The Pareto Principle and the Commercial World of Smartphone Apps

I will admit: I am Pareto's principal devotee. The basic idea that numerous phenomena can be characterized by the "notion of the vital few" will account for the lion's share of something seems to resonate with my own anecdotal and analytical experience. Often referred to as the "80/20 rule" (such as "80% of one's sales come from 20% of one's customers"), I find myself finding Pareto-like results even when I am not really looking for them.

The eponymous principle derives from an observation made by Vilfredo Pareto that 80% of land in Italy (and other countries) was owned by 20% of the population. However, the name "Pareto principle" was in fact not coined by Pareto himself, but by a fascinating U.S. engineer named Joseph Juran, who story is itself worth retelling. Suffice to say that Juran's contributions to management based on his adaptation of Pareto's findings is an often under- appreciated milestone in the field here.

I would like to use the notion of the Pareto principle to consider a question that was asked on a recent "60 Second Tech" podcast produced by Scientific American magazine: How many people download only free or spend very little (a dollar or so) for smartphone apps? Citing a study by ABI Research here, the podcast reported that 70% of all users of smartphone apps download only free or virtually free apps, This, more or less, suggests a Pareto-like division, whereby only 30% of smartphone users ever pay for any apps that are not free or virtually so.

This result resonates with a finding that I remember hearing about Twitter, whereby only 20%-30% of Twitter users account for the lion's share of Tweets. Once again, Pareto seems to be popping up all over. But the ABI Research-inspired podcast reported additional data regarding the app-buying habits of smartphone users. Having regard to the release that accompanied the report, it turns out that only 3% of app users account for nearly 20% of all expenditures for apps, where the average outlay by users who have at least once paid for an app (including this small number of hard-core users) is approximately $14.00 per month. Pushing even further on these results, it turns out that the median monthly outlay for app users is only approximately $7.50, approximately 50% less than the average monthly expenditures of $14.00.

Consistent with a Pareto-like view of the world, there is certainly nothing Gaussian about the discrepancy between the mean and median amount of the monthly outlay. In a word, app developers who hope to cash in on their creative efforts are relying a very thin layer of app users. Moreover, there appears to be a clear distinction in the type of apps that will attract "high-roller" users. Most of these apps are what is called "a utility app", most frequently for business purposes. A second category of apps that attract paying customers are "iOS games monetized through strings of in-app purchases." At the other end, apps regarding sports and the like can expect to have little or no commercial traction.

 The ABI Research report suggested two ways that app developers can somehow improve the commercial odds against enjoying even a semblance of commercial success:

 1. Try to make sure that your app either supports or is supported by a web component. 

2. Try to find a way to convince your customer that the app merits a long-term (by app standards) engagement by them. 

One way to do so is by the time-honoured practice of first giving the app away for free with the hope that you will develop a small yet highly devoted band of followers who will be willing to lay out monthly sums to ensure their continued access to the app and its updates or upgrades. I have to admit--this is all very depressing. My son is nearing the completion of a Computer Science degree and I wonder what I would advise him, should he announce one day that he has decided to work on developing smart phone apps. If not quite "blood, sweat and tears", should I counsel him on the dismal likelihood of success? Or should I simply wish him the best on his journey and assure him that he has always has a roof over his head, if all else fails?

More generally, I wonder whether the business model described above is sustainable in the longer run, whereby the promise of substantial revenues for the very few, together with the more broadly based challenge to develop an app that will be used by others, irrespective of whether such an app generates revenues, will continue.

More on the Pareto principle here.

The Branding Wars in Smart Phones.

The media-hyped recent coverage of Steve Jobs, as he discussed the bells and whistles that adorn the 4g iPhone, stands in stark contrast to a sombre article that appeared on Bloomberg.com on 12 May. Entitled "Nokia Goes 'Back to the Future' in Attempt to Topple iPhone" and written by Diana ben-Aaron here, it discusses the appoint of Anssi Vanjoki as head of the company's smartphone unit. Vanjoki's mission: make Nokia competitive in the smartphone space. His challenge (as described by Carolina Milanesi of Gartner, Inc.): "It's a bit back to the future ... [and] he doesn't have much time, so Nokia needs to deliver."

The company's recent history in this area is grim. While the company worldwide is the largest manufacturer of handsets, it has become a laggard in the up-scale smartphone business. In a field with compressed timeframes and ferocious competition, how long ago March 2007 seems now. Then, Nokia launched the N95, the company's first handset with GPS. It reported sold more than 10 million units and enjoyed an operating profit of more than 21%. That was then, however.

In the face of the onslaught of the BlackBerry by Research in Motion, and the iPhone of Apple, not to mention Android-based devices such as those of HTC, Samsung and LG Electronics, operating margins plummeted to just over 10% in Q1 2010. There seems to have been a subsequet model N97, being a combination touchscreen and keyboard phone, but that model has not enabled Nokia to overcome the Blackberry or iPhone products.

Against this backdrop, analyst Tero Kuittnen (MKM Partners) has offered Nokia only luke-warm encouragement: "The stakes couldn't be higher. The iPhone is a luxury juggernaut that can no longer be defeated, but Nokia still have a shot at snuffing out the challenge of its Aisia midrange rivals." Another analyst, Ben Wood, of CCS Insight, was more pointed, observing that "[i]f these people don't suceed, they will be doing something different in three years."

The competition in the handset industry generally, and the smartphone
business, in particular, has been the subject of countless articles and is a favoured topic for business school case studies. I want to mention an IP-based one aspect that tends to be overlooked, namely the role of trade marks. We noted above that the N95 handset was eclipsed by the Blackberry and the iPhone and that the N97 failed to buck this trend. To counter this, Vanjoki plans to roll out a new slim touchscreen device. And what is the name for this new product? Are you ready for this ...? None other than the "N 8."

I simply don't get this branding move by Nokia. First, it is a mystery why a newer model bears a lower number than an earlier model. Weren't we all conditioned to expect that the 386 Intel chip would be an improvement on the 286 product, and that the 486 chip was in improvement on the 386. I know--Intel was unable to register these later chip models as trade marks, at least in the U.S., but that does not change the basic principle that consumers expect higher model numbers or numeric brand names to represent a more advanced product than its lower-numbered predecessor. If my assumption is correct, then the rationale for the progression from N95 to N8 remains a mystery.

Second, the very choice of the series of markets based on "N" plus a number seems odd. Compare it with the Blackberry name, which is a garden-variety (no pun intended) use of an arbitrary name that has planted deep branding roots in the consciousness of consumers. It does not really matter if the consumer knows that Research in Motion (or RIM), stands behind the product. It is enough that one asks for a Blackberry. It is a wonderfully strong arbitrary mark.

The selection of the iPhone suggests an antipodal branding strategy.

Here, Apple has built a stable of strong marks, each of which is comprised of the prefix "i" together with an arguably descirptive noun. Fear not--acquired distinctiveness has or will ensure that each of these family of marks can be protected in its own right, as well as being used together the Apple mark. Both the product name and the house mark come out as branding winners.

Now let's consider N8 (or N95 or N97). Unlike the Blackberry name, there is nothing distinctive about such an alphaneumeric combination. There is ready reason for a consumer to know (and remember) that iPhone is a telephone device and that iPad is a tablet device. The same cannot be said, in my humble opinion, for the N8 mark. This means either that Nokia will have to use N8 together with Nokia, so as least to take advantage of the strong value in Nokia, or settle for a product name that is doomed to be less effective than the names of its rivals. Either way, Nokia would seem to come out second best in the trade mark wars, and where it can ill afford to do so.