Why the next big app explosion will be in China



China earlier this year surpassed the United States as the world's biggest smart device market, according to researcher Flurry. However, until recently there hasn't been much of an incentive for mobile developers and publishers to market their apps in the Chinese market. Unlike the U.S. app market, which is primarily controlled by Apple's (NASDAQ:AAPL) App Store and Google (NASDAQ:GOOG) Play, the Chinese app market is fragmented by hundreds of third-party app stores, making it difficult for overseas developers to reach a wide enough audience to make the jump worthwhile. In addition, fears of piracy have kept many developers from choosing to branch out to the Chinese app industry.US vs China - Android and iOS devices

While these concerns continue to hamper the Chinese app market, a number of other factors are now helping to smooth out the path to China for mobile developers. As a result, many in the mobile app industry are taking another look at the possibilities of moving into the world's largest wireless market.

Apple's presence in China will only grow
Android commanded fully 90 percent of the Chinese smartphone market in the third quarter of last year, according to a Reuters report, while Apple's iOS platform accounted for just 4.2 percent. However, iOS appears poised for growth in China.

The iPhone is currently offered through China Unicom and China Telecom. But China Mobile is the nation's largest carrier, with a 64 percent market share. China Mobile's network currently cannot support the iPhone, but rumors continue to point to a possible deal between Apple and China Mobile to bring the iPhone to China Mobile's network. Such a move could dramatically expand the addressable market for iOS developers in China.

Even without China Mobile, Apple could triple its market share in China if it introduced an iPhone mini or other low-cost iPhone, explained Morgan Stanley analyst Katy Huberty. Analyst firm Analysys International estimated the Chinese mobile application and services market to be about $35 billion last year, in part due to the introduction of cheaper smartphones that appeal to a broader base of consumers. If Apple does introduce a cheaper iPhone to market, this number could grow even more.

China has already started gaining momentum in the iOS App Store. According to App Annie it was "the leading contributor to the increase in iOS downloads from Q4 2012 to Q1 2013."  

Even Apple itself is bullish on its growth in China. "China is currently our second largest market. I believe it will become our first. I believe strongly that it will," said Apple CEO Tim Cook during a recent trip to China. 

However, a stronger presence from Apple alone won't guarantee a better market for app publishers. Last month, the website 7659.com exploited the App Store, allowing users to download free, pirated versions of App Store apps to non-jail broken devices.

App piracy a double-edged sword
While China has long been a hotbed of piracy, some in the industry believe app developers shouldn't be as concerned about it as they have been.

Game development firm Papaya Mobile sees piracy as a reason for developers to market their apps to the Chinese market rather than a reason to shy away from it. "Pirated [apps] are our best selling point," said Fernando Pizarro, general manager for North America at Papaya.

Pizarro explained that Papaya has relationships with the major app stores, and, by working with a third-party partner like Papaya, a developer can have these stores swap out the pirated versions of their app with a legitimate version that can actually be monetized.

Henry Fong, CEO of Yodo1, a company that specializes in taking Western games and distributing them in the Chinese market, agreed.

"There's two elements that need to be addressed. First is piracy of the game binary--people ripping their game binary. The second is people cloning the game mechanics for the way it plays," Fong said. "You can clone someone's game but it's really hard to make it as good as the original. Instead of a pirated version of the game, we're providing these app stores and users with a fully socialized version of the game."

Monetization is getting easier
The 2012 China Game Industry Report estimates income from the mobile gaming market of $526 million. The key to a successful monetization strategy in the Chinese market is simplicity. In terms of user experience, users want "to find, download and pay for a particular application and do it all in one place," said Fong. "In China, there are more than 500 different app stores, hundreds of app promotion and discovery websites and a dozen different payment types," explained Fong.

However, he added that a lot of consolidation has happened within the last year, making it easier for developers and publishers who are trying to branch out and sell their apps in China.

Another major event in the space happened this week, when Amazon (NASDAQ:AMZN) threw its hat into the ring, becoming the first Western company to offer paid Android apps in the Chinese app market. Google Play currently only offers free apps, making this a huge opportunity for publishers of premium apps looking to sell their apps in China.

A number of vendors are also working to add carrier billion options to their services in China, with the hope of improving app monetization. For example, Papaya last month launched the AppFlood SDK, integrating carrier billing with China Mobile. "Papaya is the first and currently the only company that can provide both ad exchanges and carrier billing for in-app purchasing in China to independent developers. Our relationship with China Mobile, our success with AppFlood, plus our deep understanding of the Chinese mobile games space, makes Papaya the ideal partner for developers worldwide seeking to enter this dynamic market and monetize their games," explained Papaya CEO Si Shen.

Fishing Joy

Fishing Joy is a hit in China.

Currently the three big Chinese carriers--China Mobile, China Telecom and China Unicom--offer carrier billing through various app stores in China. Developer CocoaChina, whose hit Fishing Joy now makes the company over $6.28 million a month and has over 10 million daily active users, credits its success to carrier billing. Fishing Joy, like most successful games in China, adopts a freemium model and monetizes through in-app purchases. Fong noted that Chinese consumers are much more likely to spend money in this manner rather than paying for a premium title outright.

Games stay at the top of the heap
There's a lot of work that developers and publishers will need to do to ready themselves for the Chinese market. "It is the same work you have to do everywhere else—times 10," said Misha Lyalin, chief executive of Zeptolab, in an interview with the Wall Street Journal. Zeptolab, best known for its Cut the Rope franchise, now has more DAUs in China than anywhere else worldwide.

Apps will need to be translated and adjusted to be culturally relevant to a Chinese audience. Fong recommends that companies either hire someone to help them with this process directly in China or work with a third-party firm that specializes in readying games for a Chinese audience. 

iResearch Chart - Jan 2013

Source: Wandoujia

"Right now games are probably the most monetizable type on the smartphone platform," added Fong. Some things are the same, regardless of the market.