Open Mobile business models – the impact of free, open and fremium on the Mobile Data Industry

NOTE: I am tracking developments/links in this space at the end of this blog. These include both development of Open Mobiles as well as development of more closed handsets(in the belief that both will co-exist). If you can add any insights, please do so. You can email me at ajit.jaokar at futuretext.com

Introduction

I started writing this article on a day when yet another component became ‘open’. Unexpectedly, it was ‘search’ – driven by Yahoo open search and ironically for once, the company talking most about openness (Google) – was not doing the opening!

Open is a big buzzword now – Both on the Internet and the Mobile internet

And that makes a change from the early days of this blog – which has been all about openness in the mobile data industry. At that time, openness was a strange word. While the technology has always existed – the business reality was based on hope!

Much has changed over the past few years and it is time to look at Open 2.0 – to use a much maligned suffix.

Synopsis

This is a long article – even by my standards :) -and the links I have referred to on this blog are also comprehensive. It draws from many sources and refers to ‘free/fremium’ business models originally discussed by Chris Andersen at Wired magazine

Further, I expect that there may be an addendum. The overall ideas are discussed in my forthcoming book Open Mobile Ecosystems co-authored with Anna Gatti and Mauro Del Rio and contributions from Dr Andreas Constantinou

This article covers

a) The meaning of ‘Open’ in context of the mobile ecosystem

b) The disruption in business models

c) The emergence of new business models which arise from open ecosystems.

d) Ultimately, we hope to cover the impact on Operators and other players etc and new models they can adopt

e) Free/Fremium business models and their applicability to the mobile data industry.

I have also invited some feedback from people whose views I respect in the industry – to complement my own thinking. So, all feedback welcome.

What is Open? – Defining Open from a customer standpoint

Firstly, let us talk about what we mean by openness. This is not as easy as it might seem. For instance, depending on the context both MySpace and facebook could be deemed ‘open’ (or not!). The same applies to Apple/iPhone.

For the lack of a better definition, we can define openness from a customer standpoint as -

‘The freedom of choice for the customer and the removal of commercial and technological barriers that hamper free communication between people’.

This customer oriented definition of openness is universal since benefits to the customer is the common factor for all businesses.

If we break this down into its component parts, then we get

a) The customer is the main driver

b) She should not be patronised

c) She has choice

d) She expects interoperability(systems to talk to each other) and will not like business models which are meant to serve the vendor at the expense of interoperability(for instance region coded DVDs)

e) She owns her own data (Data portability)

By extension,

a) Openness is about services that are driven by communication (and not consumption)

b) Open systems are not synonymous with ‘free’

c) Openness is disruptive and will lead to new business models which affect incumbents and create new winners, losers and partners

d) Creators of platforms which benefit ALL players in the value chain are the winners in an open ecosystem as opposed to closed platforms like the traditional Operator portals

e) Open is not synonymous with open source – in the sense that commercially restrictive business models can still be built around a system that is created using open source.

f) Having said that, Open source is an important part of open systems(as we shall see below)

g) The Web is a driver for open systems and the adoption of the Web, Web standards and Web business models on the Mobile Internet is a catalyst for Open systems

h) Privacy, Identity, security, reputation and revocation will be an important part of the open ecosystem – especially on Mobile devices.

i) ‘Choice for the customer’ means ‘low barriers to entry for third parties’. This is controversial for many people i.e. why should we allow third parties on ‘our’ network? Won’t that affect our profits? We address this question below through the discussion about innovation at the edge of the network.

j) Open systems in general lead to innovation. To understand this, we have to appreciate the ‘edge of the network’ thinking which we also discuss below.

The inevitability of openness

When I talk of Open Mobile Ecosystems – people often respond by framing the problem in terms of ‘On portal – Off portal’(On Deck/Off Deck). This is very limited and it ignores the real issues – for instance choice for the customer, Low barriers of entry for third parties etc

But firstly, why talk of Open Mobile ecosystems? Why not continue with the mechanisms that have worked before?

There are many reasons. Here are a few

a) Customer choice – This is the biggest reason. Customers have a choice and increasingly these choices will increase. The customers will go with what serves them best. These choices extend at the network level(Wimax vs. HSDPA) to devices(open devices vs. closed devices) to services(access to any service – not just ‘on deck’)

b) Market opportunity – Openness can lead to new market opportunities – see the discussion on Mobhappy about the opening up by Verizon potentially driven by opportunities like Amazon Kindle.

c) Openness reflects the way we live I recently asked this to a vendor – Do all your friends and family have subscriptions from the same Mobile Operator? OR Do all your friends have buy devices from the same vendor? – Obviously not. Then why do we base business models and strategies on such ideas?

d) The consumption based Mobile Content model is levelling off out and user generated content may play an important part in future content mix: Again, on first glance, this sounds unlikely. But look again. One of the market leaders in supplying / managing content for Operator portals is Mobile Streams.

However, in a trading statement in Jan 2008, Mobile Streams said: Growth in downloads from operator portals was largely flat

And again in the same statement

The Company expects in 2008 to see the continued gradual opening up of the Mobile Internet around the world as companies such as Apple and Google continue to strengthen their global mobile presence.

I expect others like motricity whose business also depends on Operator portal strategies, will also suffer from the same woes. The market has changed and all players will need to react to these changes.

Nor is it an isolated trend.

BMI Forecasted Ringtone Market Down 8% in 2007 (BMI is an American performing right organization that represents more than 375,000 songwriters, composers and music publishers in all genres of music.). And Nokia predicts 25% of entertainment by 2012 will be created and consumed within peer communities

and again YouTube showed a surge of 18% in traffic in the two months since the writers’ strike began

All these trends are collectively pointing to a significant shift in content/media – and they all affect existing business models and partnerships – especially when they are based on consumption based content(i.e. non user generated content) and will get even faster with developments like the deployment of Google Gears on Mobile devices

e) The rate of change is accelerating Just a few years ago, no one talked of ‘off portal’, fixed rate pricing and so on. Today, no one wants to deny that they support fixed rate pricing! The rate of change is faster than anyone predicted.

e) Google and iPhone .. are changing business models .. for instance the iPhone changes the Operator billing relationship through iTunes. Both Google and Apple are unifying the fragmented value chain. Both have their roots in the Web/PC world. Both are developer friendly and have potential to create a viable ecosystem

f) Customer education – AOL learned this recently. In the early days, there is always the perception of the ‘Big bad world’ out there. However, once customers are educated and familiar with technology, they want to explore. In other words, wander out of the walled garden

g) The Mobile Web As the Mobile Web adopts the full web standards (like CSS, Javascript etc), the Web and the Mobile Web become synonymous. This means applications(like Widgets) can be deployed both across the Web and the Mobile Web.

Options to openness

The end goal of Open systems to create interoperable systems. There are other ways to create interoperable systems. A large vendor/ monopoly is one way (Microsoft on the Web, DoCoMo in Japan etc). Government mandates is another way(South Korea and also China).

A preferable way(which we are seeing in the West) is a mixture of Open source and Open standards. Specifically we are seeing the emergence of light weight standards like FOAF and microformats – which are open. Unlike standards driven by the bigger standardization bodies or industry consortia, we are seeing standards created by passionate and knowledgeable individuals Dan Brickley for FOAF and then subsequently adopted by industry players(like Google for Android, Nokia, Yahoo etc)

This is the future as I see it – both for the web and the mobile web.

The question then arises:

a) What are the dominant business models which will prevail in an open ecosystem

b) How should incumbents adapt to the new open ecosystem? How will their business models change?

These are the questions we seek to address in this document

Contra viewpoints

Before we proceed further, here is a contra perspective. One could argue, and indeed some still do, that they don’t need third parties at all(developers). They can do it ‘their way’ all by themselves .. works for Sinatra .. but not for others I suspect :)

In addition, the results of opening up an ecosystem may be unpredictable. Look at facebook. Do we honestly need so many facebook applications? Do they add value?

One could also argue that a closed system provides a better end user experience. This is a well known argument but it tends to favour services where the customer is merely consuming content(not creating it as in the Web 2.0 world).

Then there is the security argument(open systems are more susceptible to risks and threats). And finally the unknown business model argument – for instance Long tail services may work on the Web but they cannot work on the telecoms network where the upfront investment is a lot higher.

Perspectives and benefits of open systems

Before we address Open business models, let us look at Openness from different perspectives i.e. customer, developer and ecosystem

Customer

a) The ability to access any content (note this does not mean for free)

b) The ability to communicate with anyone – whether the person is on their network or not

c) A choice of services – not just services from the provider

Developers

a) A viable off deck ecosystem

b) Open device connectivity – also called the Carterphone principle

c) Transparent pricing(ideally fixed price billing) for both national and roaming scenarios

d) Access to device APIs(subject to security ),

e) Easy availability of technical information, SDKs etc

f) Equal access to third party application in relation to the provider’s application s

g) Unrestricted access to content and applications including via side loading

h) A commercially viable certification mechanism(or ideally a certificate mechanism that is light weight and user driven. For more on this, see this post from Denis at wapreview.

Ecosystem

In this section, I am referring to existing blogs.

Open source and open standards: Open source vs. Open Standards – complementing or competing?

Edge of the network innovation – Smart nodes and dumb pipes:

The rise of the stupid networks 2.0

Open Web business models

Open and closed coexist – but the rate of open systems far exceeds closed systems

So, where is this all going to commercially? To seek answers we have to look at both the Internet and the Mobile Internet. There are two forces: The Internet(and the Web) with it’s free, ad driven and open model on one hand and the Mobile data industry on the other hand

While the Mobile data industry is not used to many such revolutions / paradigm shifts; the Internet is. And the rule of thumb is – new ecosystems emerge but old ecosystems also co-exist. In the early 90s, with the advent of relational databases like Oracle, everyone expected the mainframes to be ‘replaced’. It is coming up to 2010 now and no one talks of replacing mainfames even after Y2K. So, the revolution will be bloodless. But that does not belittle the fact that relational databases are underlying a very large segment of computing today.

It is the rate of growth rather than the segment itself which is the critical factor – and there the incumbents DO stand to lose.

Secondly, hardware costs decrease but software and services costs increase.

Let’s look at an example: Sony NR21M Laptop – Laptop for the Home and Office costs £499.99. The windows Vista edition that goes on it costs £287.4985. That’s 73%. Dixons sells ‘optional Coverplan Support’ (3 Years £189.00, 4 Years £209.00, 5 Years £259.00).If you add other software(Antivirus – £50) then quickly costs of services and software add up.

Hence, I see a range of options. An unlocked phone(sold with supporting ‘coverplans’) on one hand – to a completely locked down phone(with remote monitoring and support) and a range of options in between.

This is not speculative. There is some analyst research to back it up. When I asked Dean Bubley of Disruptive Analysis about this – he said: “Disruptive Analysis expects the handset market to continue to feature both

‘operator-locked’ and fully-open devices. For example, by 2012, there will be about 250m smartphones capable of supporting non-operator competitive VoIPo3G, plus another 50m mobile broadband enabled laptops. Conversely, there will be over 600m 3G phones in use which mobile operators have restricted or ‘closed’ in some fashion.”

Taxonomy of Free .. Fremium et al – Chris Anderson and Wired

The underlying question for the Web is: How can you make money in an era of abundance as opposed to an era of scarcity. This is made worse with Mobile devices where there are significant infrastructure costs. By that we mean, Web based companies can afford to take risks, try new services since the cost of new services are low. Not so with Mobile ecosystems.

The march 2008 issue of wired has a fascinating article from Chris Anderson called ‘Free’ . (By the way the whole issue is fascinating with two other articles – one on autism and the other about how Kissinger and Nixon tried to bluff the soviets by ‘pretending’ to launch a nuclear war – only governments can be that stupid!)

However .. back to the topic on hand ..

This article explores the taxonomy of free .. and here are some insights from that article.

Traditional economics is oriented towards scarcity … (Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses as per wikipedia definition of economics ) This definition breaks down in an era of abundance since there is no scarcity.

The web is all about scale and it is not about the inputs(costs of servers) but rather about the outputs(what can be done with the inputs. Practically everything that web technology touches starts on the way to free. Technology has always had a deflationary effect but the rate of ‘free’ has increased with the web. Almost free is not the same as free. The moment we charge even a penny to the customer then you are in a different business from ‘free’

A taxonomy of free business models on the Web include(as per Chris Andersen)

Fremium – basic version is free. Advanced version is not. The difference is – it is the whole version(not a sample) and the belief is 10% of the paying userbase will pay the remaining 90%

Advertising This is well covered and so I am not discussing it in detail here. We will discuss the advertising business model in subsequent blogs.

Cross subsidies I discussed this in a blog long ago called Salt, pepper and social networking and also JP Rangaswami referred to it as the Prince business model . Any digital product that entices you to pay for another (often non digital) product is free. Money is charged for the non digital product(like concerts).

Zero marginal costs – Things that can be distributed without any marginal costs to anyone. Digital music is the best example of this between digital reproduction and p2p distribution – the production and distribution costs are zero.

Labour exchange – users do something for the provider in return for free content. This is the original ‘Web 2.0’ business model and the information the users provide becomes the metadata for the content. It enriches the data and hence provides value to the provider. The best example of this is flickr. See my blog – Communities are not Web 2.0 because talk is cheap

Gift economy – The best example of this is wikipedia.

Besides this, there are two other examples: The attention economy and the Reputation economy – both of these are separate topics in themselves.

Open mobile business models

How does this work in the Mobile Data Industry? Here are some thoughts and I shall continue to expand this idea more

a) The Web is all about scale. Contrary to the numbers, mobile networks are mainly sub national i.e. there are more than one in a country. Other than SMS, no other service has critical mass. So, the Mobile data industry lacks scale (and hence advertising model suffers)

b) The Web is all about ‘Free’ but mobile has significant investments. So, the free model(which is also tied to the idea of Long Tail i.e. many low cost, low risk services that can be experimentally deployed)

c) You cannot charge money for a service on mobile which the Web provides for free(the woes of IMS are a classic example)

We will continue to explore these ideas .. but here are some thoughts

a) The deployment of mobile services takes longer because the network is tightly coupled to services. A decoupling of the network and the services will drive applications

b) If innovation shifts to the edge of the network, then where is the edge of the network? The two beneficiaries are the device and the browser.

c) How do the free business models apply to the mobile data industry. How do the ‘non free’ business models apply to the Mobile Data Industry? This is a topic of discussion.

d) Convenience(one click), Identity, reputation, Attention etc are all beneficial business models on the open Internet. How will they play out?

The platform strategy is a true disruptor. Amazon does it with web services, facebook does it with facebook APIs. Google does it with open social. Even Yahoo has joined the game with open search. All these diverse initiatives have one thing in common – they are designed to attract a large numbers of developers / third parties. The telecom industry took the first steps in this direction with web services/network abstraction/Parlay – but little has happened – and I suspect it may be too late now

Conclusions

Open systems and their impact is inevitable. It is clear that recreating existing business models will not work. Savvy companies like Nokia, Google, Opera and Apple are leading the way in this space. Encouraging, I see many operators also looking to embrace this model.

The question we must always ask ourselves is – In an era of abundance, what are the new scarcities? Comments and thoughts welcome at ajit.jaokar at futuretext.com . I will continue to update this.

updates and addendums

I will update this section with relevent links and developmemts which I am tracking

a) Anything but anarchy in the uk – This is a positive development. what is really needed in addition to the revenue model is a ‘GSM like ‘ coopreartion on interoperability/interconnectivity for Mobile Data. If THAT happens, I will be truly encouraged. IPX network is an initiative from the GSMA in that direction – but I am not aware of specifics / status

b) GSMA ipx networks

Comments

  1. Kevin Smith says:

    A well written blog as always, Ajit, thanks for posting. A couple of comments:
    - the Web is not free: there is an access charge. No broadband subscription = no access. Personally, I’d be happy for an ISP to provide fully ad-funded access, but as long as ad blockers exist, that’s unlikely to happen :)
    - agree that upfront investment is higher for mobile access, which has driven a more aggressive return on investment (walled gardens with both access and content, data card rollout etc.). However this should not preclude Long Tail uptake; as operators move away from walled gardens the user is able to discover services as they choose. Such niche services are (ideally) available to consume on mobile just as they are on the ‘fixed’ Web.
    - “In an era of abundance, what are the new scarcities?”. How about disposable income for parents mortgaged to the hilt…
    - finally agree that a concerted effort to ‘lower the barrier to entry’ for 3rd parties is a good thing :)
    all the best!
    Kevin