Carrier App Stores Suck, So Japan’s KDDI Did Something Different And Is Pulling In $250M A Year For Apps

When Apple launched its app store about five years ago, the company had no idea it would become the success it is today. It disintermediated carriers from what would become a lucrative revenue stream, one that’s brought Apple more than $11 billion in gross revenue (based on the $8 billion figure that CEO Tim Cook said the company had paid out to developers by last month).-

In the old feature phone world, developers used to have to beg and plead with the carriers for pre-install deals on phones. But these days, they just go straight through Apple’s review process or directly into Google Play.

Some carriers have tried to run app stores over the years like Verizon’s Vcast app store, but they haven’t exactly been successful. Because Google Play and the iOS app store are still the main channels for downloading apps, how do carriers cope and stay relevant?

Instead of starting another old app store, Japan’s second largest carrier KDDI launched a subscription program for a collection of about 500 apps last year. Called the AU Smart Pass, it comes pre-installed on its Android phones. At 5 million users per month paying 399 yen ($4.20) each, that’s up to $250 million in annualized revenue to pay out to developers.

It’s definitely a unique model. KDDI partners with developers to bring apps into the AU Smart Pass but they often ask for premium or special unlocked content. For example, Japan’s hit messaging app Line, which has more than 120 million users, gives away exclusive stickers. Many of the other apps are normally paid ones.

Then KDDI splits overall subscription revenues back with developers based on monthly active usage. Developers can also offer in-app purchases, but they get to keep 80 to 90 percent of revenue instead of the standard 70 percent that Google Play or Apple’s app store gives them.

“We needed to invent a new model and we wanted to manage the shift from feature phones to smartphones,” said Kazuhito Shimizu, who oversees mobile business development for KDDI in the U.S. He oversees a $60 million corporate venture fund that has taken stakes in companies like New York-based taxi and transportation startup Hailo.

“This is kind of like Netflix for apps,” he added, saying that consumers would get confused if there were two app stores — Google Play and a branded KDDI store — on their Android phones.

The Japanese carriers like NTT Docomo, KDDI and SoftBank have been in the unique position of being able to watch and learn from how U.S. and Western carriers adapted to the shift in power toward Apple and Google’s platforms.

In Japan, smartphone penetration is still lower than 50 percent. Yet, Japan has this wonderfully rich history of elaborate feature phones and gaming and app platforms that have revenue-per-user metrics that still put Western markets to shame.

Still, app distribution in Japan is changing dramatically as the big mobile gaming platform companies like GREE and DeNA adapt to the rise of smartphones and as players like messaging app Line emerge as interesting, new platform players. The AU Smart Pass could be an option for larger developers that are looking to break into the market there.

The pass only works in Japan and on Android phones. But KDDI is exploring how to bring it to other Asian markets. The carrier is also building out features like extra cloud storage space for photos, files and music.

“It can be a first marketing channel into Japan for developers,” he said.