2015's $100 Billion question: What drives the mobile app economy?

forbes.com

Mobile applications and services are overtaking the World Wide Web for the key activities that we do on the Internet. Mobile is an increasingly important part of any company’s marketing strategy, and developers think mobile first when they design new Internet applications.  In 2015 the app economy, the revenue driven through mobile apps and related activities, isexpected to reach as $100 billion. So what drives mobile innovation and adoption? Here’s a review of the key academic theories.

In his book Innovator’s Dilemma Clay Christiansensuggests that profits from established companies are a signal for upstart firms to find disruptive innovation. This would explain the success of WhatsApp, which disrupted a successful stream of SMS revenue by offering a free over the top messaging service.  He notes that successful firms are so busy focusing on the valuable part of their business that they forget the opportunities at the low end of the market. Similarly Joseph Schumpeter’screative destruction is predicated on the idea that necessity creates invention.  Technology is an endless cycle of one paradigm toppling the next.  Just as the telephone eclipsed the telegraph, the mobile phone eclipsed the landline phone.

 Two other theories come from UC Berkeley professors David Teece and Henry Chesbrough.  Teece’s theory of complimentary assets observe that an app by itself has no value. It needs to be embedded with the complementary assets that give it value. For example the digital personal assistant app Siri can’t be realized without an iPhone or a high speed mobile network.  The fact that more than half of the world’s 4G connections are in North America enables a de factor digital market to many users with advanced devices on advanced national networks.  

Chesbrough, who coined the term open innovation, was interested in how established firms such as IBM and Xerox could keep innovating.  He suggests that they need to look outside their walls to find innovative partners.  Interestingly WhatsApp leverages the global Indian diaspora with a partnership with Indian mobile operators. Grandmothers, who would never otherwise have a mobile broadband connection, now use “zero-rated”  versions of WhatsApp to keep in touch with their children and grandchildren around the world.  WhatsApp is not charged to the mobile subscription data cap, but it’s the incentive needed to get the elderly to try the Internet.

Zero-rating  is just a fancy way to say that a sponsor supports the delivery of a product or service, just like advertisements on radio, TV, print or website. It’s a business model that has been around for a century. Google zero-rates its searches with ads just as Facebook its social network. Similarly on handsets, the device maker can license pre-loaded apps to make their handsets more cool (think Angry Birds). Alternatively Google offers the Android operating system for free to device makers in exchange for the pre-installation of certain apps on the device.

There are other innovation theories such as Lemley and Lessig’s end to end principle, the ability of an application to reach any user.  This theory is used as the basis of proposed regulation for net neutrality, but the rise of app store optimization (ASO) challenges any idea that the mobile Internet is neutral and that users simply find apps without any mediation.  Similar to search engine optimization (SEO), ASO is the practice of making one’s mobile app findable for the target audience because apps without marketing almost never find users.

For Everett Rogers, the most cited academic on this topic, adoption of innovation is a social, not economic process. Anyone who has seen a line outside the Apple Store on the day of a new release has seen the motivation of what Rogers calls “early adopters”. Rogers introduced and refined the Diffusion of Innovations bell curve in five subsequent editions of his best-selling book.

There are many theories which could explain the mobile app economy, and no one theory explains everything.  However policymakers are keen to boil down complex processes and systems to a simple prescription, such as approve or prohibit X. For example earlier this year the Chilean government banned zero-rating on mobile subscriptions, only to do an about face shortly thereafter because citizens demanded zero-rated versions of Wikipedia. It is strange that some want to ban zero rating, as they may be the very partnerships we need to realize the app economy. It goes to show we should be careful what we ban, especially that which we don’t understand.