Which mobile apps are making good money?

At a conference the other day, several industry executives were on a panel discussing mobile application stores. There were representatives from Yahoo, Qualcomm, Motorola, and an independent application store. Someone from the audience asked a simple question: "Other than entertainment apps, name three mobile applications that are monetizing well." (In other words, apps that have a good business model and are making good money.)

The interesting thing was that none of the panelists had a very satisfying answer. The Qualcomm person cited navigation apps and something called City ID, and had no third app. The app store guy cited search-funded apps (Opera) and apps that are extensions of PC applications (Skype). The Motorola person, who used to work at Palm, cited two cool old Palm OS developers (SplashData and WorldMate, the latter not even available for Motorola's Android phones). And the Yahoo guy talked about Yahoo-enabled websites.

None of them had the sort of answer that the room was looking for -- what categories of smartphone apps are making it, and what are their business models, so other developers will know what to emulate? I started to laugh at the panelists' obvious discomfort, but then I realized that if I'd been on the panel and had been asked the same question, I would have blown it too. I know of a lot of mobile app companies that aren't making steady money, because they send me e-mails asking for ideas, but I don't seem to hear from the raging successes. Also, because I try to focus on what needs to be fixed in the industry, I'm probably guilty of skewing my posts toward what's not working.

So I did some thinking and a bit of research, and here are my three nominations for categories of non-entertainment mobile apps that are making it, and why. Then I'll open it up to your comments -- I have a feeling you'll have much better answers than me.


1. Vertical-market business applications. This was a good category for PDAs ten years ago, and it's a good category for smartphones today. There are dozens of business verticals where information overload, or an excess of written forms, hinder productivity. Find a way to manage that information electronically, and your application quickly pays for itself in increased productivity.

One example is ePocrates, which gives doctors drug reference, dosing, and interaction information. ePocrates has a beautiful business model in which the drug companies pay to get access to the doctors who use it. That helps the company give away its base product. I have to believe there are other verticals where you could create apps that would act as a middleman between suppliers and users.

Another interesting example, which I ran into at a conference recently, is Corrigo. They do work-order management (stuff like managing a mobile workforce and dispatching them to work sites on the fly). I like Corrigo because it makes good use of mobile technology, and scales nicely to multiple vertical markets.

Note that neither Corrigo nor ePocrates is a purely mobile application -- they are business solutions that leverage mobile. That's very typical of the business mobile market. It's not about being mobile for its own sake, it's about solving a business problem and using mobile technology to help do it.

One other cool thing about these businesses is that you can ignore the whole app store hassle and market them directly to the companies. You control your customer relationships, and you can keep 100% of your revenue.

2. PC compatibility applications. Inevitably some people will need to do on a mobile device the same things that they do on a PC -- edit a document, for example, or query a database. There's a solid market for applications to let the user do that. The market isn't enormous (not everyone is crazy enough to edit a spreadsheet on a screen the size of a Post-It note), but the people who need to do that are usually willing to pay for the apps. Or to make their employers pay for the apps. Documents to Go was probably the most successful application on Palm OS, and based on the stats posted by Apple I think it is probably one of the most lucrative non-entertainment apps on iPhone.

Unfortunately, Docs to Go is also a very well-entrenched application, so good luck displacing it. Maybe you can find another category of PC app that needs a mobile counterpart.

3. Brand extenders. There seems to be a steady market for mobile apps that help a major brand interact with its loyal users. A few recent examples:

• -The Gucci app lets a customer get special offers, play with music, and find travel attractions endorsed by Gucci. The company calls it a "luxury lifestyle application."
• -There are four different Nike iPhone apps: a shoe designer, a women's training guide, a football (soccer) training guide, and an Italian soccer league tracking app.
• -The Target store search app lets you find stores, and search for items within the stores (it'll tell you which aisle to look in). (For those of you outside the US, Target is a large chain of discount department stores.)
• -Magic Coke Bottle is a Coke version of the Magic 8-Ball. It's one of three Coke-branded apps.

The iPhone is the most popular platform for these apps today, although I expect they'll spread to other smartphone platforms over time.

The business model for this one is simple -- you get hired by the brand (or its marketing agency), they pay you to develop the app, and then they give it away. The more popular smartphones become, the more companies feel obligated to create mobile apps, so this is a growing market for now. (Beware, though -- having an iPhone app is kind of a corporate status symbol right now, like creating a corporate podcast was a couple of years ago. Development activity could drop off when businesses find the next trendy tech fad.)

To create this sort of app, you need to be very skilled at visual design, and you need to be comfortable managing custom development projects. Some developers don't have this sort of project and client management skills, and you can get yourself into a lot of trouble if you sign a contract without understanding what'll really be required to execute on it.

Also, you don't get to change the world creating a shopping app for Brand X. But in the right situation this can be a good way to make money while you work on your own killer app on the side. And if you're not into changing the world, there are companies that have built solid ongoing businesses on custom mobile development.


Other possibilities

There are a few of other categories of apps that I think could be candidates for inclusion, but in my opinion the jury is still out on them. I'm interested in what you think:

Location. Right now there are several location and direction apps selling well for iPhone, but with Google making directions free on Android, I fear the third party apps are at risk. However, the direction-finding business is a lot trickier than you'd expect (I learned that as a beta-tester for the Dash navigation system, which sometimes tried to get me to make a right turn by telling me to make three consecutive left turns). So we need to wait and see how good Google's directions are. But in the meantime I don't feel comfortable pointing to this as a viable category in the long term. What do you think?

Travel apps. There was once a very nice business in city guides for PDAs, but I get the sense that like many other categories of mobile apps, this one is being sucked into the free app vortex. But I suspect that there may still be a paid market for specialized tools like translation programs, and software that helps executives manage trips. WorldMate is an interesting example -- the base product is free, but if you pay you get special services.

Upgradeware. Speaking of free base products, I think this is the most intriguing possibility in the whole mobile app business today. In the PC world, there are a lot of app companies that manage to build sustainable businesses by giving away a free base product and then charging you for the advanced version (this is how most of Europe gets its antivirus software today, for example). In mobile this model worked well on Palm, but was not available on iPhone because Apple's terms and conditions prohibited a free application from offering in-app conversion to a paid upgrade. Apple just changed those terms.

Rob at Hobbyist Software asked the other day what I thought about the change. I think it's very long overdue, and I'm intensely interested in hearing from developers who have moved to that model. How's it working out for you?


Okay, so that's my list. If you're scheduled to appear on a panel somewhere, you're welcome to quote from it as needed. But now I'd like to throw the discussion open to you. Please post a comment -- What do you think of my list? And what non-entertainment mobile app categories, and business models, are making good money today, and why?

Two videos for mobile app developers

Just a quick note to let you know about a couple of informational resources for mobile developers.

--Motorola is starting the online publicity for its upcoming Android-based smartphones. They did a brief interview with me, asking how mobile app developers can distribute their software (link).

--Elia Freedman of Infinity Softworks did a great presentation on his experiences selling through the iPhone App Store, and the lessons he has learned. It’s well worth watching the video here.

It's best to watch both of these, and think about them, before you develop your mobile app.

App stores and APIs: It's the ecosystem, stupid

If you make a web application or mobile platform, one of the trendiest things you can do is add APIs and a software marketplace to it so developers will extend your product. Google is previewing its application market for Android (link), T-Mobile USA has promised a new applications store for its phones (link), and many people I've spoken with believe Microsoft bought Danger in order to get its software store technology.

The idea of encouraging third party developers dates back at least to the early days of MS-DOS, but it was associated mostly with operating systems until Web 2.0 applications took off a few years ago. Google played a big role in that change, by exposing APIs to Google Maps that made it possible to embed maps in other web applications. That helped Google Maps quickly blow past established mapping services like Mapquest, while the installed base of Google Maps extensions made it hard for Microsoft's web mapping product to gain traction.

The drive for web APIs got another big boost when Facebook enabled developers to extend its functionality, driving an explosion of widgets for Facebook that helped it grow past MySpace to become the #1 social network in the US (at least according to Alexa).

The web app people all noticed Google's and Facebook's success and furiously started adding APIs to their products. Today it's unusual to hear about a new web app that doesn't have some sort of API story or future plan to add them.

In mobile, applications have an interesting history. Lately some new mobile players have generated huge attention for their application marketplaces. The chart below shows the one year growth in the developer base for a certain well-known mobile platform:



If you're like most people in Silicon Valley, you probably think that's an Apple iPhone developer chart. But actually it's Palm OS ten years ago, from 1998 to 1999.

Disturbing, isn't it? The idea that a platform could take off like that and then crash and burn...makes you wonder if the same thing could happen to the platforms that are popular today.

And in fact, if you look at the history of APIs on both mobiles and web apps, the failures are more numerous than the successes. If you're a developer trying to pick the right platform to create your apps on, that choice is very dangerous -- you're betting the success of your company on something that has a better than 50-50 chance of failing.

If you work at a web or mobile company creating APIs or an app store, the news is equally disturbing: The odds are that you won't succeed.

So it's very important to look at the history of those failed platforms, to figure out what goes wrong and how to avoid it. When you do that, the answer is pretty clear:


It's the ecosystem, stupid

The success of a developer program is not driven just by the beauty of the APIs or the store, but by how the overall ecosystem works to enable developers to prosper. The two parts of the ecosystem that are most important to developers are the ability to create something cool, and the ability to make money. Coolness gets developers to try your platform in the first place. Most developers, especially the innovative new ones, gravitate to a platform that lets them easily create something cool that will impress their friends. But as those developers get older and more responsible, they eventually get tired of drinking lemon drops with Mark Cuban (link). They need to pay rent, buy food, and do other things that require money. If they can't make money from a platform, they will move away to the next one. So the financials are what makes developers stick around over time.

If the ecosystem breaks down anywhere in the chain, the developer community will eventually collapse. You can see this in process driving the history of some prominent web and mobile platforms:

Facebook. Earlier I said Facebook apps were a success because they helped the company grow. That's definitely true from Facebook's short-term perspective, but if you talk to Facebook developers the story is much more mixed. Some people online say there are lots of ways to monetize Facebook apps (link), but other reports say it's difficult to actually make the revenue come in (link). The online attitude toward this when Facebook's platform launched in 2007 was pretty dismissive. One commentator wrote (link):

The problem of not making money with your app is not a Facebook problem. It's your problem!

That's the right attitude for a developer to take: Control your own destiny. But monetization becomes a Facebook problem if nobody can make money. Developers poured into the Facebook platform like the tide in the Bay of Fundy, but a lot of them couldn't make money and promptly poured back out. I can tell you from personal experience that some are pretty bitter and unlikely to do anything with Facebook again.

Mobile Java's problem was that it's not a real platform. Handset vendors and operators were allowed to break compatibility between their implementations of Java, forcing developers to tweak their java apps almost endlessly, dramatically raising their costs and making it hard to scale their companies. The selling model for Java apps was also seriously broken -- to get prominent placement on a phone, developers often had to cut special deals with carriers. Some of the most successful mobile Java game developers have survived because they're great deal-makers; they figure out how to develop for a big brand that wants to create a mobile presence, or they hook into the promotion of a movie. This business model favors a few companies with the skill and contacts to cut the deals; the current mobile Java world is not an ecosystem that can support huge numbers of developers.

Palm and Windows Mobile both succeeded at first in enabling developers to create a lot of interesting applications. Although both operating systems had technical flaws, they were reasonably open to any developer, and the "write once run anywhere" idea mostly worked. Unfortunately, the marketing and sales model for those applications started out mediocre and got worse over time. There was no software store on device, so users had to go out on the web to find apps. This cut the number of people looking for applications. Those who did look online usually landed in the mobile application stores, which over time took a larger and larger share of the developer's revenue. Eventually, the stores' cut grew to more than 50% of revenue, making development uneconomical for many companies. When sales of Palm OS and Windows Mobile devices failed to grow rapidly, the financial model for many developers fell apart, and the ecosystems faded.


What to look for in an ecosystem

If you're a developer looking to find a viable ecosystem, or a platform vendor looking to build one, here are the things to look for.

How easy is it for developers to create something cool? How powerful are the APIs? Can the platform be programmed using standard development tools? Eclipse seems to be the preferred platform among much of the web app crowd, and it's free.

Is the platform programmed in a language that's obscure or difficult to use? This has long been one of the big barriers to Symbian native app development.

How do applications get visibility? Is the store displayed at the first level of the smartphone? How easy is it for users to navigate the store? Online stores like Handango are notoriously hard to navigate; the user experience is about like walking through a flea market.

Can good apps rise to the top? In some software stores, the developer has to pay for prominent placement on the store. This is incredibly corrosive to the ecosystem. The big software companies with money to pay for placement are often the least innovative. So users see an app prominently featured, try it, are disappointed, and never try another one. If web search worked this way, there's a good chance that the web as we know it would never have developed. The practice of pay for placement is a self-defeating, regressive tax -- it penalizes most the small developers who are most likely to create compelling new apps that make a platform more successful.

Ideally, placement on the store should be based on independent user reviews, so the best new apps can rise to the top naturally.

What are the terms of business? Can a developer bill for an app through the user's phone bill? Forcing people to input their credit cards separately slows adoption of software. Can the developer choose different forms of payment? Developers should be enabled to experiment with freeware and subscription payment systems, just as they do on the web. How much of the developer's revenue does the store keep? The ideal cut is no more than 20%.

Are there restrictions on the application's functionality? This is a sore point for iPhone developers. Apple won't allow intermediate platforms that run other applications. So no Java, no Flash, and no emulators like StyleTap's Palm OS emulator (link). This also inhibits other developers who want to expose APIs within their applications.

What is the overhead for security? Some platforms require applications to pay for a new security certificate every time the app is revised. The cost is typically a few hundred dollars, which doesn't sound like much to a big operator or OS company, but is a huge burden to a small company with several apps. They're basically punished every time they fix a bug, which is very unwise -- you want developers to fix bugs instantly, because that increases user satisfaction and reduces support calls. Basic security certificates can and should be issued automatically by the software store, at no charge.

How big is the user base? This will be a more and more important issue over time. For a developer, the ideal platform would let them sell to the whole base of mobile phone users, not just one brand or model.


Room for improvement

Based on those tests, no mobile platform offers an ideal ecosystem today. Apple probably comes closest at the moment. Here's how I'd grade it:

--Power: A-. The iPhone APIs give developers a huge amount of power, and there was a lot of delighted commentary on the web when the APIs were first revealed. But there is a learning curve for iPhone development; Apple has its own tools and its own variant version of C. And support for some typical OS features (such as cut and paste) is missing.

--Store: A-. The store is built into the device prominently, so apps are easier to discover. And there is a user-driven rating system. Developers can bill through Apple's iTunes system; not as convenient as billing through the carrier, but not bad. Apple takes 30% of revenue, which is not ideal, but is better than the 50% or more cut that burdens mobile app developers elsewhere.

--Terms: C+. There are significant, ambiguous restrictions on what a developer can do on the iPhone. The most onerous terms restrict the ability of developers to add functionality to applications and create software that run other applications. The terms cause a lot of confusion among developers; I'm on a mailing list for iPhone developers where they have been trying to figure out whether they can download content to an iPhone app. The answer: it's unclear as to whether content is a form of functionality, and you should ask Apple's lawyers. That is an incredibly intimidating message to app developers. It feels far too much like doing business with the operators.

--User base: Incomplete. It's relatively straightforward to make money from iPhone apps today because the number of developers is still relatively low. But over time, I think it's unlikely that Apple will be able to grow its user base at the same rate as the developer base is growing. If that happens, life will get much less pleasant for iPhone developers.

The ideal mobile app ecosystem would have the API power of the iPhone and the discovery experience of the iPhone store, coupled with business terms that allow add-on APIs like Flash, Java and Google Gears, all working across a much larger base of devices.


What it all means

If you're a software developer and some platform vendor or web company comes around evangelizing their software store or their APIs, you should evaluate the overall ecosystem they're providing, not just the store or APIs alone. If they haven't thought through issues like billing and discovery, it's a big warning sign.

If you work for a platform or web app company that wants to create a developer community, you need to plan the whole ecosystem and make sure it'll all work. This is especially important for a mobile company that wants to compete with the iPhone store. The way to fight iPhone for developers is to create a superior ecosystem. Apple's weak point is the business and technical restrictions on its developers, and the limited reach of the iPhone APIs. If another vendor -- say, Nokia or Google or Microsoft -- can pair a great store and powerful development with more openness and broader reach, they might be able to give Apple some serious competition. Elia Freedman had some good suggestions on ways to start (link).

____________

PS: Thanks to MobHappy for including my post on smartphone share in the Carnival of the Mobilists (link).

Nokia goes for 1% market share in the US

Okay, I'll admit in advance that this is going to be a pretty snarky post, but it never ceases to amaze me how badly Nokia handles itself in the US market. In Europe and most of the rest of the world, Nokia operates like a fighter jet, incredibly nimble and powerful. But in the US, it's more like a biplane. An old biplane. With holes in the wings. Nokia's market share in the US has dropped from 20% to 7% in the last two years (link), and sometimes I wonder if it's trying for 1%.

Case in point: Nokia's "Open to Anything" ad campaign featuring people who have created software for Nokia N95 smartphones (link).

It features, swear to God, a guy who created a self-hypnosis application for the N95, someone who created a bad breath detector, a man in the Witness Protection Program who created a location-aware app to track the hit men chasing him, a ditzy woman who uses the phone to track fertilizer schedules for her plants, a jealous wife who created a lie detector, and a flake Jewish photographer who glued together two n95s to create a 3D camera.

"You've never really seen a bris until you've seen a bris in 3D." --Nokia's website

They're all fantasy applications from obviously fake people, but beautifully animated in an elaborate Flash-driven site.

From time to time, I've talked with Nokia employees who were confused about why people don't buy more application software for their Nokia S60 smartphones. There are a lot of reasons -- lack of awareness that they can do it, lack of a built-in software store on the device, incompatibility between various versions of S60, etc. But one huge reason is because no one has ever made a compelling case to most users on why they should care about smartphone software.


The triumph of creativity over business sense

The Open to Anything campaign is a great example of how Nokia's hurting itself in the applications business, and in the US market in general. I'm sure Nokia's intent was to do something light-hearted to draw attention to the N95, and if you view the ads as standalone short films they are moderately witty. You see this a lot in online marketing lately -- a creative agency will create humorous websites (often with video) designed to draw traffic from bored web surfers. But unless the ads also align with your strategy, they don't drive sales. In Nokia's case, they actually do harm:

--Once again, Nokia is communicating that its users are freaks and morons, which in the US is not the way to build a loyal following. Nokia has a long habit in the US of positioning itself as the preferred phone of people who lack social skills. At least this time there aren't any sluts in the ad (link).

--The benefit of an open phone is not that you can write your own apps, it's that you can buy applications created by others. Almost no one wants to create their own apps. So we're being told that N95 users are not only freaks and morons, but they are freaks and morons who have programming skills -- an even narrower demographic.

--Since the argument for why users should care about applications has not been made, showing a bunch of nonsensical applications actually makes people less likely to take an interest in mobile apps at all. It trivializes the whole idea of mobile software, at a time when Nokia claims it is trying to make itself into a computing company that can compete with Apple and Google.

Meanwhile, Apple's ads depict its users as smart and hip, it puts its CEO on stage with real developers showing lustworthy iPhone applications, and it plans a built-in software store for the iPhone. Care to guess which platform is going to get more user and developer loyalty?

I'm tempted to start taking bets on when the iPhone application base will be larger than S60's. Unless Nokia wises up quickly, it won't take long.

The iPhone SDK: Apple gets it right

I have time tonight for only a quick note on Apple's iPhone software developer kit announcement. Overall, it is deeply impressive how many things Apple got right. We still need to see more details on terms and conditions, and a lot will depend on Apple's execution, but here are the problems they appear to have solved:

--Mobile applications are hard for users to find and install, so Apple is building the applications store into every device. Apps are installed automatically when you buy them, and you can also be notified of upgrades when they're available.

--Third party applications stores take far too much of a developer's revenue -- 60% or more. So the Apple store takes 30%. That's a bit high (20% would be better), but everyone else has been so greedy that Apple looks like a charity.

--Getting applications certified for use on mobiles is expensive and time-consuming, so Apple has streamlined the process dramatically. Developers pay $99 a year, and apparently get automatic certification of all their apps. We need to learn more about how the app approval process will work, but if it's not burdensome this service alone justifies Apple's 30% cut of revenue. Apple takes responsibility for ensuring that iPhones remain secure and do not abuse the network, something that no one else has been willing to do.

--Developers want to get access to the features of the phone, so Apple has exposed a very rich API set including access to the accelerometer and other special features of the iPhone. This is not a sandbox; it looks like it's access to pretty much the whole OS.

--And oh by the way, Kleiner Perkins is creating a $100 venture million fund for iPhone developers. Makes Google's $10m contest for Android developers look like a popgun.

It has been obvious for at least six years that all of these changes were needed in the mobile market, but until now no one in the US and Europe has had the courage / political muscle / intelligence to carry them all out. The other mobile platforms now look pretty pathetic by comparison -- not so much because their technologies are bad, but because their business infrastructure is so primitive.

At the announcement today, John Doerr called this Apple's third platform, which has a very specific meaning in Silicon Valley. It means they're planning to drive rapid growth in apps, which will make the iPhone more attractive to customers, which will in turn attract more developers, bringing in even more users, and so on in a virtuous circle.

I don't know how far Apple can drive that, just because their sales are so small compared to the total number of phones out there. I still think it's likely that web apps will eventually displace most native mobile apps, because the addressable market will be so much larger. But eventually can take a long time, and if anyone can buck the trend it'll be Apple. They have created by far the best overall proposition for mobile developers on any platform in the US or Europe, and I hope they'll do very well for a long time.

Apple is challenging the rest of the mobile industry to compete on its terms. It will be very interesting to see how the other mobile vendors react, Nokia and Microsoft in particular. Nokia seems to be focused on a strategic positioning activity around seeing who can collect the most runtimes, while Apple is solving real developer and user problems. It's a striking contrast.

The rest of the industry is still trying to figure out how to respond to the system design of the iPhone, and now they need to also figure out how to run an ecosystem as well. Right now Apple is changing the terms of the competition faster than the other guys can react, which is exactly the right way to beat a group of larger competitors.

Nokia and Microsoft, sittin' in a tree...

There's so much hype in the mobile industry that I'm always reluctant to use a word like "shocking," but nothing else fits Nokia's announcement today that it will support Microsoft Silverlight.

If you missed the press release (link), Nokia said that it's going to make Microsoft Silverlight available for all of its mobile platforms -- Series 40 (the low-end phone OS), S60 (the high-end OS), and its Maemo Internet tablet. (It's not clear if Silverlight will be bundled or just offered as a download.) Silverlight is a web app graphics and interface layer, intended to displace Adobe Flash.

The announcement was shocking for several reasons:

--Up until now, Nokia and Adobe had worked together closely. Nokia is one of the few companies paying to bundle Flash on its phones, and Nokia had featured Adobe prominently at some of its developer events in Silicon Valley. So the announcement I was expecting was that Nokia would bundle Air, the next evolution of Flash, rather than its competitor.

--Nokia has generally treated Microsoft as the spawn of the devil. The whole Symbian OS consortium was designed primarily as a way to prevent Microsoft from getting a controlling role in mobile software. Now Nokia gives Microsoft's software layer a huge boost?

--Although Microsoft had hinted vaguely about taking Silverlight mobile, it had given no definite plans at all. So this is a huge step forward for Silverlight.

--Just a few weeks ago, Nokia bought TrollTech and announced that its software was going to unify development across Series 40 and S60. Now Nokia endorses Silverlight, which will also run across Series 40 and S60. Which one are developers supposed to focus on?


What in the world is going on?

I don't know. Nobody from Nokia has explained it to me, so I have to read between the lines. Nokia says in the press release: "Nokia aims to support market leading and content rich internet application environments and to embrace and encourage open innovation. By working with Microsoft, we are creating terrific opportunities and additional choices for the development community." Okay, so I guess what they're saying is that they want to support every platform and development option out there. Presumably the benefit to them is that they can claim their phones support more software than anyone else.

I doubt that's the only motivation, though. By supporting numerous platforms, Nokia reduces the possibility that any one of them can dominate the market and push around Nokia. It also lets Nokia play the sides off against one another. I'm sure the threat of embracing Air made Microsoft give Nokia a very good deal on Silverlight, and no doubt Nokia will now use its Microsoft relationship to get business concessions from Adobe (assuming that Nokia still plans to work with Adobe at all; that's not entirely clear).

Anyway, I can sort of see how this all works for Nokia strategically, although it feels like Nokia is trying too hard to be clever. I'm not as clear on the benefits of all this for mobile developers and users. As was covered in last week's post on mobile apps (link), many developers view the proliferation of platforms as a problem, not a benefit. Microsoft itself said in the Nokia press release:

"We want to make sure developers and designers don't have to constantly recreate the wheel and build different versions of applications and services for multiple operating systems, browsers and platforms."

That's a pretty danged funny quote coming from a company that now offers at least four mobile platforms (two versions of Windows Mobile, Silverlight, Tablet PC, and does .Net CF count as a fifth?), in a press release from a company that apparently wants to support every platform available. If you really think platform confusion is a problem, guys, look in a mirror.

For users, the benefit of all this deal-making is unclear. We're stumbling into a world where you'll need to know details of which platforms are loaded on a particular phone in order to know which apps it can run. I can't think of a better way to discourage use of mobile applications.

Following up on "Mobile Applications, RIP"

I was very surprised by the volume of responses to last week's post on the decline of the mobile applications business. Many of the comments were passionate and well reasoned, and if you haven't seen them I recommend that you check them out here.

My biggest insight from the comments was that I had generalized too broadly about the mobile software world. Several mobile developers wrote in to say that they're doing just fine, thank you. Most of them seem to be either in enterprise mobile software, or doing contract development for major companies that have decided they want a mobile presence. In both cases, they have ways to get around the distribution logjam that I see as the biggest barrier to success in mobile software. I wasn't thinking about either of those developer categories when I wrote the post.

Anyway, I really appreciate all the comments. I learn a lot from the folks who post feedback, and I hope the comments are useful for you as well.

Mobile applications, RIP

Summary: The business of making native apps for mobile devices is dying, crushed by a fragmented market and restrictive business practices. The problems are so bad that the mobile web, despite its many technical drawbacks, is now a better way to deliver new functionality to mobiles. I think this will drive a rapid rise in mobile web development, largely replacing the mobile app business. This has huge implications for mobile operators, handset companies, developers, and users.


The decline of the mobile software industry

Mobile computing is different from PC computing.

For the last decade, that has been the fundamental rule of the mobile data industry. It was the central insight of Palm Computing's "Zen of Palm" philosophy. Psion came up with similar ideas, and you can hear echoes of them from every other successful mobile computing firm: Mobile computers are used differently from PCs, and therefore must be designed differently.

We all assumed this also meant mobile devices needed a whole mobile-specific software stack, including an operating system and APIs designed specifically for mobility, and native third-party applications created from the ground up for mobile usage.

That's what we all believe, but I'm starting to think we got it wrong.

Back in 1999 when I joined Palm, it seemed we had the whole mobile ecosystem nailed. The market was literally exploding, with the installed base of devices doubling every year, and an incredible range of creative and useful software popping up all over. In a 22-month period, the number of registered Palm developers increased from 3,000 to over 130,000. The PalmSource conference was swamped, with people spilling out into the halls, and David Pogue took center stage at the close of the conference to tell us how brilliant we all were.

It felt like we were at the leading edge of a revolution, but in hindsight it was more like the high water mark of a flash flood. In the years that followed, the energy and momentum gradually drained out of the mobile applications market.

The problem wasn't just limited to Palm; the level of developer activity and creativity that we saw in the glory days of Palm OS hasn't reappeared on any mobile platform since. In fact, as the market shifted from handhelds to smartphones, the situation for mobile app developers has become substantially worse.

That came home to me very forcefully a few days ago, when I got a call from Elia Freedman. Elia is CEO of Infinity Softworks, which makes vertical market software for mobile devices (tasks like real estate valuation and financial services). He was one of the leaders of the Palm software market, with a ten year history in mobile applications.

I eventually moved on from Palm, and Elia branched out into other platforms such as Blackberry. But we've kept in touch, and so he called recently to tell me that he had given up on his mobile applications business.

Elia gave me a long explanation of why. I can't reproduce it word for word (I couldn't write that fast), but I've summarized it with his permission here:

Two problems have caused a decline the mobile apps business over the last few years. First, the business has become tougher technologically. Second, marketing and sales have also become harder.

From the technical perspective, there are a couple of big issues. One is the proliferation of operating systems. Back in the late 1990s there were two platforms we had to worry about, Pocket PC and Palm OS. Symbian was there too, but it was in Europe and few people here were paying attention. Now there are at least ten platforms. Microsoft alone has several -- two versions of Windows Mobile, Tablet PC, and so on. [Elia didn't mention it, but the fragmentation of Java makes this situation even worse.]

I call it three million platforms with a hundred users each (link).

The second technical issue is certification. The walls are being formed around devices in ways they never were before. Now I have to certify with both the OS and with each carrier, and it costs me thousands of dollars. So my costs are through the roof. On top of that, the adoption rate of mobile applications has gone down. So I have to pay more to sell less.

Then there's marketing. Here too there are two issues. The first is vertical marketing. Few mobile devices align with verticals, which makes it hard for a vertical application developer like us to partner with any particular device. For example, Palm even at its height had no more than 20% of real estate agents. To cover our development costs on 20% of target customer base, I had to charge more than the customers could pay. So I was forced to make my application work on more platforms, which pushed me back into the million platforms problem.

The other marketing problem is the disappearance of horizontal distribution. You used to have some resellers and free software sites on the web that promoted mobile shareware and commercial products at low or no charge. You could also work through the hardware vendors to get to customers. We were masters of this; at one point we were bundled on 85% of mobile computing devices. We had retail distribution too.

None of those avenues are available any more. Retail has gone away. The online resellers have gone from taking 20% of our revenue to taking 50-70%. The other day I went looking for the freeware sites where we used to promote, and they have disappeared. Hardware bundling has ended because carriers took that over and made it impossible for us to get on the device. Palm used to have a bonus CD and a flyer that they put in the box, where we could get promoted. The carriers shut down both of those. They do not care about vertical apps. It feels like they don't want any apps at all.

You can read more of Elia's commentary on his weblog (link).

Add it all up, and Elia can't make money in mobile applications any more. As he told me, "Mike, it's time for you to write the obituary for mobile apps." More on that later.

Although it's a very sad situation, if Elia's experience were an isolated story I'd probably just chalk it up to bad luck on the part of a single developer. But it mirrors what I've been hearing from a lot of mobile app developers on a lot of different operating systems for some time now. The combination of splintering platforms, shrinking distribution channels, and rising costs is making it harder and harder for a mobile application developer to succeed. Rather than getting better, the situation is getting worse.

I've always had faith that eventually we would solve these problems. We'd get the right OS vendor paired with a handset maker who understood the situation and an operator who was willing to give up some control, and a mobile platform would take off again. Maybe not Palm OS, but on somebody's platform we'd get it all right.

I don't believe that any more. I think it's too late.


The mistake we made

We told ourselves that the fundamental rule of our business was: Mobile is different. But we lost sight of an even more fundamental law that applies to any computing platform:

A platform that is technically flawed but has a good business model will always beat a platform that is elegant but has a poor business model.

Windows is the best example of inelegant tech paired with the right business model, but it has happened over and over again in the history of the tech world.

In the mobile world, what have we done? We created a series of elegant technology platforms optimized just for mobile computing. We figured out how to extend battery life, start up the system instantly, conserve precious wireless bandwidth, synchronize to computers all over the planet, and optimize the display of data on a tiny screen.

But we never figured out how to help developers make money. In fact, we paired our elegant platforms with a developer business model so deeply broken that it would take many years, and enormous political battles throughout the industry, to fix it -- if it can ever be fixed at all.

Meanwhile, there is now an alternative platform for mobile developers. It's horribly flawed technically, not at all optimized for mobile usage, and in fact was designed for a completely different form of computing. It would be hard to create a computing architecture more inappropriate for use over a cellular data network. But it has a business model that sweeps away all of the barriers in the mobile market. Mobile developers are starting to switch to it, a trickle that is soon going to grow. And this time I think the flash flood will last.

If you haven't figured it out yet, I'm talking about the Web. I think Web applications are going to destroy most native app development for mobiles. Not because the Web is a better technology for mobile, but because it has a better business model.

Think about it: If you're creating a website, you don't have to get permission from a carrier. You don't have to get anything certified by anyone. You don't have to beg for placement on the deck, and you don't have to pay half your revenue to a reseller. In fact, the operator, handset vendor, and OS vendor probably won't even be aware that you exist. It'll just be you and the user, communicating directly.

Until recently, a couple of barriers prevented this from working. The first was the absence of flat-rate data plans. They have been around for a while in the US, but in Europe they are only now appearing. Before flat-rate, users were very fearful of exploring the mobile web because they risked ending up with a thousand-Euro mobile bill. That fear is now receding. The second barrier was the extremely bad quality of mobile browsers. Many of them still stink, but the high quality of Apple's iPhone browser, coupled with Nokia's licensing of WebKit, points to a future in which most mobile browsers will be reasonably feature-complete. The market will force this -- mobile companies how have to ship a full browser in order to keep up with Apple, and operators have to give full access to it.

There are still huge problems with web apps on mobile, of course. Mobile web apps don't work when you're out of coverage, they're slow due to network latency, and they do not make efficient use of the wireless network. But I believe it will be easier to resolve or live with these technical drawbacks in the next few years than it will be to fix the fundamental structural and business problems in the native mobile app market.

In other words, app development on the mobile web sucks less than the alternative.

Here's a chart to help explain the situation. Imagine that we're giving a numerical score to a platform, rating its attractiveness to developers. Attractiveness is defined as the technical elegance of the platform multiplied by how easy it is for developers to make money from it. The attractiveness score for native mobile app development looks like this over time:



This is why mobile app developers are in trouble. Even though the base of smartphones has been growing, and the platforms themselves have become more powerful, the market barriers have been growing even faster. So attractiveness has been dropping.

Now add in mobile web development:



Based on what I'm hearing from mobile developers, the lines just crossed. The business advantages of mobile web development outweigh its technical limitations. More importantly, if you look at where the lines are going, the advantage of mobile web is going to grow rapidly in the future.

I'm not saying all native mobile development is dead. In fact, we're about to see the release of Apple's native development tools for the iPhone, and as Chris Dunphy just pointed out to me, they are sure to result in a surge of native development for that platform. But I think even a rapidly-growing base of iPhones can't compare to the weight of the whole mobile phone market getting onto a consistent base of browsers.


What it all means

If you're a mobile developer, you should consider stopping native app development and shifting to a mobile-optimized website. That's what Elia did, and he said it's amazing how much easier it is to get things done. Even mobile game developers, who you'd think would be the last to abandon native development, are looking at web distribution (link; thanks to Mike Rowehl for pointing it out).

See if you can create a dumbed-down version of your application that will run over the mobile web. If the answer is yes, do it. If the answer is no, try to figure out what technology changes would let you move to the web, and watch for those changes to happen.

There are exceptions to any rule, and I think it makes sense to keep doing native development if your app can't work effectively over the web, and it's a vertical application so popular that you can get about $50 or more in revenue per copy. In that situation, you probably have enough resources to stay native for the time being. But even you should be monitoring the situation to see when you can switch to the web, because it will cut your expenses.

If you're a mobile customer, make sure your next smartphone has a fully functional browser that can display standard web pages. And get the best deal you can on a flat-rate data plan; you'll need it.

If you're an operator or a handset vendor, get used to life as a dumb pipe. By trying to control your customers and make sure you extract most of the revenue from mobile data, all you've done is drive developers to the Web, which is even harder to control. You could have had a middle ground in which you and mobile developers worked together to share the profits, but instead you've handed the game to the Google crowd.

Congratulations.


Oh, about that obituary...

In loving memory of the mobile applications business. Adoring child of Java, Psion, Palm OS and Windows Mobile; doting parent of Symbian, Access Linux Platform, and S60; constant companion of Handango and Motricity. Scared the crap out of Microsoft in 2000. Passed away from strangulation at the hands of the mobile industry in 2008. Awaiting resurrection as a web service in 2009. In lieu of flowers, the family asks that you make a donation to the Yahoo takeover defense fund.

Google, the OS company

The bottom line: Google is now an OS company.

The fact that Google's recently-announced OS products are aimed at mobile devices and social networking sites is interesting, and I'll talk about the impact of that below. But it's secondary. I think the big, really important change is that Google has now jumped with both feet into the middle of the operating system world. That potentially has huge implications for the industry.

The impact will depend a lot on how Google follows up. If it pours substantial energy and resources into its OS offerings, it will be extremely bad news for Microsoft and other companies trying to charge money for their own platforms. On the other hand, if Google doesn't make a serious long-term commitment, it will embarrass itself deeply. This isn't like launching a new web application -- an OS has to be complete, and it has to work properly in version 1, or there won't be a version 2.


What they announced

It's kind of ironic. For years after Google became a prominent web company, people speculated about whether or when it would create its own OS. The logic was that Microsoft has its own OS, and Google was challenging Microsoft, so Google would create its own OS too. But then as the years went by and it didn't happen, people moved on to other subjects. The speculation died out. But one of my rules about the tech industry is that "obvious" things happen only after everyone in the industry has written them off. So I guess Google was due.

The company has been creeping toward the OS space for a while. Google Gadgets is an API to create small applications that run in web pages, and Google Gears is code that lets web apps run offline, making it easier for them to challenge desktop applications. But they were both relatively low-profile (or as low profile as anything Google ever does). But in the last couple of weeks, Google made two much more assertive announcements:

--OpenSocial is an effort to create a shared platform for applications that can be embedded within social websites (link).

--The Open Handset Alliance is an effort to create a shared platform powering mobile devices (link).

Although they're aimed at very different parts of the industry, they're both efforts to create a standard platform where there was fragmentation; and they're both alliances of numerous companies, with Google providing most of the code and the marketing glue. I think there's a recurring theme here.


Details on the Open Handset Alliance

Open Social was covered very heavily when it was announced a couple of weeks ago, so I won't recap it all here. If you want more details, Marc Andreessen did an enthusiastic commentary about it on his weblog (link).

The OHA announcement was today, and I want to call out some highlights:

--It's built around a Linux implementation called Android. Android will be free of charge and open source, licensed under terms that allow companies to use it in products without contributing back any of their own code to the public. This will probably annoy a lot of open source fans, but it's important for adoption of the OS, as many companies thinking about working with Linux worry that they will accidentally obligate themselves to give away their own source code.

--Google is creating a suite of applications that will be bundled with Android, but they can be replaced freely by companies that want to bundle other apps, according to Michael Gartenberg (link). There is a lot of speculation, though, that if you bundle the Google apps you'll get a subsidy from Google. The folks over at Skydeck estimate the subsidy could be about $50 per device (link). That might not sound like huge money to you and me, but keep in mind that mobile phone companies routinely turn backflips to squeeze 25 cents out of the cost of a phone. When you sell millions of phones a year, it adds up.

--A huge list of companies participated in the announcement. That's not as impressive as it sounds; when you have a well-known brand, a lot of companies will do a joint press release with you just for the publicity value. But a few stood out:

Hardware vendors. Samsung, Motorola, LG, and HTC all endorsed the OS. HTC and LG gave particularly enthusiastic quotes. The first three companies have all been playing with Linux for some time, so I wasn't surprised. But HTC is another matter -- it is the most innovative Windows Mobile licensee, and Microsoft must be very disturbed to see it blowing kisses at Google.

(A side comment on Motorola: For a company that said it wanted to consolidate down on a small number of platforms, Motorola is behaving strangely -- it jumped all over Symbian a couple of weeks ago, and now is supporting Android as well. I think it has now endorsed more mobile operating systems than any other handset vendor.)

Operators. Participants in the announcement included NTT DoCoMo (a long-time Linux lover), KDDI, China Mobile, T-Mobile, Telecom Italia, Telefonica, and Sprint. That's a very nice geographic spread, and ensures enough operator interest to make the handset vendors invest.

--Google claims all Android applications will have the same level of access to data on the phone. That's pretty interesting -- most smartphone platforms have been moving toward a multiple-level approach in which you need more rigorous security certification in order to access some features of the phone. I'll be interested to see how the security model on Android works.

--We'll get technical information on the OS November 12, and the first phones based on Android should ship in the second half of 2008.

--Although Android's first focus is mobile phones, the New York Times reports that it can be used in other consumer devices as well (link).


What it means to the mobile industry

It all depends on the quality of Google's work and the depth of its commitment. If Android has technical or performance problems, it could sink like a stone. If it doesn't have enough drivers or has poor technical support, the handset vendors will avoid it. If the developers can't create good applications, users won't want it. This is a very different business for Google -- handset vendors and operators will not tolerate the sloppy, indifferent technical support that Google provides for its consumer web apps.

If, on the other hand, Google's platform really works and the company invests in it, I think it could have some very important impacts.

Impact on Windows Mobile: Ugliness. The handset companies endorsing Android are also Microsoft's most prominent mobile licensees. I doubt any of them are planning to completely abandon Microsoft (they don't want to be captive to any single OS vendor), but any effort they put into Android is effort that doesn't go into Windows Mobile. So this is ominous.

The whole mobile thing just hasn't worked out the way Microsoft planned. First it couldn't get the big handset brands to license its software, so it focused on signing phone clone vendors in Asia, thinking it could use them to pull down the big guys. But Nokia and the other big brands used their volume and manufacturing skill to beat the daylights out of the small cloners.

Now Google is coming after the market with an OS that's completely free, and may even be subsidized. This will put huge financial pressure on not just Windows Mobile, but all of Windows CE. Even if Microsoft can hold share, its prospects of ever making good money in the sub-PC space look increasingly remote.

Impact on Access: Ugly ugliness. How do you sell your own version of Linux when the world's biggest Internet company is giving one away? I don't know.

Impact on Symbian: Hard to judge. Symbian is the preferred OS of Nokia. As long as Nokia continues to use Symbian, it stays in business. The question is how much it'll grow. After years of painful effort, Symbian just managed to get increased endorsements from Motorola and Samsung. Now Google is messing with both of them. Japan has been a very important growth market for Symbian, now Android is endorsed by both DoCoMo and KDDI. All of that must feel very uncomfortable. If nothing else, it's likely to produce pressure on Symbian to lower its prices. And Symbian should be asking what happens if Android turns out to be everything Google promises -- a free OS that lets handset vendors create great phones easily. It's not fun competing against a free product that's been subsidized by one of the richest companies in the world (just ask Netscape).

Maybe if Symbian agrees to enable Google services on its platform it can get the same subsidies as Android does. It's worth asking. If not, maybe Symbian should be looking for other places where it can add value in the mobile ecosystem.

Impact on mobile developers: Potentially great. Mobile developers have suffered terribly from two things: They have to work through operators to get their applications to market, and they have to rewrite their applications dozens of times for different phones. If Android produces a single consistent Java environment for mobile applications, that would be a big win. And if it can open up the distribution channels for mobile apps, that would be great as well. We don't have enough details to judge either outcome yet, and the app distribution one depends on business arrangements that may be outside Google's control.

Impact on Apple, RIM, and Palm: Probably none at all. A lot of the coverage of Android is positioning it as some sort of challenger to iPhone and RIM.

I don't buy it.

Apple, RIM, and Palm all make integrated systems in which the software and hardware are coordinated together to solve a user problem. Android, by contrast, is only an operating system. It's plumbing, not the whole house. Unless Google's handset licensees magically develop the ability to design for users -- a feat equivalent to a giraffe sprouting wings -- their products won't be any better as systems solutions than they are today. The OS hasn't been the thing holding them back, and changing OS won't alter the situation.

Android puts interesting financial pressure on Microsoft, but it doesn't directly solve any compelling user problems. If it eventually drives a great base of mobile applications, that might eventually be attractive to some users. But in that case the systems vendors could just add a copy of Google's application runtime (it's open source, they can grab it anytime they want). Or they could host their devices on Google's plumbing. Palm and RIM might both benefit if they could transfer engineers away from core OS and toward adding value that's visible to users.


Impact on the tech industry: This isn't just about mobile phones

I have no access to Google's internal thinking, but even if it sincerely believes it's only doing a mobile phone OS, I don't think it can or will stop there. Technology products often develop a momentum of their own, no matter what was intended at the start. The lines between the computing and mobile worlds are breaking down already, and if Google creates an attractive software platform that's free of charge, that platform will inevitably get sucked into other types of devices. I'm not saying that Android is going to end up in PCs, but if it's functional and well supported I think it could end up running on just about everything else that has a screen.

Besides, if you look across all of the recent Google announcements, I think it's clear that Google has a larger agenda: It wants to break down walled gardens, because they interfere with Google's ability to deliver its services. It has even developed a standard methodology for attacking them: Create a consortium so you don't look like a bully, and fund an "open" alternative to whatever is in the way. They are doing it to Facebook, and they're doing it to Windows Mobile. Google doesn't even have to make money from the consortium, as long as it clears the ground for its services to grow.

Take a lesson from evolutionary history. The most successful animals are not those that adapt to the environment; they are the ones that reshape the environment to match their needs. I think that's what Google is doing. It's going to use open source and alliances to suck the profitability out of anybody who creates a proprietary island that it can't target.

It'll be interesting to see if and how Google applies this principle to the upcoming frequency auction in the US.

Or to anyone else who gets in its way.

What's more insecure, the iPhone or Apple?

It's been interesting to watch the reactions to Apple's crackdown on people who hack their iPhones.

If you've been living in a cave or otherwise off the net, I should explain that Apple's latest software update for the iPhone tends to disable phones that have been hacked to undo the SIM lock (enabling them to make calls on other networks) or to install third party applications. In some cases, Apple has refused to repair the software in these "bricked" phones, forcing the user to buy a new one.

I've read contradictory reports on what level of hacking causes the iPhone to be disabled. Some reports say the update disables the phone only if the SIM lock has been broken. In phones with an intact SIM lock but third party applications, word is that the update "merely" erases the apps without disabling the phone. But the fear among iPhone users is that doing anything unauthorized with the phone, even installing an app, can cause it to be disabled. Apple appears to be feeding this fear deliberately.

This has stopped (at least temporarily) the rapid growth of third party applications that developers and enthusiasts had started creating for the iPhone. Although Apple doesn't endorse or encourage the creation of native apps for the iPhone, developers had quickly found ways to access the modified version of Mac OS X inside the iPhone, and were busily producing a series of interesting and cute add-ons.

I was astounded by the speed at which iPhone applications were appearing. Usually it takes about six months to get developers cranked up on a new device, and that's when things are going well. Just three months after the first shipment of the iPhone, there were already a lot of interesting apps appearing, and David Pogue at the New York Times had even created a video celebrating them (link).

Most technology companies would kill to have that publicity and a bunch of third parties creating new software for their products. Web 2.0 companies are all adding application interfaces so they can get developers, companies like Adobe, Microsoft, and Google are competing aggressively to create APIs for web development, and even Apple invests heavily in encouraging developers to create software for the Mac.

The assault on hacked iPhones has provoked a nasty reaction online, starting among enthusiasts (check out the video here) and now spreading to the mainstream press. The latest example, pointed out to me by Chris Dunphy (an angry iPhone user), is from BusinessWeek (link):

"Wasn't Apple itself the creation of two guys in garage with a knack for making interesting ideas into real things? So why punish the people who try to create something interesting, threatening them with the prospect of an inoperative phone?....The company that styles itself as the technology supplier of choice for creative people with great ideas is insisting that to own its products is to accept a defined orthodoxy where there's only one acceptable way to do things. That doesn't sound like the Apple I know. So I'm not going to buy an iPhone. And until Apple commits to changing this ridiculous policy, I don't think you should either."

I can't remember the last time someone at BusinessWeek actively campaigned against a product of any sort.


Why would Apple expose itself to so much criticism?

The weirdest thing about this whole saga is that it's not at all clear why Apple is putting itself through it. I've been asking myself that a lot, and want to share some thoughts.

The first thing I think we have to do is separate the SIM lock issue from the applications issue. They are two very different business and technical issues, and Apple may have completely different motivations for pursuing them.

Why defend the SIM lock? Many mobile phones, especially in the US, are locked for use on a particular network. All CDMA phones outside of China are like this (because there is no SIM card), and many GSM phones in the US are as well. The excuse for this is usually that the operator paid a subsidy for the phone hardware, and needs to recover the subsidy through service charges. But the operators also achieve this recovery through big cancellation fees if you switch operators before the contract is up, so the industry has not traditionally worked very hard to defend the SIM lock. Unlock codes for many phones are available online, and many operators will reportedly unlock your phone if you call them and say that you're traveling overseas.

Apple is the first phone hardware vendor that I've seen aggressively defend the SIM lock, and I'm not sure why. The most common explanation on the Web is that Apple's getting a revenue share on the monthly billings from iPhone users, so it actually loses a lot of money when any iPhone moves to another network. There is also speculation that if iPhones can be moved into countries where they are not available, Apple will have trouble extracting lots of money from local operators who sign up to carry the phone.

The latter explanation doesn't hold a lot of water for me -- most people want their phone to work in their native language, so an English-language version of the iPhone is not going to destroy the market for a legitimate iPhone in France. Also, iPhones moved onto unauthorized networks lose some of their cool features, such as the visual voicemail function. If Apple were selling iPhones in some countries for $99 and in others for $699, I would see more of a gray market threat, but the price gaps are not nearly that large. Combine the language issue, loss of features, and low opportunity for price arbitrage, and I don't think there is enough motivation for Apple to subject itself to the abuse it's taking.

But the revenue opportunity is a different thing. If Apple got, say, 20% of the mobile billings for an authorized iPhone, that would probably be about $120 a year from an average user -- in pure profit. That's going to be similar to the total margins Apple makes on the actual iPhone, and they get the billings every year. I have no idea if Apple's actually getting 20%, but that sort of number has been rumored for some of the European iPhone deals. Even if Apple's cut is only $10%, the revenue share would be a huge part of Apple's total profit on the iPhone, and something they would be willing to defend vigorously, even if it pisses people off.

Why kill third party applications? This one is harder to understand, because I don't understand what Apple gains from it. Having applications for the iPhone makes it more popular, and also sucks up developer activity that could go to competing products. My first reaction when I heard that Apple wouldn't allow applications on the iPhone was that it was a control issue for Steve Jobs - he watched the base of cool Mac developers get sucked away by Windows, and never wants to be vulnerable to a third party again (link).

There are a lot of commentators online who assume the control freak attitude is driving Apple's behavior on the iPhone. Others speculate that Apple is planning to offer a third party applications store, in which it will take a large revenue cut for third party applications that have been approved by Apple. I have no idea what the cut would be, so it's hard to say how much it's worth to Apple. But I think if it were a big part of their plans, they would have made that store available on the first version of the device. So although I believe they might create such a store (it's an obvious thing to do), I don't think that is the whole explanation. It's hard for me to see them bringing this level of criticism on themselves just to defend that hypothetical store.

Instead, I'm starting to suspect that they have a deeper motivation that they don't want to discuss in public because even acknowledging it could damage iPhone sales. It's better to take criticism from people who think you're evil than to admit that your device has a serious flaw, and I think maybe the security structure of the iPhone is a serious flaw.

When the iPhone was announced, Steve Jobs said it didn't allow third party apps because they could bring down the phone network. I thought that was stupid bluster at the time, because on most smartphones it's very difficult to do anything really nasty to the network. The applications and the phone run on separate processors, and given the limitations of the smartphone operating systems, it's very difficult to do anything really heinous to the network.

But the iPhone has a much more powerful OS in it, a derivative of Unix. The reports posted online by hackers who have played with the innards of the iPhone are very disturbing (link). Here's a great example:

EDGE network access is horribly slow, but it works....I made a few attempts to discover other hosts in the private address space, in hopes of finding other EDGE devices, but instead only found a few scattered routers, switches, and servers.

So the hacker was looking to hack other phones via AT&T's Edge network, and was not able to do so. That's a good thing from the perspective of the average user. But you have to wonder what those "scattered routers, switches, and servers" are. I doubt AT&T deploys switches and servers on its network just for laughs, so who knows how important they are to the functioning of the network, or how secure they are. I'm sure they were not set up with the expectation that hackers would be tickling them from an iPhone.

If you know the technical details of Edge and have any thoughts on this, please post a comment. Maybe I'm overstating the risk here. My personal reaction was that if I worked at an operator and read the quote above, my hair would stand on end (if I still had any).

Here's another interesting quote:

Every process runs as root. MobileSafari, MobileMail, even the Calculator, all run with full root privileges. Any security flaw in any iPhone application can lead to a complete system compromise. A rootkit takes on a whole new meaning when the attacker has access to the camera, microphone, contact list, and phone hardware. Couple this with "always-on" internet access over EDGE and you have a perfect spying device.

Well, that's pretty straightforward. There are already third party applications that turn a smart phone into a spying device, but you need physical access to that particular device in order to install them. The difference with the iPhone, according to this report, is that once you find a security hole you could install that sort of spyware remotely, via the wireless connection.

That led to a Computerworld article which says basically that viruses and other malware could spread from one iPhone directly to another without the user ever being aware of it (link). I'm not too alarmed by that just yet, because there isn't a critical mass of iPhones in any one geographic location to infect each other. But it could be interesting the next time there's a big gathering of iPhone users. Macworld, anyone?

To me the more troubling part of the report was the root privileges thing. I'm not a Unix expert, so I talked to someone who is. He confirmed that applications with root privileges in Unix can do just about anything. Unix is designed to empower programmers, and the assumption is that someone with root access knows what they are doing and can be trusted. (You can read some similar commentary in a eWeek column here).

There are ways to prevent third party applications from having root access, but the disturbing possibility (and I'm speculating here) is that Apple may have stripped out those protections in order to reduce the memory requirements of the iPhone and make it run faster. If that's the case, my friend said, it may be a pretty involved project for Apple to add those protections back in. Not at all impossible, but requiring a lot of work and time.

Through my years in the industry, I've done a lot of research on technology users. One of the things I've learned is that security problems are a great way to scare people away from a new technology device. If it even sounds insecure, a lot of people will stay away from it. Based on what I'm seeing online, there is a lot of evidence that the iPhone as currently structured is a genuinely insecure device once any uncontrolled third party applications get onto it. What's more, keeping third party apps off your own iPhone does not necessarily protect you, because malicious software could propagate from device to device.

If I were working at Apple, and this were the situation, what would I do? Well, first I would not want to acknowledge the vulnerability, because that itself would scare away customers. Second, I would do everything in my power to shut down all third party native application development. Squash it, kill it completely. And I'd be willing to take a lot of criticism for doing so because the alternative, acknowledging the security problem, would produce even more bad PR.

Let me be very clear here: I'm not saying that I know this is what's going on at Apple; I don't. And I'm not trying to start any nasty rumors (they are already out there). I should also point out that some reports on iPhone security have been a lot less alarmist (for example, here is Symantec's take from early July). But that was before the latest reports surfaced.

I think we need to ask whether Apple botched the security of the iPhone in the belief that people wouldn't try to add apps to it. They could easily have made that assumption; there have been comparatively few efforts to add apps to the iPod, after all. But the publicity for the iPhone, and Apple's bragging that OS X was in it, made it an irresistible target for hacking.

If Apple really does have a security problem in the iPhone, I don't think they will be able to keep it quiet. Experience shows that the best approach in this sort of situation is to come clean about the problem, take your lumps, and fix it as soon as you can. That way you at least retain your reputation for honesty. If the iPhone really is vulnerable, Apple risks ending up with the worst of all possible worlds -- it'll damage its reputation for honesty, piss off a lot of technophiles, and people will still hear that the iPhone is insecure.

It will be interesting to see how Apple handles this issue in the weeks to come.

=====

Thanks to John Hering at Flexilis for pointing me to the Computerworld story.

The (partial) state of the mobile data market

Despite all the hype and excitement about the mobile data market, it is very difficult to get reliable data on how it's actually developing. The mobile operators don't like to release full details of their sales, and surveys of users cost a lot of money to conduct and therefore are usually available only to people who pay.

We're left to chew on anecdotes, partial information released by companies that are trying to push a point of view, and unscientific "polls" of online enthusiasts.

So I'm always on the lookout for more rigorous information. Recently I came across several fairly good sources of data, and they give some interesting perspectives on what's happening with mobile data. It is by no means a complete view, and most of it is US only. But I think it's worth sharing.


Steady, unspectacular growth

The overall picture of mobile data is one of steady but unspectacular growth. It's a bit like watching a tree grow -- you can't see anything changing day to day, but if you walk away and come back in six months you'll notice the difference. SMS continues to be the dominant service, especially in Europe, and there's no sign of some other service surpassing it.

Is the growth rate good or bad? It all depends on how much growth you were expecting, and how fast you wanted it to happen. The one thing I think is very clear is that each country market is different, and you can't classify any of them as leaders and laggards. They're just unique.

Here are the details:


Capabilities of mobile phones in the US

The Pew Internet organization has been surveying Americans on their Internet usage for years. A couple of the questions in their survey ask about the data capabilities of their mobile phones. In the most recent results, from early 2006, 75% of mobile phone users in the US said their phones are capable of texting. 63% said they can play games, and 39% said they have cameraphones. Here's the full chart:



Nothing there stands out as shocking, although I expected the penetration of cameraphones to be higher. My guess is it has gone up in the last year.

(Note that some people could have capabilities in their phones and not realize it. So the question tells us as much about awareness of features as it does about the phones themselves.)


What people do with their phones: Nothing else rivals SMS

The chart below examines the percent of mobile phone users in the US and several European countries who have ever performed various tasks with their mobile phones. The source is M:Metrics, Q4 2006, and the numbers were quoted in a presentation by Orange / France Telecom.

The figures show that there's no other mobile data service with near the penetration of short messaging service (texting). That's not really news, but it's striking to see the hard numbers. About 80-85% of people in most of the big European countries have ever sent a text message, with France lagging slightly (at about 75%). In the US, almost 40% of mobile phone users report that they have sent a text message.

The next closest service is picture messaging, with 20-30% of mobile users in the big European countries saying they have received photo messages at least once. In the US, the figure is 15%. It's ironic that photo messaging is in second place, since it's generally considered a major disappointment. What does that say about the other services? Well, none of them generally crack 10% usage.



Is the US really a laggard? The other thing in the chart that really stood out to me was that the adoption "lag" of US mobile users varies depending on service. The US is far behind in SMS, MMS, and playing music on the phone (the last one is, I'm sure, due to the strength of the iPod in the US). But in the other categories, the US is in the middle of the pack, or even ahead (somebody explain the ringtone result to me, please).

It's always fun to stereotype the US market as primitive in all areas of wireless, but the adoption numbers don't support that. It just looks different.

What does it all mean? Orange's spin was that it means we're just getting started in mobile data, and everyone should wait patiently for the good services to take off. They showed the following growth projection from Ericsson as evidence:



No offense to Orange, but that is basically a statement of faith rather than analysis. If you're a cynic, you'll point out that the chart assumes compound growth will continue uninterrupted for a decade, something that is often true for technology specs but is rarely true for technology markets.

What we really need is time-series data, so we can see what's growing and what isn't. Unfortunately, Orange didn't present any numbers like that, but the research firm Telephia did, in a separate presentation. Unfortunately, their numbers were US only, and they didn't cut the usage categories in the same way as France Telecom. But they still show some interesting trends...


Mobile data growth in the US

Telephia measures mobile data usage by analyzing the monthly bills of mobile phone users. This should give very accurate information on revenue and number of users, but it doesn't track physical usage. Because some services are billed per-use and some have monthly subscription fees, it's hard to tell how heavily people are using the services listed below.

Telephia reports that billings are growing steadily for a wide range of mobile data services. The chart below shows total US operator revenue for mobile data from Q3 2006 to Q1 2007. (These figures include anything that passes through the user's phone bill. Applications and services paid for separately by the user are not included.)



The chart is in billions of dollars, so it shows that in Q1 2007, total on-deck US data revenue was about $4.6 billion. Is that a big number or a small one? Well, total service revenue for the US mobile operators is about $32.5 billion per quarter, according to the CTIA. So mobile data is about 14% of mobile billings.

Where is e-mail? I can't find e-mail anywhere on the chart. I'm very surprised they didn't break it out separately.

Strangely consistent growth rates. The weirdest thing about the chart is that everything's growing at the same rate. In the real world, that sort of thing doesn't often happen. I wonder if a lot of the growth might be driven by people buying service bundles, where they pay a flat extra rate per month to activate a bunch of different services, and then the revenue gets allocated across the services by the operator. That would cause everything to grow in lockstep.

If that's what's going on, then these numbers really might not say much about usage -- what they'd be tracking is the ability of the operators to sell services bundles.

Anyway, the numbers show that the US operators are making pretty good revenue from mobile data. I didn't make a chart of this, but in general, the growth in mobile data billings is large enough to make up for the ongoing decline in mobile voice revenue. So the operators aren't getting rich, but data is helping to keep them from getting poor.

More details. Telephia lumps a lot of different things in the "Downloads" category. For Q1 2007, they gave more details on that category. So I can't give you a time series, but here's a more fine-cut look at how mobile data revenue looked in the US at the start of 2007:



Premium SMS is mostly ringtones paid for via SMS, plus voting for things like American Idol. Audio is downloading and streaming of songs. The other categories are self-explanatory. I feel bad about the tiny size of the applications category, but keep in mind that most smartphone apps are sold through the web and then synced onto the device, and so don't show up in operator billings.

Number of users per service. Telephia also reported the total number of users for each service. As we saw in the Orange chart, SMS has the most users in the US (although the gap between it and the other services isn't as large as in Europe).



Revenue per user. Combining the user and revenue data, we can estimate monthly billings per user for each service:



You can see why the operators like premium SMS. And look at WAP! It never lived up to the original hype that it would become the mobile version of the Web, but as a tool for getting things like sports scores and weather reports, it's not doing too bad. (Whether it's paying for all the money that was invested in it is another story.) Video's generating the most revenue per user, but with a very tiny user base. Audio revenue (which is revenue from listening to songs, not ringtones) is fairly close to what Apple gets from iTunes users (the average iTunes user downloads about 3.3 songs per month, or about $3.30) (link).

Usage doesn't follow capability. And now for the "big" mashup. We can combine Pew Internet's figures on phone capabilities with Telephia's numbers on service usage to figure out roughly what percent of US mobile customers who know they have a given feature on the phone ever actually use it. The results are interesting:



For communication-related services, the percentage of users is quite high (although remember that we don't know how heavily the features are being used). But most mobile users are not adopting the entertainment features in their phones. That's exactly what you'd expect if only a limited percentage of the population were interested in using their phones for entertainment, which is what a lot of user studies have shown (link).

The lesson: If you're an operator or handset vendor, be careful about pushing phones that are a kitchen-sink collection of expensive features. The odds are very good that you'll spend a lot of subsidy money on people who won't ever adopt the underlying services that were supposed to justify the subsidy. It's much better to offer a variety of phones specialized for different types of user, and let them pick the ones they want.

=====

As I said at the start, it's an interesting collection of tidbits, but far too US-centric. If you live outside the US and have information to add on your market, please post a comment.

Sources:
Total revenue of the operators: link
Orange's presentation at the Global Mobility Roundtable: link
Telephia's presentation at the GMR: link
Pew Internet: link