Table of Contents
Both the smartphone and mobile internet advertising industries are rapidly growing industries offering great opportunities for innovative product development. Especially, with the introduction of mobile applications market (after launch of iPhone 3G) by Apple last year, this industry segment has excellent prospects for potential entrepreneurial opportunities.
Our entrepreneurial venture revolves around simplifying customers' shopping experiences. How many times have you been to a mall and had trouble locating your favorite shop or eating joint? Imagine those times, when you have been frantically trying to locate the floor shop plan at the Mall or asking people for help and directions. Our venture aims at solving these problems. We are building a smartphone application which offers a detailed layout of different shopping malls, including the floor plan and eateries, and saves people from the pain of locating individual shops. Moreover, this listing is fully searchable. We will offer this application for free. Our business model is ad-based where we are inviting individual retail outlets within a mall to approach us so that theirhops get prioritized listing when customers searches for relevant keywords. So, for example, if someone searches for shoes in our app and we have a deal with Nike to sponsor their results, Nike will appear among the top search results. This will offer increased visibility to shop-owners and increase the buying options for our users.
The industries we are focusing in this paper are the mobile internet and smarphones industry. Within the smarphones industry, our research will concentrate on the mobile applications segment – a new and rapidly growing sector which was created by Apple last year and which already generates more than $700M in revenue per year.
In this paper, we will first conduct a detailed analysis on our industries of choice – including its demographics, value chain, how the industry works and potential attractiveness. Thereafter we will go onto discuss our entrepreneurial venture and why we believe it offers great potential in today's fast paced world.
According to a report by the market research firm iSuppli, smartphones may see up to an 11% increase in 2009 and will form 17% of all mobile phones sales this year. Moreover, with the increase in sales of smart-phones, we are seeing a proliferation of mobile phones applications which is becoming a big industry by itself. For example, iPhone's App Store saw sales of more than $150M since the time they launched in July 2008. Overtime, this space is expected to get crowded by Nokia, Blackberry, Microsoft (Windows Mobile), Android (Google's App Market) and Palm (Pre) – all expected to launch their own variants of mobile applications marketplace by the end of this year. A side-by-side comparison of the various features and characteristics of different stores is given in the table.
Mobile advertising is still in its nascent stage and expected to have a huge growth potential in the future. Currently, it is a $80M industry (in the US) which is expected to grow at a CAGR of 79% to reach a net revenue of $890M by 2012. According to the Nielsen Mobile Survey, 15.6% users in US actively use internet on their mobile phones. As of May 2008, the US mobile Internet audience (over the age of 13) is about evenly split between those over the age of 35 (48 percent) and those under the age of 35 (52 percent). Additionally, there are approximately as many teenagers using the mobile Internet as there are persons over the age of 55 (5.1 million persons age 13–17 and 4.4 million persons 55 and older).
3.2 Value Chain
The above is a possible value chain for this industry. As we can see, the mobile internet, smart-phone industries and mobile applications sector will create value for themselves in 3 different tiers. The top tier represents the major telecom companies (such as AT&T, Vodafone) which provide the infrastructure and network capabilities (and thus create value) to enable mobile internet and communications. The next tier belongs to the innovators (application developers) such as Twitter or Yelp who work on top of different platforms (such as Android, Windows, iPhone as represented by Tier 3) to create value for themselves and the user. The Platform providers enable applications developers to use a standard development environment to and develop innovative applications on top of that.
3.3 How Industry Works
The mobile phone applications industry is a rapidly growing and evolving industry. It started from virtually $0 last July and has grown to $700M (in revenue) now!
The defining point in this industry came when Apple's iPhone opened its SDK last year and allowed any developer (with sufficient computer skills) to develop applications for the iPhone and earn money out of the process. One of the main reasons for this explosive growth has been the low barriers to entry for app-developers. Continuing with Apple's App Store, the registration fee for developers to start making applications is less than $100 which gives you immediate access for posting your own applications. Additionally, Apple has been able to create a very user-friendly interface which allows iPhone users to easily search, download and pay for these applications. iPhone App Store currently allows developers to either host their applications for free (users can use the applications without paying) or charge a fee for each download. In case of latter, App Store shares the revenue with the developer in the ratio of 3:7 (Apple keeps 30% and gives the rest to the developers). Developers are also allowed to show advertisements within their applications and keep the revenue.
The rivalry among various applications is huge (given the fact that developers can copy each other's ideas without restrictions) with more than 35000 applications in the Store as of this moment. Some developers give their applications for free in an effort to undercut others who are offering similar products and to build a critical mass of users which will help them to attract advertisers. Users of smart-phones are spoilt for choices when selecting which applications to use (no switching costs!) and exert significant power over developers to come up with innovative and improved offerings. Since App Store is the only way to download apps to the iPhone, this industry faces less threat of substitutions (albeit, some cases of using jailbroken iPhones – which Apple claims is illegal and places severe upgrade restrictions on the same).
3.4.1 Favorable to New Ventures
The smart-phone applications industry is very favorable to new ventures – primarily because of low barriers to entry. For ex., an iPhone app-developer needs to make a down-payment of just $99 to register at the iTunes App Store. Thereafter, he can develop unlimited number of apps and sell them through the iTunes distribution network at no additional cost. The learning curve to develop an iPhone app is not very steep and skilled computer programmers can get started within days. Moreover, the development process can even be outsourced to either freelancers or developers in other countries (such as India) where it can be done at very low cost.
Since the launch of App Store last July, more than 35,000 applications have been developed and downloaded over a billion times.
3.4.2 Examples of New Ventures
There are many examples of successful ventures in this industry. Some of the popular applications in the iPhone store are Tap Tap Revenge (game) by Tapulous, Facebook (social networking application), Shazam (identifies which song is being played) and Ocarina (musical instrument) by Smule.
3.4.3 Critical Success Factors
The critical success factors of this industry are:
- Innovation: The ability to identify novel opportunities that satisfies a customer's need or sense of entertainment is crucial in this industry. Products like Shazam and Ocarina gained immediate mainstream following as they were disruptive and received good reviews – which lured others to try it.
- Ease of use: A user friendly interface and simple human-device interaction is an important consideration for smartphone-customers. This is one of the reasons why applications like Falling Balls and Super Monkey Ball are so popular.
- Marketing: With over 35000 applications in the iPhone App Store, product marketing is one of the key factors to success in this industry. The App Store is full of similar applications trying to undercut each other in pricing and product quality. However, cross marketing, where one application is advertised to the user when he is using another application (usually by the same developer), is emerging to be an important tool for marketers.
Another strong marketing play in the App Store is to offer a free trial of your game or application. Not only is the App Store designed for this, but also it's the best way to reduce consumer risk in trying your application, with the goal of eventually getting that user to purchase the full version.
3.4.4 Major Challenges
Some of the major challenges in this industry are the risk of imitation and inability to gain critical mass. As an application becomes popular, many copy-cat applications emerge which provide similar services and compete in the same space. Another problem in an ad-supported business is that advertisers will not approach the app-developer unless he has built a sizeable customer base that is loyal to his product. This may take a long time and consume large resources before he even starts generating revenue.
4. Entrepreneurial Opportunities
4.1 Types of Entrepreneurial Opportunities
The entire internet and mobile industry is in its growth stage and there is a lot of experimentation going on. There are multiple opportunities and the business models followed in each case are very different from each other as everyone is trying to leverage their strengths. Traditional companies with offline presence are trying to get into online space and then there are pure online plays. Opportunities exist in both spaces.
Brick and mortar companies are moving online to enhance their distribution channels and / or improve customer experience. All industries from auto manufacturers to big retailers to service providers to restaurants have an online presence. In this scenario opportunity exists to consolidate small mom and pop shops and enable them to have an online presence. Majority of these small businesses do not have an online presence let alone being accessible through mobile phones.
The obvious challenge to such an offering would be scalability as it would be difficult for an entrepreneur to provide comprehensive services to cover a large area. So initially entrepreneur can pull listings from the closest thing to have such an offering i.e. the yellow pages. However, yellow pages only provide the address and rarely add any value, so the next step for the entrepreneur will be to pull reviews from sites like yelp.com and enhance their listings. Finally, they can create a mash-up on Google Maps to visually display the data. Over time, entrepreneur can get the online community involved and expand on their listings.
Additionally, there are companies with only online presence. If they do have offline presence it is very small limited only to toll free numbers for customer support. Moreover, some businesses like Mary Beth's Apple Pie Company have an online presence but link to other websites (Drugstore.com) for some specific functions (placing an order). To deliver their products, if they have one like Netflix and Amazon, they use postal services. However, most of these companies offer just services e.g. Google (search, mail etc), Digg (find stories), Blogs (communicate) etc. In this scenario opportunity exists for an entrepreneur to offer services that are currently not being offered. We think that there is opportunity in the financial services website focused around a community. In this website, Web 2.0 elements can be combined with financial analysis. The site could provide recommendation on how to create your portfolio and when to buy or sell stocks.
The challenge for any online venture to succeed is to survive the initial period. As a website is launched, it takes some time to get traction. There are only two ways to make money of a website. First, ad-based model, however, this needs lot of users on the website. Second, subscription based model, however, you need loyal users for this. For any of those models to work website has to be around for some time. To succeed, the entrepreneur will have to control costs and build a community at the same time. The biggest challenge is to build a loyal community as online businesses based on community do not have lot of overhead costs as they can scale easily when they grow.
4.2 Our Venture
Do you ever go to a mall and find yourself going to a Directory to figure out where a particular store is? Do you wish there was an easier solution? How much would you like to search for a store on your mobile phone and get the directions? Our venture would provide solutions to the above pain points and the venture would make it easier for a user to search for a particular store in a mall using smart phones. We will combine aspects of online web 2.0 to get the mall directory information and combine it with content delivery on smart mobile phones.
Initially, we will start local and tie up with the malls in Southern California to get the layout and directory information. This information will be further enhanced by pulling reviews from various sites like yelp.com. Additionally, we will talk with the big retailers to get inventory information. Finally, to deliver content we will create an application for various smart phones, like Blackberry, iPhone, Nokia etc.
User would be able to search and retrieve the information using two different options. First, by store name, in this case the application will be able to guide them to the nearest mall based on their current location and to the store once inside the mall. Second, the user could type in what he wants e.g. shoes, bags, camera etc; in this case the application will provide with a list of stores and inventory information along with the ratings of those stores. Once the user selects a store the application will guide the user to the appropriate location.
To scale the application to other parts of the country we will tie up with the leading retail property groups like Westfield Group to get the directory information and layout for their malls. This is an ideal solution to get the data for national and large regional malls. Additionally, to enhance the service, we would create an online community. In the community the users will be able to add directory and layout information for the malls in their cities. Using user generated content we will be able to cover even the smaller regional and local malls.
Subscription based business for mobile application will not get traction. Therefore, we will base our business model on mobile and online advertisements. The biggest advantage of our business model is the low fixed costs involved and its scalability. Most of the information that we need like mall's location, retailer's merchandise is available online for free through individual websites. We will have to consolidate these listings and enhance them with reviews pulled from other online websites.
Once we have a usable database phone application can be easily developed. Thus, we will be able to generate positive cash flow quickly and would be able to concentrate on building the community and build a comprehensive listing. To generate revenues we will approach national retailers for advertisements to be displayed on the mobile phone e.g. when user searches for shoes, we would display sponsored retailer offering shoes before displaying other retailers.
4.3 Business Concept
The venture will focus on enabling users to search for merchandise or for a particular store through a smart phone and then guide them appropriately based on their current location first to the closest mall and then to the store inside the mall.
The application is meant for users who want to search for a particular store or merchandise. In that sense the application is broad enough to be used by anyone. However, the application will obviously require a smart phone to work. Therefore, we will be targeting the segment of population that has smart phones. This segment is expected to grow at 26% per year.
The obvious place to start will be to target iPhone users and then later expand it to other types of smart phones like Black Berry, Nokia etc. The reason we intend to start with an iPhone is because an ecosystem for applications already exists on that platform. Therefore, initially we will focus on this group. Later on the application will be rolled out to users of additional platforms.
4.3.3 Product / Service
The service will have two distinct aspects to it. One would be a downloadable application that will work on the user's smart phone. This application would be free to download and use. It would allow the users the capability to search for either a particular item or a particular store. Once the user enters a search for an item e.g. "camera" then the user will be displayed the list of stores carrying that item. After the user selects a store he will be guided to the mall from his current location. Once at the mall the user will be presented with the mall layout and directed on how to reach the store.
The second aspect of the service will be the online community. This main purpose of building an online community is to give users the ability to enter directory information of local and small regional malls. As a result, user generated content will supplement our data for national malls and retailers and allow us to scale quickly. Since the mobile application is limited to search, another important use of the online community will be to get feedback from the users on how to improve the offering. Thus, online site will provide two way communication with our customers / users.
For this purpose and to learn more about mobile application development, we spoke with Mr. Tero Ojanperä (EVP, Nokia) at the Web 2.0 Expo in San Francisco. Mr. Tero is handling the development of Nokia's Ovi Store, their brand new App Store. Mr. Tero gave us good insights into the challenges faced by the developers (in creating same applications for different platforms) and how Nokia is planning to make the process truly open which will help streamline and integrate different App Stores. Mr. Tero was also impressed by our idea and gave us useful tips, such as using the magnetic compass capability available to today's phones to give a sense of directions to the users of our application.
The pain we are trying to solve is making it easier for users to be directed to a store of their choice to buy the item they need. The direction will not only get them to the nearest mall but once at the mall, layout of the mall will be presented. They will then be guided to the store they want in the mall. The users will not have to spend time searching for a directory and trying to figure out how to get a particular store.
In current scenario, the closest competition is searching for an item on Google. Then the user has to figure out the closest mall and then look for a store once he gets to the mall. Our service will consolidate all this in one simple user friendly interface. The most important feature of the application will be the mall layout to guide the user once they reach the mall.
The application will be distributed by a simple download on the user's mobile phone. The application will be free for the user to download and use. Initially, it will be rolled out to iPhone users using the Apple apps distribution platform. Later, when the application for other smart phones is created the users will be able to download it either directly through their phones or through the online website.
The principal advantage of rolling it to iPhone is to leverage an already existing ecosystem without minimal effort. It will also allow us to scale slowly as we will not have to provide applications that will work on the every smart phone. It will also help us iron out any kinks in our content delivery mechanism. Once the iPhone application gains critical mass we will start rolling it out for other smart phone users. Since there is no ecosystem for other phones the user will be able to download it from our website and install it on their phones.
The biggest issue with online advertisements is that the intent of the user is unknown. A user searching for "camera" online could easily be searching for reviews instead of buying one. This is the biggest advantage of our platform. The user is already looking to shop or is already shopping. In this case the user has already declared the intent and is searching for the store location or for other options. Thus, when a customer searches for "camera" and a retailer is displayed first it is like the customer will go to the retailer.
We can approach the retailers and clearly show the advantage of signing up on our platform. Our value proposition to the retailers will be able to increase the foot traffic at their stores. As the community grows, the more our value proposition would increase. With growth not only will we increase our total revenues but it will also increase our power and we would be able to demand higher revenue per click.
The business concept has a lot of potential. It has low fixed costs; low operating costs; is easily scalable and is likely to be cash flow positive quickly. With right execution it has the potential to become a highly valued business in a high growth industry.
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