Vision arena report- open innovation cases and profit models on mobile app stores in south korea

VisionArena Insight Report 2011
2011
⏏ Open Innovation Cases and Profit Models on Mobile App Stores in South Korea

Open Innovation Cases and
Profit Models on Mobile App
Stores in South Korea

Cho YongHo

VisionArena Co.,Ltd

6/16/2011

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Executive Summary

Open Innovation is a new way of sourcing better idea and solutions from out of company. Some
companies like P&G saves their R&D cost dramatically every year by adapting open innovation. In fact,
Mobile AppStore is based on open innovation by itself because store operators like Apple just provide
environment and applications are developed by outer developers. But when we look into this situation,
developing application itself requires another sort of open innovation because developing application is
usually complex works with high cost.

The Open Innovation Model for Mobile AppStores can be designed by two factors. One is the objective
of Open Innovation in the viewpoint of AppStores or application publishers. Those are application / idea
sourcing for direct benefit to the company and community building for indirect benefit in the long term
perspective. Another is the value for developers like lowering opportunity cost such as developing and
maintenance cost, and building team to enable sharing the risk and revenue when making heavily invested
commercial applications.

AppStore lowered the distribution cost and set-up cost to developers, but there remains developing cost
and opportunity cost to be bounded to specific platform. So, AppStore operator and platform providers
should give some incentive to motivate the developers. Developers want to build a strong team with
project by project and want to lower the opportunity cost by revenue sharing model with collaboration
activity. Developers as a small entities want to mitigate the overall cost and risk, and to maximize to
generate the revenue when developing application for specific platform and AppStores. In the perspective
of Open Innovation, that is another problem solver to meet the market’s unmet needs.

1) Outsource: Developers can minimize initial cost to make applications when AppStore or
publisher buy the application with expense of dedication.
2) Resource Align: If the main constraint of developing application is not just money, AppStore or
publisher can share or provide resource of their own to the developers.
3) Fund Matching: Developing application is a project itself. So project financing can be raised to
assist building applications and sharing the revenue after sales.
4) Team Matching: AppStores did not invoke this type of team building activity openly, but they
support many developer communities to stimulate the team building outside.

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About the profit model, direct profit is a profit made directly from the open innovation in AppStores.
They are App Sale Revenue, Transaction Fee, Matching Commission and H/S (Handset) Sales Revenue.
In-direct profit is a profit mad indirectly from the open innovation in AppStores. They are Data Revenue,
Platform Fee, Advertising Revenue and Market Recognition.

When we applied the three major players to Open Innovation Model of AppStore, there are first and
second wave of approach in South Korea. The first wave is to establish the education center which
contributes the growth of developers and service designers in the viewpoint of ecosystem. The second
wave is to inject a fund to the start-ups and support building the strong team for individual developers.

The strong intention to grow the mobile ecosystem in South Korea comes from two facts. One is the late
recognition triggered by Apple iPhone that South Korea is not the world best mobile contents company
anymore. The Korean government and major network operators reviewed previous closed mobile
ecosystem controlled by network operator and try to build the new ecosystem as an alternative. Another is
that South Korea’s local market is not large enough to compete with global payers like Apple, so to
induce developers’ mind and lessen their opportunity cost to choose AppStore in Korea rather than global
AppStores are important.

The profit model for Open Innovation mainly resides on the App Sales and Market Recognition. But it
has a potential to extend to the other profit models easily. The market recognition is somewhat driven by
the Korean Government, but AppStore operators have to compete with relatively competitive advantage
to others. The mind share of developers is essential to do an AppStore business. So market recognition
from developers is very important.

AppStore operators and Korea government eagerly try to grow the mobile ecosystem in South Korea. At
first, AppStore operators make content providers to develop application to their AppStores with the
expense of development fund. No company can inject money forever to the AppStore business, so making
the mobile ecosystem that can circulate between AppStore operators and developers is critical.

Now AppStore operators support mobile ecosystem with education center and matching hub for fund and
team. But from the viewpoint of developers, it is a still problem of lock-in whether loose or tight. So to
give persistent incentives to the developers, the AppStore operators should generate their own innovation
to the speed of global competitors.

That is the matter of Inside-Out Open Innovation and SK Telecom started to provide its own service
platform APIs to developers. But just opening the service platform is not enough because what to open

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and how much to open are always critical problem to solve when opening the platform. It has to open its
result of innovation. That is the key to the community related with AppStores.

In South Korea, major AppStore operators move onto make another AppStore, K-WAC (Korea Wholesale
App Community). That is the Korean localized version of WAC, led by GSMA. In the bird’s eye view, K-
WAC can act as a Matching Hub of Open Innovation Model because developers, designers and funders
can meet in that community regardless which AppStore to enter. But it is possible K-WAC cannot have
position of Matching Hub, but web application sourcing sites. To grow the true mobile ecosystem,
Matching Hub like function should exists in the market rather than K-WAC as a common platform test-
bed.

End.

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Table of Contents

Executive Summary ····················································································· iii
Table of Contents ························································································ vi
List of Tables ·····························································································viii
List of Figures ···························································································· ix
I. Introduction ·····························································································1
1. Research Motivation ··························································································1
2. Advent of Mobile Era and App Stores ······································································1
3. Why Open Innovation of Mobile App Stores Matters? ···················································5
II. Open Innovation Models for Mobile App Stores ················································9
1. Overview········································································································9
2. General Open Innovation Model Concept ··································································9
3. Key Considerations for Mobile App Stores Models ····················································· 10
4. New Open Innovation Model for Mobile AppStores ···················································· 12
5. Profit Model Comparisons·················································································· 16
III. Case Study: Korean AppStores ···································································18
1. Overview······································································································ 18
2. Activities ······································································································ 18
(1) SK Telecom’s TStore ················································································· 19
1) History ···························································································· 19
2) Role of Open Innovation ······································································· 19
3) Applied Open Innovation Model ······························································ 20
(2) Korea Telecom’s ShowStore ········································································ 20
1) History ···························································································· 20
(3) Samsung Electronics’ A-Store ······································································ 21
1) History ···························································································· 21
3. Comparing Open Innovation Cases in Korea ···························································· 22
IV. Discussion and Conclusions ·······································································25
1. Findings ······································································································· 25

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Appendix ··································································································26
References ·································································································30

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List of Tables

<Table 1> Comparison of Four major players in AppStore business ································4
<Table 2> Profit Models of Open Innovation in AppStores··········································16
<Table 3> Applied Profit Models of Open Innovation in AppStores ·······························17
<Table 4> Comparison of Three major players in AppStore business in South Korea ···········22

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List of Figures

<Figure 1> Viewpoint of AppStore and Platform Provider’s Approach ·····························3
<Figure 2> Four components for Open Innovation ····················································6
<Figure 3> Simple AppStore Model applied into Open Innovation ·································8
<Figure 4> General Open Innovation Models ·························································10
<Figure 5> Market unmet needs of self-publishing model in AppStores ···························11
<Figure 6> Open Innovation Model in AppStores ····················································12
<Figure 7> Profit Models of Open Innovation in AppStores ········································16
<Figure 8> Three major players’ Open Innovation Model in South Korea ························23
<Figure 9> Profit Model for each Open Innovation Model in South Korea ·······················24

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I. Introduction

1. Research Motivation

Mobile AppStore is still booming all over the world after Apple supported its iPhone AppStore
since Aug 2008. The concept of AppStore enables that small business unit like an application developer
can sell his product to global market with very low cost.

Open Innovation is a new way of sourcing better idea and solutions from out of company. Some
companies like P&G saves their R&D cost dramatically every year by adapting open innovation.

In fact, Mobile AppStore is based on open innovation by itself because store operators like Apple just
provide environment and applications are developed by outer developers.

But when we look into this situation, developing application itself requires another sort of open
innovation because developing application is usually complex works with high cost.

For example, developing application needs team activities like concept planning, design and development,
but to do all the activities in one company may not be the best way of doing business because we have to
utilize superior resources to win at the competitive market like Mobile AppStore.

There are some cases to adapt outer resources like application concept idea in developing applications.
But it usually focused on very simple model and its business models just started to evolve.

In Korean market, the open innovation model in AppStore is especially important because the real Mobile
AppStore ecosystem lately applied to Korea in 2009 and its competitiveness in perspective of global
market is very low yet.

So when we can learn and know the core business model of open innovation in AppStore, the market
friendly ecosystem development could be possible in near time

2. Advent of Mobile Era and App Stores
The mobile was increasingly becoming important to major ICT (internet-communication-technology)
companies because of its rapid market size expanding and market quality enhancement. It is mainly due

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to the two facts. One is that the citizens in low-developed countries like China and India can manage to
buy more handsets for their daily life communication. Another is that smart phone enables more PC like
consuming habit to the handset owners, so most of behaviors happened in PC with internet can be played
in the internet ready handset like smart phones.

The most common example of new mobile life is such as buying some products like books in mobile
commerce sites, buying game item while playing mobile game, chatting with friends, checking social
media sites like twitter and facebook, and much more to be done without landline connectivity. With its
powerful capacity, smartphone can handle versatile works by its applications like PCs. So application
itself is proved to be a powerful promotion tool for selling high performance handset like smartphone.

Apple made the iPhone AppStore when it announced new product line of iPhone 3G model. iPhone was a
exceptional device by three facts when we compare it to its precedents. The first is introducing the new
rule of controlling application distribution by unique way, Apple AppStore. The second is breaking the
old rules which were enforced by telecom operators for many years. Some example of such an old rule is
that all the applications on the handset are to be approved by Telecom operators because they operate
contents business by themselves as well as telephony business. The third is that it harmonized its user
interface with mobile adapted functionality and elegant usability. Very few companies achieved this type
of contradicting value all at once.

Now that Apple iPhone proved itself as a mega hit consumer electronic device, all the competing
companies try to follow Apple’s way of success with iPhone and its AppStore.

About the major players in AppStore, we can categorize them in many ways. If we categorize it with a
value chain concept, there are white label AppStore and consumer-facing AppStore. White label
AppStores usually act as aggregators who gather the application over the world made by small sized
companies and developers, and provide applications to retailing business customers. It usually handles
multiple platforms to reach the economics of scale. Handango can be one of example of this case.
Customer-facing AppStore is having its own front store to sell the application to its customers directly.
Most of major companies including telecom operators and device manufactures are operating their
AppStore in this way.

If we categorize AppStores with a dedication to proprietary platforms, there are versatile platforms
supporting AppStore and dedicated AppStore. Almost aggregators support versatile platforms. Dedicated
AppStores are usually operated by mobile platform provider like Apple and RIM. The strong relationship
between AppStore and mobile platform is prevalent because the major platform provider’s concern is

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focused on platform leadership not AppStore sales revenue. Because many platform providers have their
own source of profit, the common rule of success in the marketplace is that the platform leader can
maximize the profit by its platform dominance in the market.

And if we categorize it with a controlling issue in the viewpoint of platform provider, there are multiple
AppStores and single AppStore for one platform. For example, while Google let another 3rd party Android
AppStore enter the market anytime, Apple operate its AppStore as a unique market for its products like
iPhone or iPad. The main difference of company’s stance might result from if the company makes its own
handset which is tightly bounded with its AppStore and mobile platform. If there are no clones any more,
then there are no needs to expand AppStore’s market reach to its clones. That is the exactly the Apple’s
case. Google is not the device manufacturer and give away the Android mobile platform to partners like
telecom operators and device manufacturers. So to maximize the market reach with allowing multiple
Android AppStore makes no issue of strategic drawback.

<Figure-1. Viewpoint of AppStore and Platform Provider’s Approach>

Lastly we can categorize AppStore with a lock-in approach in viewpoint of platform provider. In this
context, there are persistent incentive and incurring cost way of lock-in strategy. For example, platform
providers like Apple, Google have their own mobile platform. So once the developers made their
application on the base of specific mobile platform, then switching cost is very high to move onto another
mobile platform in a near time. This type of cost is due to wholly different developing language and
environment to make an application for platform by platform. About the incentive, almost platform
providers made a budget to inducing developers and communicate with developer community in their

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early stage of platform introducing. But without persistent incentive to developers, when switching cost
becomes lower, developers will move to next competitive mobile platform provider’s territory. That is the
positive way of inspiring developers to make a qualified application for a long time. Lowering switching
cost is really happening by some cross platform providers. Such an important move is driven by
companies like Adobe and open source communities. So platform providers should consider positive and
persistent incentive to developers not enforcing negative lock-in trap like switching cost.

In Apple’s case, Apple AppStore is consumer-facing, dedicated, single, persistent incentive characteristics
in its essence of operation stance. We can look into this 4 by 4 viewpoint of AppStore and platform
provider to major companies like Apple, Google, RIM and Microsoft as below.

<Table-1. Comparison of Four major players in AppStore business>

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3. Why Open Innovation of Mobile App Stores Matters?

In the PC world, Microsoft is a dominant platform player who can induce and orchestrate the developers
and other 3rd party partners to grow its ecosystem. Microsoft’s platform leadership comes from its core
product, OS (operating system) which was installed in most of PCs worldwide. The more applications
dedicated to Microsoft OS, the more powerful Microsoft’s platform leadership. That was the one of main
cause that Apple was beaten by Microsoft in the early 1980s’ platform battle. Apple had implied some
cost to its Mac OS system developers in contrary to Microsoft. Developers wanted less initial cost when
developing applications, so they inclined to choose Microsoft’s development tool kit. This made the
Microsoft OS to have more applications as time going. The more Microsoft OS has its dedicated
applications, the more customers want the PCs which installed Microsoft OS.

That was the whole thing about opportunity cost in economical perspective. In the viewpoint of
developers, they have two major costs. One is initial developing and maintenance cost. Another is
opportunity cost driven by short of sales which eventually make loss of profit in total sum. To be
competitive in the marketplace, companies which provide platforms like OS should consider helping
developers to reduce these types of cost.

Open Innovation is a popular term these days which indicates the activity of companies to maximize its
cost-to-performance efficiency by interacting with outer research and development units. The term begins
with the recognizing that internal research and development activity sometimes might not be efficient
enough to adapt to the market needs. But it can also be applicable to the business environment that always
need enough and strong complements to lead the market.

At early stage of AppStore business, platform providers tried to make and display application of their own
to stimulate the market recognition and demonstrate the capability of its platform. But no one platform
provider can afford to provide all the application what customers need in his AppStore. For example, in
Apple AppStore, there are more than 285,255 active (currently available for download) apps. The number
of active publishers in the US App Store is more than 58,638. So the most reasonable action to reach this
number is to encourage outer developing communities to devote themselves developing for platform
provider’s AppStores. So almost company operating AppStore usually hold marketing and promoting
event to developer community and major content providers, who are going to make great application with
their old famous content assets.

About Open Innovation, there are many models to explain Open Innovation in the industry field. In this
paper, I suggested simple model which consists of four components to explain the Open Innovation. This

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model is very simple, but is effective to explain applying the Open Innovation to AppStore business.

Four components are 1) Orchestrator, 2) Build to be Used, 3) Build by Outer Communities, 4) Build to
Reward. The explanation of each is as below.

1) Orchestrator: The player who invokes the policy and coordinates all the important activities to
build business ecosystem.

2) Build to be used: Core product or service of orchestrator that can be used with some degree of
freedom by outer community to make some value added derivatives.

3) Build by Outer Communities: Product or service by outer communities made with the Core
product of orchestrator.

4) Build to Reward: The mechanism to reward players (both orchestrator and outer communities)
for the effort of growing the ecosystem.

<Figure-2. Four components for Open Innovation>

To give and gather the innovative product bidirectional is the key to success of AppStore business. So this
kind of Open Innovation model is suitable to explain the Open Innovation in AppStores.

When we consider the interactive way of Open Innovation, there are two types of it. One is Outside-In,
and another is Inside-Out Open Innovation. If companies want to get some idea or technology to fulfill
their business purpose, they can source the core asset from outside of company. That is the case of
Outside-In Open Innovation. But some companies may want to open its technology and intellectual right

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to outer community, and earn some revenue from its sharing of asset. That is the case of Inside-Out Open
Innovation.

In perspective of AppStores, both type of Open Innovation is needed. About Outside-In way, AppStore
business can get enough market recognition only after it has many applications to consume by customers.
About the Inside-Out Open Innovation, Big sized companies which invest on research and development
for many years may want to change their intangible asset to cash equivalent. So, they can share the
license of their asset and get rewarded after outer partner can generate revenue with related business. For
example, IBM changed to be a sponsor of open source community with some fund and technical support.
By the relation with open source community, IBM can reduce its server product maintenance cost
dramatically. That was the case of both Inside-Out and Outside-In Open Innovation.

Considering the Inside-Out and Outside-In approach, four components in Open Innovation of AppStore
can be changed into 1) Key Stone Leader – Platform Provider, 2) Mobile Platform, 3) Applications -
Complements, 4) AppStore. The explanation of each is as below.

1) Key Stone Leader (Platform Provider): The player who makes the platform to be leader in
competitive market.

2) Mobile Platform: Mobile Operating System or middle platform to be used by outer communities.

3) Applications (Compliments): Applications made by outer communities to earn some revenue in
Key Stone Leader’s ecosystem.

4) AppStore: The marketplace to sell applications by outer communities and spread the influence
of mobile platform.

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<Figure-3. Simple AppStore Model applied into Open Innovation>

We can see the AppStore is one of reward tool for outer communities who provide complements for
mobile platform. So AppStore itself is a subcomponent of Key Stone Leader’s business strategy to win
the platform leadership. And Inside-Out and Outside-In approach occurs circularly at the same time to
grow the ecosystem in the long term. So in the viewpoint of want-to-be Key Stone Leaders, Open
Innovation is a set of continuous process that will never end.

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II. Open Innovation Models for Mobile App Stores

1. Overview

The Open Innovation itself comes from the Technology Sourcing from outer partners to maximize
R&D efficiency and eventually corporate profit. The guru of open innovation, Henry Chesbrough
suggested some business model framework for corporate considering open innovation. They basically
depend on the elements like how-to-operate-process and how-to-manage-intellectual asset. The
fundamental concept defined by Henry Chesbrough is still important, but the business models are
evolving and being complex more than one-to-many relationship style model for corporation. In this
report, I will enhance the Open Innovation Business Models regarding the key considerations and match
the related few cases if any. Finally, the Profit Models generated by New Open Innovation Business
Models will be compared among players.

I already suggested the four components of Open Innovation in AppStore business. The major platform
leader like Apple invested big money to stimulate and communicate with outer developer communities.
Their effort to grow the ecosystem is consistent even still they acquired big mid share of developers and
enough applications to sustain their AppStore business. In the viewpoint of late followers, this dominant
platform providers’ WTA (winner-takes-all) game may be very critical to their business because attention
from developers is scarce resource and the key to success in smart phone business. The Open Innovation
Model for AppStores suggested below will be applicable to general purpose, but it will be better to
explain the following AppStores. That is because they use more direct promotion and event to get an
attention from developers who are already devoted to dominant AppStore players like Apple and Google.

2. General Open Innovation Model Concept
In the viewpoint of relations among players, we can define Open Innovation Model as a one-to-many and
many-to-many cases. One-to-many relation model is for companies being in the middle of value chain
and trying to outsource from and provide some values with outer partners. The company has basic needs
to interact with outer community and it can provide values like fund or technology to interact with.

For example, one of the biggest network equipment manufacturing company, Cisco hold i-Prize business
idea competition every year to get a great idea and technology to strengthen the vision of Cisco’s new
business domain. In popular P&G’s case, it outsources research and development capability from outer
engineer groups to reduce annual R&D cost. Usually we can say that the companies are big and known

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enough to be attractive to outer community. But what is big enough is the matter of relative size of outer
community and the company itself. If the outer community is personal unit, then the size of company may
not be a first decision factor to outer community. Good brand marketing and credibility would be more
valuable indicator to induce outer community in this case.

<Figure-4. General Open Innovation Models >

Many-to-Many Relation Model is for the company who cannot enjoy economic of scale and want to use
matching hub for needs and values like technology, fund and idea. For example, one of the major 3rd Party
Open Innovation Hub, Innocentive coordinates the customers and providers of new technology, idea and
make them to meet in the negotiation table in the cyber space. Many companies like P&G already uses
Innocentive as a complementary channel to interact with outer community.

In this many-to-may relation case, need and fund are not always bounded to one company because
sometimes matching fund can be happen in the hub. Idea, technology and entrepreneurship are essential
for Open Innovation, and fund can lower the entry barrier to match the people who have complementary
capability to others. Matching hub usually act as a player to induce enough fund from major investors like
venture capitals.

3. Key Considerations for Mobile App Stores Models
Before we apply this general Open Innovation Model to AppStore Business, there are some issues to
consider.
1) AppStore operator is not the final destination of values from outer community. It is just one of
distribution channel in the viewpoint of developers.

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2) Platform providers have to persuade the developers to make the application with the provider’s
platform.

3) AppStore itself means that small entity like person can publish his application to worldwide
potential customers with very low cost. So by the prevalence of self-publishing, the developing
entity becomes smaller than ever.

4) But, there need a big money to develop commercial application when developers decided to
make applications. The cost incurred from concept planning, UI design, developing and
maintenance.

5) To sum up AppStore operators need more applications to earn the revenue. Platform providers
want more application made with their own to lead the platform market. Developers need a
strong team work and enough seed money to develop commercial application.

<Figure-5. Market unmet needs of self-publishing model in AppStores >

AppStore lowered the distribution cost and set-up cost to developers, but there remains developing cost
and opportunity cost to be bounded to specific platform. So, AppStore operator and platform providers
should give some incentive to motivate the developers. Developers want to build a strong team with
project by project and want to lower the opportunity cost by revenue sharing model with collaboration
activity. Developers as a small entities want to mitigate the overall cost and risk, and to maximize to

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generate the revenue when developing application for specific platform and AppStores. In the perspective
of Open Innovation, that is another problem solver to meet the market’s unmet needs.

4. New Open Innovation Model for Mobile AppStores
The Open Innovation Model for Mobile AppStores can be designed by two factors. One is the objective
of Open Innovation in the viewpoint of AppStores or application publishers. Those are application / idea
sourcing for direct benefit to the company and community building for indirect benefit in the long term
perspective. Another is the value for developers like lowering opportunity cost such as developing and
maintenance cost, and building team to enable sharing the risk and revenue when making heavily invested
commercial applications. Below is new open innovation model suggested for AppStores with two by two
matrixes in this report.

<Figure-6. Open Innovation Model in AppStores>

In each rectangles, the model of Open Innovation can be defined as 1) Outsource, 2) Resource Align, 3)
Fund Matching, 4) Team Matching.

5) Outsource: Developers can minimize initial cost to make applications when AppStore or
publisher buy the application with expense of dedication. This usually happens when the

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AppStore business is immature and application demand is greater than supply as a whole. Both
Apple and Google gave monetary incentives to initial application partners for inducing them to
their ecosystem. Initial application partners can also minimize the opportunity cost with being
funded by the AppStore operators.

In Korea, usually beneficiary of this model is content providers those are already in business
with the Telecom operators or Device manufacturers for a long time. AppStore operators’
policies are inclined to require dedicated application ownership or usage right for specific
duration.

6) Resource Align: If the main constraint of developing application is not just money, AppStore or
publisher can share or provide resource of their own to the developers.

For example, MEDL Mobile which operates ‘App Incubator’ sources his application ideas from
outside of company. It collects the tons of ideas from people who could not develop their own
applications, but have some idea. When it chooses the winning idea from the many candidates, it
communicates with the owner of the idea and negotiates the revenue sharing terms and
conditions. The suggested guideline by MEDL mobile is that idea owner can be rewarded by
approximately 25% of application sales revenue through AppStores. In fact, idea owner can get
little money than expected because MDEL mobile deduct some developing and maintenance
cost from the money to idea owners.

There are two important implications about the MEDL mobile case. One is that idea itself is a
critical and scarce resource for applications because good idea is an essential differentiator in
today’s grand application flood era. Another is that revenue sharing mechanism is effective to
the Open Innovation if credibility can be provided. There are so many ideas to be ready to be
changed to applications, so applicants have to wait more than 1 month to be reviewed by
available development team.

In MEDL case, there are some issues to clear the meaning of Open Innovation. Firstly, the
possibility of power fraud by publisher can exist. There is no guarantee that idea will not be
used without expense. There is no guarantee that so many ideas will not be exposed to another
party for unexpected purpose. Secondly, the fairness of reward and clear revenue sharing
principles is necessary not to hurt the relations with idea owners. The number from real cost
cannot be decided in early developing stage, but to suggest concrete expectation to idea owners
have to be defined by publishers while contracting. To sum up, minimize the power fraud by

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publisher and clarify the rewarding rule is essential to this type of model.

7) Fund Matching: Developing application is a project itself. So project financing can be raised to
assist building applications and sharing the revenue after sales. There are some online sites
which offer micro funding to starters.

One of them is KickStarter, Inc. KickStarter Inc. is a matching hub between fund demand and
Supply by ordinary people. For example, when someone want to make a documentary film and
have little money to do that, then he can post the fund wanted message to the bulletin. He can
suggest the some funding options to the people who are interested in the micro funding. Usually
funders’ names are listed in the ending credit, or funder can get free access to the made
documentary film. In the viewpoint of funders, the micro funding can be a donation, discounted
purchasing or booked order in developing product stage.

One of the real cases in KickStarter is a film to be made to capture the reality of education
environment in South Korea, ‘ALL in on The Exam: a documentary on S. Korea's education
fever’ by Judy Suh. She set the funding goal to $2,000 and eventually received the $2,035 from
backers (funders) in Sep 10, 2010. There are relatively few funding cases about mobile
application because application itself is hard to be qualified before working as an ending product.
There are so many AppStores which developers can sell their applications directly and recover
the development cost as soon as possible. So basically funding in early stage by micro funders
are not easy to achieve.

In South Korea, AppStore operators are usually being funders to the application development in
its early stage. The reason why AppStore operators give away the money to the developers is
that they know the self motivated application development environment will be made when
small entities get an enough small wins with the AppStores. So before that time, sponsorship
from enterprise and government is needed to build an ecosystem. The major difference between
global AppStore and local AppStore is the size of market. That makes the local AppStore has to
make more direct promotional fund to induce developers to small sized local market.

8) Team Matching: In early stage of AppStores, developers can sell applications with less
investment by one or two members. At that time, there are few applications in AppStores, so
marketing and exposing to customers was not as difficult as now. When more and more
applications are becoming competent in the same AppStore, the integrity and functionality of
application itself determine the success of application business by developers. To make a

14


competitive application in the marketplace, strong team with capabilities of concept planning,
design and development is mandatory. AppStores did not invoke this type of team building
activity openly, but they support many developer communities to stimulate the team building
outside.

In South Korea, there were spontaneous attempt to build a team for developing applications in
the communities of internet portal or community sites. But credibility is important to trust each
other in one team, and share the revenue by selling the applications. Without the efficient
credibility management system, all the relation and building process would be ad hoc based and
trial and error. AppStore operators begin to think that strong team is good for their business
because it means good applications in their AppStores. So Team Matching and Building are to
be another important agenda to grow the application developing environment more and more.

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5. Profit Model Comparisons
Before identifying the profit model for each rectangle in above open innovation model in AppStores, we
have to define the concept of direct and in-direct profit.

Direct profit is a profit made directly from the open innovation in AppStores. They are App Sale Revenue,
Transaction Fee, Matching Commission and H/S (Handset) Sales Revenue.

In-direct profit is a profit mad indirectly from the open innovation in AppStores. They are Data Revenue,
Platform Fee, Advertising Revenue and Market Recognition.

These entire eight profit models can be applied to four open innovation model in AppStores respectively.
Detailed description of these profit models are below.

<Table-2. Profit Models of Open Innovation in AppStores>

AppStore operators or publishers always have their own intention to adapt open innovation approach. In
Telco operator’s perspective, Data Revenue was the most important source of revenue. Now that some
Telco operator provide unlimited data usage price structure, the Application Sales Revenue is getting
more important as time goes on. While in device manufacturer’s perspective, Handset Sales Revenue is

16


most important to their bottom line. So applications in AppStore are just a promotion tool to spur the
positive customers’ buying culture for the handset made by the manufacturer.

<Table-3. Applied Profit Models of Open Innovation in AppStores>

When applying outsourcing open innovation model, Telco operator and device manufacturer want to get
their main revenue of source like H/S Sales Revenue and Data Revenue in the expense of developing cost.

About the resource align model, Telco operator or publishers usually get rewards from application sales
revenue share and market recognition. In MEDL mobile case, market recognition means that it get an
attention from ordinary people who have application ideas.

Fund Matching and Team Matching Model is usually made by 3rd party matching hub, but in South Korea,
the model is shown by AppStore operators. The operators inject some funds to stimulate the application
developing environment and to get the mid share of developers.

17


III. Case Study: Korean AppStores

1. Overview

In Korea, there are three major Mobile App Store Operators. Which are SK Telecom, Korea
Telecom and Samsung Electronics. Of course Apple and Google do their App Store business in Korea, but
they are globalized proprietary business, not customized in Korea business situation.

So this case study includes the role of Open Innovation and its Business Models of three Mobile App
Store Operators in South Korea.

Before looking up the AppStores in South Korea, there is a background to know understanding the market
environment. Mobile phone distribution system is divided into two categories. One is closed-market or
operator market, which is that network operators handle distribution of mobile phones to its subscribers.
Another is open market, which is that device manufacturers sell their products to the normal retail
distributor like mart or electronics stores. Usually the market type of almost countries is closed-market,
because network operators give a subsidiary to sell more handset to its customers. So device
manufacturers can have trouble to sell in the open market without network operator’s subsidiary.

When device manufacturer and network operator operate AppStore of their own, there is an issue of
which AppStore will be on the top of mobile screen. By the bargaining power from distribution system,
usually network operator handles the top of mobile screen. Which results that device manufacturers
AppStore remains behind the curtain unless it does not have its own mobile platform that network
operator does not have.

In South Korea, Samsung Electronics is under the rule of closed market system. So its front of AppStore
is only shown through the network operators’ AppStore by shop-in-shop structure.

2. Activities

We will look through the major AppStore operators in South Korea with the viewpoint of open innovation.

18


(1) SK Telecom’s TStore

1) History
Korean No.1 mobile carrier, SK telecom opened T-store in Sep.2009, making the first entry into the
business in Korea. They have focused on Korean style contents to overcome the limits that could be
expected in mobile carriers promoting App store business. And those strategies have been
somewhat effective that it is expected the number of contents will be increased to more than 70,000
by the end of 2010 from the starting number 6,500. Also, they have widened their business
categories like e-book contents in order to meet the trend of spreading various devices. In Oct. 2010,
3 Korean mobile carriers established K-WAC promotion committee and chose "Conpanna“as
standard terminal web-platform. It's only in a starting stage to predict its effectiveness, but it is
expected that under the free use of app regardless of specific terminal unit or OS, the revitalizing
development will come as a result of linking with global app markets. Mr. Chung, SK Telecom
President, emphasized opening and expanding the services, saying "We will open application
programming interface (API) to our competitor, KT. I guess we will be almost a single unit beyond
as a developer and cooperator relationship." which shows their plans to design and build all
platforms based on opening their own technologies.

2) Role of Open Innovation
SK Telecom uses Open Innovation to capture the good idea and technology for mobile AppStore
business. But their approach is based on the long-term position. For example, SK Telecom invested
on the education center that has many curriculums about application development and service
design. It recently opened Open Innovation Center, goal of which is to grow the healthy ecosystem
with small sized company and developers. It gives away about $$40,000 and office space to
startups with no expense. More large sized companies can suggest business plan proposal to be
invested by SK Telecom. SKT has built Open Innovation System which includes App, contents
teaching and developing, and promoting enterprises based on the idea of ecosystem vitalization for
innovation.

T Academy-Mobile Device (MD) Test Center- T-Academy takes care of contents developing and
instructing, MD Test center provides developing and testing environments, and Open innovation
centers is in charge of supporting and promoting 1-Man companies.

Open structures of Shop in Shop: T store has included Samsung App store and Android Market in
the form of Shop in Shop to overcome the limited services of mobile carriers. These mobile
manufacturers and platform provider‘s cooperation has brought a remarkable growth in market

19


share as the second runner.

3) Applied Open Innovation Model
At early stage, SK Telecom only used Outsource Model for Open Innovation. Many contents
providers made a similar content from iPhone AppStore or Android Market to fill the empty floor of
leading Telecom operator in South Korea. But its innovation model evolved in the viewpoint of
long-term ecology. At its second step, it established the education center for developers and service
designers. And recently, it established the Open Innovation Center which is for injecting enough
fund to start-ups in South Korea. The target model of Open Innovation Center resembles the Fund
Matching and Team Matching in Open Innovation Model.

(2) Korea Telecom’s ShowStore

1) History
The second biggest mobile carrier, KT opened SHOW App Store in Jan. 2010, and newly opened
Olleh Market after reorganizing it in Oct. 2010. Olleh Market improved the downside of
downloading existing apps, claiming itself a multi-shop where consumers can use a number of
contents. But the lack of apps and contents can't bring consumers' satisfaction and frequent visits,
making it hard to accept it as an active app store.

Korea Telecom has also invested on ecosystem growing with the catch phrase of Econovation,
which is the new word from Ecosystem and Innovation. It provides community site for developers
and hold application festival to stimulate the developer community.

Econovation Center: KT has opened Econovation center-24hour supporting center- in Mar. 2010
following Show app store application instructing in Dec.2009, claiming to stand for the open
relationship with app developers.

Phyo Hyun-Myung, president of KT, mentioned "We will support everything to make the
developers' creativity and ideas the realization of smart phone dream by innovation of the previous
carrier-centered closed business structure into opened structure. Multi-contents can be used by
downloading or streaming application, movie, music, or e-books. In the AppStore, it is available in
multi-platforms like Android OS, Window mobile, and Window CE etc, except in Apple iOS. In
spite of these various and innovative programs, the amount of app and contents is still not enough,

20


and the available terminal units are only 3 kinds of Android Smartphone and 2kinds of Window
mobile OS smart phones.

Korea Telecom’s Open Innovation Model is similar to SK Telecom. Its AppStore is filled by its old
related contents providers. And it provides developer community sites to convert community value
to its ecosystem growth. Korea Telecom introduced the iPhone in 2009 and is a beneficiary of
Apple by the innovative brand image. Before introducing Apple iPhone, people tend to think Korea
Telecom far less innovative than SK Telecom. It holds application festival and the winner can be
funded by Korea Telecom with little expense. Korea Telecom’s education function is less
competitive because it does not provide offline programs like SK Telecom. And its funding
program is less structural than SK Telecom because its funding is more likely competition winning
prize rather than persistent investment program.

(3) Samsung Electronics’ A-Store

1) History
Samsung Electronics is the second biggest handset manufacturer in the world following Nokia.
It has provided the service "Samsung Apps' application store to 109 nations around the world to meet
the needs of their worldwide customers. Also, for domestic customers they have operated their
application store in 'Shop in Shop' way which affiliates with SK telecom's T-Store (www.tstore.co.kr).
Samsung Electronics deploy the glocalization strategy to provide suitable contents like game, news,
navigation and social networking by each country.

Samsung is not the software company by its nature, but it is trying to change its DNA to Software
Company after iPhone introduced in South Korea. It has recruited many developers for design and
making new service platforms like Bada. It also has to contribute to the ecosystem especially for
invoking the developers’ attention to Bada.

Ocean Development Center: Samsung Electronics operates AppStore, 'Samsung Application Store'
and developer community site, 'Samsung mobile innovator' and seller supporting site, 'Samsung
Application Store Seller Site'. Also for outer developer community, Samsung made a mobile
platform named 'Bada'. Recently App development center, 'OCEAN' was opened to support
developers from application registration to sales.

21


Samsung Electronics’ Open Innovation Model is behind the other AppStore operators like SK
Telecom and Korea Telecom. That is because Samsung is difficult to invoke aggressive program
without the support of local Telecom operators that are major clients in local handset market. And it
is preparing its proprietary mobile platform named Bada, but its ability to communicate with
developer community elegantly is still under development. Recently it opened development
supporting center, ‘Ocean’. That is the start of Resource Align model of Open Innovation we
discussed.

3. Comparing Open Innovation Cases in Korea
We compare the three major players in the perspective of AppStore itself.

<Table-4. Comparison of Three major players in AppStore business in South Korea>

Two major network operators’ AppStore are not compatible yet, but they are preparing the K-WAC
(Korea Wholesale App Community) to source the application together. About the lock-in approach
persistent incentive to develop for the specific AppStore is still weak because local players are behind the

22


innovation made by global players like Apple and Google. In AppStore, the innovation by platform
providers itself is the main portion of locked-in mind of developers. Some companies try to decorate the
three screen enabling platform for mobile handset, TV and PC. But that type of innovation is untouchable
yet to developers.

<Figure-8. Three major players’ Open Innovation Model in South Korea>

When we applied the three major players to Open Innovation Model of AppStore, there are first and
second wave of approach in South Korea. The first wave is to establish the education center which
contributes the growth of developers and service designers in the viewpoint of ecosystem. The second
wave is to inject a fund to the start-ups and support building the strong team for individual developers.

The strong intention to grow the mobile ecosystem in South Korea comes from two facts. One is the late
recognition triggered by Apple iPhone that South Korea is not the world best mobile contents company
anymore. The Korean government and major network operators reviewed previous closed mobile
ecosystem controlled by network operator and try to build the new ecosystem as an alternative. Another is
that South Korea’s local market is not large enough to compete with global payers like Apple, so to

23


induce developers’ mind and lessen their opportunity cost to choose AppStore in Korea rather than global
AppStores are important.

<Figure-9. Profit Model for each Open Innovation Model in South Korea >

The profit model for Open Innovation mainly resides on the App Sales and Market Recognition. But it
has a potential to extend to the other profit models easily. The market recognition is somewhat driven by
the Korean Government, but AppStore operators have to compete with relatively competitive advantage
to others. The mind share of developers is essential to do an AppStore business. So market recognition
from developers are very important. Network operating business often requires approvals from
government to enter or change the business portfolio. So government policy friendly approach gives
another benefit to the network operators.

24


IV. Discussion and Conclusions

1. Findings

AppStore operators and Korea government eagerly try to grow the mobile ecosystem in South Korea. At
first, AppStore operators make content providers to develop application to their AppStores with the
expense of development fund. No company can inject money forever to the AppStore business, so making
the mobile ecosystem that can circulate between AppStore operators and developers is critical.

Now AppStore operators support mobile ecosystem with education center and matching hub for fund and
team. But from the viewpoint of developers, it is a still problem of lock-in whether loose or tight. So to
give persistent incentives to the developers, the AppStore operators should generate their own innovation
to the speed of global competitors.

That is the matter of Inside-Out Open Innovation and SK Telecom started to provide its own service
platform APIs to developers. But just opening the service platform is not enough because what to open
and how much to open are always critical problem to solve when opening the platform. It has to open its
result of innovation. That is the key to the community related with AppStores.

In South Korea, major AppStore operators move onto make another AppStore, K-WAC (Korea Wholesale
App Community). That is the Korean localized version of WAC, led by GSMA. In the bird’s eye view, K-
WAC can act as a Matching Hub of Open Innovation Model because developers, designers and funders
can meet in that community regardless which AppStore to enter. But it is possible K-WAC cannot have
position of Matching Hub, but web application sourcing sites. To grow the true mobile ecosystem,
Matching Hub like function should exists in the market rather than K-WAC as a common platform test-
bed.

End.

25


Appendix

<Appendix 1> CA (Content Aggregator) Model for AppStores

No Role of Content Aggregator

1 Technical Packager

2 App Factory

3 APP License Bank

4 Single Point Back-Office Provider

5 App Publisher

Source: VisionArena Co.,Ltd (http://visionarena.net)

CA is an application distribution hub between app developers and app stores.

26


CA supports porting global apps to operator-specific apps.

Partners and CA provide new apps which meet operator’s concept design.

27


CA supports APP License Bank model between operators and partners.

CA supports single point back-office with payment conversion for multi-operators.

28


CA supports App Publisher model if valuable apps are found.

29


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