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More Effort Needed to Develop Application Stores in China
SKU: IN0904397CWW Analyst: James Lei James.lei@instat.com.cn +1.8610.66422042 January 2010

Executive Summary
An application store is a service platform for a specific mobile device through which providers integrate the value chain and other resources to provide mobile applications to consumers via the Internet, Wi-Fi, and cellular networks. Application stores developed alongside Web 2.0 and began with Apple’s App Store. The store’s huge success has since attracted other players to the market. As of October 2009, the App store has earned over US$ 2.4 billion for Apple and the independent developers the store uses. Over 93,000 applications are currently available, and over 2 billion downloads were made. There are two kinds of application store depending on the type of platform provider used. . Handset and OS vendors: Currently, most top smartphone vendors have launched their own application stores. Examples include Nokia’s Ovi Store, RIM’s BlackBerry App World, Palm’s App Catalog, Google’s Android Market, Microsoft Windows Marketplace for Mobile (WMM), and Samsung’s Mobile Innovator. Mobile carriers: Examples include China Mobile’s Mobile Market, China Telecom’s AppMarket, and Shanghai Unicom’s Wo-Store

HIGHLIGHTS
Most smartphone and OS vendors are becoming involved in the application store market because of the huge success of the App Store. Most platform providers use the 30/70 revenue share model, under which the platform provider takes 30% and the developer 70%. Licensing, application localization, and payment systems will be the most crucial factors for platform providers in China. China Mobile’s Mobile Market will be one of the winners in China’s application store market because of its competitive payment system and strong developer ecosystem.

Regarding the huge potential of this market, China Mobile followed handset vendors and launched a self-developed application store, Mobile Market, in August 2009. Mobile Market is the first application The number of subscribers store created by a mobile operator. Unlike other application stores, and the revenue of this market which are dedicated to a specific device, Mobile Market functions like is estimated at 309 million and an online department store, providing services for all kinds of RMB 35.67 billion (US$ 5.10 devices. Currently, the store offers software, games, and related billion) respectively in 2013. content. China Mobile has also launched several franchised stores that serve over 500 million subscribers of companies including Nokia, Samsung, and Motorola. Another mobile carrier, China Telecom, launched the beta version of AppMarket co-developed by China Telecom and Huawei in September 2009 with plans to officially release AppMarket in December 2009. China Unicom has been developing its own application store, which Shanghai Unicom has launched as Wo-Store.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW The App Store business model has effectively created a new industry that allows third-party developers to share revenue with the platform provider. However, the success of an application store depends on many factors, including platform development and management capability, payment system and method, licensing, and application localization. Apple’s store uses a 30/70 revenue share model, with platform providers taking 30% of sales revenue and developers 70%. Nokia’s Ovi Store, Microsoft’s WMM, China Mobile’s Mobile Market, and China Telecom’s AppMarket also use this model. RIM’s BlackBerry App World uses a 20/80 model, with RIM taking 20% and developers 80%. China’s application store industry is currently in a state of rapid development. The booming smartphone market, huge efforts from mobile carriers, and other initiatives are driving the market forward. The number of subscribers and the revenue generated by this market is estimated at 52 million and RMB 9.36 billion (US$ 1.34 billion) respectively in the close of 2010. For non-local providers such as Apple, Nokia, and Google, however, licensing and application localization are the most crucial concerns in the Chinese market. This gives China Mobile, which is both a local provider and a mobile carrier, strong competitive advantages. In-Stat believes that China Mobile’s Mobile Market will ultimately be one of the winners in China’s application store market because of its competitive payment system and strong developer ecosystem.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW

Table of Contents
Executive Summary.................................................1 Definitions and Introduction .....................................4 Overview..................................................................5 What Generated the Application Store? .............5 Dynamics in China’s Application Store Market ...6 Application Store Value Chain in China...................8 Handset Vendors as Application Providers.......10 OS Vendors as Platform Providers ...................13 Mobile Carriers as Platform Providers ..............15 China Mobile’s Mobile Market.......................15 China Telecom’s AppMarket.........................18 China Unicom’s Wo-Store.............................20 Summary ...........................................................21 Business Model Analysis.......................................22 Drivers and Barriers...............................................23 Drivers ...............................................................23 Booming Smartphone Market .......................23 Huge Efforts from Mobile Carriers and Other Providers.............................................23 Abundant Third-Party Developers and Rich Applications ..........................................24 Barriers..............................................................24 License Barriers for Non-Local Providers .....24 Application Localization ................................24 Smartphone and Application Fees................24 Forecast for China’s Application Store Market ......25 Conclusion .............................................................27 Methodology ..........................................................29 List of Tables .........................................................30 List of Figures ........................................................30 Related In-Stat Reports .........................................31

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW

Definitions and Introduction
An application store is a one-stop service platform for a specific mobile device through which providers offer mobile applications, mobile value-added services (MVAS), and other digital products to consumers via the Internet, Wi-Fi, and cellular networks. A store allows users to browse and download applications that are mostly developed by third parties. Apple Computer pioneered the app store, and its success has attracted an increasing number of companies, including Google, Microsoft, RIM, Palm, Nokia, and China Mobile, to this market space. Strictly speaking, the application store is not a brand-new business model; an earlier version known as i-mode was created by NTT DoCoMo in 1999 and provided similar services to mobile users. China Mobile did the same thing with Monternet. However, the runaway success of Apple’s store has brought the application store increasing attention and is driving this market forward. As of October 2009, there were 93,000 applications available in the App Store, and over 1.5 billion downloads have been made in the past year. The store has also attracted over 100,000 third-party application developers.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW

Overview
As defined by In-Stat, an application store is a delivery platform for a specific mobile device that allows users to browse and download applications that are mostly developed by third parties. The basic features include cataloging content, providing virtual “storefronts,” delivery of applications, e-commerce and transaction processing, and reporting.

Origins of Application Stores
The application store model took off following the launch of Apple’s App Store in July 2008. Initially, the store offered 500 third-party applications for the iPhone and the iPod touch, 125 of them for free. In its first month the store had 60 million downloads. As of October 28, 2009, Apple had 93,000 applications available to over 50 million users, including iPhone users and iPod touch users, with over 2 billion downloads. Over 100,000 applications are in the process of verification prior to availability for sale. In short, the store has been a huge success. It is estimated that Apple’s App Store earned about US$2.4 billion per year for Apple and its developers. Another statistics shows that an average of 10.2 and 18.4 applications per month are downloaded by iPhone users and iPod touch users respectively. The application store model has also had a marked impact on all players in the value chain. The App Store has, in fact, become a crucial element of the iPhone’s appeal along with its attractive user interface and a mostly positive user experience. It has also been a boost for smartphone sales as a whole, especially as more iPhone “killers” enter the market. Nokia, Google, Microsoft, RIM, China Mobile, China Telecom, and other companies have followed Apple’s lead and launched their own application stores. Figure 1 shows a timeline of the development of the application store market.
Figure 1. Development History of the Application Store
-Palm released App Catalog in August 2009 -Microsoft announced Windows Marketplace for Mobile in October 2009 2009 2009 2009

-Nokia released Ovi in August 2007 2007 2008

-Google released Android Market in September 2008 2008

-Apple released App Store in August 2008

-Samsung released Samsung Mobile Application Store in Feb 2009 -RIM released BlackBerry App World in April 2009 -LG released LG Application Store in July 2009

-CMCC released Mobile Market in August 2009 -CTC released AppMarket in August 2009 -Shanghai Unicom released Wo-Store in August 2009

Source: In-Stat, 10/09

What Generated the Application Store?
The application store developed alongside Web 2.0 and mobile Web 2.0. In addition, Internet use in China has become very popular and is showing a strong trend towards mobile devices. Most popular

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW Internet applications and services, such as portals, search, instant messaging (IM), games, and advertisements, are now available on mobile devices and offer a user experience comparable to that of PC-based Internet. Mobile devices have been steadily expanding their functionality, moving from basic communications to manipulation, entertainment, and communication-integrated functionality capable of supporting complex applications. Improved mobile bandwidth is also enhancing user experience. Consumers are increasingly enthusiastic about managing their affairs and enjoying their lives using mobile devices, and application stores definitely meets this need. The App Store model has generated a new industry and business model that allows third-party developers to share revenue with platform providers regardless of their size. Traditionally, only large or mid-size developers have enjoyed any bargaining power in its partner relationships, but the App Store provides a mobile platform that is available to all. Third parties develop their applications using the iPhone’s software development kit (SDK) and publish them directly to the store after they receive approval from Apple. As mentioned, other developers have launched their own stores. Nokia’s Ovi store, which launched in May 2009, supports about 50 Symbian-based phones, including S60- and S40-based mobile devices; Ovi uses the same revenue share model as the App Store. Palm also released an App Catalog for the Palm Pre device on June 6, 2009. Another application store, Android Market, is used in conjunction with OHA’s (Open Handset Alliance) Android operating system. In addition, Microsoft has announced Windows Marketplace for Mobile, an application store for their Windows Mobile platform. Overall about 10 companies have launched application stores, and we can expect this booming market to continue to grow in the coming years.

Dynamics in China’s Application Store Market
China’s smartphone market has seen strong growth through the year 2008 to 23.6 million units shipment, up 30% from that of last year. China’s share in total mobile phone shipments grew from 12% to 15.3%. The below figure shows the shipment forecast of China’s smartphone market from 2009 to 2013. The expectation of continuous growth of China’s smartphone market will drive smartphone vendors to develop their application stores in China. Google’s Android Market, Nokia’s Ovi Store, and Microsoft’s WMM provide this kind of service for Chinese users. In addition to these international smartphone vendors, China Mobile—China’s biggest mobile operator with over 500 million subscribers—launched its own application store, Mobile Market, in August 2009 and provided a variety of applications on www.mmarket.com. As of October 2009, there are about 2,000 applications available and over 4 million downloads, and over 230 thousand subscribers in the China Mobile Developer Network. Currently, consumers can download software, games, and related content for free on China Mobile’s Mobile Market. China Mobile is expected to begin charging the subscribers for application downloads after November 1, 2009. China Mobile predicts that the revenue of Mobile Market will reach RMB 50 million (US$ 7.14 million) by the end of 2009.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW In September 2009, a few weeks following the release of China Mobile’s Mobile Market, China Telecom launched the beta version of AppMarket, codeveloped by China Telecom and Huawei. Currently AppMarket is under the management of Sichuan Telecom and provides over 500 applications. Although the release date of China Unicom’s self-developed application store is still undisclosed, several provincial companies have developed the platform and Shanghai Unicom launched Wo-Store.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW

Application Store Value Chain in China
The application store model has fundamentally changed the rules of the game for the mobile industry by combining an intuitive user interface with clever, entertaining, and useful applications. The value chain for the application store generally includes platform provider, handset vendor, OS vendors, mobile carrier, third-party developers, and other players. The platform provider value chain can be broken into two categories. Handset and OS vendors: Platform provider provides handset and OS: Apple’s App Store, Nokia’s Ovi Store, RIM’s BlackBerry App World, Palm’s App Catalog Platform provider provides OS only: Google’s Android Market, Microsoft’s Windows Marketplace for Mobile (WMM)—both have operated in the China market Platform provider provides handset only: Samsung’s Mobile Innovator, LG’s LG Application Store, Coolpad, located in Shenzhen, China launched Coolmart, and Meizu, a local handset vendor, will launch its own application store soon Mobile carriers: China Mobile’s Mobile Market, China Telecom’s AppMarket, and Shanghai Unicom’s Wo-Store. Players involved in the application store value chain include application store providers, third-party developers, application store platforms, marketing channels, and end-users. Together they provide a one-stop platform for consumers. Application store providers: Handset vendors, OS vendors, and mobile carriers can all provide an application platform. The core business is software as a service (SaaS) and provides a one-stop e-commerce platform based on mobile digital products.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW
Figure 2. Application Store Value Chain
End User Application and Service Marketing Channel Payment System Handset Data Pipe

Application Store Platform

Handset Vendor

Mobile Carrier

Application Store Provider

Third-Party Developer

Other Players Source: In-Stat, 10/09

Application store platforms: The essential goal of an application store is to provide a transaction platform that allows consumers to purchase a range of digital products. Transaction models include B2B, B2C, and C2C; at present B2C appears to be the most successful. In order to create value for the entire ecosystem, a platform must integrate partners and resources to improve its operational and marketing capability. It must also provide an easy-to-use payment system and a range of payment options to execute transactions and improve user experience. Third-party developers: These are responsible for developing applications and publishing them on the platform. Generally speaking, the more developers a platform has, the greater its competitive advantage. Handset vendors: As mentioned above, the app store model is based on providing services to specific mobile devices; handset vendors provide these devices. Most mobile devices currently being produced are smartphones that support application download and installation. Marketing channels: Consumers can purchase digital products via several channels, including WEB, WAP, handset client, SMS, IVR, and handset retailer. Currently, the Internet is the most popular marketing channel because of its low cost. The development of the application store has, in short, expanded consumer choice. Products and services: Application store products include the following: Handset applications: Handset software, mobile offline games, themes, music, photos, and videos Online applications: Mobile online games, social networks, online video, online commerce The chart below shows the number of applications offered by several application stores. Obviously, Apple’s App Store has the most applications, and although China Mobile and China Telecom have far fewer applications, we predict that their offerings will increase significantly in the coming years.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW
Figure 3. Number of Applications Offered as of October 2009, by Vendor
Apple's App Store Google's Android Market BlackBerry's App World China Mobile's Mobile Market Nokia's Ovi Store China Telecom's AppMarket Palm's App Catalog Microsoft's Windows Mobile Marketplace
Source: In-Stat, 10/09

93,000 11,763 3,040 2,231 660 580 350 246 0 20,000 40,000 60,000 80,000 100,000

Handset Vendors as Application Providers
As mentioned above, most app store applications are designed for specific mobile devices. Under this model, handset vendors, generally smartphone vendors, play the role of application store provider by giving third-party developers an SDK that allows them to develop device-specific applications. For example, Apple released the SDK for the iPhone OS on March 6, 2008 and currently offers two options for third-party developers: the standard program and the enterprise program. Applications developed through the standard program are sold exclusively through the iTunes Store for Mac and Windows or on the App Store for the iPhone and iPod Touch. Applications developed using the enterprise program are exclusively for institutional use and allow large corporations and government agencies to develop proprietary applications not intended for public release. Nokia’s Ovi Store is an application platform for S60- and S40-based mobile devices. Nokia presented the concept of Ovi in August, 2007 at the Go Play event in London and launched the store in May 2009. Unlike the App Store, Ovi initially only provided services to consumers in selected European countries. In October 2009, Nokia started to operate Ovi in the China market. Third-party developers face greater challenges in developing applications for Nokia phones than for the iPhone. Nokia has several development platforms: the Series 40, which uses a proprietary Nokia OS with a J2ME application framework; the Series 60, which is powered by Symbian OS and also supports J2ME; and Maemo, which is Linux-based. These platforms developed in parallel but are targeted at different market segments. Ovi Store applications can be used on both S60 and Series 40 devices. For each of these platforms, however, there are several SDKs, which means that developers must port from one platform to another when developing applications, making the process both laborious and time-consuming.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW In addition to providing an SDK to developers, handset vendors must provide a consumer billing system and provide for splitting revenue with developers. An efficient and user-friendly billing system will offer a competitive advantage when the application store market becomes mature and multiple providers are offering competing products. In this respect, the App Store has a distinct advantage over other handset vendors. There are over 65 millions active accounts on iTunes, and it was relatively straightforward for Apple to configure these accounts for use in the App Store. In addition, consumers can use either a credit card or a PayPal account to buy desired applications. Currently, the Ovi Store has over one thousand applications, most of them free, and provides two kinds of payment method to consumers: a credit card and a mobile carrier-bundled account. Although Nokia released Ovi in 2007, earlier than the App Store, and provides games, music, videos, location-based services, and other applications, at present it has fewer customers. Nokia has also released client software for S60-based mobile devices that can be found in the “My Assistance” menu on the Ovi Store and includes “Recommended,” “Applications,” “Games,” “Audio&Video,” and “Personalization” channels. Consumers must open an Ovi account in order to make downloads. Nokia’s Ovi Store started operation in China in October 2009 offering games, music, videos, tools, and other applications. Third-party developers also play a crucial role in the value chain by providing content and applications for consumers. One of the reasons behind the success of the App Store is Apple’s creating an entire ecosystem to support, develop, and provision applications both online and at the device level, including discovery, and thereby attracting a huge number of application developers. The App Store currently has an estimated 100,000 developers; regardless of size, each pays a US$99 fee to use the iPhone SDK and upload applications, and receives 70% of sales revenue. Developers are not required to pay any distribution costs for their applications. All these factors have made the App Store by far the most successful in the market space, and the number of applications has grown from the initial 500 to over 93,000 and growing. The most popular categories are games, entertainment, books, and travel. Interestingly, only about 20% of app store subscribers have actually downloaded content or applications, although market research suggests that most subscribers will eventually do so. Clearly, there is huge potential, but there are a lot of intricate dynamics at play as the market emerges. Let’s take the App Store as an example to analyze the application structure. Games, entertainment, books, and travel take 16%, 13%, 7%, and 7% respectively.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW
Figure 4.
15%

Application Statistics for Apple’s App Store
16% Games Entertainment Books

2% 2% 2% 2% 2% 2% 3% 4% 13% 13%

Travel Education Utilities Lifestyle Reference Music Sports Navigation Productivity Business Health & Fit News 6% 6% 7% Others

5%

Source: 148apps, In-Stat, 11/09

Leading handset vendors have begun to launch application stores in the wake of the App Store’s huge success. For example, LG announced that it will launch LG Application Store in 2009 and provided over 1,400 applications supporting 15 languages, and over 100 apps will be free. According to its plan, LG will begin by providing service for Singapore, Malaysia, Australia, and other Asia/Pacific countries, and then cover Europe and South America by the end of 2009. Meizu, a local handset vendor producing iPhone-like smartphones, announced in October 2009 that it will launch its own application store to promote the sales of M8. However, traditional handset vendors face an uphill struggle in adapting their business models to the new market circumstances. Firstly, most handset vendors play only a single role in the value chain, usually providing handsets to consumers. They lack experience in developing and managing thirdparty developers. Secondly, most vendors have no proprietary operating system but must embed their handsets with one or more operating systems, such as Symbian, Windows Mobile, or Mobile Linux. Thirdly, most are hardware providers, not software providers, and consumers purchase their products not for their software but because they offer style, competitive price, or brand recognition. Finally, most handset vendors have no customer accounts; consumers are required to open an account before making any purchases.

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OS Vendors as Platform Providers
Google became the first OS vendor to operate as an application store provider with the launch of Android Market, a software application the company developed for Android-based mobile devices. As with the App Store, the software allows users to browse and download applications published by thirdparty developers. Currently, however, there are a number of competing operating systems for mobile devices. Symbian still dominates the market, although its roughly 43% market share in 2008 represented a decrease of more than 15% over the previous year. Symbian is followed by Mobile Linux and Windows Mobile. Android is a newcomer, but has huge potential. The Symbian Foundation developed Symbian OS for advanced 2.5G and 3G mobile phones and licenses it to handset vendors. User interface layers, including Nokia’s Series 60 and Series 80, UIQ’s UIQ Technology, and MOAP’s NTT DoCoMo, are provided by third parties. In December 2008, Nokia acquired the remainder of Symbian and the company became privately-owned. Windows Mobile is a compact operating system combined with a suite of basic applications for mobile devices. It has been updated multiple times, and the current version is Windows Mobile 6.5. Windows Mobile 7 is expected to release in late 2009. Android is a software platform for mobile devices running on the Linux operating system. It was initially developed by Google and later by the Open Handset Alliance. Despite Android’s short development time, by May 2009 it had taken about 5% of the North American market. Most of the main OS providers have launched application stores: Nokia’s Ovi Store, Palm’s App Store, Microsoft’s Windows Marketplace for Mobile (WMM), and Google’s Android Market. In addition to providing handsets for consumers, in this model the OS provider plays a role similar to that of the handset vendor in the previous business model, that is, it provides an SDK for third-party developers and a billing system for developers and users. Google announced the launch of Android Market in August 2008 and made it available to users in October 2008. Initially, the service offered only a few dozen applications, all of them free; paid applications were added for US users in March 2009. Android’s SDK includes multiple Android platform versions, including Android 1.5 and Android 1.1. Unlike the App Store, however, only developers in a few countries can currently develop and publish applications, Google is working to extend coverage worldwide. The application store uses a typical “open application + closed handset” business model. “Open application” means that third-party developers can freely develop and publish applications. “Closed handset” means that applications are designed for a specific device. In order to drive Android Market, Google is encouraging handset vendors to use Android in their handsets and even in PCs and netbooks by offering three ways of cooperating. In the first model, the handset vendor is permitted to embed Android in its smartphones for free but is not permitted to embed other Google applications such as Gmail or Google Calendar; in the second, vendors embed Google applications and sign a distribution agreement with Google; in the third, Google applications are embedded in handsets if mobile carriers and handset vendors undertake not to remove them.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW A number of handset vendors, including HTC, Huawei, Acer, Toshiba, and Samsung, are already developing Android-based smartphones, and the market share of Android-based mobile devices is sure to grow rapidly in the coming years.
Figure 5. Handsets Based on Android by Huawei and HTC
HTC Dream Based on Android

Huawei Handset Based on Android

Source: Huawei, HTC, In-Stat, 8/09

Source: In-Stat, 8/09

Google has also developed a billing system known as Google Checkout. Developers of paid applications receive 70% of the application price, with the remaining 30% going to carriers. Revenue is paid to developers via Google Checkout’s merchant accounts. We are concerned, however, that Google Checkout does not as yet have a substantial number of these accounts. Google’s biggest concern with Android Market is how to drive its development as quickly as possible. Google is an OS provider, not a designer or a handset manufacturer, and must therefore sell all Android-based handsets in cooperation with mobile carriers and handset vendors. Driving Android therefore involves building partnerships with as many of these as possible. To do so, Google is leveraging its competitive advantage in Internet service. Microsoft announced Windows Marketplace for Mobile at the 2009 Mobile World Congress and made it available to third-party developers in May 2009. Full release is expected in November 2009. Windows Marketplace for Mobile is an application store for the Windows Mobile platform that allows consumers to browse and download third-party applications. Applications are available on Windows Mobile 6.5 devices and on PCs. To develop and publish applications on Windows Mobile 6.5-based devices, third-party developers must create a Windows Live ID, submit tax identification and bank account numbers, and pay an annual registration fee of US$99. In addition, the annual registration fee allows developers to submit a maximum of five submissions per year. However, fees are waived for student developers enrolled in Microsoft’s DreamSpark program. Applications submitted for publishing on Marketplace for Mobile are subject to a more rigorous approval process than Apple uses. The following types of application are prohibited: VoIP apps that use a carrier’s data, which means Wi-Fi applications such as Skype are unavailable Apps that replace or modify the default dialer, SMS, or MMS apps

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW Apps that change the device’s default browser, search client, or media player; consumers can only use IE, Bing, and Windows MediaPlayer to browse, search, and play Apps with an OTA download of over 10MB Microsoft, of course, provides many of these applications itself and its tough approval standards are likely intended to protect these applications. With the release of Windows Mobile 6.5 in October 2009 and over 10 kinds of Windows Mobile 6.5-based handsets launched, Microsoft accelerated the progress of WMM in the China market. WMM is embedded in Windows Mobile 6.5 and provides applications for users.

Mobile Carriers as Platform Providers
Different from overseas markets, China mobile carriers have a dominant position in the telecom and mobile value-added service (MVAS) industry. Driven by the huge success of Apple’s App Store, China Mobile, China Telecom, and China Unicom have launched their self-developed application stores for enhancing the bargaining power in the value chain. In the previous two value chains, the mobile carrier plays a “bit-pipe” role for data transmission. As the mobile Internet has grown, however, mobile carriers have increasingly focused on data service. China Mobile, China Telecom, and China Unicom have launched their own application stores: China Mobile’s Mobile Market, China Telecom’s AppMarket, and Shanghai Unicom’s (a subsidiary of China Unicom) Wo-Store. Mobile carriers have an advantage—a billing infrastructure already in place and a direct relationship with their customers. They are also the only industry players that can manage the entire customer lifecycle, including acquisition of devices, acquisition of services, payments, removal of services, and migration to new devices. As such, they are theoretically in a perfect position to establish application stores and deliver applications.

China Mobile’s Mobile Market
In 2001, China Mobile launched Monternet, a service similar to the App Store. Monternet is an application platform that allows both service providers and content providers to develop and publish applications and allows consumers to browse and download them. The mobile carrier shares revenue with both kinds of providers, and this model has driven fast growth in mobile value-added services (MVAS). By the end of 2008, the percentage of data ARPU in subscriber ARPU exceeded 25%.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW
Table 1. Monternet and Mobile Market Comparison

Mobile Market Vision Build a cooperative, win-win, and innovative environment Value Chain Mobile operator + application provider + handset vendor Evaluation System Ranking and recommendation by Customer evaluation and relevant mobile operator recommendation Billing First charge, then experience First experience, then charge Product Service provider in charge of operation Mobile operator in charge of operation Pricing Pricing mainly by mobile operator Pricing mainly by application provider
Source: In-Stat,10/09

Monternet Build an open, just, and fair environment Mobile operator + service provider

China Mobile launched Mobile Market on July 3, 2009 and provided various services on www.mmarket.com. The site has three areas: a free area, a mobile area, and an exclusive agency that provides software, games, and themes. Consumers also have access to applications based on various handsets and can download applications via PC or mobile phone. In August 2009, China Mobile officially released its self-developed application store and provided handset client software for it. One of the store’s innovations is that it has developed many third-party distribution channels to agents and sales applications. In addition to classifying by application type, Mobile Market offers device-specified applications, including those for Ophone, Nokia series, Samsung, Sony Ericsson, Motorola, LG, Lenovo, Dopod, and Dell. This strategy will drive Mobile Market forward dramatically in the coming years.
Figure 6. China Mobile’s “Mobile Market”

Source: Mmarket, 10/09

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW Mobile Market is being developed by Guangdong Mobile and ASPire Holdings, a joint venture company owned by China Mobile, HP, Vodafone, and other investors, and will integrate many applications from Monternet. Mobile Market’s applications business will be operated by several branches of China Mobile. Guangdong Mobile is responsible for mobile games and mobile email, Liaoling Mobile for location-based services, Hunan Mobile for mobile payment, Sichuan Mobile for mobile music, Zhejiang Mobile for mobile reading, and Shanghai Mobile for mobile TV. Currently, Mobile Market has officially been in operation for three months, and 2,231 applications have been made available to consumers. Consumers download and install the client software and can browse and download any applications they are interested in. The following are statistics about Mobile Market. Of 2,231 applications, games, software, and themes take 29.6%, 55,8% and 14.5% respectively 60.1% of applications are currently free Most applications are priced at RMB 1–15 (US$ 0.14–2.14), the average price range of the most popular games and software are RMB 10–12 (US$ 1.43–1.71), 3–5 (US$ 0.43–0.71) respectively, and all themes free As of September 8, 2009 since the official release in August 17, 2009, there are over 100,000 subscribers and over 200,000 download are made, which means 2 downloads per subscriber—much lower than Apple’s 18.2 downloads per subscriber for its App Store. We have no information about the revenue Mobile Market created for China Mobile and third-party developers; we predict, however, little revenue is generated because of China Mobile’s free strategy in the beginning. China Mobile’s plans for Mobile Market call for 20 million subscribers, 100 million downloads, and 20,000 applications and China Mobile predicts that Mobile Market’s annual revenue is expected to reach US$800–900 million by the end of 2010. Third-party developers will be responsible for developing and publishing applications. Under the company’s latest revenue-share model, developers set any price they choose and receive 70% of sales revenue. Unlike other application stores, Mobile Market plans to use diversified pricing models, adding monthly fee and item-billing options to the current pay-per-usage model. China Mobile is also using the “first experience, then pay” method to encourage consumers to evaluate and recommend applications, and has waived data traffic fees during downloads and for use of Mobile Market client software, including for browsing, playing, downloading, and recommendations. To improve the promotion of its Mobile Market, China Mobile provides a developer zone, called China Mobile Developer Network (CMDN), on which third-party developers can register, publish, and view their applications. As always, China Mobile will provide a billing system for service providers (SP), content providers (CP), and consumers, a crucial consideration because of low credit card penetration among Chinese consumers and their resulting lack of experience with e-payment. To leverage its competitive advantage in the value chain, China Mobile has also developed a proprietary OS, the Open Mobile System (OMS), and an Ophone handset. The OMS was developed by China Mobile and Borqs Beijing Ltd. and is a mobile Android-based OS that supports TD-SCDMA networks. The O1, an Ophone developed by Lenovo, was released in Beijing on September 16, 2009. In addition to Lenovo, other handset vendors, including Dopod, CECT-Philips, Dell, LG, and Hisense,

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW also joined the Ophone camp and will release Ophone in the near future. As a kind of customer handset, many 3G-based mobile applications are embedded in Ophones, including mobile IM (Fetion), mobile paper (news), mobile search, and mobile security. This will promote 3G development and improve awareness and acceptance of 3G services.
Figure 7. China Mobile’s Ophone by Lenovo

Source: Lenovo, In-Stat, 8/09

Source: In-Stat, 8/09

China Telecom’s AppMarket
After China Mobile’s Mobile Market, China Telecom and China Unicom followed China Mobile to launch their own application stores. With the release of the beta version of AppMarket on September 1, 2009, China Telecom entered the application store market. AppMarket is developed by Sichuan Telecom, subsidiary of China Telecom, and Huawei, and currently is managed by Sichuan Telecom. Frankly speaking, AppMarket provides similar services to Mobile Market and provides the same revenue-share model. The difference is AppMarket targets nearly 40 million users, which is far fewer than China Mobile’s over 500 million users.

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Figure 8. China Telecom’s AppMarket

Source: AppMarket, 10/09

According to In-Stat’s statistics, 580 applications are available on AppMarket, 79.1% (459) of which are free—higher than the 60.1% free apps of Mobile Market. Most applications are priced at RMB 1–12 (US$ 0.14–$0.71) on AppMarket. In addition, China Telecom cooperates with several IT companies, such as Baidu, UCWEB, 3G portal, to sell applications. Although there are no statistics announced listing the amount of subscribers and downloads, In-Stat predicts AppMarket has far fewer subscribers and downloads than Mobile Market because of the shorter operation period and fewer mobile users. Compared to three application categories of Mobile Market, games, software, and themes, AppMarket provides complex offerings under the headings of games, themes, software, entertainment, life, communications, reading, travel, commerce, education, finance, and tools. Among these categories, games and entertainment take the bigger share. A distinctive character on AppMarket is that applications are classified by device type, PC or handset, which means that AppMarket is just not for mobile devices, it also provides applications for PC users. By far, there are about 58 applications for PC users and all free. The latest news shows that AppMarket will officially be launched on December 1, 2009, and China Telecom predicts that the amount of subscribers of AppMarket will reach 14 million in 2010 and over 70 million in five years. After the official release, AppMarket will support more pricing methods, including per download, per month, and per item.

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China Unicom’s Wo-Store
Prior to October 2009, China Unicom hadn’t positioned itself as though it regarded the application store as an important strategic business, and had kept a low profile. After the National Day of China, China Unicom presented a big vote of confidence in the market by cooperating with Apple and promoting the iPhone. Officials from China Unicom said that China Unicom will develop a self-developed application store but won’t launch in the near future. Currently, several provincial companies have been establishing application store platforms, and Shanghai Unicom, a subsidiary of China Unicom, makes a trial to operate its application store, Wo-Store; the prefix was derived from the 3G brand of China Unicom, WO. From the website, www.wo-store.net, we found that it focuses on the introduction and promotion to 3G business and we don’t think it is a site dedicated for an application store.
Figure 9. Shanghai Unicom’s Wo-Store

Source: Wo-Store,10/09

One of the barriers causing China Unicom to lag behind China Mobile and China Telecom in the progress of a self-developed application store is that China Unicom had hoped to manage the operation of Apple’s App Store in China. The latest news indicates that Apple will operate its own business in the China market and has established cooperation with local third-party payment providers to solve the payment issue. China Unicom officially started selling iPhones in the China market in late October 2009, and those iPhone users will download applications through Apple’s App Store. China Unicom’s application store will not include any applications exclusively designed for the iPhone. China Unicom is preparing to challenge China Mobile with a new OS, Uniplus, and a new handset, the Uphone. Developing branded mobile operating systems and customer handsets is undoubtedly of

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW value in improving brand awareness and loyalty, but it is not realistic to rely too heavily on device standardization. China’s three mobile carriers together have over 700 million subscribers using a huge variety of mobile devices, operating systems, and SDKs, and in this environment it is difficult for individual devices to stand out. The one exception to this rule is Apple’s high-profile iPhone.

Summary
As discussed above, there are three kinds of application stores: handset vendors as application providers, OS vendors as platform providers, and mobile carriers as platform providers. Several overseas application store providers have entered the China market, including Apple’s App Store, Nokia’s Ovi Store, Google’s Android Market, and Microsoft’s WMM. With China Mobile’s Mobile Market and China Telecom’s AppMarket, there are six providers that have entered China’s app store market. The table below lists the details.
Table 2.
App Store Ovi Store Android Market WMM Mobile Market AppMarket Founder Apple Nokia Google Microsoft China Mobile China Telecom

Comparison of Six Application Stores in China
OS Supporting Mac OS Symbian Android Windows Mobile 6.5 Almost all kinds of OS, including Symbian, Android, OMS, Windows Mobile Almost all kinds of OS, including Symbian, Android, OMS, Windows Mobile, Win CE, also support Java, BREW Development Status Over 93,000 applications, and fewer applications for China market Hundreds of applications Hundreds of applications Fewer applications Over 2,000 applications Over 500 applications

Source: In-Stat,10/09

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Business Model Analysis
Platform providers function as both application platform and billing system provider. Consumers browse applications and purchase them using one of several options, such as credit card, PayPal, or the mobile carrier’s billing system. Generally speaking, platform providers and third-party developers use the 30/70 revenue-share model. Apple, Nokia, Microsoft, and China Mobile all do so. RIM’s BlackBerry App World uses the 20/80 model, under which RIM takes only 20% and gives the rest to developers.
Figure 10. Application Store Business Model
End User End User

100% revenue Retailer Retailer Mobile Carrier Mobile Carrier Mobile Carrier Mobile Carrier 0-30% revenue

Handset Handset

Application Store Provider Application Store Provider 70-80% revenue 3rd-Party Developer 3rd-Party Developer Source: In-Stat, 8/09

Google’s Android Market also uses the 30/70 model, but it divides its 30% share with mobile carriers, after expenses. This should actively encourage mobile carriers to promote the service. Although China Telecom also offers the 30/70 model, China Telecom affords more flexible cooperation methods with third-party developers to promote its AppMarket. Third-party developers can be broken into four categories: application-developed, application-cooperated, channel-cooperated, and operation-cooperated. Application-developed: generally, most third-party developers belong to this category. Third-party developers develop and publish applications on AppMarket and get 70% of the sales revenue. Application-cooperated: China Telecom outsources application development and pays a development fee to a third-party developer. The ownership of the outsourced application belongs to China Telecom. Channel-cooperated and operation-cooperated: remuneration depends on the cooperation level between China Telecom and third-party developers.

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Drivers and Barriers
Drivers
Booming Smartphone Market
Smartphones are an increasingly important part of the handset market, and the emergence of devices with increased functionality and computing power is allowing more consumers to access application stores and use their applications. According to In-Stat forecasts, by 2013 smartphone shipments in China will reach 73.6 million and will represent 31.5% of total handset shipments, up from 19.3% this year.
Figure 11. China’s Smartphone Market Shipment Forecasts, 2009–2013 (in Millions)
80 70 60 Units in Millions 50 40 29.7 30 20 10 0 2009 2010 2011 2012 Growth Rate 2013 Smartphone Shipments Source: In-Stat, 8/09 5% 0% 10% 37.8 48.3 25.7% 27.3% 27.8% 25.3% 60.5 21.7% 25% 20% 15% 73.6 30%

Huge Efforts from Mobile Carriers and Other Providers
Providers are aware of the importance of application stores and are becoming increasingly engaged in this market. On the one hand, they are working to improve their platform operation and management capability in order to increase customer stickiness and loyalty; on the other, they are using more attractive business and revenue share models to enlarge and refine the whole ecosystem. Apple entered into an agreement with China Unicom in August 2009 under which it will attempt to enter China’s handset market using operator-customized iPhones. Apple has not said whether its iPhones in China will embed the App Store, but the company has definite plans to introduce the store to the Chinese market. Nokia’s Ovi Store, Google’s Android Market, and other application stores also regard China as an important market. All of these initiatives will drive market evolution.

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Abundant Third-Party Developers and Rich Applications
Although application store providers place some restrictions on developers, the current revenue-share model is attracting huge number of them to the market, and the result is a fantastic array of applications that are available to consumers. As mentioned above, China Mobile’s plans call for 20,000 applications and 100 million downloads by the end of 2010, and this huge market opportunity is expected to attract over 200,000 developers.

Barriers
License Barriers for Non-Local Providers
Licensing is one of the biggest challenges for non-local providers. Would-be entrants must set up a joint venture with a local company in order to develop and operate an application store in China. Nokia, Apple, Samsung, and other handset vendors are working closely with Chinese operators, but they lack operational experience in China’s mobile value-added services market and it is crucial that they choose a partner wisely.

Application Localization
Currently, applications in the App Store and other application stores are not widely available in the Chinese language. Third-party developers need to port code from one handset to another, which increases development time and costs in this market. Pirating, which is very popular with Chinese consumers, is another big barrier.

Smartphone and Application Fees
Currently, the average price of a smartphone is about RMB 2500 (US$ 357), which puts it out of the reach of many consumers. Consumers, however, have no option but to buy a new phone if they wish to access and use an application store. Many are also concerned about high traffic fees and application costs. Mobile carriers currently offer a few competitive data packages, but high traffic fees continue to hamper market development. Additionally, Chinese customers are accustomed to free service, and getting them to accept paid service will not be easy.

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Forecast for China’s Application Store Market
Currently, the number of China’s mobile subscribers reached over 720 million with a 53% of penetration rate. In-Stat predicts the number will continue to increase and reach 1,104 million in 2013. China Mobile takes 71.6% and still is the biggest mobile operator in China. The table below shows our forecast from 2009 to 2013.
Table 3. China’s Mobile Subscribers Forecast, 2009–2013 (in Millions)
2009 525 53 146 723 2010 6 03 70 1 59 8 32 2011 669 86 172 926 2012 734 101 186 1,021 2013 790 114 199 1,104

Total Mobile Subscribers (in Millions) China Mobile China Telecom China Unicom Total Chinese Subscribers
Source: In-Stat, 11/09

China Mobile and China Telecom have officially launched their own application stores in 2009, China Unicom is expected to launch its application store in early 2010, also, Google, Nokia, Apple, and Microsoft started to operate their application stores in China. Based on the prediction of the penetration rate of app stores subscribers in total mobile subscribers, In-Stat gives the forecast of the number of app stores subscribers. From the table below, we see that the penetration rate of app stores subscribers in total mobile subscribers is estimated at about 30% with 309 million.
Table 4. China’s App Stores Subscribers Forecast, 2009–2013 (in Millions)
2009 3 2 0 1 6 2010 20 11 8 2 41 2011 65 20 18 4 106 2012 112 32 35 5 184 2013 188 48 66 7 309

Total Apps Stores Subscribers (in Millions) China Mobile China Telecom China Unicom Others Total
Source: In-Stat, 11/09

Also, In-Stat presents a prediction of annual downloads. With the prevalence of pirating and the lower income level of China’s mobile subscribers, downloads per subscriber is far lower than that of Apple’s App Store. Annual downloads per subscriber per month in China App Stores market is estimated at 7 times.

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Table 5. China’s App Stores Annual Downloads Forecast, 2009–2013 (in Millions)
2009 90 60 0 15 165 2010 7 20 3 96 2 88 72 1,4 76 2011 3,120 1,170 864 210 5,364 2012 8,064 3,072 2,940 499 14,575 2013 13,536 4,608 5,544 672 24,360

Annual Downloads (in Millions) China Mobile China Telecom China Unicom Others Total
Source: In-Stat, 11/09

Finally, In-Stat presents a revenue forecast in 2009–2013. The revenue for 2009 will reach RMB 307 million (US$ 43.86 million) and rapidly grow to RMB 35.67 billion (US$ 5.10 billion) in 2013.
Table 6. China’s App Stores Revenue Forecast, 2009–2013 (US$ in Millions)
2009 $31 $9 $4 $44 2010 $195 $76 $45 $20 $337 2011 $749 $221 $156 $61 $1,186 2012 $1,802 $618 $547 $145 $3,112 2013 $2,959 $927 $1,014 $196 $5,095

Total Revenue (US$ Millions) China Mobile China Telecom China Unicom Others Total
Source: In-Stat, 11/09

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Conclusion
The success of Apple’s App Store is a phenomenon that will be hard for other providers to match. The reasons for Apple’s success are as follows: A huge user base: Apple has over 60 million iPod, iPhone, and iTouch users, and attracting these customers to Apple’s other services has been fairly straightforward. Customer loyalty: Apple’s customers are generally willing to use Apple-branded services even if to a limited extent. Development capability: A successful application store needs a professional development team and rich experience. Apple has used its abilities in these areas to provide third-party developers with convenient and flexible access to the App Store and its software development tools. Payment environment: Apple’s iTunes store has 65 million accounts, and these consumers can seamlessly transfer to making App Store purchases. Variety of applications: As of October, the store had 93,000 applications and is adding 100 new ones every day; consumers can easily search for, download, and install any applications they are interested in. The success of an app store depends on many additional factors, including platform development capability, payment system and payment method, licensing, and application localization. The table below demonstrates the strengths and weaknesses of China’s main application stores with respect to these issues. The most crucial challenges for non-local operators are licensing, application localization, and payment method. Operators must apply for a service provider license to operate in China because of government policy regarding mobile value-added services.
Table 7. Application Store Comparison, by Suitability for Chinese Market
OS Entry Barrier for 3rd-Party Developer Low Low Low Medium Medium Medium Ecosystem Overall Rating High Medium Medium Medium High Medium

Payment Platform Application System and License User Base Development Localization Payment Capability Method Apple’s App Store Nokia’s Ovi Store Google’s Android Market Microsoft’s WMM China Mobile’s Mobile Market China Telecom's AppMarket
Source: In-Stat,10/09

High High High High Medium Medium

High Low Medium Low High High

High Medium High Medium Medium Low

Low Low Low Medium High Medium

Low Low Low Low High High

High High High High Medium Low

High High Low High High High

The App Store offers over 93,000 applications, but most are aimed at English-speaking consumers. Providers in China will therefore need to attract local developers who can develop applications geared to the preferences of Chinese consumers.

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More Effort Needed to Develop Application Stores in China SKU: IN0904397CWW Payment method is another important issue. Unlike in Western countries, credit card penetration in China is very low and there are few mobile payment methods available to consumers. Mobile carriers in China dominate the mobile payment market and non-local providers will need to negotiate with them to resolve payment issues, which will probably take several years. For domestic application store providers, the biggest challenges are platform development capability and handset adaptation. China Mobile is using the China Mobile Research Institute (CMRI) to develop Mobile Market and Inspire Inc. to develop the platform; however, there are some indications that the Mobile Market platform is at a competitive disadvantage compared to the App Store. In addition, China’s mobile carriers have about 700 million customers with diversified handsets, meaning that third-party developers must devote time and effort to porting code from one kind of mobile device to another. Overall, In-Stat believes that China’s application store market will boom in the coming years, although it is too early to judge who will be the final winner. According to our comprehensive analysis of several providers in the Chinese market, however, China Mobile’s Mobile Market has substantial advantages and will probably be successful.

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Methodology
This report covers the application store market. The information it contains is derived from primary and secondary sources. Primary research includes interviews with key market players; secondary sources include white papers, magazines, journals, vendor websites, vendor presentations, and various organizations and associations. The application store is a hot topic and is receiving increasing attention from both the supply and demand sides. For this reason, our report primarily analyses the market from the supply side and uses the value-chain-analysis method to explore market drivers and barriers and the factors that influence the entire ecosystem.

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List of Tables
Table 1. Table 2. Table 3. Table 4. Table 5. Table 6. Table 7. Monternet and Mobile Market Comparison.......................................................................................... 16 Comparison of Six Application Stores in China ................................................................................... 21 China’s Mobile Subscribers Forecast, 2009–2013 (in Millions) ........................................................... 25 China’s App Stores Subscribers Forecast, 2009–2013 (in Millions).................................................... 25 China’s App Stores Annual Downloads Forecast, 2009–2013 (in Millions)......................................... 26 China’s App Stores Revenue Forecast, 2009–2013 (US$ in Millions) ................................................ 26 Application Store Comparison, by Suitability for Chinese Market ....................................................... 27

List of Figures
Figure 1. Figure 2. Figure 3. Figure 4. Figure 5. Figure 6. Figure 7. Figure 8. Figure 9. Development History of the Application Store ....................................................................................... 5 Application Store Value Chain ............................................................................................................... 9 Number of Applications Offered as of October 2009, by Vendor ........................................................ 10 Application Statistics for Apple’s App Store ......................................................................................... 12 Handsets Based on Android by Huawei and HTC............................................................................... 14 China Mobile’s “Mobile Market” ........................................................................................................... 16 China Mobile’s Ophone by Lenovo ...................................................................................................... 18 China Telecom’s AppMarket................................................................................................................ 19 Shanghai Unicom’s Wo-Store.............................................................................................................. 20

Figure 10. Application Store Business Model ....................................................................................................... 22 Figure 11. China’s Smartphone Market Shipment Forecasts, 2009–2013 (in Millions)........................................ 23 Return to Table of Contents

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Related In-Stat Reports
#IN0904424MCM The Apps Store is Born: Smartphones Enable New Marketing and Advertising Opportunities Worldwide, March 2009 http://www.instat.com/abstract.asp?id=231&SKU=IN0904424MCM

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Copyright In-Stat 2009. All rights reserved. Reproduction in whole or in part is prohibited without written permission from In-Stat. This report is the property of In-Stat and is made available to a restricted number of clients only upon these terms and conditions. The contents of this report represent the interpretation and analysis of statistics and information that is either generally available to the public or released by responsible agencies or individuals. The information contained in this report is believed to be reliable but is not guaranteed as to its accuracy or completeness. In-Stat reserves all rights herein. Reproduction or disclosure in whole or in part to parties other than the In-Stat client who is the original subscriber to this report is permitted only with the written and express consent of In-Stat. This report shall be treated at all times as a confidential and proprietary document for internal use only. In-Stat reserves the right to cancel your subscription or contract in full if its information is copied or distributed to other divisions of the subscribing company without the written approval of In-Stat.

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