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

Transcription

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

2 Authors Laurent Viviez, partner, London Axel Freyberg, partner, Berlin Maria Molina, consultant, London Ulrich Loewer, consultant, London

3 T he staggering growth of the smartphone applications () 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 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 took off four years ago after Apple launched the first iphone. Initially, Apple s intention was to create Web 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 for the handset. Apple then created the App Store and the app craze began. In a very short time, native 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 to read news, watch videos or play games. Smartphone users globally have made 10.9 billion downloads of the 600,000 available across various app stores. The 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 extraordinary success is underpinned by the slick experience they deliver to consumers, which addresses most of the limitations of Java, wireless application protocol (WAP), and browser-based digital services. In so doing, have opened up and vastly expanded the market for digital services for mobile phones. Too Many Apps, Not Enough Time Moving beyond the hype, we see two structural limitations with the native boom both from a demand and supply perspective. First, 1 IDC, Silicon Alley Insider, March Global Entertainment and Media Outlook 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 The App Frenzy Just a Short-Lived Fad? A.T. Kearney 1

4 HTML5 isn t just another technology standard. Its impact could fundamentally alter the balance of power on the mobile Internet. from a consumer perspective, accessing content and services through 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 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) when they change their smartphone or tablet. Second, native effectively re-create the walled gardens from the early days of the Internet. Today, are platform-specific and, to some extent, device-specific. That means 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 developers. The popularity of native 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 for more than one platform only makes sense for that will sell in high Figure 1 Mobile app revenues are expected to grow by 80% per annum from 2009 to 2014 Mobile applications revenues (US$ billion) $38 $30 CAGR 80% $21 $12 $2 $ Note: CAGR is compound annual growth rate Sources: IDC 2010; A.T. Kearney analysis 3 Pew Research Center s Internet American Life Project, April 29-30, 2010 Tracking Survey; The Nielsen App Playbook, December The App Frenzy Just a Short-Lived Fad? A.T. Kearney

5 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 supporting only ios. For complex (average price $5), the volumes required follow a similar pattern to those of simple, 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 significantly 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 Paradigm The ecosystem might be prepared to put up with native drawbacks if there were no viable alternative. HTML5, the collective name for a set of emerging Web standards, is a developer platform that enables 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 proprietary plugins and application programming interfaces (APIs). Figure 2 Apponomics comparison: Gross profit of versus sold Simple $1 (such as small tools and simple games) $1.5 All platforms profitable: ~0.6 million downloads Complex $5 (such as business software and complex games) $6 $5 Gross profit (US$ millions, after store commission) $1.0 $0.5 $0.0 -$0.5 HTML5 app profitable: ~0.2 million downloads 0 500,000 1,000,000 1,500,000 Apps sold (in thousands, across all platforms) Adding Android more profitable than ios after ~1.4 million downloads $4 $3 $2 $1 $0 Number of copies an average app sells ~30, ,000 1,000,000 1,500,000 -$1 Apps sold (in thousands, across all platforms) -$2 HTML5 only ios only ios + Android All five platforms Adding Android more profitable than ios after 1.0 million downloads 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 4 Apple website 5 HTML5, the fifth revision of the hypertext markup language (and file extension), is still under development as of September The App Frenzy Just a Short-Lived Fad? A.T. Kearney 3

6 We might be prepared to put up with smartphone drawbacks if there weren t a viable alternative. HTML5 promises to be a game changer. HTML5 enables developers and content providers to deliver a consistent experience across different devices, while emulating native 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 platforms. HTML5 works with any online payment technology, enabling developers or content companies to provide customers with a choice of payment methods. Finally, HTML5 allows developers to embed links to specific Web pages into specific parts of an app, a technique that can be particularly useful for promotions and advertising. To date, this deep linking has not been easy to do in native. HTML5 also opens up the range of distribution 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 in a single stroke. Although HTML5 will reduce developers dependence on app stores, which typically take a commission of between 10 percent and 30 percent, they will still incur some marketing, distribution and transaction costs. Although many developers complain about the difficulties of standing out from the hundreds of thousands of native now available in the leading stores, they will face the same challenge selling their HTML5 through the Web. Moreover, fragmentation (and some incompatibility) 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, such as games. The Java programming environment, which was also designed to enable 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 more robust in areas with bad mobile coverage or no connectivity. Growing Support for HTML5 Although HTML5 is still under development and pending final standardization (targeted for 2014), some companies have already launched HTML5. For example, the Financial Times HTML5 app for the ipad can be downloaded through the Web browser, rather than through the App Store, 4 The App Frenzy Just a Short-Lived Fad? A.T. Kearney

7 Figure 3 Range of distribution channels for Four distribution channels Key functions OS-centric Operator-led Third-party store Open web Search Application store (Example: Apple App Store) Operator portal (Example: Vodafone s and downloads) Online shop (Example: Amazon tore for Android) Web search engine (Example: Google) Payment Payment platform (Example: Apple s itunes) Mobile phone billing (Example: monthly bill or prepaid credit) Credit card (Example: Amazon credit card payment) Credit card or online payment (Example: Paypal) Security App testing (Example: Apple s app approval process) App testing and monitoring via network App testing (Example: Amazon tore review) Reputation of app developer and third-party tools Source: A.T. Kearney analysis 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 market by enabling us to use the same software across platforms and allowing us to maintain a direct relationship 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 Apps Widespread support for the new standard suggests that most digital services and content for mobile phones will eventually be delivered via HTML5 browser-based. However, the HTML5 channel will likely be complemented by platformspecific super- 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 platformspecific graphics-intensive, such as 3D games, written to take advantage of the full multimedia capabilities of each device. As it shakes up the market, HTML5 is likely to have a significant impact on the mobile industry s structure and competitive dynamics. The App Frenzy Just a Short-Lived Fad? A.T. Kearney 5

8 Figure 4 The app evolution by platform TODAY Planet of the Apps ios Android Blackberry Windows 7 Symbian TOMORROW Mobile Web ios Android Blackberry Windows 7 Symbian Web Browser-based content (based on HTML4 and plug-ins) Web Web Web Web Browser-based content and platformindependent web (based on HTML5) Apps Apps Apps Apps Apps Apps Apps Apps Apps Apps Super Super Super Super Super Native Platform independent Source: A.T. Kearney analysis 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 (both native and HTML5) are going beyond the smartphone ecosystem to move into the PC environment exemplified by Apple s use of its Mac Appstore to sell native 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. By enabling purchased 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 consumers minds and continue to influence their choice of handset. Moreover, the major app 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 discovery tool, rather than the primary channel through which to download. While supporting 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 6 The App Frenzy Just a Short-Lived Fad? A.T. Kearney

9 balance of power on the mobile Internet. It is likely to continue to enjoy broad support from across the telecoms, media and technology sectors 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 ; more broadly, the standard could help these operators regain influence 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 that could be used to produce a distinctive user interface. In time, some content providers and developers 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, 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 are distributed a shift that will have ramifications across the entire mobile ecosystem. The App Frenzy Just a Short-Lived Fad? A.T. Kearney 7

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