BLOG STARTUPS, VENTURE AND THE TECH BUSINESS

February 16 2012
by Todd Hixon

Going Viral On The Mobile Web

John Doerr usually gets credit for describing the potential of the Internet to create a “new economy” (however, a Google search credits Clement Mok). Whoever said it, the point was: the bricks-and-mortar economy was about to be recreated in the virtual space of the Internet, and in many ways it has been.

Today there’s a new, new economy: the smartphone economy. The smartphone now has critical mass: smartphones have close to 60% penetration in the U.S.*; 600 million smart phones will be shipped worldwide this year versus 350 million PCs**; and the Apple App Store and Android Market had 30 billion cumulative downloads at the end of 2011***.

Commerce on the mobile web has been hyped for years (remember all the pitches about walking past Starbucks and receiving an offer for a free Latte on your phone?). Finally, a lot is happening:

  • PayPal did $4 billion in mobile payments last year, and projects $7 billion in 2012.
  • Google had about $12 billion of mobile ad and app revenue in 2011.
  • Pandora and Twitter now have 55%-60% of their usage via smartphones.
  • Pandora is the first mobile app company to achieve an IPO.

US Market Penetration By Year From Introduction; Data via Mary Meeker of KPCB

Fundamentally, the smartphone is the fastest technology adoption yet, as shown by the chart. And it has a long way to go: only 15% of worldwide mobile phones are smart phones.

So, another Internet gold rush: what’s different?

  • The first-generation Web was browser-based, but the smartphone economy will be app-based, because apps optimize the limited resources and connectivity of smartphones.
  • Many of the prime movers in the mobile app economy are experienced digital companies, not start-ups. E.g., Google and PayPal have done a brilliant job building mobile businesses.
  • The price of entry for a smart phone app is very low: a few $100k to develop a credible app.
  • And, there are multiple new drivers of user behavior in the mobile app economy, on top of the established Internet drivers: the always-on and always-with-you nature of mobile devices, geolocation, social networks, casual gaming (e.g., Angry Birds), and potentially “gamification” of many aspects of life.

Some working hypotheses for what this means:

1.            Don’t expect many functional champions like Amazon (king of commerce) or a Google (king of search) to emerge again. Amazon, Google, and many of the other functional champions of the digital domain are extending their franchises into the smartphone economy very effectively.

2.            There will be a huge number of new mobile app entrants but few successes. We see this already in the Angel investing bloom, which I fear will end up resembling an algal bloom (grows fast, exhausts oxygen, dies suddenly, and smells bad). It’s easy to get started, but it’s hard to survive.

3.            If you want to survive, you have to “go viral” by making your customers your sales force. Virality was important on the wired web. It is far more important for smartphone start-ups. There are a million apps out there; fighting to the top of the pyramid with marketing dollars is prohibitively expensive. Winners need “unfair” advantage: strong partners, strong brands, or natural virality.

I believe that businesses that help create virality will occupy a strategic choke point in the smartphone economy, something like the Straits of Hormuz. How do you do that? Virality seems to arise from a delicate interweaving of value proposition (make it compelling for your friends/counterparties to invite theirs), information, social networking, and fun. It’s key to provide options to buy “in-the-moment”: when users are influenced by friends or engaged with compelling content. Facebook and Twitter sit at this choke point; and they are very valuable.

App developers need tools that promote viral behavior among their customers. Apple’s App Store and Android Market offer nice sites to find apps, but they are basically brochureware. Several start-ups are developing innovative approaches that create virality for smartphone apps by combining deep content, federation into content sites, social networking, on-line app simulations, and of course download tools. AppTap, one of our portfolio companies, is a leader in this market. Something quite important could emerge here. Whoever develops the little blue pill that promotes virality in the smartphone economy will have a blockbuster indeed.

Sources:

* Mary Meeker, KPCB

** Taiwan Marketing Intelligence & Consulting Institute (smartphones), Gartner (PCs)

*** Wikipedia: http://en.wikipedia.org/wiki/App_Store_(iOS), http://en.wikipedia.org/wiki/Android_market

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