Mobile app stores deliver little direct revenue but are critical for ARPU

13 Jul 2009

Wireless carriers are unlikely to make much direct revenue from app stores, the electronic storefronts where smartphone users can download applications. However, carriers cannot afford to ignore the popularity of these app stores with consumers and their ability to drive sales of more services.

Pioneered by Apple\'s iPhone and its tight integration with iTunes, online storefronts for mobile applications have quickly become a must-have for marquee phone manufacturers that are eager to work with carriers on implementation.

Research In Motion (RIM) announced its own mobile app store for the BlackBerry, which is set to open April 1. Microsoft has announced its own Windows Marketplace in the fourth quarter. Nokia is getting in on the game, too, with its Ovi service launching an app store in May. Even Google\'s upstart Android OS has its own app store.

The sudden push for app stores does not, however, appear to be boosting telecoms\' revenue as they continue their quest for improved average revenue per user (ARPU) -- at least not directly.

The iPhone App Store, for example, produces revenue only for Apple and third-party developers. Developers collect 70% of application revenue, while Apple receives 30% plus some minor application testing fees. AT&T delivers the bandwidth required for downloading applications, but it doesn\'t get a piece of the revenue. The iPhone App Store is not even AT&T-branded.

Similar proposals by the other app store creators have led some industry observers to worry that such stores will render carriers as providers of \'dumb pipes,\' draining their profitability while third parties discover new revenue streams by using the carriers\' networks.

Such a hostile view might be short-sighted, however, because it ignores all the indirect revenues that carriers can generate by embracing quality app stores.

For one, it reduces a top service provider headache: churn.

\'In the larger broadband world, you call that bundling, and bundling has a huge effect on churn,\' said Stephen Blum, president of telecommunications consultancy Tellus Venture Associates. \'If all this does is reduce churn, that\'s a huge amount of money in the carrier\'s pocket.\'

In traditional bundling, carriers look to triple-play or quadruple-play services to keep consumers from looking elsewhere. With an app store, each \'service\' could be as small as a 99-cent bubble wrap simulator, but those applications add up and put more at stake if a customer considers leaving: They are giving up not only their current carrier\'s service but their paid-for investment in software.

Even if churn is reduced just a few percentage points, the savings in retained monthly revenues are tremendous.

In addition to keeping customers, well-run app stores can also boost phone sales, of which operators can get a cut of the profits, and pull in new customers looking for phones with rich functionality.

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