The Party is closing. Its curtains for the gate crashers. An undifferentiated approach to the Indian Markets has led to several of the new aspiring Telco wannabees to burn more than just their hands. In an earlier post in the same series of blogs, I had written about how consolidation is setting into the Indian Telecom markets. According to recent article by Economic Times, The telecom department (DoT) is examining proposals that would allow new mobile operators, who were given licences and airwaves under controversial circumstances two years ago, to sell out or exit, paving the way for a possible consolidation in the 14-player domestic telecom market.
DoT is considering exit options after these new players who haven’t been able to find a foothold in the Indian markets have approached the regulatory boy seeking a refund of Rs.1,651 crore entry fee in return for them surrendering their regulatory licences and spectrum to the government. These Telcos are wanting to selectively surrender licences and spectrum in specific circles as they faced ‘several’ constraints, including funding, in launching mobile operations across all 22 geographies in the country.
The other possibility being considered are Merger with larger operators: This will require shortening the three-year lock-in period during which the promoter of a new company cannot sell out, and relaxing rules to allow incumbents to retain airwaves held by these new companies if a buyout or merger were to happen.
Two years and 49 days after its launch, the Apple Apps store passed the quarter million applications milestone just in time for the September Apple event. There were 251,007 applications from 50,304 publishers available for download for the iPhone, iPad or iPod touch. Appshopper.com estimates the total at 253,777 apps, including 24,334 for the iPad. This one is “One Up” for Apple: 70% of app download on Apple are paid apps which pales Google’s 36% paid apps.
New stats from 148Apps state that books (with 17%) have now overtaken games (14%) and entertainment (11%) in the Apps stores.The Apps store has downloaded 5 billion Apps downloads.The Apps store has generated a revenue of $249 million for Apple since its launch 2 years back and is on the verge of breaking even on its costs.
Another report by Piper Jaffray’s Gene Munster lays down the following key findings:
• $1 billion generated for developers since the store launched on 7/10/08 suggests gross app store revenue of $1.4 billion, $429 million of which Apple keeps after paying the developers’ 70% cut.
• App pricing data suggest that 81% of apps are free and 19% are paid, with an ASP (average selling price) of $1.49.
• Apple’s gross margin on the App Store is about 44%, according to Munster, assuming 70% goes to the developer, $0.20 plus 2% of the ASP to the credit card company, and 1% for storage and delivery.
• Apple has generated a total of $33.7 billion in gross profit since the App Store launched, to which the App Store has contributed $189 million, or 1%.
• Over the same time period (Q4 2008 to Q2 2010), the entire iTunes store has generated $3.6 billion in revenue, to which the App Store has contributed $429 million, or 12%.
Munster’s numbers suggest that iPhone, iPad, and iPod touch users download more than 16.6 million apps per day, nearly double the 8.9 million daily rate of iTunes tracks downloaded.
A few numbers on the Apple Apps stores:
Total Active Apps (currently available for download): 252,894
Total Inactive Apps (no longer available for download): 49,769
Total Apps Seen in US App Store: 302,663
Number of Active Publishers in the US App Store: 50,606
A graphic on the numbers in the store: Applications and Games
Inevitability finally catches up with the new comers in the Indian Telecom space. It is a no brainer to see that a market with 15 players will not have space for the bottom listers. Thus new entrants are beginning to scale down the roll out plans and shying away from reducing the tariffs further. With 14-15 Telcos jostling for share of the consumer purse, consolidation is now setting into the Indian Telecom markets. In most circles, only about 6 operators continue to sustain market momentum. The Top 6 players account for 90% of the market shares by subscriptions and higher shares by value.
The intensity of competition is coming down visibly. Some of the new entrants in the telecoms market have not rolled out networks in many geographies despite being granted spectrum. All new entrants – with the exception of Sistema – are under probe by both the Central Vigilance Commission as well as the Prime Minister’s office for delaying the rollout of their operations. While it has been close to three years since these firms bagged their license, Etisalat DB is yet to launch commercial services, Loop Mobile has started services only in Mumbai while Videocon has launched mobile services in only in five of the 22 circles. Even Uninor and S Tel, the other new entrants, have failed to meet all their rollout obligations. Many new entrants did not bid for 3G and broadband spectrum. All this are tell-tale signs that consolidation has started in the minds of companies.
Consolidation has also started in the minds of customers. Even in this crowded market, six operators now account for almost the entire revenue market share, indicating that customers have learnt to recognise bigger, more established, stronger and better brands. The increase in minutes of usage for larger mobile companies is proof that only certain players are present in the minds of consumer. The top six players have an unique advantage as they have a larger and longer brand recall. The top 3 Telcos have registered increases in the minutes of usage in the quarter.
Tata DoCoMo, Telenor and MTS set off a savage tariff war last year when they entered the Indian market. This resulted in a fall in profits and revenues of all operators. But the rate of growth posted by these companies slowed substantially in the last quarter. Uninor, STel, Loop, Etisalat DB, Videocon, and Sistema together added less than 12% of 18 million customer additions in June. This is in sharp contrast to last year’s numbers when Uninor added a million users within 30 days of launch. STel managed to clock one million subscribers in 90 days from three small circles. While Videocon added 1.39 million users in May, it could add only a third of that in June. The new entrants together account for less than 3% of India’s 600 million mobile users.
With 10 million and more subscriptions happening per month, The Indian Telecom Market is the largest growing Telecom market in the world. However, Telco after Telco have made the mistake of entering the Indian Market without a proper and thought through strategy. The three pronged strategy basis volumes from 10 million subscriptions, ARPU from Data services and high end customers from MNP has not really worked. MNP has not kicked in yet, and moreover, the incumbents today have the scale, information and cumulative resources to dig deep into the consumer wallets. The Challengers in this scenario were required to out-innovate, not out-run the market by larger marketing dollars and cheaper call rates. That unfortunately has not been the forte of the Videocons, Etisalats and Telenors of the world. Reminds me of an old blog post on the merits of MNOs/MVNOs. There still is space in that corner, but the new Telcos need to re-look at their complete thought, perspective and the revenue generation dynamics.
Google recently unveiled its VOIP (Voice over IP) service on Gmail which will now enable its users to make phone calls over the Internet. With this move, Google takes Skype head on in the VOIP space. Google already has a video chat facility for its gives users an audio and visual experience online. This new calling Feature, allows users to dial phone numbers directly through the mail interface. Thus Google now pushes the communication interface from Computer-Computer to Computer-Phone space. Users can click “Call phone” at the top of their chat list and enter a number or a contact name.
So, does Google have the muscle to make Gmail a Skype killer?
Skype, a 7-year-old company, is used by individuals and companies to make video and voice calls over the Internet. According to Skype, its users made 6.4 billion minutes of calls in the first half of 2010. While Google may be starting out behind in this competition, it has the benefit of its large Gmail user base.
Skype could get hurt by this. Skype has been offering the ability to call land lines and cell phones for years now. But having it integrated into Google’s Gmail and, assumedly, their other offerings down the road, is quite an extension for Google.
Google, has always been on the lookout for new streams of revenue, and is looking to expand its reach over their customers and to move into complementary markets that will draw more revenue.Adding voice calls to their existing product set enhances the user experience and keeps people using Google apps longer and more frequently. It also keeps people from using another service like Skype, and it certainly may prompt some defections from Skype. Google definitely has the scale and reach to put a big dent in Skype if Google can deliver on the service side.
The voice calling feature is expected to be rolled out to U.S.-based users over the next few days, according to Google. Users will need to install Google’s voice and video plug-in and watch for the “Call Phones” button to appear on their chat list.
The Tiered Internet Proposal: Google favours being pragmatic than principled.
Amid all the vitriol, one overlooked fact is that a Verizon, has agreed that the FCC should have the regulatory authority to enforce nondiscrimination, which is at the heart of net neutrality for its Wireline networks. That’s the good news. For Verizon, this is a short term loss in realizations in favour of a taking a stake in the future of Internet on Wireless.
The bad news is that the proposal wouldn’t require net neutrality on wireless networks.Google has clearly compromised the position on wireless net neutrality it held almost religiously. Both Google and Verizon realize that the future belongs to Wireless Internet and they had to hedge the future gain against a current loss, which is why, they have up their stakes in Fixed Line Internet.
What, Exactly, Is “Managed Services”? (Tiered Internet)
The first two components of the deal — net neutrality for wired networks, no net neutrality for wireless networks — are fairly straightforward. But it’s the third component, the mysterious “managed services” provision, that has proved most confusing and has the most controversial and potentially long-lasting implications.
In essence, Google and Verizon are proposing a separate network apart from the “public Internet,” where nondiscrimination wouldn’t apply and where interested parties would be able to buy huge chunks of bandwidth and superfast connections. Some of the benign-sounding uses Google and Verizon have mentioned are things like medical data that need a fast, secure network, or low-latency networks for hardcore Internet gamers. Managed services would be a faster, paid alternative to the public Internet, kind of like ultra-premium cable. For example, YouTube videos delivered faster than other content.
There is some merit in the advent of tiered services, but it all depends upon what levels of regulation, self-discipline and control that carriers are ready to impose on themselves. Then there is a the case that while favored services have some steam in the debate, there is also a lot of open innovation that the internet fosters. Imagine having You Tube or Twitter in a tightly regulated internet domain.
In an earlier post,i had posted about how the wealth distribution in the smartphone markets is increasingly getting skewed towards Apple with its iPhone.Apple Takes 48% of the Earnings from Smartphone sales globally with only a 3% market share of the smartphones. That compares starkly against Nokia which has 40%+ smartphone share and only 22% of its earnings share.
This post examines the reason why Apple is able to command that kind of margin from the carriers and mass emotional appeal from its consumers, which thus make it one of the most profitable companies.
1. Connecting with the consumer in terms of Tangible emotional experience (Thru Hardware)
An Apple iPhone has a BoM (Bill of Materials cost, production cost) of less than $200. However, it sells at $645 to customers (Carriers) who subsidize it. Very clearly, Apple is able to dip into the service revenues generated by the carriers from higher data usage. By front ending the realization upfront with a $645 price tag (which is 3X the production cost), Apple is able to cover its costs and future risks.
To make this happen, Apple surely has the best hardware which compels people to move to a higher ARPU and do so enthusiastically. (Call that Branding at an emotional level, something Apple does best). There are very few and far between instances when the proposition has been strong enough for consumers to move to higher price points.There are several devices which have data capabilities and yet they are not competing with iPhone on the subliminal emotional levels. That possibly is Apple’s biggest connect with the consumer “want”.
2. Apple earns both ways
Why is Apple more profitable than Microsoft or HP? Why does Apple command one of the highest Market Caps globally?2. The main reason Apple is more profitable than their competitors is Apple makes highly-profitable software and services, not just low-profit hardware. Apple is more profitable than HP and Microsoft because … Apple takes both the HP part of the profit on a PC/Device/Hardware and the Microsoft part of the profit on a PC on the software/OS/Browser, and in some cases, the retail part of the profit. The iOS, iTunes and the Safari browser make up for great experience on the device through stunning software. The mastery over Software precedes Apple’s competence with great devices. Remember it was Apple who made the first Mac OS before Microsoft took it mass.Apple is close on the 250,000 milestone in terms of numbers of apps in its Apps store.
The user walks in with a problem, and Apple provides a solution made up of a combination of hardware, software, online services, support services, training, accessories, and even culture. Apple users pay for that entire package. Apple has its own SOC (system on a chip), battery technology, unibody construction, etc. which give it an edge in portability, battery life and speed.
In an earlier post, i had blogged about Global smartphone markets: The effect of disruptive competition on wealth and profit. distribution. This post attempts to take the analysis of the global smart-phone wealth distribution to the next level and ponders about the effect that Android will have on this scene.An interesting theme set in here is the ASPs of the top 7.
While the unit markets has grown, ASP erosion has seen to it that the incumbents like Nokia make less money than the 2007 period. Apple on the other hand has positive volume increases as well as a smart ASP increase. The case study of Apple’s success will be discussed in another post going forward.
We have seen how the incumbent 5 (Pre 2007) lost EBIT shares from 93% to 35% (2010). Thats a giant fall and these are learnings to be taken from this fall. Summarizing the learnings from the market in terms of smartphone EBIT shares:
1.The lack of a real response. The recurring theme in the giant drop has been that giant multinational incumbents in a vast and rapidly growing industry, enjoying all the advantages that size and incumbency, have had their profits taken from them. And they don’t seem to have put up much of a fight.
2.It’s all wealth transfer. Note the total amount of profit available has not increased markedly; this is not about incumbents growing the pie. Two thirds of what should have rightly been theirs moved from the incumbent shareholders to the entrant shareholders.
3.Speed. This shift of profit occurred over an unprecedentedly short period of time. Three years is no more than two product cycles in the industry and it’s an order of magnitude faster than what happened historically to other industries.
4.Disruption is the diagnosis here. The incumbents were caught in the headlights. Disruptive innovation leads to asymmetric competition and this is what we just witnessed. History has shown that the shift of profits is usually the last stage of disruption and is usually irreversible because the change in business models cannot happen at the rate of change of profit transfer.
When analyzing the potential for challengers to the new winners, the most cited is Android. Can Android affect this redistribution of profit once again? And to whom? If Android is to become the dominant platform, does it depend on the success of its licensees? Who are these licensees and what are the chances that they will be able to align their businesses to what Android offers (a new revenue model based on services and advertising).
Google is making a bet on those same vendors who are now squeezed in the middle of that last pie chart: Samsung, LG, Motorola and Sony Ericsson. Nokia, Apple and RIM will certainly not take the OS over what they already have as it dilutes their differentiation and margins. That means Android is aligned with the biggest losers in the industry.
The real challenge to Android is its partnership with defeated incumbents whose ability to build profitable and differentiated products is hamstrung by the licensing model and whose incentives to move up the steep trajectory of necessary improvements are limited.In other words, Android’s licensees won’t have the profits or the motivation to spend on R&D so as to make exceptionally competitive products at a time when being competitive is what matters most.
Google: a $120 billion public colossus with 20,000 employees with a moto “Do no Evil”. To quote Brin and Page in their IPO document in 2004, “We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo some short-term gains.”The idea was to build “a company that is trustworthy and interested in the public good. We believe a well-functioning society should have abundant, free and unbiased access to high quality information. Google therefore has a responsibility to the world.”
Tiered Internet services: Evil Deal or Pragmatic Compromise? (Tiered Internet services are an antithesis of Net Neutrality)
Google Followers, Critics, Enthusiasts and the denizens of a free world Internet were thus jolted when Google(along with Verizon) brought out a proposal to FCC on Net Neutraility. To many it was “an abuse”. For years, Google has been the single largest — and loudest — proponent of net neutrality among any private company- the basic principle that broadband companies shouldn’t play favorites with Web content — their own or others’ — for payment. Idealogy apart, it’s not hard to see why. The company’s entire business model — it earns 95% of its revenue from search ads — depends on users being able to access Google.com on the Internet for free.
The idea of net neutrality has generally been opposed by the big broadband providers who, after all, invested mightily to build the hardware backbone of the Internet. Why should Google be allowed to stream YouTube videos for free to millions when we built the infrastructure, the providers ask? Also a tiered service helps in terms of differentiating services from a consumer perspective. The analogy here is that of premium HDTV services versus “Plain Vanilla” satellite TV services.
The Germination of the Thought: Tiered Internet (Courtesy Android)
Google and Verizon have coordinated on many launches around the Android – mostly featured on Moto and HTC devices. With some heavy duty marketing by Verizon and courtesy its lineage to open source, the popularity of Android has shot through the roof. The proof of the pudding is in the Android market shares (14% gained in a year’s time) and the fact that Android is selling 200K phones per day, outselling iPhone by a distance.
In terms of ideologies, Google was the proponent of Open Internet and Verizon was backing the Tiered Internet structure. It was when Google and Verizon started discussing common grounds between each of their interests, that the thought and the proposal of (possible) regulation of wireless internet came into being. What helped this marriage was the animosity both these corporations shared with AT&T.
The 2Q,2010 Global smart-phone mobile market earnings (EBIT) report compilation by industry analysis firm Asymco has come out with a stark and clear disruptive profit shift in the industry in favour of Apple (and Android). This is mainly because of a lack of viable response from the incumbent handset makers three years ago (Read Nokia, LG, Moto, Sony Ericsson).
RIM (Blackberry) and Apple which were the last of the top 7 smartphone manufacturers in the world contributed 7% of the EBIT share which in three years has risen upto 65%. It was Apple’s iPhone introduction, which was the point at which this re-distribution of wealth started taking shape.Overall handset sales in the second quarter of 2007 accounted for $28 billion, says Asymco, while sales in the same quarter of this year were only up 12 percent to $32 billion. But far more of those recent sales dollars went into Apple’s coffers at the expense of Nokia, Motorola, LG and others. Such revenue erosion can’t continue in the long-term for a company to remain a key player in the industry.
Apple in particular is capturing about half of the available profits with three percent of the units. It dwarfs all the other vendors, more than double the nearest (Nokia). All that in three years and with the added burdens of only four models, a recession and limited distribution.
Nokia being the seller of the most handsets overall is an excellent example, as the bulk of its devices don’t bring large amounts of profits relative to the number of sales. To illustrate, Apple enjoys six times the revenue when compared to the average Nokia device due to the average selling price.But the big picture isn’t just Apple taking on Nokia. Handset makers embracing Google Android are earning money, while Research In Motion is also faltering. The turnaround of Motorola and Sony Ericsson and the increases in Samsung shares have been Android powered.
Google Music was announced in May 2010 and it is expected to be up and running by the end of this year. As always, Google finds it looking into the eye of Apple Inc. with its iPods and iTunes dominating digital music space in US, accounting for 28% of all music purchased by US consumers in Q1,2010. Currently, Apple holds more consumer credit cards than any other company besides Amazon. Google Checkout in comparison is not put to pace.
In order to stand up to the Apple iTunes, iPhone and iPod, Google will need to look at the drawbacks of Apple as a music platform and must position itself as an alternative to the Apple Music platform. A few pointers to Google to get a march ahead of Apple in the digital music space:
1.Leverage Cloud Computing
Making an iTunes clone is one thing, making an iTunes alternative is completely another. Google with its expertise in cloud computing has the best opportunity to be the iTunes alternative. This is especially true in face of the trend where Smartphones are becoming primary storage devices. Even then, music storage on phones is not a realistic and sustainable alternative. Google must focus on cloud storage, which users will sync/access to music files.
2. Streaming Media
Streaming media synched to the cloud is the future of music.Music companies like Rdio, Spotify and Rhapsody already offer subscription based services for music on Mobile. Google’s opportunity would be to create a hybrid service that offers synching, streaming and purchase of music. That is where Google Checkout checks in.
3.Cross Platform Integration
While Apple specializes in selling all inclusive content packages, Google’s USP of being “Open” can help them make a music platform which is cross platforms. The acquisition of Simplify Media by Google in May is a good measure in this direction. Google already has plans to make their Google music available across a range of devices through the Android platform. The next frontier is to make Google Music available on all platforms whether Google or not.
4.Leverage vendors and music companies currently not on iTunes platform
Getting a sign-on on the Google platform with music labels and companies will allow Google to access popular content that is still not available in the iTunes store (eg. Beatles). Many such blank spaces exist where iTunes has not been able to establish themselves. Music will be a key factor in smartphone sales success, but with 75 to 85% of the catalogues still untouched by iTunes, there’s plenty of room for Google to step in.
Thus the positioning of Google Music is thus not just an iTunes+, that is open across platform hosts more labels and has new cloud based services and streaming that leverages Google’s “Open Technology”