Distilling market noise into market sense
The VisionMobile blog is a space where VisionMobile analysts and industry insiders exchange views on the fast-changing mobile market and the trends that define the future direction of telecoms.
Monetising apps: Lessons from the music industry
[VisionMobile analyst Stijn Schuermans muses about the similarities between the app economy and other businesses like FMCGs and music. What can app makers learn from other industries?]
In a recent post on our newly launched Developer Economics portal with facts and insights for app developers – build.developereconomics.com – colleague Mark Wilcox likened the app economy to a retail business:
In the early days of relatively empty app stores, simply launching a good product was often sufficient to get noticed and soar up the store charts. However, as with any fast-moving consumer goods (FMCG) business, the value within apps has shifted from the contents (the functionality) to the packaging (the user experience) and marketing.
I agree: packaging is crucial and the fight for shelf space is fierce, just like in retail. In the app business, this is called “app store optimization” (ASO).
Here’s an interesting thought: with which other industries can the app business be compared, and which lessons can we apply from those other industries to make developers more successful?
One industry that strikes me as pretty similar is the music industry. It too is experiencing a shift in competition: the internet has made it much easier for musicians to reach an audience. At the same time, this has undermined the traditional album-sales business model, making it much harder for musicians to make a living from their trade. Sounds familiar?
Direct sales of either apps or albums is no longer a sustainable business model, or at least it can’t be relied on anymore to make a living. There’s just too much competition (700.000 apps in the app store; everyone with an instrument and some YouTube skills), including from free apps and music. Some lucky ones are still making millions, but most who try hardly make any money at all. In our Developer Economics 2012 survey, we found that as much as half of the app developers live below the app poverty line, i.e. they don’t make enough money to sustain themselves. Apps and music sales are hit-driven businesses.
In the music industry, people are tackling this issue by moving to indirect sales methods: the revenue focus shifts from selling CDs to selling performances, special edition releases (direct to fan) and merchandise. The tracks themselves are often given away for free on a website or through an online music service to drive interest and discovery. Marketing guru Seth Godin has a nice way of explaining how this works: first, you create a tribe, i.e. a group of raving fans, he says. Then, you will have their permission to sell them souvenirs, for which they will happily pay a good price.
The merchandise model has made its way already into the app economy. The most obvious and well know example is Rovio, the mobile-first gaming company that already derives 30% of its revenue from physical goods related to its Angry Birds hit and aims to reach 50% in a few years time. However, this is not very helpful to other app developers: Rovio is not successful because it sells merchandise. Instead, Angry Birds merchandise sells because the game was a hit in the first place. This said, all apps related to non-digital brands basically use the same model implicitly: they use apps to drive physical-goods sales. Most of those apps will be free. The money comes from the goods being retailed.
I find this to be an immensely encouraging message for developers: the real app economy is a whole lot bigger than the numbers reported from paid apps, in-app purchases and advertising! Opportunity is abundant.
What do you think? Which other lessons can app developers take from the music industry and others?
- Stijn (@stijnschuermans)