In the first of three exclusive excerpts from their book, OpenGardens, Ajit Jaokar and Tony Fish ask the question: why aren’t entrepreneurs making money in the mobile data industry?
There are some good reasons why profits are scarce in the mobile data industry, but also some very practical means to create wealth. This article, the first in a series of three, provides some concepts about the mobile data market drawn from our book OpenGardens. The second article will discuss the concepts of ‘Innovation, Entrepreneurs and OpenGardens’ and the third article will discuss the future of ‘OpenGardens and Digital Convergence’.
Our book focuses on the question of innovation in mobile data and results from extensive research throughout the growth of the mobile communications industry. Whilst the mobile data industry holds considerable promise for the future — it is estimated to create a trillion dollars in revenues worldwide by 2010 — the existing ecosystem is challenging for the ‘garage entrepreneur’.
OpenGardens acts as a guide for both developers and operators by offering a two-stage roadmap of how to work within the existing ecosystem and also how to prepare for the more complex ecosystem of the future. Without an innovative component, new services will not succeed in this industry (especially when they are not backed by strong brands, extensive funding etc). Thus, innovation is necessary for the new entrant and also for the industry as a whole to thrive. Further, we believe that the greatest opportunities for success lie ‘on the fringe’, where one or more existing elements are combined to create a new service.
From the perspective of the large providers such as the mobile operator, innovators are ‘third-party developers’ or ‘external developers’, typically engaged through their developer programmes. We embrace the innovator spirit by collectively calling them ‘garage’. To understand OpenGardens and how to create wealth we need to look at both ‘Openness’ and ‘garage’.
What is Openness?
n the context of the mobile data industry, ‘Openness’ can mean many things:
a) Openness of access for the customer (i.e. the ability to access any content from their mobile device)
b) Openness of platforms (for example a level playing field for third party applications as compared to the provider’s applications) or;
c) ‘Open source’ as defined by http://www.opensource.org/
While ‘open source’ and ‘open access’ are useful, openness mainly refers to openness of platforms. By ‘platform’, in the mobile applications context, we mean the mobile operator’s infrastructure.
Technologically, in its ultimate form, this approach can be viewed as ‘API enabling’ a telecommunications network. The external application can make a software call via the published API (Applications Programming Interface), thereby creating a plug-and-play ecosystem. The API model is also called by other names such as networked model, Bazaar model or web services model.
However, we do not foresee telecoms platforms opening up in one big bang. The challenge is to work within the existing environment and understand the phased opening up of the platform and the opportunities that this will afford us.
What is garage?
As with openness, the concept of garage has a different meaning in the context of the mobile data industry.
When used in this context, a garage includes an entity or individual who has an unfavourable negotiating position with the mobile operator. It’s easier to explain this in context of the converse — i.e. entities who have a favourable position with respect to mobile operators. These include well known brands like Coke, large communities like Friends Reunited, unique content like CNN and anyone who has a large amount of money to spend! Unless one has a unique proposition, practically everyone else is in the garage (even if they are venture funded) because they are approaching the operator from an unfavourable negotiating position. Thus, it’s a large garage!
This situation means that you need to differentiate. You cannot take on the existing players head-on. It is a large market that will not thrive unless effective partnerships are formed. There is a need for new players and new partners in the value chain. However, starting ‘in the garage’ as we define it above, implies one’s strategy must be different from that adopted by entities that are not in the garage.
Let’s take the example of mobile games. This sector of the industry has shown promise recently. There are already players in this sector who are creating content, which their customers want. We see a critical mass of handsets in the marketplace, billing is possible and aggregator models already exist. However, developing a ‘me too’ game in the industry at this stage is a recipe for failure since the market is already saturated with many mobile games.
The numbers present a sobering picture. How many game downloads would it need to attain a profit? The mobile game industry is similar to the PC or console game market. Traditionally sales are heavily skewed to the top ten titles, and in many cases the top five take a huge portion of the entire market. Most titles lose money. Net margins for mobile operator and aggregator distribution models (for example using aggregators like Cellmania, Mforma etc) run from 60% to 75% in the USA. In other markets, it could be worse (for example India), or better (for example Japan and Korea).
In the USA, a game typically retails at $3.99 for an over-the-air (OTA) delivery. Product development costs for a single player game title could range up to $40K including handset testing and porting (but that could get a lot cheaper if developed overseas). Assuming a net of $2 after all costs, sales of 20,000 units are needed just to break even. This gets even worse because many successful titles depend on a brand — for example a ‘Harry Potter’ game. Brands have their own costs leaving even less for the developer.
Therefore, we believe that most existing titles are not making money — so new entrants have an even more uphill task. But there are opportunities in this sector today because variants in the mobile gaming space are possible — for example 3D games, networked games (i.e. multiplayer), and games for women to name just three. In these variants, there is some scope for innovation and new players but note that each of these examples must broaden the scope of the basic offering along a new dimension i.e. a simple mobile game.
OpenGardens hopes to facilitate this type of thinking by acting as an ‘ideas pot’ where you can understand the building blocks that could then be combined in a unique way to create a new service. Our vision of OpenGardens can be summed up in the following ideas:
The open ‘free for all’ culture of the Internet does not translate directly on to the Mobile Internet. We believe ‘a level playing field’ which encourages the grassroots developer is essential for the overall prosperity of the industry. This implies ‘openness of platforms’ and ‘openness of access’.
An innovative component is necessary for garage entrepreneurs to make a difference because they lack the backing of big brands, extensive funding etc. Opportunities often lie ‘at the fringe’ i.e. the intersection of the business/technical elements that comprise the mobile data industry.
Rather than a ‘big bang’ opening — we are witnessing a phased opening of the gardens.
Ultimately, the vision of Open Gardens lies in Open APIs and the emergence of a ‘plug and play’ ecosystem (also called the networked model, Bazaar model, web services model). Indeed the vision of a ‘plug and play’ ecosystem is so vast that it affects all facets of Mobile applications development. Hence, it requires extensive understanding of a number of strategic, business and technical aspects of mobile applications development. The model is not radical or futuristic – companies like IBM (www.ibm.com) are speaking of an ‘On demand economy’ even today. The model can also be seen with the rise of ay and Amazon. The provider (for example Amazon) becomes the hub (and not a pipe!) in the marketplace where small providers (sellers of services) transact business profitably and easily. For this to happen successfully, we need both technical feasibility and commercial viability (for both the small provider of services and the company who manages the platform).
However, Open APIs need to be looked at in the wider context — i.e. the viewing of Open Gardens in terms of Open APIs is one dimensional. It misses other opportunities like ‘off portal revenues’ that we discuss later.
We believe in the OpenWaspa model that we describe below in detail.
Considering the state of the industry, one could wonder if the Mobile operators need partners at all?
There are three reasons why they do.
a) Firstly, although Data is taking longer to become mainstream, no one denies that it’s going to be a huge source of revenue for all concerned
b) ‘You never know who walks in through the door’. Maybe there is a killer app out there?
c) Related to (b) — competitive intelligence: someone else may deploy a killer application first
Another way to look at this problem is to study ecology. The bottom of the food chain (the plankton — if you take a marine biology example) is expected to feed the ‘whales’ at the top of the food chain). But, the food chain can only work if the ‘plankton’ i.e. developers survive. If the developers do not have a viable business, the industry can never attain it’s full potential.
So, there is indeed scope for the innovator!
In the next article in this series, we will examine the impact on garage entrepreneurs and how they can craft a revenue-based strategy on the foundations on innovation.
We shall see that the process is broken, insofar as the mobile operator’s resources and developer’s requirements are still some distance apart. There needs to be a party that can bridge the gap. We do not believe that the WASP (Wireless Application Service Provider) is the best solution to bridge this gap because it does not benefit both sides of the equation, but rather introduces an additional element that is attempting to produce economic return for its shareholders.