Innovation in

The Apps market

Martin Gubri

MS DS

25/03/14

Table of contents

I - Innovation in a sectorized market

II - IP, a solution to protect innovation from Competitiveness?

Introduction

Some Characteristics of

The apps market

  • A fragmented market by OS and plateforms
  • Specificities of digital markets (e.g. "long tail")
  • Very high competition
  • Huge diversity of apps categories, but...
  • ...There is a lot similar apps!

Too competitive to be innovative?

Some Characteristics of

The apps market

  • A fragmented market by OS and plateforms
  • Specificities of digital markets (e.g. "long tail")
  • Very high competition
  • Huge diversity of apps categories, but...
  • ...There is a lot similar apps!
  1. IS there sufficient innovation in the Apps market?

  2. How this innovation is produced according to the specificities of this market?

IS there sufficient returns in this market to allow companies to invest in R&D?

  • No: social loss
    (not enough innovation)

  • Yes: how?
    (Strategies to face competitiveness?)

Problematic

How innovation is evolving in a highly competitive and divided market with few IP protection

Types of apps developeurs...

  • Professional app developers
    Ex: Rovio Entertainment
  • "consumer oriented companies"
    Apps = enhance products or marketing tool
    Ex: RATP, SNCF, eBay
  • Hobby apps developers

 

(S.Kraaijenzankb, C.Helmersa and Y.Liuc, 2014)

...Related to different "business models"

  • Ads
  • Paid Apps
  • In-app purchases
    Ex: "Free2Play" Games
  • Apps financed independently
    Ex: RATP, SNCF, eBay
  • Others
    - Features, ex: Firefox with search engines
    - Gift
    - etc.

     

References

  • T.Bresnahan, J.Orsini and P.Yin, "Plateform Choice by mobile Apps Developers", 2014

  • S.Kraaijenzankb, C.Helmersa and Y.Liuc "Innovation without Patents? Evidence from the Mobile Apps Market", 2014

  • (The Guardian, "iOS v Android: why Schmidt was wrong
    and developers still start on Apple", 2012)

I - Innovation in a sectorized market

Background on plateform choice

Some conclusions inspired by

The Guardian article, "iOS v Android: why Schmidt was wrong and developers still start on Apple"

Choice of a mobile OS

Criterias to choose a plateform:

  1. Numbers of users
    Volume
  2. Users wiliness to pay
  3. Costs
    Development & Debugging costs
    are different across plateforms

Android fragmentation

Different models to support = costly

in terms of development & debugging

OS versions

Update OS version is a long process: a lot of phones don't run the latest version

OS versions

Different versions of the OS to support = costly

in terms of development & debugging

Costs

Developing apps for a new plateform = Entry cost

For a developer point of view:

  • Fixed costs
    learn new SDK (Software development kit are OS specific)
  • Variable costs
    a very small portion of code can be reuse across plateforms

 

Is this entry cost bad for innovation?

(here, innovation is a synonym of new apps released)

T.Bresnahan, J.Orsini and P.Yin, "Plateform Choice by mobile Apps Developers", 2014

  • Model plateform choice by apps developers
  • Between iOS and Android
  • Including  the 'multihome' option

A Fragmented market

Users are split between ios and android

Studying only iOS and Android

Incentive to multihome are strong

Centralized Apps repositories

Pros

  • Technological and institutional infrastructures
  • Visibility

This lower the cost of innovation

Ex: Google Play, Apple Store

Cons

  • Fragmentation of developers and consumers is costly
    Choice between reduced pool of demand or cost of 'multihoming'
  • and slower the diffusion of innovative apps

This increase the cost of innovation

TOP APPs

Empirical probabilities to be on a top list

Be on top10 of a category is often the key of the success

Some invest in marketing ("incentivized downloads" for ranking)

the Model

Estimate a model of developer choice of OS

Including the choice of multihoming

 

By estimating the developers' expected profitability from entering in one or both plateforms

 

Entry Model

Costs

  • Technical costs of porting an app on a plateform
  • Market costs for being profitable (e.g. marketing)

 

The developer face a fixed entry cost. Different between plateform.

 

They suppose that:

C_b = C_i + C_d
Cb=Ci+Cd

Returns

Returns are linear in the number of users

Per-customer profits are supposed constant across apps

(no pricing model)

 

The developer only observe a signal of

the app "reach" on the plateform p:

the fraction of total users of p which use the app 

r_p
rp

Top APPS

Introduce 2 types of "reach":

  1. with the app on the top list
  2. without the top list

The effective demand is given by:

Data

Two data sources:

  • Manual sample with questionnaire to have covariates
  • comScore dataset of a panel of 5000 tracked users
    aggregated to app*plateform*month level
    censored variable: only apps with at least 6 users

1044 apps

Distribution of Apps' reach

Very skewed market

Econometrics model

Custom and complicated estimation model
to be able to handle the 4 requirements:

  1. predict the probability that a particular developer publishes for either or both platforms and the success, measured as (censored) reach, the app receives there

  2. deal with the problem of selection of potential entrants

  3. accommodate both the parts of the sampling frame (Tobit)

  4. provide estimates, to the extent there is information in the data to identify them, of the main economic elements of the model

Estimated by ML

Results

Population/sample: sample scheme of comScore thresold

Sample reaches are higher than population reaches

we look at the population row

 

Potential/Realized: in/out of the top apps

Little differences between Android and iOS in the both reaches: developers are likely to get the same demand

 

Potential/Realized differences: marketing costs to be at the top can be justify

Conclusion

  • Android and iOS are approximately equally attractive
    Consistant across apps categories
  • Large developers (or firms outside mobile) are more likely to multihome
    Expected success is high on both OS
  • Different impacts on market actors:
    - users are impacted
    - large firms spread the fixed costs of multihoming over large demand
    - but entreprenarial developers are hardly impacted

 

Wide ranging entrepreneurial experimentation is undercut

Go beyond

Alternatives  Choices of plateform specific apps:

  • Mobile website
    Responsive design
  • Web based apps
    Firefox OS principles

Innovation in a sectorized market

Plateform specific development acts as
Entry cost

then reduce the amount of Apps developed

And potential innovated apps

II - IP, a solution to protect innovation from Competitiveness?

How to produce sufficient returns in a highly competitive market to support innovation: IP?

Huge competition in the apps market

 

Is there sufficient returns for companies to invest in innovation?

 

Is IP used to protect themselves from copying?

If not, what strategies are used?

S.Kraaijenzankb, C.Helmersa and Y.Liuc "Innovation without Patents? Evidence from the Mobile Apps Market", 2014

PATENT wars in the smartphone/tablets market

SAME in the apps market?

Apps & Patents

Apps are subject to be patented in the US

 

But it turns out that very few apps are protected by patents

 

Patents are not very suitable in very dynamic digital industry, in terms of speed, innovation and competitiveness

 

Other type of returns to innovations, such as secrecy, lead time or complexity.

A typical digital market

Producing an app is costly:
creative process, programming & marketing

But the marginal cost is zero

This allow apps repository to be profitable even with the "long tail"

Subject of study

  • Focus on professional apps developers relying on:
    - paid-to-download apps
    - in-app purchases
     
  • Exclude:
    - companies that are not primarily in the business of producing apps
    - companies that create apps purely on a contract basis
    - hobby app developers

Data

 

Join apps developers and patent publishers automatically and manually

Filter patents which are not apps related

Then, join patents with apps

  • App market data
    5 major app stores: Apple, Blackberry, Nokia, Microsoft, Google
     
  • Patent data

    European Patent Office (EPO) Worldwide Patent Statistical Database (PATSTAT), version April 2012

Data

Limiting to app developers that rely on apps as their main line of business, the number of potentially patenting app developers collapses

 

82 directly app-relevant patents for Apple’s App Store from 45 distinct publishers considered to be in the app development business. 0.03% of the total publishers

  • 44 patents for Google Play
  • 34 for BlackBerry App World
  • 12 for Nokia Ovi Store
  • 14 for the Windows Phone Store

Results

Be careful: there is a lot of 'imitations' in the apps market, so we can't say that 0.04% of innovations are protected by patents

 

But, indeed very few apps are patent protected

Comparison of characteristics

If popularity is taken as a proxy to innovation, this would suggest that patented apps are more innovative in average

But:

  • This can be the results of the skewed distribution
     
  • This is an univariate analysis
    We do not know the real effect of patent protection

Only for (9,872) apps that received more than 1000 ratings:

  • only 13.8% of patented apps received an average rating of 4.5 or 5 stars
  • whereas 19.7% of non-patented apps received a top rating

So, patented apps may not have a higher value

Categories of (NON-) patented apps

Apps developers rely mainly on lead time

Subset of 779 Apple Store Apps which:

  • have at least 1 year
  • have received more than 1000 ratings
  • have average rating of 4.5 or 5 stars

 

Identify fast-follower candidate apps by 'related apps' propositions

Eliminate 'related apps' older than the original app

339 manually identified as fast-followers

Fast-followers

21% of innovative apps have been copied

Most of them have been copied by only one app

Lead time

Copying occurs fast: from few days to 1 year

 

Here, lead time advantage = 1 month without fast-follower

Conclusion

  • First mover strategy seems better than patent protection
    in this fast-moving market
  • But, the shorter the expected lead time, the less is invested in innovation
  • Relying on lead time is common in the Apple Store
  • Patented apps are more related to digital data transmission categories

Conclusion

Innovation in the apps market

  • Segmentation acts as a entry cost, reducing innovation
  • "First mover" is a viable strategy to competitiveness in absence of IP...
  • ...But developers have to find a balance between development time and innovation (app quality)

Thanks!