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Smartphones and App Stores: where is the Telecom Industry Being Led? (Guest Post)

Ed: This is a guest post from Cato Rasmussen of Martin Dawes Systems. Delegates at the Telco 2.0 America event were almost evenly divided about the possibilities of app stores - a large proportion (45%) didn’t expect them to add much value - as this chart shows:


Can we find ways of delivering on their promise?

Mobile app stores are where the industry is building high hopes for customer retention and revenue growth. Frantic manoeuvring over which operator wins the developers’ attention is evidence of this, as is the rush to open application stores that sell apps and content for smart phones.

But my fear is that while the industry is being dragged along by social networking brands like Facebook and Twitter, we are not taking the time to fully comprehend the implications of building a service versus building a business.

The industry also needs to take a reality check about the Apple iPhone in particular. Selling this device doesn’t automatically trigger a jump in profitable revenues even though customer numbers rise, according to independent analysts. In fact, a recent Strand Consult report suggests that the most recent exclusive iPhone deals make no difference to those operators’ profits or market rankings.

Of course, this may no longer be relevant as exclusive deals are coming to an end in many markets. Whether this means operators can strike better deals on the iPhone is hard to discern but they should be worried by retail powerhouses like UK supermarket giant Tesco getting its hands on the iPhone through a deal with O2 UK.

In rushing to embrace smartphones, operators are further adopting a culture of over-subsidising the likes of the iPhone in the hope of driving up mobile data revenues when voice revenues are flat or falling. But this is illusory when the devices are sold with all-you-can-eat data packages, and operators get little or no share of the revenues being made from buying apps and content from independent content store fronts, such as iTunes.

Another possible issue is that handset lifecycles are going to get a lot longer, especially high-end smartphones. Improving the functionality of the phone is tied into operating system updates and app downloads, rather than swapping an old handset for the latest model. A PC hardware model could begin to take root where software is king with customers less inclined to upgrade handsets than in the past.

The challenge for operators therefore is; how are they going to maintain revenue over the longer lifecycle of the smartphone? The answer could be to find ways to get a slice of the revenues from content downloads. As a result, operators are ploughing ahead with grand plans around dedicated stores and other content services.

Great news, except I detect a whiff of the dotcom hyperbole around apps and app stores. Yes, customers seem to love apps but their willingness to pay is low if not invisible. People talk about the “freemium” model but the evidence shows that people won’t pay for premium content even when they’ve had limited access to free content. So, although they might help customer retention, the app store model is no guarantee of regular revenue and cash flow.

All of my anxieties about how operators are warping their operations around smartphones and app stores could be allayed. What I want to see the industry doing is spending more time on thinking through viable revenue models that are fit for purpose.

This is no easy task, and the exact details aren’t yet clear, but I would suggest the following basic features:

  • The model needs to take account of product cross-subsidy on a per item basis and do so dynamically.

  • Operational processes in billing, charging, provisioning and support need to be thoroughly reviewed and streamlined to give an operator the agility to not just compete with new entrants on the same level, but quickly pre-empt those initiatives.

Building new revenue models in telecom is a real challenge. If we don’t get this right, operators will dwindle into being the bit pipe utilities that they dread becoming. Wrapping themselves in the latest fads and consumer technology is not a worthless objective but should come after the industry has spent more time and energy on working out how they will generate revenue for the long term.

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This is a great post. I happen to think there is also a significant opportunity to offer application marketplaces for telco commercial/business customers so they can manage key business applications like sales, finance, payroll/hr, etc.

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