Where’s the Mobile Biz?

I’m not sure there’s much chance of building a successful business selling through an App Store. And I know how hard it is to generate service revenue off a Web site, whether you’re aiming at mobile clients or not. So, I have a question: Is there really any money to be made in mobile apps?

I think there is, but I think the only way to do it is via a new kind of partnership, one that is only now becoming possible, with the mobile network operators.

[Context: I’ve been a Web guy almost as long as that’s been possible, for business and pleasure too. Recently, I’ve been intensely interested in the mobile market (see Mobile Gold and Experimental Engineering) and more specifically the Android platform.]

A billion mobile devices are being delivered per year, more or less. This makes the space interesting from a business point of view, but consider also that for many people in the less-developed parts of the world, these new devices represent their first and only exposure to the Internet. Thus, I think there’s an opportunity here not only to make some money, but to change the world in a beneficial way.

App Store Businesses? · I would be reluctant to try building a business on the Apple or Android or Palm or any other app store. Given the typical less-than-$10 price point, the volumes you’re going to have to reach to see meaningful income levels are frighteningly huge. A business model built around a steady succession of moderately-priced upgrades is a little more plausible but unproven (and disallowed at the moment in iPhone-land).

That Apple store in particular has been taking a pretty severe beating recently; consider for example David Weiss’ The Inhospitable Land of the App Store. It’s hard to feel sorry for Apple, which is making buckets of money on iPhones, based in part on all the great apps independent developers are cooking up, while at the same time treating them like peons.

I suspect that the problem will go away simply because what Apple’s trying to do just can’t be scaled up, and the pain will come to outweigh the profit. Which is just as well; Developing for the iPhone at the moment is like picking up dimes in front of a bulldozer.

But let’s not let Apple’s current problems divert our attention from the real problem with the app store: the price point forces you to bet on volumes in the millions to have an even marginal business.

It’s the Cloud, Stupid · Most interesting mobile-device apps are going to have a server-side component. First of all, the mobile devices just don’t have enough power or storage or battery life to be interesting as standalone platforms. The best thing about a mobile device is that it’s connected to the Net, where you can interact with any person or service in the whole world; this capability to be used, even if for nothing else, for silently and safely persisting data upstream to something that can’t be accidentally dropped into a toilet bowl.

The Online-Service Business Model · Unfortunately, it isn’t much easier. The landscape is littered with the corpses of online service offerings with one model or another for making money. If you can drive huge traffic, there’s money in advertising. If you have a popular real-world product to sell, there are old-fashioned retail margins. Direct subscription is tougher, and once you get past 37signals, there are just not that many outfits making a go of it.

So, What Will People Pay For? · Or, as Guy Kawasaki asked recently: Will Anyone Pay for Anything? His piece is sort of depressing; young people in particular, a demographic many public-facing businesses would like to reach, apparently are very reluctant indeed to open their wallets.

But I thought the article failed to highlight its really important findings. These people all had cellphones plus they spent a lot of time online. That meant they were paying their phone bills plus some sort of ISP charges, direct or indirect; for a high proportion of people, that’s all one bill. What we’d all really like would be to get on that bill. What chance, then for some sort of partnership with the network operator?

Network History · A little history is in order; everybody knows that before the iPhone, there weren’t many interesting mobile apps. The main reason was the insistence of the mobile network operators that they control every aspect of their relationship with their customers.

One thing they turned to be really bad at was creating a landscape where developers could flourish or even wanted to play. I can remember getting pitches from smart young people with good ideas for making cellphones more useful; I’d have to tell them that their customers weren’t going to be their customers, their customers were going to be the network operators, so they’d have to fight their way through a phalanx of telco middle management who couldn’t reasonably be expected to have much of a feeling for innovative new street-flavored apps. Also, that the telco would expect a slice of every penny at every stage of the business, and probably a bunch of up-front money.

Whatever you think of Apple, they deserve immense credit for breaking down those walls and showing the good things that happen when you let developers connect to customers.

Network Hate · As a result of all this history, most people in the software-development community have built up a visceral dislike of the network operators, and a basic assumption that they can never do anything but get in the way. I don’t know how fair that perception is, but it’s a fact of life.

It doesn’t help when we encounter irritants such as the AT&T network buckling under pressure from iPhone users.

A Hard Question · Why would AT&T want to invest in fixing their network? Everybody’s on a fixed-rate data plan, so they’re not going to get any more money.

On the one hand, they might be afraid of losing customers. On the other, the customers they’ll lose are precisely the ones who are hammering the network and making those fixed-price economics hurt.

And it’s not like people have stopped buying iPhones, so what exactly is AT&T’s motivation again?

If people get irritated enough to switch networks in volume, wherever they go is going to end up with a ton of fixed-price business and, just like AT&T, incented to keep people from actually using bandwidth.

I’ve made this argument before, in Flat Rate Considered Harmful, calling for a-la-carte data priced low, aligning the incentives of the people who provide the bandwidth and those who use it. It looks like #3 and #4 on my list have happened.

Now, if you read the comments on that piece, a bunch of people wrote in saying “It’ll never fly because the telcos will rape us on bandwidth charges” or (slight variation) “People will be too scared to try because they’ll worry that the telco will rape them on bandwidth charges.” This fear is legitimate, but let’s just assume hypothetically that there were a telco that saw an upside in avoiding rape; in being fair and transparent. To achieve this, I have two more suggestions:

• The charge per unit of bandwidth decreases steadily the more you use.

• The telco offers a trivial network service so that every handset can provide a continuous readout of how much you’ve used and how much of a bill you’ve run up.

Also required would be a polished and in-your-face marketing campaign to reset those rape-fear expectations. I’m thinking something along the lines of “Pay for what you use. But not much.” Or “No surprises. Low bills. Next question?”

Once again, this does assume the existence of an operator willing to take a chance on fair and transparent pricing. That’s something of a leap, I know, but businesses that take the right leap are the ones that win.

And I have another, really radical, proposal: The telcos should incent the developers to help them sell bandwidth by giving them a cut of the revenue.

How To Win · Bringing it all together: Here’s a recipe for how a smart, courageous network operator could turn the mobile-Net business inside out, do the world a favor, and score a business triumph:

1. Offer a-la-carte data at a price that seems ridiculously low.

2. That price falls steadily (per unit of data) as the amount you use ramps up.

3. Provide a lightweight billing-info service so every handset can display how much data you’ve used, how much of a bill you’ve rung up, and what your charge per unit has come down to.

4. Open up the network. Let anyone connect anything to it, and download apps from anywhere, and let the apps do anything they want. Get out of the way.

5. Don’t ask developers for any money. But sell the use of your billing system at a really attractive rate, so people can sign up for apps and have charges billed to their phone plan. Do this with enough hands-off efficiency that an app can charge a dime a month and still make money on scale.

   (It’s like this: would you rather sell an app to a million users for $1.99, once each, or charge them a dime a month? Work it out.)

6. Pay developers a small fixed commission on every dollar of bandwidth revenue their application generates for the operator.

7. Watch your competitors play catch-up because all of a sudden you’ve got all the cool applications, and are getting paid for the bandwidth you provide.

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