the publicity about apps and the rush to build them, it is time to ask “Where’s the money?”. To put it differently, how and how well do developers monetize their apps?

Pay-per-Download

This is the leading revenue model for mobile apps. Users pay for each of the apps they download. On Apple App Store, for example, it is the route taken by 59 percent of developers, compared to 43 and 42 percent for in-app advertising and in-app purchase strategies, respectively (O’Dell, 2011). For their services (e.g., providing a store front and processing payments), app stores typically get a cut of 30 percent on the selling price of an app; the remaining 70 percent go to developers. These stores are getting very crowded as the number of apps continue to rise rapidly. So, competition among the apps becomes more intense and their prices are on a decline as a result, particularly among the top-100 apps. Between January and December 2010, the average selling price declined by 12 percent overall and 19 percent for the top-100 apps on Apple App Store, 24 and 24 percent on Blackberry App World and 29 and 61 percent on Nokia Ovi; on Google Android Market, there was a 1-percent rise overall, but still a 9-percent decline for the top-100 apps (Distimo, 2010 December). The majority of apps are now priced below $2.00, be them iOS, Android or Blackberry apps. The percentage of apps priced at $10 and up is in the single digit across all app stores (Distimo, 2010 November).

Most developers would dream of having a mega hit like Angry Birds but more often than not they find it tough to make a living from paid downloads. One third of paid apps generate less than $1,000 each for their developers even though they often take months to develop (Vision Mobile, 2011). The app business seems to be more like the music business than the software business, some would say. On average, it may take as much time to build an app as to compose a song; both bring in about the same revenue per download, below $2.00 (before the 30 percent cut for the app stores) in most cases; some become mega hit but most linger in the “long tail”. Apart from “evergreens” (e.g., games, utilities and programs to use Facebook and Twitter), even more successful apps often quickly fade into obscurity (Economist, 06/17/2010). Increasingly, developers are turning to other strategies for monetizing apps or even switching to earning their money through salary or commission from developing branded apps for organizations that use such apps for marketing purposes, e.g., advertising or engaging customers (Vision Mobile, 2011).

In-App Purchases

This revenue model let users conveniently acquire upgrades, additional game-playing levels, new content or virtual goods right within an app, without having to go back to the app store. It enables developers to monetize user engagement ratherthan downloads. Apps with in-app purchase functionality can be either free apps or paid apps (at a price lower than it would be otherwise). Purchases from within an app have to be paid for with real money in return for the desired items or app features, or for virtual currency to be used inside the app. Here are some examples.

  • Tap Fish by Gameview Studios is a free game app available on both iOS and Android platforms. It offers multiple playing levels with different numbers of aquariums. Users can decide what fish to grow, sell and breed; they can buy, feed and sell their fishes; they can add backgrounds (e.g., Atlantis), coral reefs, caves, sunken ships and mermaids, among others. In-app purchases give users virtual currency, called “Fish Bucks and Coins”, which is used for game activities.
  • Guitar Hero by Activision Publishing is a paid game app ($2.99 on iOS platform) that let players create rocker avatar and play rock guitar. It comes with only 6 songs but players can get more through in-app purchases of $1.99 per 3-song pack.
  • Amplitube by IK Multimedia enables its users to turn their iPhone, iPod Touch or iPad into multi-effect processor for an electric guitar and a mobile recording studio. Its free version comes with only basic features, which can be expanded with in-app purchases (e.g., metal and clean amp effects for $4.99 each and chorus, wah and delay pedal effects for $2.99 each). Its paid version, at $19.99, comes with a bundle of selected features beyond the basics. Even here, users still can add more features through in-app purchases (e.g., graphic equalizer for $2.99 and 4-track recorder for $9.99).
  • FarmVille by Zynga is a free game app that was initially designed for Facebook platform but is now available also on mobile devices. Players can buy farm land then plow, plant, harvest and sell their crops, thus spending and earning game money doing that and other related activities. They buy game money, called Farm Cash and Coins, through in-app purchases.

Apps with in-app purchase feature: Tapfish, Guitar Hero, Amplitube and FarmVille

In-app purchases fall into three categories: consumable, durable and personalization items. Consumable items, once used, cannot be used again,e.g., virtual currency or special items that can help a player get through a game faster and ascend to the next level. Durable items can be used again and again after their purchase, e.g., additional playing levels or add-on features. Personalization items create a more personalized user experience, e.g., decorative items such as sunken ships and mermaids in Tap Fish game or clothing outfits for rocker avatar in Guitar Hero. About two thirds of in-app purchase dollars for game apps are consumables, with virtual currency purchases being most common; at the other end, personalization items account for only a tiny fraction (2percent); durable items account for the remaining or nearly one third of in-app purchases (Warren, 2011).

In-app purchases generate a new and very substantial stream of revenues. On Apple App Store, for example, they are found in only 4 percent of iPhone apps but they generate 72 percent of the revenues in 2011; by comparison, paid-only apps bring in just 28 percent. It was the other way around in 2010 when in-app purchases generated just 30 percent of the revenues and paid-only apps 70 percent (Distimo, 2011 July). Data for Android Marketplace is currently not available. Android has been supporting in-app purchases only since April 2011, whereas iOS has done so since June 2009. Overall, in-app purchase revenue model has become more popular with app developers and will rival pay-per-download revenue model before long (both being the choice of 50 percent of developers for 2012); the latter model has lost some of its luster (Ogg, 2011).

In-App Revenue Models Gain Popularity

App stores maintain their typical 30-percent share of in-app purchase revenues, leaving the remaining 70 percent to developers. They justify their revenue share for providing the services needed by such purchases (e.g., electronic delivery, secured billing and payment processing). On the other hand, they can impose very strict requirements to protect their share. Apple will reject (from its App Store) any apps that do not use Apple’s in-app purchase application programming interface (API). Such apps would let their in-app purchases bypass Apple’s service infrastructures (i.e., not using iTunes and Apple customer ID) and hence skip paying Apple its revenue share. For some apps (e.g., e‑readers), their developers simply cannot afford the 30-pecent cut for app stores after having to pay also for the content (e.g., books and magazines) to publishers. Sony eReader was reportedly rejected by Apple App Store for not complying with its restrictions whereas iFlow Reader was taken off the App Store by its developer for being too costly. Meanwhile, Amazon Kindle app simply lets its readers go to Amazon web site to purchase books. With its highly efficient website and convenient ordering process, Amazon still can make the whole content purchasing process as seamless as possible for Kindle app users without providing in-app purchase functionality. Most other e-reader developers cannot do that; neither can they afford the 30-percent revenue share for app stores.

In-App Revenue Trends

In-App Advertising

This revenue model relies on payments from advertisers for having their advertisements inserted into individual apps when the latter are in use. Advertising is a major source of income for many media channels (e.g., newspapers and magazines, radio and TV programs, and websites), and mobile communication is no exception. In-app advertising, or “appvertising”, has received a lot of attention lately after Rovio begins offering the full-size versions of its Angry Birds games for free and funds them through in-game advertising; it is generating about $1 million a month from appvertising on the Android platform alone. Meanwhile, platform operators have also promoted their mobile ad networks (e.g., Apple iAd and Google AdMob), which help advertisers effectively target their audience and serve their ads, give consumers greater user experience and efficiently manage billing for app developers.

As a huge number of apps are being downloaded onto mobile devices and as consumers are spending a great deal of their time using these apps, appvertising has become a rapidly expanding business opportunity despite being eclipsed by the even faster growing volume of in-app purchases. On per-user basis, the average advertising revenue is only better than half of what it was in 2009. However, with a fast growing population of smartphones and mobile devices, appvertising revenues are project to rise from $87 million in 2010 to $894 million in 2015, or ten folds in 5 years, admittedly from a small base (Flurry, 2011). There are also other reasons, besides the growing population of mobile devices and apps, for advertisers to be interested in appvertising. One is its apparent effectiveness. The recall rate for ads seen inside apps is higher than that for ads seen while surfing the mobile web at large, 52 vs. 40 percent. Another is the relatively stable audience share for in-app ads on iOS and Android platforms during much of the day, from early morning to almost midnight; by comparison, the audience shares for ads on TV and the Internet tend to rise for only a few hours in the evening but remain much lower during most of the day (Flurry 2011). Anticipating the growing demand for appvertising, developers also show an increased interest in appvertising revenue model, from 27 to 43 percent between 2010 and 2011, on par with their interest in in-app purchase revenue model.

In-App Advertising Infographic -- BuySellAds.com

Not all apps are a suitable candidate for appvertising. Most suitable are apps that are still in use long after being downloaded and used frequently (e.g., weather and news apps plus some popular games and “cannot do without” utilities). Those “sticky” apps can help generate a large number of (app) lifetime ad impressions. Least suitable are “gimmick” apps that are low on both dimensions (length of usage and intensity of usage).

Types of Apps Suitable for Appvertising

Paid, Free and Freemium

The revenue models above can be described as direct models where developers make money directly from their apps either through paid downloads, in-app purchases or in-app advertising. The pay-per-download model applies to paid apps whereas the in-app models apply mostly to free apps. These free apps are not exactly free but rather “freemium” (“free” + “premium”). A key characteristic of freemium products is that most users can have them for free while only some users pay (e.g., for advanced features and additional content). It is often necessary for “experience goods”, which apps are, to be offered as freemium products. Experience goods are those consumers need to use for some period of time before being able to determine their value and would therefore be reluctant or unwilling to pay for them up front. “Free” is an emotional hot button that immediately reduces the mental barriers for consumers by giving them a feeling of having nothing to lose. The freemium model works best when the products are “phenomenal” – having something to amaze users and hence to prompt them later to pay for the upgrades (Shmilovici, 2011).

There are also free, not freemium, apps where their developers do not intent on monetizing them directly. Instead, these free apps are designed for the purpose of engaging customers, building business relationships and accomplishing other marketing objectives. They are known as “branded apps” because they are individually tied to a specific brand. Some of them may cost money to download (e.g., Kraft charges $0.99 for its iFood Assistant app that features recipes and cooking tips), not unlike paid apps, but generating revenues directly from paid downloads is not their primary purpose, marketing is (e.g., 90 percent of iFood Assistant users, many among them are men, also go to register at Kraftfoods.com, helping Kraft not only to promote its products but also to reach a broader consumer base beyond its traditional audience of women) (Northcott, 2010). As more companies are getting interested in offering their branded apps, the number of these apps is going to grow rapidly. The next post in this series will look more closely at them.

All About Apps: Part 3. App Business by the Numbers

This is Part 3 in the series “All About Apps”.

Here are a few numbers to put the business of apps in perspective.

There are more than half a million apps available on the leading platforms. About 60 percent of them are iOS apps (for the iPhone and iPad) and nearly 25 percent are Android apps (Distimo, 2011 April). These are figures for the United States. The figures on the availability of apps worldwide should be quite similar because the apps being made available in different national markets are almost identical, e.g., 93 percent of apps on Android markets in the US are identical to those in Germany and Australia, and 91 percent to those in Singapore (Distimo, 2011 January). Developers show a strong interest in building apps for iOS platforms (92 and 87 percent for iPhone and iPad, respectively) and Android (87 percent for phone and 74 percent for tablet). Beyond these two platforms, their interest drops significantly (to 38 and 28 percent for Blackberry phone and tablet, respectively, 36 percent for Windows 7 phone and 16 percent for WebOS tablet) (Appcelerator-IDC, 2010).

Game apps account for the lion’s share (45 percent) of revenues. No other category of apps comes close (Vision Mobile, 2011). Android has more free apps than any other platform. Proportionally, it has twice as many (60 percent) free apps as iOS (29 percent for the iPhone and 26 percent for the iPad) and Backberry (26 percent) (Distimo, 2010 August). Going by usage, games still make up the most popular app category (e.g., 64 percent users have played a game app in the last 30 days), ahead of weather (60 percent), social networking (56), maps/navigation/search (51), music (44) and news (39) (Nielsen, 2011). For tablets, they are very popular with book apps thanks to their larger screen, e.g., books are the second most popular app category (54 percent) behind games (62 percent) (Yudu Media, 2011).

In 2009, the apps had been downloaded 7 billion times and generated US$4.1 billion in revenue globally. Two years before that, the app market barely existed. Asia had the highest percentage of downloads (37 percent), slightly ahead of Europe and North America, yet North America generated over half of the revenues, ahead of Europe and several times more than Asia. This means Asian mobile users are much more likely to download free or low-price apps than European and North American users. Looking forward, app downloads are projected to approach 50 billion and revenues to reach US$17.5 billion in 2012 (Sharma, 2010).

App Business by the Numbers

App Business by the Numbers

Downloading apps does not equate with using them. About one in four apps, once downloaded, is not used again after the first time; and the trend seems to get worse (22 percent in 2010 Q1, 26 and 28 percent in Q3 and Q4, respectively), according to Localytics (2011). Among tablet owners having downloaded just a few apps, 95 percent use them on a regular basis, those having downloaded 10+ apps 37 percent, and those having downloaded 20+ apps only 16 percent. App usage among iPhone owners shows a similar pattern – only 17 percent of users having downloaded 10+ apps use them regularly (eMarketer, 09/22/2011).

All About Apps: Part 2. Web Stores as a Business Model

This is Part 2 in the series “All About Apps”.

App stores must not be viewed as simply distribution outlets for apps but as a new business model. That model centers on building an attractive business platform and leveraging its network effects to reshape the competitive landscape to the advantage of leading app store operators.

Mobile apps are downloaded mainly from app stores, e.g., three out of four iPhone apps from Apple App Store and more than half of Android apps from Android Market (VisionMobile, 2011). These stores generated approximately 7 billion downloads for $4.1 billion in revenue in 2009 and are projected to reach 50 billion downloads for $17.5 billion in revenue by 2012 (Chetan Sharma Consulting, 2010). There are 103 app stores, according to the Wireless Industry Partnetship (WIP, 2010). Only a few stores (among them, Apple App Store, Google Android Market, Androlib and GetJar) have reached the level of one billion plus downloads. For developers, app stores offer the widest market reach, far ahead of other distribution channels (e.g., own websites). However, each store has its own developer sign-up, app submission process, app certification and approval criteria, revenue model options, and payment settlement terms. Developers may find the costs of distributing apps via multiple stores, even for the same development platform, add up quickly and are thus hesistant to go beyond a few stores.

App stores are run by either:

  • mobile device producers (aka original equipmentmanufacturers [OEMs], e.g., Dell Mobile Application Store, BlackBerry App World, Nokia Ovi and Samsung Apps),
  • mobile operating system developers (e.g., Apple App Store, Android Market and Windows Marketplace for Mobile),
  • mobile network operators (MNOs, aka phone carriers, e.g., Orange App Shop and Verizon Apps) or
  • independent intermediaries (e.g., Amazon Appstore, Getjar and Appitalism).

By design, some stores carry only native apps for a particular operating system (e.g., Android Market, Apple App Store, BlackBerry App World and Nokia Ovi Store) while others offer apps for multiple platforms (e.g., Getjar, Mobango and Hallmark).

App stores embody a new business model that capitalizes on the trends toward technology and media convergence, leverages a different economic driver and reshapes industry landscape to the advantage of leading app store operators.

Technology and media convergence. Traditionally, industry boundary was clear cut and key market players easily identified. In the hardware sector, the phone industry was led by global OEMs (e.g., Nokia, Samsung, LG, RIM, Sony Ericsson and Motorola). Their focus was on the hardware; they typically treated software (operating system and applications) as a supporting elements necessary for the hardware to function rather than a key market differentiator. In introducing the iPhone and its associated App Store, Apple sees the business quite differently: traditional industry boundary no longer matters when several technologies are converging on a single piece of hardware. The iPhone is not just a mobile phone; it is also a media player, a game device, a web browser and a networked computer (though with only limited computing capabilities).

From scale economies to network effect. Apple views its operation system iOS not as a piece of software on which its iPhone hardware runs but as a platform serving a multi-sided market. In the old mobile phone business, the market was viewed as single-sided – the OEMs served only one side of the market (phone users); third-party developers and their applications were very few in number and limited to providing some basic functionalities for the hardware as specified by the OEMs. One OEM saw other OEMs as its competitors. Their business model typically relied on supply-side economies of scale – pricing aggressively to boost sales; higher sale volume would lead to larger production scale, lower unit costs and in turn even lower prices to boost sales further. By contrast, the iOS platform, with the App Store being its business element, mediates interactions and transactions between several groups of market partipants who were, except the phone users, traditionally not key players in the mobile phone business. Each group is attracted to the platform by the vast opportunities to monetize on the products and services they can offer to participants on the other side or sides of the market, e.g., independent developers by the large base of iPhone users who may download their apps, and iPhone users by the large and growing number of apps and media sources that enrich their user experience. The value of a platform to any group of market participants depends on the number of participants on the other side or sides of the market. This is known as the (cross-side) network effect. It tends to propel a market leader already ahead of its competitors further ahead. There is little benefits for market participants to join a trailing platform when many participants on the other side(s) already join the leading platform. Few developers are interested in building apps for HP Touchpad, which runs on HP WebOS, when most users prefer Apple iPad; in absence of any other compelling incentive, few users would be interested in buying the Touchpad when most apps are being built for the iOS (and Android) instead.

Altered competitive landscape. Apple’s rival, Google, has been quick to recognize the new business model centering on leveraging the network effects. It leads the Open Handset Alliance, a consortium of many hardware, software and telecommunication companies, in developing Android as an operating system for mobile devices. It seeks to capitalize on Android not simply as an operating system for mobile devices but as a platform to capture the lion’s share of a multi-sided market emerging from the convergence of several technologies and media. Unlike Apple, it does not offer mobile devices but its partners in the Open Handset Alliance (e.g., Samsung, LG, Sony Ericsson and Toshiba) do. The graphic below depicts Android as a platform serving a five-sided market.

  1. On the one side are app developers and media publishers who seek to monetize their apps and media content through downloads, subscription and/or advertising revenues. They are attracted to Android by the potentially large number of devices running on this operating system.
  2. On another side are the OEMs who see the bennefit of having a common (thus popular) operating system that (a) lets them quickly enter the smartphone business without having to develop an operatingn system of their own and (b) can quickly attract many app developers.
  3. On the third side are mobile device users who are drawn by the large number of available apps giving the hardware a fuller set of functionalities and offering them rich sources of media content.
  4. On the fourth side are network operators (or phone carriers, e.g., Verizon and ATT) who see a huge pool of subscribers for their service and data plans. They also see the growing libraries of media content being made available for mobile devices as a new source of demand growth for higher-price, unlimited data plans. They are eager to sign up subscribers by offering subsidized prices for mobile devices so as to lower the initial cost of hardware acquisition.
  5. On the fifth side are marketers. They view this huge pool of mobile device users, who are individually identifiable and geographically located, as an attractive target for their ads and services.

For Apple’s iOS, the picture is quite similar. The main difference lies in the second side of this five-sided platform – mobile device producers. All devices running iOS are Apple’s products. Still the network effects work the same way. All the other sides are atttracted to iOS by the large and fast expanding population of iOS devices (iPhone and iPad) in use.

In this emerging multi-sided market, the rising stars are the few players that can attract the most apps for their platforms and in turn enrich user experience and generate greater value to other market participants. Success in this regard enables these platform operators to gain market shares without resorting to price competition. Apple (with its iOS) and Google (with its Android) are two such rising stars. Apple has been charging premium prices on its iPhone and iPads. Meanwhile, Google focuses on making money from advertising and location-based services, leaving  it up to the OEMs to flood the market with affordable Android smartphones and mobile devices; the more ubiquitous these devices become, the more money Google is going to make from its advertising business. On the decline are some former leading OEMs (e.g., Motorola and Sony Erickson) who have stayed too long with the old-style strategy of exploiting supply-side economies of scale to drive down unit costs and prices. Unfortunately for them, the consumers buying smartphones and tablets in recent years are much more willing to pay for design novelty, rich media consumption experience and business productivity tools than for stripped-down devices at a low price. Other OEMs may have rested on the large size of their customer base and thus not been active in attracting app developers. Their platforms (e.g., Blackberry by RIM and Symbianby Nokia) trail far behind Android and iOS in app count.

All About Apps: Part 1. Native, Web or Hybrid App?

This is Part 1 in the series “All About Apps”.

The rapidly growing population of mobile devices such as smartphones and tablets has opened up a new world of opportunities centering on “apps”. There is an app for practically everything, from games and entertainment to education, news, weather, shopping, social networking and productivity. Several hundred thousand apps are now available; they have been downloaded more than 10 billion times in the last few years. What are these apps? Are they any different from the software applications traditionally found on personal computers (PCs)?

What are so different about apps?

Applications are software programs designed for end users (e.g., database, word processors, presentation, spreadsheets, Web browsers and e-mail client) and are different from systems software, which consists of files and programs making up a computer’s operating system (MS Windows or Mac OS) and managing its resources (e.g., drivers for hardware). Applications sit on top of systems software; they cannot run without the latter. Those deployed by organizations are predominantly enterprise applications, which perform system-wide functions such as accounting, payroll processing, e-mail systems, production scheduling, procurement and customer relationship management. They are hosted on some servers and provide simultaneous services to a large number of users, typically over a computer network. Some are proprietary applications being developed and deployed in-house by corporate IT staff; others are outsourced from application service providers (ASPs). The latter can be installed on-premise or hosted by the providers (thus known as software as a service – SaaS). A more recent trend is to move enterprise applications to the “cloud” – a type of Internet-based computing services delivered to an organization’s computers on-demand.

Other than enterprise applications, there are single-user applications. They are installed and executed on a user’s PC and serves only one user at a time. Thanks to the proliferation of personal computers, single-user applications have become widely common, inside as well as outside organizations.

There is another kind of applications, which have caught on like wild fire thanks the rapidly multiplying population of handheld mobile devices such as smartphones and tablets in recent years. Known as “apps” (an abbreviation for “applications”) or often also as “mobile apps”, they make it easier for users to access common Internet-based services and utilities (e.g., email, bookmarking and text messaging) on handheld devices, which generally have smaller screens and more limited computing power than desktop or laptop PCs. They also provide additional functionalities and utilities (e.g., games, photo editing and office productivity) to mobile devices, making these vastly more useful (e.g., a smartphones is not just a voice and data transmitting device but also a web browser, a gaming device and a media player; a tablet is not just a gaming device and media player but also increasingly a replacement for a netbook or laptop PC). They have become the new channel for delivering enhanced services and experiences to mobile device users.

It should be noted that apps are not strictly for mobile devices even though their rise has been closely associated with the proliferation of mobile devices and in particular with the market success of Apple App Store. In May 2007, for example, Facebook launched the Facebook F8 Platform to provide a framework for software developers to create applications that interact with core Facebook features. Within a few months, it had attracted thousands of applications that enabled users to perform numerous tasks, from shopping (by tapping into circle of friends to find the best deals) to nightlife (by notifying friends on the nightlife hangouts of one another), which had not previously been available on online social networks, Facebook or elsewhere. These apps quickly expanded the functionalities of Facebook and helped to propel Facebook quickly ahead of its rival (then market leader) MySpace. They were originally designed for PCs, not mobile devices. Apple did not open its App Store until July 2008. Within 9 months of its launch, however, Apple App Store reached one billion downloads and by January 2011 (or two and half years later) ten billions. In light of Apple’s spectacular success, other competitors have also launched their own stores for mobile apps (e.g., Android Market by Google, BlackBerry App World by RIM and Ovi Store by Nokia). Even Apple has extended the App Store business concept with its Mac App Store for its Mac computers (instead of the iPhones and iPads) and its rivals have quickly followed (e.g., AppUp Store for Windows netbook PCs by Intel). So, apps are now going beyond mobile devices and onto the desktop and laptop PCs, the web (Chrome Webstore by Google) and even the billions of other connected devices out there, from TVs to cars.

If “apps” are not strictly for mobile handheld devices, then how do they differ from more traditional “applications” for desktop and laptop PCs? Both are software applications for end users, but they differ in some subtle ways.

  1. Functionalities and features. Traditional applications for PCs are typically designed to provide a fuller range of functionalities and features, where only a subset of which is actually needed by any individual users. They normally give users a menu of options for personalizing these features to individual needs. They require substantial hardware resources (e.g., computing power, graphics capabilities and storage space). By comparison, apps are more like mini,or bite-size, applications that perform very specific functions, typically on handheld devices with more limited computing resources.
  2. Prices. Given their full range of functionalities and features, applications for PCs naturally cost a lot, often in hundreds of dollar. Apps are on the other hand much simpler in design and hence in development and testing. They cost much less, $2.28 on the average on Apple App Store (148Apps.biz, 2011), although some may cost close to $1,000 (Shontell, 2011; Ide, 2011) .
  3. Distribution. Applications on PCs usually require relatively complex processes of software installation, personalization and updating that often cannot be easily completed without the help of an user manual. The same processes for apps are relatively simple and completely automated. Users usually find, purchase, download and update apps through a few major app stores, usually with a simple press of a button. Some apps can also be found on websites other than app stores; still, users can download, install and/or launch them with one button click.

Native, web or hybrid?

From the development standpoints, there are three choices: native, Web and hybrid apps.

  1. Native apps are those designed to run on a specific operating system (e.g., Apple iOS, Google Android or HP webOS) or even a specific type of device (e.g., iPad or iPhone, though both are running on iOS). Being system/device-specific, native apps can access the hardware features (e.g., camera, gyroscope, compass, accelerometer, microphone and GPS) and resources (e.g., local files, contacts and calendar events) of the device to give richer user experiences (e.g., responsive user interfaces and complex animated content). They use robust programming languages (e.g. Java, Objective C and C++) which are highly suitable for complex application development and have proven track records. Games and entertainment apps therefore tend to go the native route. On the downside, native apps designed for one operating system need to be recoded (with considerable time and cost) to run on another operating system. They are typically distributed through an app store and must therefore get approval from that store; the standards and process for approval vary from store to store. They have to be downloaded and installed on a device before they can run; once installed, they can run even when that device is offline.
  2. Web apps are web sites specifically optimized for mobile devices. These sites can be anything, from a currency exchange rate calculator or business brochure to an online newsletter. Web apps run on mobile Web browsers. They are typically written in a browser-rendered language such as HTML (for defining the static text and images) combined with CSS (for defining styling and presentational elements) and JavaScript (for describing interactions and animations), e.g., content is simply reformatted with CSS to suit a particular screen size and resolution. They work across almost any mobile devices and operating systems. Some uncertainties remain because, for any version of HTML, not all its features are supported by all browsers; likewise, JavaScript may not be interpreted in the same manner by all browsers and on some browsers may not be interpreted at all. There is no guarantee that a particular feature that works on one mobile web browser (e.g., Safari) will also work on another browser (e.g., Chrome, Firefox Android, Dolphin or Opera Mobile). Web apps do not need to be installed on mobile devices; nor do they have to be distributed through an app store. Each time a Web app is used, all or some of its parts are automatically downloaded from the Web. That means it cannot run unless the device on which it is used is connected to the Internet. Web apps are particular popular for communication, shopping, weather and financial services, which depend on data and content constantly updated via Internet connection.
  3. Hybrid apps combine selected features of native and web apps to take advantage of the strengths of these two app types. They do so by “wrapping” a web app, which uses cross-platform web technologies, with a native app to gain access to hardware features and resources (e.g., camera and local files). To users, hybrid apps look and feel just like native apps – they are downloaded from the app store or marketplace, installed on a mobile device launched just like any native apps. For developers, it is not necessary to recode hybrid apps from scratch in order to port them from one mobile operating system to another. Their web portion is already written in HTML, CSS and JavaScript, which can be reused across operating systems and devices.

Mobile Apps Explained from Splash Digital Media, LLC on Vimeo.

The image below illustrates how native, web and hybrid apps differ from one another. A native app has binary executable files that are installed on a mobile device. It interfaces directly with the mobile operating system, without any intermediary or container, and access hardware features and resources via the application programming interfaces (APIs) made available by the operating system vendor for the device. By contrat, a web app consists of web files written in HTML, CSS and JavaScript, and run on a mobile web browser, and thus does not interface directly with the operating system. A hybrid app wraps such web code inside a native container; that container then interfaces with the operating system through the device APIs.

Apps illustrated

Apps illustrated: native vs. web vs. hybrid (by Worklight, 2011a)

Until very recently, the look and feel of, and hence the user experience with, native apps and those of web apps were far apart. But that is beginning to change fast. Behind this change are the technology improvements being made by HTML. Its latest version HTML5, still a work in progress, promises to push the capabilities of web apps to the point of making them as engaging as Flash applications and as integrated with the device as native apps. It supports vector graphics, besides bitmap, and animation. Slowly it is enabling Web apps to gain access to some hardware features. Web apps can now get the user’s current location from the mobile device’s GPS. Before long they can gain access to its camera and sensors, and be cached on the device for offline use when Internet connection is not available.

HTML5 hardware access

Timeline for HTML5 access to hardware features of mobile devices (Global Intelligence Alliance,2011)

Which type of apps should an organization opt for?

  • When there is a need to offer complex user interfaces, killer speed and rich user experience (e.g., games), native apps are the way to go. Being distributed through an app store can be a benefit because app stores are where users go to look for apps. However, be prepared for the high costs of development and porting the apps to multiple platforms, and the time and uncertainties of getting these apps and their subsequent updates approved for distribution through an app store.
  • When there is no need for access to hardware features or only limited need for such access (e.g., simple GPS) but a much greater need for data to be updated frequently, and when speed is not important but low-cost, cross-platform availability is, web apps offer a better option. They cannot be distributed through app stores, however, and must therefore rely on search engines and website marketing to be found by users. This may not be a serious disadvantage as it was not too long ago. With the influx of (native) apps onto app stores, it is getting harder and harder to gain visibility there.
  • When there is a need to reuse a code base across multiple platforms for development cost savings and also to access some (but not the whole set of) hardware features for more complex user interface or richer user experiences, not to mention a desire to have app store distribution, hybrid apps offer an attractive compromise. There are some mobile development frameworks out there (e.g., PhoneGap) that let developers build the native wrapper for hybrid apps by using JavaScript, HTML and CSS, instead of difficult languages such as Objective C and Java, to query the device’s compass, take pictures, find contacts, create appointments and tap other hardware features not otherwise accessible to web apps.

Native, Web and Hybrid Apps Compared (by Worklight, 2011b)

Resources

  1. 148Apps.biz “App store metrics”, accessed Sept 19, 2011.
  2. Global Intelligence Alliance, Native or Web Applications? How Best to Deliver Content and Services to Your Audiences over the Mobile Phone, (April 2010).
  3. Micheal Ide “List Of Most Expensive iPad Apps Hits $999”, IT ProPortal, (May 11, 2011).
  4. Alyson Shontell “The 15 Most Expensive Android Apps In The World!Business Insider, (August 11, 2011).
  5. Worklight (2011a), HTML5, Hybrid or Native App Development.
  6. Worklight (2011b), Native, Web or Hybrid App Development? Worklight Webinar Series.

There’s an App for That

Note: I wrote this blog  post almost a year ago on a different platform (which is no longer conveniently accessible). The lessons are just as valid now as they were back then. So, I like to repost it here.

I wonder if you watched Steve Jobs unveiled the iPad yesterday. I did for the most part. But I am not “blogging” about the iPad here. Instead, I simply want to use the iPad (or for that matter, the iPhone and iPod Touch) as a vehicle to discuss about complementarities, the value webs (or networks) and value co-creation, and their ramifications on business strategy.

It is worth noting that Steve Jobs did not simply showcase the hardware (iPad) but also the possible content (e.g., photos, the NY Times and ebooks), entertainment (e.g., music via iTunes) and applications (e.g., games and other applications via Apple Apps Store) available for the iPad. This is increasingly the case for many information- and technology-based products and services. Such a product creates not much value by itself but much much more when being made available with other complementary products. What can you do with the iPad without the content, entertainment and applications offered by other publishers, media sources and software developers?

Lesson #1think not of a standalone productbut rather of a bundle of offerings or even a platform (iPad plus iTunes and Apps Store).

When complementary products and services are offered together, they enhance one another’s appeals; the value of the whole system or bundle is greater than the sum of its parts. Complementarities therefore indicates a condition of increasing returns in which the adoption of one element has a higher payoff when one or more complementary elements are simultaneously adopted. The more consumers find the apps on the Apps Store appealing, the more interested they would be in having an iPad, iPhone or iPod Touch. In fact, “there’s an app for that” has become the selling point for these Apple products.

Contrast Apple iPod with Microsoft Zune. The latter product has received high marks for quality hardware in many product reviews. Its sale volume has been meager however, despite the financial clout of Microsoft. There are simply not that many apps for Zune and the Zune Marketplace, unlike Apple iTunes Apps Store, attracts far few more visitors and buyers. For prospective iPod, iPhone and iPad challengers, it is the apps as much as the hardware that will determine their success.

This new reality necessitates a shift in strategic thinking from the value chain to the value web. In a traditional value chain, a firm competes by occupying those links where it can add more value at a lower cost. Strategy becomes equated with strategically positioning the firm along that chain of value-adding activities. Value creation focuses on transforming objects. The value thus created lies in the resulting products themselves. However, as complimentarities among products and services become the source of value, the value chain concept proves less useful in uncovering value and analyzing value creation. A firm succeeds only by finding complementary technologies, products and market participants it can network together to co-create value.

Lesson #2Value co-creation focuses on mediation (i.e., facilitating interactions and collaborations) among the networked participants.

The value thus co-created lies not only in the product itself but also in complimentarities among the products and services. The value of Google Maps lies not as much in the database of geographical mapping information as in Google’s ability to attract a large and growing number of map-based applications. Likewise, the value of the iPad is not as much in the device itself but in Apple’s ability to attract a large number of publishers, media companies and software developers to make their content, entertainment and applications available to iPad users.

The shift from value creation along a value chain to value co-creation through network relationships also coincides with a shift from production of goods (in the physical world) to the provision of service (more prevalent in the digital world). The latter necessitates a shift from the goods-dominant (G-D) logic of value to the service-dominant (S-D) logic. In the G-D logic, producers and consumers have distinct roles; the primary focus of the firm is on the production of goods to be sold to customers. In the S-D logic, their roles converge; the focus turns to interactions between the two sides, not simply to facilitate transactions but also to offer an experience unique to individual customers.

Lesson #3Value is ultimately derived with participation of the beneficiaries (often the customers) through use, and is thereby essentially ‘value-in-use’ as opposed to ‘value-in-exchange’.

Think of YouTube, Flicker and Facebook, just to name a few. Without user active participation, they cannot even exist. The locus of value creation then moves from the ‘producer’ and market exchange to a collaborative process of co-creation between parties.

The next time, if some one says “there’s an app for that”, I hope you would also think of serious strategic marketing stuffs like multi-sided markets and platforms, complementarities, value co-creation and S-D logic.

On a lighter note, there are times (such as now — December in snowy Michigan, and thinking of sunny Florida Keys) when “there is no app for that”.

What do Amazon, Apple, eBay, Facebook and SalesForce have in common?

View this presentation — Increasing Returns — a Key Principle of the Information Economy — on Prezi.com

The most obvious answer to the above question — “What do Amazon, Apple, eBay, Facebook and SaleForce have in common?” — is that these companies all conduct their business exclusively, or extensively, over the Internet. That answer is technically correct but it misses a key element for understanding the information economy. The true success of these companies lies in their ability to leverage increasing returns to their competitive advantage.

Take Amazon as an example. Amazon’s decision to let other retailers, from large retail chains (e.g., Macy and Target) to mom-and-pop resellers to sell their merchandise on its Website, often in direct competition with its own retail offerings, had many skeptics at first; but no more. By transforming itself from simply a retailer into a retail platform (more on the platform concept in a later post), it is able to expand its lead as “Earth’s Largest Selection” (not just Earth’s Largest Retailer originally). With so many resellers offering a vast range of merchandise on its Website, Amazon has fortified its position as a one-stop retail destination for millions of online shoppers; if shoppers can find everything at Amazon, why would they waste time going to many other places. Thus, the more retailers Amazon can attract to its Website, the more attractive it becomes to online shoppers; as more people shop at Amazon, the more attractive its Website becomes to other retailers. The network effect is at work.

Consider Apple. Its iPhone and iPod Touch are marvelously designed. By themselves, they offer little value to their users. But the thousands and thousands of applications, available via Apple AppStore, let users add a wide range of selected functionality to these products. The more apps are available, the more attractive the iPhone and iTouch become; the more people owning them, the stronger is the incentive for developers to build applications for the iPhone and iTouch. Billions of downloads from the AppStore tell the story. Once again, the network effect is at work.

How about eBay? There are other consumer auction sites out there; but none comes close to eBay. Why goes anywhere else. As more sellers list their merchandise on eBay, more buyers find eBay an attractive place to buy; and as more buyers look for merchandise on eBay, more sellers become interested. Should I keep on saying the network effect is at work?

Look at Facebook. It was trailing far behind MySpace until it decided in May 2007 to let independent software developers to build applications for Facebook (and earn a share of advertising revenues). As more such applications become available, users can do more things (e.g., sharing shopping info with friends) on Facebook, they spend more time there instead of searching on Google or going somewhere else. As users spend more time on Facebook, advertisers become attracted. As more advertisers spend their ad dollars on Facebook, more app developers become interested; as more apps become available, users spend more time on Facebook… The virtuous circle spirals upward. Look at where Facebook is now, relatively to MySpace.

Also look at SalesForce.com. It is a pioneer of Web-based CRM software applications. Competing with software giants such as Oracle and SAP, which can spend massive amounts of money on software development, is certainly not easy. So, SalesForce creates AppExchange that lets independent developers, and users as well, to develop and market complementary applications…. [You can fill in the rest of the story].

There are more than just the network effect being at work. Amazon could have expanded its offering from books into other lines of merchandise on its own; but that would be very costly, slow and perhaps ineffective (after all, each line of merchandise requires unique “domain” expertise that takes years to build). By mobilizing other retailers to sell through its website, Amazon can accomplish the “Earths’ Largest Selection” mission very expeditiously. Furthermore, a major hurdle for online retailers is “order fulfillment” — once a customer places an online order, the merchandise has to be picked, packed, shipped and, if needed, traced. Amazon has spent around a billion dollar to build such a system. That system cannot be economically justified without the massive volume of sales to utilize it; yet, the massive volume cannot be generated without having such a system in place. Here is a chicken-and-egg problem — which one, sales volume or fulfillment system, should Amazon have first? By mobilizing resellers to Amazon site, the company can quickly build up the sales volume to justify the investments in building its fulfillment system. Scalability has been at work thanks to this. Likewise, it would be cost prohibitive and take foreever for Apple, Facebook and Salesforce to develop the massive volume of applications on their own. By mobilizing independent application developers, they can scale up very economically and expeditiously.

In the video clip above, the presenter suggests that the future lies with companies like Apple and Facebook (but not Google). That means these companies will be able to maintain their market leadership (while Google cannot, at least not so effectively). My question for you is: can they? That depends on their ability to lock-in their customers/users. In the case of Amazon, it would be very costly and time-consuming for someone else to develop an order fulfillment system of that scale and even more to replicate Amazon’s website operation capabilities (search, merchandise rating and recommendation functionality, payment processing, etc.). So, it should be difficult for resellers on Amazon to migrate elsewhere. But how about Apple, Facebook and Salesforce? As for Google, where can it finds and exploits the network effects?