Mobile Applications – Market Evaluation and Opportunities

St. Gallen, March 2009

Mobile Applications – Market Evaluation and Opportunities

prepared for b-to-v Core Croup Internet and Mobile

p. 2

Agenda

1. Recent Developments and Trends

2. Market for Mobile Applications

3. Recent Investment Activity in the Mobile Space

4. Blueprint of an attractive Investment in Mobile Applications

5. About b-to-v

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Trends for mobile applications

– Open Platforms: New development frameworks focus stronger on web technology (Apple iPhone, Palm Pre). Hence, easier deployment of applications that do not be customized for each mobile, such as with J2ME or Symbian.

– Open Shops:Strong limitation of former operating systems in distribution of applications. Changing environment with Application Stores of Platform Manufacturers (e.g. Apple App Store for iPhone) or Download Platforms, such as GetJar

– Payment: Easier setup of transaction-based business models with higher revenue shares for developers

Creating a new Ecosystem for developers

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Fostered by an improved environment

– Broadband Speed:Higher penetration of 3G+ in developed countries allows PC-like surfing behavior on mobile phones plus broader WiFi coverage.

– Flatrate data plans:User having more cost control on their data usage with flatrate plans or at least much cheaper data plans with high volume.

– Better handsets:More elaborate smartphones with more convenient usability (e.g. touch screens) becoming more accessible to the mass market, esp. the ones based upon low-cost open source operating systems, such as Android.

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Business models shifting to Device Manufacturers

– Former portals of mobile operators’ (MNOs) have not appealed to consumers

– Only new capabilities and functionalities of smartphone handsets haven driven up mobile internet usage significantly

– Device Manufacturer become more independent from MNOs and are able to dictate the terms (e.g. exclusive distribution of iPhone with selected MNOs)

– Manufacturers are actively fostering this new ecosystem through own venture activities (iFund, Blackberry Partners Fund, Android Developer Challenge are the most recent ones with over USD 250m+ funding volume), previous activities from Nokia, among others

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Agenda





5. About b-to-v

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Development of worldwide handset market

– In 2008, 1.27bn new mobile handsets shipped worldwide, thereof 14% smartphones

– Nokia being dominant market leader with nearly 40% worldwide market share overall

– However, in strong growing smartphone segment loosing market share to Apple and RIM (in 2008 Apple alone sold 13.7m iPhones)

Sources: ABI Research (2008), Gartner (2008)

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Game-changing iPhone in mobile internet usage

– The iPhone significantly has driven customer attention to the mobile web, even stronger expected with greater 3G coverage

– No other device is used more for web search, email, music and social networking

– Hence, mobile internet usage is becoming a mass market phenomena– partly thanks to the iPhone: Alone in Germany 20% (worldwide 16%) of mobile subscribers are using the mobile internet, in the US even 35% do so daily

Sources: ComScore (2008/2009), TNS (2009)

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Consumption Patterns of Content and Applications

– In part due to social networking and internet commerce, smartphone users are spending an average of more than 4.6 hours per month browsing the mobile web in the US and nearly 2.5 hours per month in the UK

– Thereof, in the UK user spent alone 1h 44min per month browsing on Facebook

– Content looked for in the mobile internet: 1) Search, 2) News, 3) Music, 4) Social Networking, 5) Weather and 6) Sports (according to TNS survey)

Sources: M:Metrics (2008), TNS (2009)

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GamesEntertainmentUtilitiesEducationProductivityLifestyleHealthcare and FitnessBooksReferenceTravelSportsMusicNavigationBusinessFinanceSocial NetworkingNewsPhotographyWeather

iPhone App Store: From 10k to 20k+ apps in 73 days

– Most efficient ecosystem for mobile apps worldwide (over 25k apps listed as of mid Mar 09) with very dynamic pricing (mostly expressed in price reductions)

– Since launch of App Store in July 08 in total 1.2k applications were pulled for various reasons

– Over 1/3 of apps are in Gaming and Entertainment, about 75% of all apps are paid-apps

Source: iPhone App Store USA (as of end Nov 08)

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Most downloaded iPhone apps

– Overall 800m downloads as of mid Mar 09 (up from 500m end of 08), thereof about 25% Games

– Recognition only through listing on “Top 25/100” (at least 20k/5k downloads needed)

Source: iPhone App Store USA (as of end of 08)

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But no sustained usage – for both free and paid apps

– For free/paid apps, only about 20/29% of users return after the first day after they downloaded it. By 30 days out, less than 5/3% are using the app.

– By category, entertainment and gaming apps seem better to retain an audience over a longer time.

– In terms of time spent gaming apps reveal 2x higher engagement than other categories.

Source: Pinch Media (Feb 09), based on 30m+ downloads

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Leaving questions open for the right business model

– Assumption: Free apps are used 12 sessions per user and run 6.6x as often as paid apps

– Compared to the average of USD 0.70/user for paid apps a free app with this assumed 80 sessions would need to command at least a CPM of USD 8.75 in order to earn through advertising (one ad per session) as much as a paid app on a per user basis

– However, current iPhone app ad rates are between USD 0.50 and USD 2.00 CPM

– Conclusion: Only <5% of apps are suitable to make money through advertising

– Open questions for the right business model:

– Charging for apps might to seem better at first

– Trying to make the app more sticky, and hence increase usage

– Benefiting from network effects in order to attract more users

– Targeting the right users in order to command higher CPMs

Source: Pinch Media (Feb 09), based on 30m+ downloads

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Agenda





5. About b-to-v

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Analysis of venture investments in mobile space (1/2)

– Tracking worldwide mobile-related VC investments from June 07 to Feb 09

– In total 360 deals, thereof 159 in Mobile Apps and 31 in Mobile Advertising

– Average investment per deal in Mobile Apps USD 8.5m, in Mobile Advertising USD 10m respectively

– With regard to newly established funds of manufacturers an increased deal activity can be seen with significant average investments per deal, e.g.

– iFund (in cooperation with KPCB): USD 6.85m (6 deals done to date)

– Blackberry Partners Fund: USD 5.7m (3 deals done to date in mobile apps)

– Android Developer Challenge: USD 187.5k (20 projects funded to date)

Source: Own analysis

p. 16

EntertainmentSocial NetworkingProductivityLocation-basedGamingeCommerceVideoMusicCommunicationPhotographySecurityTravelSearchMoneySports

Analysis of venture investments in mobile space (2/2)

– More mobile apps in entertainment* and with social neworking features attracted funding than apps in other categories; productivity apps being the third most important category

– Location-based features complement more and more funded mobile apps

Source: Own analysis (double entries possible for categories)

* Entertainment category also comprises lifestlye apps, such as dating.

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Selected mobile apps in Entertainment and Gaming

– Gaming apps with music and social features focussed on iPhone

– Most popular game for iPhone and iPod touch in 2008 (total unique installs per month: 5m+, 100k paying customers as of Dec 08)

– Business Model: Freemium model (free apps with advertising and paid apps) plus affiliaterevenues

– Financials / Funding: Break-Even in Dec 08 / funded with USD 1.8m from angel investors (Andy Bechtolsheim, Marc Benioff, Jeff Clavier, Katrina Garnett, Khosla Ventures, among others)

– Take-away: Addictive products create strong community for viral effects

www.tapulous.comUSA, Palo Alto (CA)

www.fishlabs.deDE, Hamburg

– Developer of premium 3D mobile games since 2004, business relationships to 160 mobile operators worldwide

– For iPhone and iPod touch significant number of downloaded games with high conversion rate to premium

– Business Models: Channel sales via operatators and portals & direct sales such as through download platforms (for App Store: freemium model)

– Financials / Funding: funded by Neuhaus Partners and angel investors

– Take-away: Direct sales activities on platforms have higher gross margin with greater upside than through channel partners, they only recently peaked thanks to transaction model of the App Store

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Selected mobile apps in Social Networking

– Worldwide leading social network

– 180m active registered users, 220m unique users as of Dec 08 (thereof 20m via mobile platforms); Facebook for iPhone/Blackberry has 5.4m/3.7m active users per month

– Working on own mobile development kit for Facebook apps, recently introduced FacebookConnect for iPhone allowing third-party apps to integrate with Facebook‘s social network

– Business Model: Advertising

– Financials / Funding: USD 300m revenue (2008e) / funded with USD 516m by Greylock, AccelPartners, Microsoft, among others

– Take-away: Social networking on mobile will be dominated by Facebook (followed by MySpace), thus all major mobile operators are in cooperation discussions with Facebook

www.facebook.comUSA, Palo Alto (CA)

www.qeep.netDE, Cologne

– Mobile entertainment network with social networking features and multiplayer games (only as Java app), operating since 2007

– 1m registered users with high activity level (as of Feb 09)

– Business Models: Advertising and premium features (item-selling, skill-gaming)

– Financials / Funding: Advertising revenues since Dec 08/ funded by Bertelsmann (BDMI)

– Take-away: Most users are in emerging markets, such as South Africa, Indonesia or India, and as such offer only lower CPMs in advertising; hard to monetize through advertising solely

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Agenda





5. About b-to-v

p. 20

Considerations for investments in mobile apps

– Focus on social apps with an entertainment character (e.g. multiplayer games)

– Productivity apps are mostly an extension of existing web services, otherwise an online interface is mandatory

– Usage of phone's features (location targeting, accelerometer, camera etc.), especially for games

– Need to create viral features and a high stickiness in order to foster distribution and extend usage

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Discussions of mobile apps development in general

– Are mobile apps just extensions of existing web services?

– Which applications cannot be substituted by online ones accessible through the mobile web browser? (just games?)

– How scaleable are applications? Just one-trick ponies from garage developers

– What is the upside potential of mobile apps? Compare recent sales of mobile apps, e.g. MindMaker to MindMeister

– It is still difficult to find sustainable business models that scale. What are alternatives to mobile advertising? (subscription vs. transaction-based)

– What will be the future strategy of Mobile Network Operators (MNOs)? M&A of traffic-rich apps?

Specialization and portfolio of apps in this category needed for differentiation, critical mass and upside(e.g. in Gaming, Productivity or eCommerce)

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Agenda





5. About b-to-v

p. 23

b-to-v at a glance

– At the heart of what we do is the b-to-v Investorenkreis, an exclusive circle of

entrepreneurial investors from Europe

– b-to-v renders exclusive services to members of the b-to-v Investorenkreis, e.g. it

enables the confidential sharing of investment opportunities, supports the

processing and structuring of deals, and helps to manage and control

investments

– Admission to the b-to-v Investorenkreis is granted only to candidates who have

proven their business acumen, investment expertise, and personal integrity

– Our approach gives entrepreneurs the unique opportunity to discuss their

ventures and financing needs with senior entrepreneurs, benefit from their

experience, their networks, and receive funding from them

p. 24

Cornerstones of the b-to-v Investorenkreis

– The b-to-v Investorenkreis has 54 members

– Members come from various industry backgrounds (e.g. high tech, internet, telecom, clean tech), and have

– founded > 100 companies

– and have invested in > 1’000 deals

– sold > 300

– realized > 100 IPOs

– In sum, the members’ annual direct equity investments volume amounts to EUR 20-25m

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Co-Authors

Florian Schweitzer (Partner) co-founded b-to-v and built its network of private investors since 2000. He studied Business Administration at the University of St.Gallen.

Alexander Stoeckel (Investment Manger) holds an MBA from the University of Oxford. Prior to b-to-v, he worked as fund-of-fund manager and as executive management assistant.

Sven Eppert (Investment Manager) studied Business Administration at the Catholic University Eichstätt-Ingolstadtand the Warsaw School of Economics. Prior to b-to-v, he worked in asset management and in consulting.

p. 26

b-to-v overview

Dr. Jan Bomholt, Partner and co-founder

Dr. Christian Schütz, Partner

Florian Schweitzer, Partner and co-founder

Christoph Schweizer, Partner

Three IPOs (XING, Codfarmers, Fidor) and three trade sales (Cycleon, myBet, Plazes)Most recent Exits

Early stage, expansion stage, and later stage, as well as MBI and MBO projectsFinancing stages

Europe, USA and AsiaGeographical preferences

Opportunity drivenInvestment strategy

20Deals done p.a. (average)

1,500 business plansDeal flow p.a. (average)

8 investment professionalsCore personnel

54 members of the InvestorenkreisDedicated people

BrainsToVentures AGBlumenaustr. 36 / P.O. Box 142CH-9004 St. Gallen

T: +41 71 242 2000F: +41 71 242 [email protected]

Contact

Economy & Finance

Mobile Applications – Market Evaluation and Opportunities