Open Wins

For as long as I can remember, the world’s telecom service providers have been trying to crack the code to make money in the applications business. Not just any applications but “cool apps” or “killer apps” that will be adopted by the mainstream, make lots of money, and drive rapacious usage of voice and data transport services.

These carriers are not happy dominating the transport business. While profitable, we all know that transport is a commodity (i.e., boring). The applications are complementary to transport like peanut butter is to jelly. And lastly, apps are cool and creative. Big carriers yearn to break out from their oligopoly day jobs to hobnob with the cool folks.

Despite this yearning, service providers have largely failed and in my opinion will continue to fail in the applications business. Application success requires a few key attributes that continue to be rejected as too foreign for big carriers.

For starters, history has shown that being a success in applications requires openness. In particular, exposing an application programming interface or API for third parties is a prerequisite to innovate. But big carriers have demonstrated that they won’t expose an API to third parties because that would entail giving up absolute control of their network. The argument goes that this is okay for PCs but won’t work in the telecom world where “five 9s” or zero down time is expected.

Other requirements for success include low transaction costs, third party branding and control, a balance of innovation with absolute guarantees to work. Additionally, these applications need to appeal to niche audiences or so-called Long Tail applications vs. only trying for mainstream successes.

Ironically, Apple has created the first runaway applications business success in telecom. Taking a page out of Microsoft’s playbook against them in the computer business, Apple created the world’s largest telecom applications business (Handago was first, but the iPhone giant has quickly blown by them). With app sales reported at $1 million per day and $30 million in the past month, Apple has created a larger business than its iTunes music download business in a fraction of the time.

Apple has shown the roadmap on how to create an open applications business:

Open API: clear guidelines for developers with an open platform

Reasonable profit: 30% cut of all apps, leaving lots of profit for the developers

Allow branding/control: let developers establish their own brand, don’t try to make everything under the carrier brand

Balance of innovation and testing: Provide some level of valuation and testing but allow the application vendors to ultimately support their own apps (no five 9’s reliability)

Distribution: provide a low-cost distribution option to directly reach end-users and not require a lengthy and costly contract to do business through the carrier (in the US, AT&T)

Apple’s approach is a triple win. Apple makes money by selling more iPhones and taking a cut of successful app revenue; the app developers make money through a new, lucrative market channel, and the service providers (e.g., AT&T) make money through increased traffic, lower churn, and attracting high-value, big spending customers.

There are some other recent examples of openness creeping into the telecom world, but mostly being forced on the carriers: Ribbit (www.ribbit.com) claiming to be “Silicon Valley’s First Phone Company” built an open telecom platform where any third party developer could create (and deploy) applications and sell them directly to end users. The results? Thousands of developers flocked to Ribbit for the opportunity to create neat apps and ultimately, British Telecom purchased them in July for $105 million (not a bad return on investment for $13 million invested and less than 2 years into the business!).

Another example is BroadSoft’s Xtended Program (www.broadsoft.com/xtended). Unlike Ribbit, BroadSoft is not trying to sell directly to end-users. While BroadSoft dominates the service provider voice application software business (it has the majority of the world’s big carriers and over 400 customers), the company’s challenge is to drive application sales not only to the service provider but see them deployed to the end-user.

To drive the market, BroadSoft did two things, one traditional, one non-traditional. The traditional move was to create a third party developers program for programmers to create neat apps. Important, but that’s been done before. The non-traditional move was to create an online marketplace
(www.marketplace.broadsoft.com) for developers to sell their applications directly to end-users with carriers enabling the apps through an API but not absolutely controlling them (full disclosure: I led the charge to deploy this marketplace while at BroadSoft earlier this year).

The program allows each party to do what they do well: carriers to provide infrastructure and a robust API to their network, third party developers to create innovative applications, and BroadSoft provides the carrier “sandbox” so service providers can deploy these apps without the worry of their networks being taken down by an errant or poorly written app. Initial response by the world’s carriers has been very positive to the program.

Regardless of what the world’s carriers do, consumers have spoken. Openness wins hands down over the old closed model. The message to carriers: to drive innovation, open up your network to others; stay closed and watch your business drift away through the open door. IP

Scott Wharton is the founder and CEO of Vidtel. He can be reached at
scott@vidtel.com.