the app frenzy just a short lived fad (2)

The App Frenzy— Just a Short-Lived Fad?HTML5 is poised to shake up the smartphone apps market

Authors

Laurent Viviez, partner, [email protected]

Maria Molina, consultant, [email protected]

Ulrich Loewer, consultant, [email protected]

The App Frenzy — JuST A ShorT-Lived FAd? | A.T. Kearney 1

T he staggering growth of the smartphone applications (apps) market in the past four years has fundamentally changed the way in which people access and consume content, and caused

a paradigm shift in competitive dynamics for telcos, OS/app stores and handset manufacturers. But native apps might be a short-lived fad. They may be fundamentally challenged by the advent of HTML5— a platform that addresses several significant drawbacks in the native app customer experience.

native smartphone apps took off four years ago after Apple launched the first iphone. initially, Apple’s intention was to create Web apps for the iphone, which could be accessed via widgets, but the fragmented Web app environment prompted Apple to release instead a tool that would allow developers to create native apps for the handset. Apple then created the App Store and the app craze began. in a very short time, native apps have become a mainstream media means for delivering content to mobile devices and are driving significant changes in consumer usage behavior. rather than surfing the Web, people are increasingly using native apps to read news, watch videos or play games. Smartphone users globally have made 10.9 billion downloads of the 600,000 apps available

across various apps stores. The apps market is now worth approximately $12 billion in revenues and is projected to surpass $38 billion by 2014—that’s larger than the global music publishing industry (see figure 1 on page 2).1,2 native apps’ extraordinary success is under-pinned by the slick experience they deliver to con-sumers, which addresses most of the limitations of Java, wireless application protocol (WAp), and browser-based digital services. in so doing, apps have opened up and vastly expanded the market for digital services for mobile phones.

Too Many Apps, Not Enough TimeMoving beyond the hype, we see two structural limitations with the native apps boom—both from a demand and supply perspective. First,

1 IDC, Silicon Alley Insider, March 2011 2 Global Entertainment and Media Outlook 2011-2015 estimates that global recorded music revenues will reach $22.1 billion by 2015, taking into account that revenues in this industry have been declining since 2006.

The App Frenzy — JuST A ShorT-Lived FAd? | A.T. Kearney2

from a consumer perspective, accessing content and services through apps is rather limiting in comparison to the relative freedom enjoyed while browsing the internet. As smartphone usage grows, we do not believe consumers will be happy downloading an app every time they want to access a new service. Smartphone owners already have an average of 18 apps downloaded, though industry experts predict that most of them will use no more than five mobile applications at a time.3 Moreover, people will grow increasingly weary over time of regularly updating or reloading (or even repurchasing) apps when they change their smartphone or tablet.

Second, native apps effectively re-create the walled gardens from the early days of the internet. Today, apps are platform-specific and, to some extent, device-specific. That means apps have to be written for each different operating system (oS) platform and type of device, which increases development costs and erects a significant barrier to entry for apps developers. The popularity of native apps artificially strengthens the negotiating hand of the leading app stores—as illustrated by the high commissions (up to 30 percent) charged by some stores to developers. developing apps for more than one platform only makes sense for apps that will sell in high

3 Pew Research Center’s Internet American Life Project, April 29-30, 2010 Tracking Survey; The Nielsen App Playbook, December 2009

HTML5 isn’t just another technology standard. Its impact could

fundamentally alter the balance of power on the mobile Internet.

Figure 1Mobile app revenues are expected to grow by 66% in the next four years

Note: CAGR is compound annual growth rate Sources: IDC 2010; A.T. Kearney analysis

2009 2010 2011 2012 2013 2014

$2$5

$12

$21

$30

$38

CAGR +90%

Mobile applications revenues(US$ billion)

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Should this be "three" years, i.e., 2011-2012, 2012-2013, and 2013-2014? Or is it inclusive of 2011 & 2014? Thanks!

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Is "66%" ok? I'm computing the increase from $12 b to $38 b (2011-14) which would be 200% + Thanks!

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"+" ok? Position of "+" ok? Or should this be "="? Or "90+"? Also, is the figure "90" accurate? I made it less than this, but I may be wrong. Thank you!

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volumes. From our research, we know that a simple app (average price $1) needs approximately 200,000 downloads to break even on the ioS platform (see figure 2). To support both ioS and Android, a simple app needs about 1,450,000 downloads to be as financially attractive as sup-porting only ioS. For complex apps (average price $5), the volumes required follow a similar pattern to those of single apps, although the gross profits are more attractive. For hTML5, the economics will be different and once the break even point is met, it will become signifi-cantly more financially attractive than any other platform or combination of platforms.

As the average native app sells 30,000 copies, most are loss making.4

A New App ParadigmThe ecosystem might be prepared to put up with native apps’ drawbacks if there were no viable alternative. hTML5, the collective name for a set of emerging Web standards, is a devel-oper platform that enables apps to run directly from the Web browser.5 it can support many features, such as video, graphics and multimedia content, without having to resort to pro-prietary plugins and application programming interfaces (Apis).

4 Apple website5 HTML5, the fifth revision of the hypertext markup language (and file extension), is still under development as of September 2011.

Figure 2“Apponomics” comparison: Gross profit of apps versus apps sold

Assumptions: Simple app: $130,000 development cost, price per app $1; complex app: $540,000 development cost, price per app $5 Effort for additional platform: 80% for programming and project management, 20% for design Store sales commissions: 30% for iOS, 10% for Android, 5% for other stores and HTML5 (payment commission). Platforms considered include: RIM, Android, iOS, Windows 7 & Symbian. Source: A.T. Kearney analysis

$1.5

$1.0

$0.5

$0.0

-$0.5

500,0000 1,000,000 1,500,000

Simple $1 apps(such as small tools and simple games)

Gro

ss p

rofit

(US$

mill

ions

, afte

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re c

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Apps sold(in thousands,

across all platforms)

$5

$3

$2

$0

-$2

500,0000 1,000,000 1,500,000

$4

$1

-$1 Apps sold(in thousands,

across all platforms)

Complex $5 apps(such as business software and complex games)

All platforms profitable:~0.6 million downloads

HTML5 appprofitable:~0.2 milliondownloads

Number of copies anaverage app sells ~30,000

Adding Android moreprofitable than iOS after~1.4 million downloads

Adding Android moreprofitable than iOS after1.0 million downloads

HTML5 only iOS only iOS + Android All five platforms

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Should we add this to the body text?

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Does this correspond to the highlighted text above? (My understanding is that simple app and HTML are not the same thing?) If not, should we add this HTML info to the body text? Thanks!


hTML5 enables developers and content providers to deliver a consistent experience across different devices, while emulating native apps’ ability to download and cache data for use when not connected to the Web, which reduces the need to be constantly online. From the developers’ perspective, using hTML5 could dramatically reduce the time spent coding, as one app will run across different plat-forms. hTML5 works with any online payment technology, enabling developers or content com-panies to provide customers with a choice of pay-ment methods. Finally, hTML5 allows developers to embed links to specific Web pages into specific parts of an app, a technique that can be particu-larly useful for promotions and advertising. To date, this “deep linking” has not been easy to do in native apps. hTML5 also opens up the range of distribu-tion channels and loosens the grip on the closed oS-centric stores (see figure 3). of course, hTML5 won’t be a silver bullet that eliminates all of the downsides to native apps in a single stroke. Although hTML5 will reduce developers’ dependence on app stores, which typi-cally take a commission of between 10 percent and 30 percent, they will still incur some market-ing, distribution and transaction costs. Although many developers complain about the difficulties of standing out from the hundreds of thousands of native apps now available in the

leading stores, they will face the same challenge selling their hTML5 apps through the Web. Moreover, fragmentation (and some incom-patibility) might also be an issue for hTML5, particularly if different browsers implement the standard in slightly different ways. in addition, the need to accommodate different device screen sizes and computing power could be a limiting factor for some high-performance apps, such as games. The Java programming environment, which was also designed to enable apps to be written once and run anywhere, was undermined by inconsistent implementations and differing device capabilities. Still, overall, hTML5 is a significant step forward. it has the same strengths that made the Web (which is built on previous hTML versions) so successful, but it also supports the seamless integration of flash-style media and interactivity, coupled with off-line capabilities. These attributes make hTML5 apps more robust in areas with bad mobile coverage or no connectivity.

Growing Support for HTML5Although hTML5 is still under development and pending final standardization (targeted for 2014), some companies have already launched hTML5 apps. For example, the Financial Times’ hTML5 app for the ipad can be downloaded through the Web browser, rather than through the App Store,

We might be prepared to put up with smartphone apps’ draw-

backs if there weren’t a viable alternative. HTML5 promises

to be a game changer.


enabling the newspaper to bypass Apple’s approval process and commission charges. The FT believes the hTML5 app will save it money. “The advent of new Web technologies is changing the economics of the apps market by enabling us to use the same software across plat-forms and allowing us to maintain a direct rela-tionship with our customer,” says rob Grimshaw, Managing director of FT.com. Although hTML5 has some detractors, it also has many supporters, including Apple itself, which is contributing to its development and lending weight to its reliability, security, performance, support for touchscreens, and other capabilities. in addition, the hTML5 platform has strong support from the mobile industry, with the mobile operator-led wholesale applications community (WAC) backing this emerging standard.

The Future of AppsWidespread support for the new standard suggests that most digital services and content for mobile phones will eventually be delivered via hTML5 browser-based apps. however, the hTML5 chan-nel will likely be complemented by platform- specific super-apps focused on particular topics (see figure 4 on page 6). For example, there might be a travel super app for each oS, aggregating a host of travel-related services (tourist guides, reservation services and local weather, for example). There will also still be a market for platform- specific graphics-intensive apps, such as 3d games, written to take advantage of the full multimedia capabilities of each device. As it shakes up the apps market, hTML5 is likely to have a significant impact on the mobile industry’s structure and competitive dynamics.

Figure 3Range of distribution channels for apps

Source: A.T. Kearney analysis

Key functions

Four distribution channels

Applicationstore

(Example: AppleApp Store)

Paymentplatform

(Example: Apple’siTunes)

App testing(Example: Apple’s

app approval process)

Web searchengine

(Example: Google)

Credit cardor online payment

(Example: Paypal)

Reputation of appdeveloper and

third-party tools

Search

Payment

Security

OS-centric

Operator portal(Example: Vodafone’sapps and downloads)

Mobilephone billing

(Example: monthly billor prepaid credit)

App testingand monitoring

via network

Operator-led

Online shop(Example: Amazon

appstore for Android)

Credit card(Example: Amazon

credit card payment)

App testing(Example: Amazonappstore review)

Third-party store Open web


To some extent, a parallel can be drawn with the development of the Web, with the shift from the early walled gardens, such as AoL, to a more open, interoperable environment. Similarly, the mobile internet is likely to evolve toward a less proprietary environment, reducing the oS owners’ control over the overall value chain. Already, the boundaries of apps (both native and hTML5) are going beyond the smartphone eco-system to move into the pC environment exem-plified by Apple’s use of its Mac Appstore to sell native apps to Mac users. Today, people tend to upgrade from an Android device to another Android device, or an iphone to another iphone, because they don’t want to lose the investment they have made in native apps. By enabling purchased apps to run across platforms, hTML5 reduces that kind of lock-in.

however, the impact on oS platforms is likely to be gradual. The positive brand vibes, created over the past few years, are likely to stay in con-sumers’ minds and continue to influence their choice of handset. Moreover, the major apps stores (for example, Apple’s App Store and Google’s Android Market) are likely to survive the shift, but perhaps evolve into more of a dis-covery tool, rather than the primary channel through which to download apps. While sup-porting hTML5, Apple is likely to look for ways to maintain a competitive advantage and the revenue stream that its market-leading Apps Store provides. A Game Changer hTML5 isn’t just another technology standard; it is potentially a game changer. its impact could be profound enough to fundamentally alter the

Apps

Superapps

Superapps

Superapps

Superapps

Superapps

Apps Apps Apps Apps

Browser-based content and platform-independent web apps

(based on HTML5)

Figure 4The app evolution by platform

Source: A.T. Kearney analysis

TODAY“Planet of the Apps”

TOMORROW“Mobile Web”

iOS Android Blackberry Windows 7 Symbian

Apps Apps Apps Apps Apps

Browser-based content(based on HTML4 and plug-ins)

Webapps

Webapps

Webapps

Webapps

Webapps

iOS Android Blackberry Windows 7 Symbian

Native Platform independent


balance of power on the mobile internet. it is likely to continue to enjoy broad support from across the telecoms, media and technology sec-tors—mobile operators, for example, could use hTML5 to open up a new revenue stream by offering a secure payment environment for the purchase of Web apps; more broadly, the standard could help these operators regain influ-ence over their customers if the power of the oS platforms wanes. hTML5 may also help reduce the commoditization risks for device manufacturers by enabling them to create a great customer experience by using hTML5-enabled

apps that could be used to produce a distinctive user interface. in time, some content providers and devel-opers may come to regard hTML5 as a mixed blessing. Although hTML5 will reduce their reliance on current oS platforms, it may intensify competition even further, by lowering barriers to entry. it may be difficult to charge for apps, just as it is tough to charge for access to websites today. At the very least, however, hTML5 is going to significantly change the way many apps are distributed—a shift that will have ramifications across the entire mobile ecosystem.

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the app frenzy just a short lived fad (2)

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