Is the app store the elusive killer app?

We in the communications industry love the concept of the “killer app” – that mythical service that will drive usage on a sustainable basis, increase revenue and eliminate customer churn. Yet with the possible exception of voice service itself, we’ve never actually had a true killer app that has fundamentally changed the industry’s business model.

That may be changing. The new killer app may actually be the app store – a service that enables subscribers to browse, purchase and download applications onto their mobile phones. The app store has the potential to meet all of the criteria of the killer app. It can generate continued usage, particularly with subscription-based service models. It can drive increased revenue by providing operators with the opportunity to take their cut of each app download. And it can reduce customer churn by creating a “stickier” relationship with the subscriber. Case in point: In the first quarter of 2009, AT&T activated more than 1.6 million iPhones, over 40% of which were new subscribers, and reported that those iPhone customers have ARPUs that are significantly higher and churn rates that are significantly lower than the company’s overall postpaid subscriber base.

However, there is competition on the horizon for the app store market. A wide range of market players, including Google, Ericsson, Nokia, and Research in Motion, as well as operators such as Orange and Korea Telecom, have launched or plan to launch app stores, capitalizing on the nearly 300 million smart phones that are expected to be in the hands of consumers by 2011.

For communications service providers, the surge of interest in mobile apps has made their options painfully clear: They can either accept a role as bit pipe providers, acting as little more than the conduit between the content service provider (CSP) and the consumer, or they can figure out how to play in this emerging market opportunity. While there will be operators who choose to take the pipe route, and build a successful business doing so, the bulk of CSPs want to play a more active role in the emerging content market.

However, to do so, there are certain functions that must be implemented. Past efforts of CSPs in the content realm have largely taken an on-deck “walled garden” approach, in which they limited subscribers’ ability to access applications and content. While this model was due in part to operators’ lack of experience in a competitive retail environment, it was also directly related to the limitations of CSP back office systems and service delivery environments. A successful app store strategy requires the following capabilities:

• A third-party content execution environment that operates either independently or as part of a larger service delivery platform, enabling content providers to securely access components of the operator’s IT and network environment
• Content billing capabilities, including flexible charging, direct-to-bill payment capabilities and transaction settlement capabilities
• End-to-end assurance capabilities that enable the operator to manage a service or application from the content provider down to the device level, to maximize the customer’s experience with the service
• Real-time policy control to guarantee quality of service for specific content types and implement access parameters, such as parental controls and time-of-day restrictions
• Subscriber data management capabilities that enable the operator to consolidate subscriber information and make it available to third party content providers to aid in their marketing efforts

An increasingly competitive environment, combined with a new generation of tech-savvy consumers, has made the communications market a challenging place for incumbent players. App stores hold promise as a way for these CSPs to maintain their relevance in a rapidly changing industry—assuming they are able to address their legacy mindsets and systems.

With 15 years as an analyst and journalist in the telecommunications industry, Shira Levine joined Infonetics Research in April 2009 an accomplished expert in the OSS, billing, and service delivery platform markets. She authors several Infonetics equipment market size and forecast reports on policy servers, service delivery platform (SDP) software and services, and subscriber data management (SDM) software and services, as well as an ongoing series of Continuous Research Service (CRS) notes and surveys on important communication industry players, technologies, and service provider trends. Bio: http://www.infonetics.com/bios.asp?id=sl