Embracing applications from outside the operator - Business models

So where are all the mass market innovative applications that IMS was supposed to enable? The millions of customers using operator internally hosted SIP centric applications running on an IMS application server and interacting with the IMS core network components like the S-CSCF and the HSS etc.? We really don't see anything that reached scale out there.

Instead, within the lifecycle of a single large operator IMS RFI, lab trial and RFP, Youtube was founded (Feb 2005), reached 100 million videos being watched daily (July 2006) and was sold to Google for $1.65B (November 2006). Video sharing. Wasn't that one of the main exciting, change the world, IMS applications? Youtube is available on many 3G mobile phones now.

So how does an operator participate in the external speed of innovation and adoption without becoming a dumb bit pipe in the process? Web 2.0 applications are in perpetual beta, with releases every few weeks. The learning from actual usage is quickly captured and used to improve the service on a fast feedback loop. This is a far cry from the five nines methodical testing pursued by an operator, the 3 month lab trial and 6 month market trial and multi-million dollar systems integration project with Cap Gemini or IBM. Entire Web 2.0 startups can get to breakeven cashflow on less than the integration budget for a typical telecom operator internal application.

The technological answer is fairly well understood - exposing the key operator golden assets of call control, location, presence, messaging and billing securely to external applications using telecom web services, often using 3GPP standards like ParlayX. Vendors like Aepona, Nokia Siemens and BEA Systems provide Service Delivery Platforms that do this in a carrier class manner, and even help bridge the external applications to gradual use of IMS underpinnings inside the network, without requiring the Web 2.0 developer to understand IMS, let alone IN. There are deployments of note at leading operators, a good example being Sprint's Business Mobility Framework for exposing location which has 50 or more enterprise applications accessing location and messaging from the Sprint Network.

So that's the answer then, case closed?

No. The bigger problem is how do an operator and an application partner on the web do business together? One is used to free trials for months, slow testing and full control over every aspect of service pricing and branding. The other cycles every few weeks, gets users quickly, and revenue as much through advertising as subscriptions. Imagine both sides in the same room trying to work out a deal. They don't even talk the same language! The cultural distance is huge.

What's needed is a roadmap or guide to selecting a business model and a set of rules for how to pick the right model for the right situation that creates aligned timelines, financial incentives and risk tolerance for each. Whilst this seem like business development 101, its hard to do for an operator and a web 2.0 startup. Below is a framework for such an approach, that looks at application types based on their position on the demand curve or so called "long tail curve".

Niche plays in the 1.2 billion unit handset industry

Something approaching 1.2B mobile handsets will be shipped this year, a market mostly dominated by Nokia, Samsung, SonyEricsson, Motorola and LG. Surely this business, with its highly competitive margins depending on huge economies of scale, its R&D investments that only a multi-billion dollar corporations can step up to and gigantic brand and distribution investments is no place for a startup, right?

Yet as in most gigantic markets, there are profitable underserved niches. The nature competing at titanic scale means that its very hard for Nokia and Samsung et al. to build a set of business processes that efficiently serve markets of 500k handsets annually, split over lets say 10-20 countries. Their supply chains are set up for super high volume. Nokia shipped 1.25 million handsets a day in 1Q08. Amortising tooling over say 100k handsets, or changing design to accommodate special materials bought in small quantities, or co-branding with lifestyle brands distributed in non-traditional outlets requires a set of business processes that the giant machine can't economically add for small volumes. They are too disruptive to business as usual to be worthwhile.

The key to finding profitable niches is to focus on underserved end user needs. One company doing just that is Sonim Technologies. The underserved users are those who work or play in extreme environments - like construction sites, open cast mines, ski slopes, sailing boats etc. The needs are for ruggedness (2 meter drop test, vibration resistance), waterproofing, (including submersibility) and loud volume for the ringer. On a boat or ski slope, in case you get into trouble, extra long battery life is valuable. If you work with protective gloves, big buttons make a big difference and a phone thats not too small. Optimizing the design around ruggedness makes these phones look very different to the mainstream design trends of the rest of the market. Indeed for a large manufacturer it would risk confusing the brand identity.

Underserved needs are also solved with special services - like push-to-talk with dispatcher capability, or push-to-help with GPS tracking. Stuck on your windsurfer a mile from shore in sudden bad weather, with half a wet hand available and not exactly sure where you are? Fell off your mountain bike coming down a steep hill far from a road and broke your leg? Push one button to have them come get you. Recurring revenue services plus handsets can make for high valuation multiples - just look at RIM who makes $7 per handset per month in service fees collected by operators for them as part of the data or Blackberry plans they offer.

Finding the right niche needs highly targeted branding and distribution - e.g. distributing the waterproof help phone in the marine equipment store co-branded by a boat manfacturer. Done right this can create defensible businesses that can command a $100+ price premium over the equivalent non-niche phone for modest additional cost, and thus be very profitable, if not Nokia sized.

There are other underserved handset niches out there beyond rugged. We'd love to hear from entrepreneurs who think they've identified one.