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Mobile app stores deliver little direct revenue but are critical for ARPU

While carriers aren't getting a big cut of the app store pie, their revenues still depend on the increasingly popular e-storefronts to cut churn and draw in new customers -- as well as sell new, ARPU-driving services.

Wireless carriers are unlikely to make much direct revenue from app stores, the electronic storefronts where smartphone users can download applications. However, carriers cannot afford to ignore the popularity of these app stores with consumers and their ability to drive sales of more services.

Pioneered by Apple's iPhone and its tight integration with iTunes, online storefronts for mobile applications have quickly become a must-have for marquee phone manufacturers that are eager to work with carriers on implementation.

Research In Motion (RIM) announced its own mobile app store for the BlackBerry, which is set to open April 1. Microsoft has announced its own Windows Marketplace in the fourth quarter. Nokia is getting in on the game, too, with its Ovi service launching an app store in May. Even Google's upstart Android OS has its own app store.

The sudden push for app stores does not, however, appear to be boosting telecoms' revenue as they continue their quest for improved average revenue per user (ARPU) -- at least not directly.

The iPhone App Store, for example, produces revenue only for Apple and third-party developers. Developers collect 70% of application revenue, while Apple receives 30% plus some minor application testing fees. AT&T delivers the bandwidth required for downloading applications, but it doesn't get a piece of the revenue. The iPhone App Store is not even AT&T-branded.

Similar proposals by the other app store creators have led some industry observers to worry that such stores will render carriers as providers of "dumb pipes," draining their profitability while third parties discover new revenue streams by using the carriers' networks.

Such a hostile view might be short-sighted, however, because it ignores all the indirect revenues that carriers can generate by embracing quality app stores.

For one, it reduces a top service provider headache: churn.

"In the larger broadband world, you call that bundling, and bundling has a huge effect on churn," said Stephen Blum, president of telecommunications consultancy Tellus Venture Associates. "If all this does is reduce churn, that's a huge amount of money in the carrier's pocket."

In traditional bundling, carriers look to triple-play or quadruple-play services to keep consumers from looking elsewhere. With an app store, each "service" could be as small as a 99-cent bubble wrap simulator, but those applications add up and put more at stake if a customer considers leaving: They are giving up not only their current carrier's service but their paid-for investment in software.

Even if churn is reduced just a few percentage points, the savings in retained monthly revenues are tremendous.

In addition to keeping customers, well-run app stores can also boost phone sales, of which operators can get a cut of the profits, and pull in new customers looking for phones with rich functionality.

Several signs indicate that such capabilities are quickly moving from nice-to-have to must-have for consumers. Even if a carrier does not get a cut of the application sale, app stores can attract new customers willing to pay voice and data fees that more than cover the cost of delivering mobile applications sold through app stores.

One recent study by In-Stat predicted that app store users will quadruple by 2013, with 30% of smartphones having "a strong app store orientation" by that date.

Carriers that try to sit out this app store race may find themselves missing out on a wave of innovation aimed at attracting customers who demand more services.

"With greater capabilities in both running native applications and viewing 'real Internet' websites, smartphones have increased usage and user expectations for mobile content," the report's author, In-Stat analyst David Chamberlain, wrote.

Finally, carriers can benefit from a quality storefront because even if they are not making direct revenue app stores, the applications can also drive additional service sales that boost monthly ARPU.

These additional services can range from increased data usages or SMS messaging to advanced location detection, services which the carrier is in an ideal position to sell either directly to the consumer or to app store developers.

"The money [developers] get from selling the app is nice, but that's basically chump change," Blum said. "The real benefit is from selling additional services."

Easy entry, even for the little guys

Tapping into these app stores, and even branding them with a carrier's logo, is relatively low-cost.

RIM, for example, will have carrier-specific storefronts for its forthcoming app store. Service providers will be able to determine which applications are available to their customers and control important pieces of the overall experience.

A savvy Tier 3 operator can take advantage of these storefronts that others have built to give customers a Tier 1 experience, Blum said.

"You're talking about a relatively low barrier of entry there," he said. "They can leverage a handset maker's store or even an [partner] ... and just rebrand it."

Because these storefronts are entirely virtual, there is nothing stopping a regional provider from creating a superior experience and then quickly rolling it out across its entire customer base, offering a product superior to those of its slow-moving national counterparts.

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