Editor’s note: Jay Eum is a co-founder and managing director of Translink Capital.
Although the word “disrupt” has taken a lot of flak recently, there are still innovations that can reorder an entire market – and one has just crossed the Pacific Ocean.
On Tuesday, August 19, Sprint announced the release of App Pass, a subscription service that allows customers to access a curated selection of premium apps and games for $4.99 per month. Subscribers also get a monthly $5 credit to spend on in-app purchases. Essentially, it is Netflix for mobile apps.
This announcement sparked little interest from mainstream media. However, if you look at the rise of app-bundling in East Asia, you’ll understand why this business model could disrupt mobile development and consumption throughout the U.S.
According to a March press release from KDDI Corporation, Japan’s second-largest cellular service, the company’s app-bundling program called “au Smart Pass” reached 10 million subscribers just two years after launching. For the basic au Smart Pass, subscribers pay ¥372 per month, or roughly $3.50 USD for unlimited use of more than 100 apps. This means that KDDI, now the county’s largest app bundler, is raking in a half billion per year from the app market.
This is significant because up until KDDI and its competitors introduced app-bundling, telecom providers were effectively cut out of the app ecosystem. Back in late 1990s and early 2000s –the days of the Nokia 6110, Motorola RAZR and games like Snake – telecom operators owned the distribution channel for all services and applications, which was appropriately labeled as their “walled garden”. When the Apple App Store launched in 2008, that monopoly ended. App developers, Apple and eventually Google both captured the market for extra services and applications. Through app-bundling, telecom providers finally get piece of the action back.
Considering that Sprint is owned by SoftBank, Japan’s third largest cellular provider and one of KDDI’s bundling competitors, it is no surprise that they are the first carrier in the U.S. market to offer an app-bundled subscription. In fact, App Pass is the first coordinated service launched together by Softbank and Sprint since the completion of their merger in July 2013. Although Sprint now has a lead on Verizon, AT&T and T-Mobile, I suspect that App Pass may soon face stiff competition. Much the way that NTT DoCoMo launched their own app-bundled service about a year after KDDI, Verizon, AT&T and T-Mobile may try to launch similar services in the near future.
If app-bundling takes off – and I suspect it will – we should consider this a win for app developers, consumers, cellular operators and Apple and Google. Let’s imagine that for a $1 premium app, currently 30 cents goes to the App Store or Google Play, and 70 cents goes to the developer. With a bundler like Sprint in the equation, perhaps the developers takes 35 cents and give the other half to Sprint, which will put the app in front of more than 50 million mobile subscribers.
In terms of customer acquisition and marketing, that is a tremendous win for most app developers. The expanded user base will offset the acquisition cost. App-bundling is also a great deal for any consumers that spend money on apps – especially since the $5 credit each month to spend on in-app purchases offsets the $4.99 monthly subscription fee.
The App Store and Google Play don’t necessarily lose anything in this new dynamic. They still take their cut from downloads and in-app transactions. Interestingly, iOS 8 is actually going to let developers create their own bundles with up to 10 apps, but Apple is not yet facilitating a bundled subscription model like Sprint’s.
So app-bundling appears to be a win-win-win for everyone involved. It is extraordinarily lucrative in East Asia, and it appears likely to succeed here. Device makers like Samsung, HTC and Sony may try to come out with their own app bundles, too. This would create competition among bundlers and exert pressure to curate the best selection of apps.
However, app-bundling services are not as simple as they sound. Somebody has to integrate SDKs and connect everything to a billing system that enables revenue sharing on the back end. This is probably why Sprint outsourced this function to Mobiroo, according to the App Pass press release. Carriers may have the resources to replicate this technology, but how quickly? What will waiting cost in the long run?
The irony of app-bundling coming to America so quickly is that the U.S. has, for over a decade, withheld from importing one of Asia’s most popular mobile technologies: Near Field Communication (NFC). It undergirds the entire public transportation and point-of-sale (POS) infrastructure in both Japan and Korea. In fact, in Korea you need to use the T-Money NFC payment cards if you want to transfer buses and subways at no extra charge.
With Apple embedding NFC technology into the iPhone 6, this could be a year where we see two major mobile trends spread from Asia to North America. NFC technology would allow your smartphone, smartwatch or other wearable device to store information and complete transactions for public transportation, e-money payments, boarding passes, ID cards, loyalty points and more.
Whereas app-bundling can launch and scale within a year or two, NFC mobile payments will take longer to gain a foothold. The U.S. has been slow to adopt most POS technology because infrastructural upgrades are madly expensive. For example, the total estimated cost of adopting Chip-and-PIN (EMV) card technology in the U.S. ranges from $15 billion to $30 billion, according The New York Times. For NFC, too, every point-of-sale terminal would need to be replaced. In places like Japan and Korea, which have high population densities and small land masses, the costs and speed of transitioning to NFC weren’t as daunting. In U.S., NFC won’t pay off or catch on very quickly. In contrast, app-bundling will produce a quick return on investment.
The U.S. and Asia have a habit of exchanging mobile trends, and the Asian trends often seem ridiculous to Americans technologists. The first camera phones came out in Japan in 2000, but at U.S. tech conferences in 2002 and 2003, panelists were still debating why anyone would want to take photos with their cellphones. Speaker phones, color screens and SMS were once controversial topics in the U.S tech community.
It’s inaccurate to say that the U.S. is always behind Asia in mobile technology. Let’s not forget that Apple created the app ecosystem in the first place. Cross-pollination between markets is one of the keys to sustaining global innovation. Foreign mobile markets can become laboratories for observing what business models and technologies will or will not work. So far, app-bundling is thriving in the markets where it has been introduced.
So here’s the takeaway: based on KDDI’s au Smart Pass’s rapid success in Japan, app-bundling has the potential to disrupt the North American mobile market within a few years. While North America will start following Asia towards NFC, adoption will be significantly slower, even if the iPhone 6 does include a NFC chip. Before you spend too heavily on individual apps or a new wallet, recognize that both are in line for disruption.
