Still Clinging to the Palm Economy
By Eric Lin, Mon Aug 16 22:45:00 GMT 2004

Mobile software developers, upset by the growing cut that electronic sales distributors are taking from their online software sales, are forming a union.

Electronic sales distributors (ESDs) take a cut of application sales from developers in return for handling transactions and distribution of their software as well as creating more opportunities for sales by partnering with hardware manufacturers, carriers and mobile portals to provide branded software stores. In 1999 when the "Palm economy" was still a buzzword, the ESDs took no more than 20% of the purchase price for their cut. A number of ESDs were launching, and their rates were highly competitive in order to attract developers, but in the past five years the consolidation has left two primary players. They have also added affiliate sites, allowing third parties to brand their software catalogs and take a cut of the sales. During this time, ESDs have doubled their take to 40% of total sales.

Mobile developers, which are often individuals or small companies, are finding it increasingly difficult to sustain themselves the decreasing cut of sales they receive, particularly so as the decline in PDA sales hampers their unit volume as well. A number of developers who have long-standing strength in Palm or Pocket PC software have banded together to form the ESD Union, dedicated to reducing the ESD's cut to 25%, or at least decreasing ESDs' sales by convincing customers to buy through developer's own Web sites instead.

These developers are not just a casualty of the ESDs' greed. They are a casualty of the market shift away from the PDA to smartphones. Although Microsoft and PalmSource both have smartphone OSes, neither controls a majority of the smartphone market, nor can any smartphone OS yet compete against the number of Java-enabled feature phones. These developers could shift their focus to more phone-centric development, but they would still have to deal with ESDs. Unlike PDAs, connected devices like smartphones often rely on over-the-air downloads direct to a device. This further complicates any attempts by developers to bypass ESDs, which partner with carriers to provide these downloads for their handsets.

Developers must follow the market in order to continue successful sales. Shifting to phone-centric software will be the first important step for many members of the ESD union. Once the mobile software market has reached critical mass, however, the business of mobile software development will most likely need to shift as well. Although it will not be sold the same way, mobile software business will probably look more like desktop or console software. Large developers or publishers will pay smaller companies a fee to develop titles which they will distribute in return for the lion's share of the sales.