How iPod changed everything

Apple just announced that it is finally ending production of the iPod. At 21 years of age, it outlived many of the dramatic changes it witnessed and triggered. In this age dominated by streaming (and a vinyl resurgence) the iPod did not really have a place anymore, other than with its ever diminishing base of super fans. It should probably have ceased production long ago, but the iPod holds a special place in Apple’s heart and sentimentalism likely played a role in allowing it to reach its 21^st birthday before it was finally put out to pasture. And there is no doubt that the iPod earned that special place, because it was the change catalyst that transformed Apple into the mega corporation that it is today. But the iPod did even more than that, it was the trailblazer that created the environment in which today’s digital entertainment world could exist.

Back in my early days as an analyst I went to my first ever Apple analyst briefing, for the launch of the second generation. I felt like a fish out of water, with the room full of dry tech analysts asking Apple about its education strategy, its server products, its enterprise computing strategy. Then little me in the corner, asked about the iPod, and the entire room turned to me with bemused faces, just like the pub scene in American Werewolf in London.

Every successive briefing session I went to, the iPod became an ever bigger deal and the other analysts in the room started asking questions about it too. The iPod shuffled along at a steady pace until the launch of the iTunes Music Store, at which point it suddenly had a purposes it previously lacked, and sales lifted off. Apple has never looked back.

It is no coincidence that it was music that propelled the iPod to tech immortality. Steve Jobs was a massive music fan and it was his passion that helped ensure the iPod continued to receive the support it needed, even when it was not yet showing signs of fulfilling its huge potential. Apple has always been a company that is as obsessed with content as it is hardware and this is why the iPod and subsequent Apple devices have been so central to the growth of digital entertainment.

As the iPod evolved from scroll wheel to touch screen it became the launchpad for something even bigger for Apple: the iPhone (the first gen iPhone was a direct evolution of the iPod touch, at a time when smart phones were all keys). With the iPhone came apps. Just in the same way that the iPod was not the first digital music player, so Apple was not the first to make mobile apps nor of course the first to make a smartphone. But in all three cases, Apple took a promising but struggling format and made it ready for primetime. This early follower strategy underpinned Apple’s success in the 2000s and the early 2010s.

Pandora was an early beneficiary of Apple’s app strategy, being natively installed on US iPhones. The result was another lift off, with Pandora soon becoming he most widely used streaming app on the planet, even though it was only available in the US. Just as with the iTiunes / iPod combination, Apple understood the cruciality of an integrated content / device experience and its App Store became the launch pad for today’s digital entertainment economy. It did so by allowing app developers across the world to find a global audience which did not need to worry about clumsy installations and fragmented billing. Everything happened in one place, seamlessly and effortlessly. Google soon followed with its own take on the app store. Now you will struggle to find a games, music, video, news, podcast or book provider that does not use the Apple App Store, nor indeed a consumer that does not use apps to consumer content. 

Apple’s subsequent launch of the iPad and Apple TV further accelerated the adoption of digital content, giving audiences and content companies more choice about where they could benefit from the app economy. Apple Music, Apple TV, Apple Books, Podcasts, News, Arcade and more followed, helping cement Apple not just as a catalyst for the digital entertainment economy, but also as a major content player in its own right.

None of this would have happened without the iPod. So even though many readers will be too young to have even owned an iPod, spare a thought for this now departed member of the digital ecosystem, because without it, the devices you use and the entertainment you consume would look very, very different.

Farewell iPod!

MIDiA’s 2016 Predictions – Here’s How We Did

Part of our job at MIDiA Research is to help our clients ‘look round the corner’ and see what disruptions and innovations are likely to impact their businesses. In short, our job is to help understand what the future holds. This is why in 2015 we published our ‘2016 Predictions’ report in which we made a number of big calls on the coming year in digital content. Here’s how we did:

Macro Trends

1. Mobile messaging apps will surpass 6 billion. VERDICT: Correct. (There are now more than 6.5 billion)
2. Video will eat the world. Whatever media business you are in, in 2016 you will be a video company too. VERDICT: Correct. (2016 was the year video took centre stage)
3. Some or all of Amazon, Apple, Facebook and Google will start to aggregate TV channel apps and SVOD apps to join the digital TV dots. VERDICT: Correct. (Amazon and Apple both made their first TV app aggregation moves in 2016)

Music

1. Digital will finally be more than 50% of revenue. VERDICT: Correct. (Q2 major label results showed digital as 54% of recorded music revenue)
2. Streaming holdouts will trickle not flood. VERDICT: Correct. (Indeed, remarkably few artists held back albums. Exclusives became the new black instead)
3. Spotify will still be the leading subscription service. VERDICT: Correct. (At the end of September Spotify had 40 million subscribers compared to just under 18 million for Apple Music)

Mobile

1. Android app revenue will surpass iOS. VERDICT: Wrong. (Apple’s App Store still has almost twice the revenue of Play Store. In our defence on this one this was as a result of Android under performing and Apple over performing. Android increased OS market share but still did not overtake app store revenue which means that Play ARPU reduced while Apple App Store ARPU increased.)
2. Adblocker disruption will accelerate for publishers. VERDICT: Correct. (Adblock plus now grew big enough to open it’s own adexchange, and publishers can do little but get on board)
3. Big freemium games will lose steam. VERDICT: Correct. (Fewer apps in the top free and top grossing app charts now compared to January)

Video

1. More unbundled SVOD services will launch. VERDICT: Correct. (2016 saw a succession of new video services)
2. Mobile video will blur at the edges. VERDICT: Correct. (Messaging apps have made video central to the user experience with the Snapchat illustrative stories feature now being replicated on Instagram)
3. Interactive ads will gain traction on TV channel apps. VERDICT: Wrong. (Although still be tested on selected Fox Networks authenticated channel apps, they have not moved into the mainstream…yet )

We’ll be publishing our 2017 Predictions report in the next few weeks. To learn how to get a copy of the report and of our 2017 Predictions report and also our 2016 Predictions report email us at info AT midiaresearch DOT COM.

Music’s Role In Digital Content Is Small And Shrinking

This week I delivered a keynote at Mobile World Congress in Barcelona on the future of media. I focused on three key areas of digital content:

• Digital Music
• Online Video
• Mobile Apps

Pulling together these three different strands really shone a light on where music sits in the broader digital economy.  One of the key themes I explored was how the streaming music business relies on pretty much the same model as mobile games like Clash Of Clans, i.e. relying on a tiny share of the total audience to pay. The big difference is that the annual ARPU of a King customer is $290.41 while for Universal Music the annual ARPU of a streaming music subscriber is $29.77.  Universal Music rightly got a lot of attention recently for becoming the first billion Dollar streaming music company. Universal has managed to make streaming revenue scale. However streaming remains a revenue stream that is plagued by free. Only 10% of the total streaming audience (i.e. including YouTube and Soundcloud) is paid, and though this small group generates 71% of Universal’s streaming revenue, the blended ARPU is just $4.15. That’s $4.15 for the entire year of 2015, not per month. You can see my full analysis of how free-to-paid conversion ratios and ARPU compare across big media companies here.

But perhaps most revealing is the relative scale of music compared to everything else. As the graphic below reveals, digital music (at retail values) will be just 10% of digital content revenue by 2020, down from 16% in 2015. So digital music is both small and losing market share. Online video, which is at an earlier stage of its development, is already bigger (at retail value) than the entire recorded music business (at trade value), while mobile app revenue is double that of online video.

Yet music continually punches above its weight. Its impact on culture and emotions far outweighs that of apps (for now at least) and music artists still have far more dedicated fan bases than actors generally do (again, for now at least). Music’s impact is far beyond its revenue, even in business terms. Just look at all the brands, telcos and device companies that fall over themselves to be associated with music.

Nonetheless, the reality that must be accepted is that sooner or later, recorded music’s diminished revenue footprint is going to catch up with it. Major record labels enjoy a privileged position, because rights are so concentrated in music they each have an effective monopoly power because each of them have the power of veto if they say no. (You try launching a mainstream music service without one of the majors). This can sometimes lead to hubris and over confidence. In video and apps, rights are far more fragmented and consequently no single rights owner has market shaping power. (As an aside it is worth asking whether rights concentration is contributing to digital music losing pace with the digital content economy.) The clear risk is that music rights holders eventually overplay their hand, demanding too much from partners with too little flexibility. I have been hearing for some time from a number of ‘partner’ companies that they are beginning to question whether music is worth the hassle. Meanwhile SVOD services and YouTubers are waiting eagerly in the wings…

Another part of the equation is that recorded music revenue only paints a small part of the global music industry picture (i.e. also including publishing, live and merch). In fact, recorded music has declined from being 60% of all music industry revenue in 2000 to around 30% today.  Most artist managers now view recorded music primarily as a marketing platform to drive live revenue. Unfortunately record labels aren’t in a position to think that way.

Whatever perspective you view this from though, one thing is clear, music’s role in the global digital content marketplace is small and shrinking.

How Data And Mobile Apps Shape Spotify’s Quest For Profitability

Spotify’s has announced the 2013 financial results for its global parent company. The headline is a -12% operating loss, down from a -19% loss in 2012. The numbers are in stark contrast to the small operating profits recently reported in Spotify’s UK and France subsidiaries. Both were able to do so because only a portion of Spotify’s costs reside in those businesses. This raises the interesting point of Spotify making efforts to report an operating profit where ever it possibly can to help build an evidence base that its model is sustainable. Which contrasts sharply with Pandora’s prolonged efforts to do what it can to not make a profit in order to help its rate lobby efforts.

Having spent the last few weeks knee deep in a client project exploring the profitability of digital music services I had a stronger than usual sense of ‘told you so’ when Spotify’s numbers came out. The headline of rights costs being the large cash drain on the subscription business model is well known, but there are other accelerating costs that are less well known. Spotify’s research and development costs rose by 92% between 2012 and 2013.

Music services find themselves running to keep up in the mobile world. Mobile apps are how the vast majority of subscribers interact with streaming services yet mobile app development is only an ancillary competence of subscription services. Unlike a King.com, a Supercell or a Mojang, Spotify’s core operating structures are built around cloud distribution, content management and music programming. Spotify and other subscription services are now having to develop mobile as core competence too and the rapid rate of innovation and change in mobile experiences mean that this more resembles an arms race that it does a standard operating cost.

The other big change is data. Streaming services generate vast quantities of usage data and making sense of that data is an ever more important task for streaming services of all kinds, not just music. Netflix spends $150 million on recommendations alone and has 150 staff just for this single data driven task.   Call it ‘big data’ if you will, but managing large data sets effectively is crucial to the success of streaming services for everything from managing churn through to rights holder reporting.

The key takeaway? Scale will definitely help streaming subscription services move closer towards profitability (as Spotify’s narrowing loss attests) but costs are also going to continue to rise for any streaming service that takes competencies such as app development and data intelligence seriously.

How The iPad May Help Soften The Decline Of The Download

In this previous post I outlined how the rise in mobile app spending is directly cannibalising iTunes music spending.  That decline was only a few percentage points in 2013 because of a confluence of factors, not least the fact that the US download market (Apple’s biggest) only fell by 3% in 2013 while the UK (another key Apple market) grew by 3% and growth also came in other major music markets and a bunch of emerging markets with scale. Throughout the course of 2014 downloads however will probably decline more sharply due to both app competition and also to the fact many of the highest spending download buyers are now subscription service customers.  But there is a slither of light for the download market….the iPad.

Apple’s customer base has changed a lot over the years.  Once being an Apple customer meant being at the bleeding edge of innovation in consumer technology.  Now it is a much more mainstream user base that in turn compels Apple to innovate at a pace appropriate for their more timid tastes.  The evolution of the iPad customer base followed a similar path: once the device of the true Apple aficionado the iPad quickly developed a distinctly populist appeal, especially the iPad Mini.

The iPad Is An iTunes Beachhead Among Android Users

But what is most interesting about iPad owners from a music industry perspective is that so many of them are Android phone users, 32% of them to be precise (see figure).  The iPad is acting as an iTunes beachhead among Android phone users.  It is a less surprising trend than might at first appear because Tablets and smartphones have highly distinct purchase consideration cycles and retail chain dynamics.  A smartphone is most often intimately tied to a mobile carrier relationship and the sales process will have as much to do with what device a carrier is pushing as it will with consumer preference.  A tablet though is, most often, not tied to a carrier and the purchase consideration cycle is instead much more about aspiration and desirability.  Other tablets might beat the iPad in terms of price and specs, but the iPad is the aspirational tablet.

The iPad Mini Effect

The trend is even more pronounced among iPad Mini owners: 48% of them are Android smartphone users, highlighting the success of this SKU to reach new consumer segments.  Meanwhile a whopping 68% of iPad Intenders – i.e. consumers that plan to buy an iPad – are Android smartphone users.  Although this figure has to be discounted to account for aspiration rather than likely intent, the directional trend is clear: Android smartphone users are a major share of iPad owners and iPad Intenders.  With all the perpetual talk of who will win the smartphone wars the iPad’s ability to grow Apple’s customer footprint almost goes unnoticed.  The fact 57% of iPad Mini customers are female indicates just how good a job the device does of reaching beyond the male dominated early adopter niche.

Because an iPad customer is also inherently an iTunes user significant opportunity exists for content providers.  For all Google Play’s valiant efforts – and extensive marketing spend – no one else manages to get people to buy music downloads the way Apple does.  More Android customers becoming iTunes users via the iPad presents the opportunity to grow the installed base of music download buyers.  And there are encouraging indicators: only 26% of iPad customers do not buy music, compared to 49% of all consumers and 47% of overall Android smartphone users.

iPad Owners Want Apps Too

But before we get too carried away with how a new wave of iPad owners are going to save the music download sector we also need to consider why consumers are buying these devices and what use cases they best serve. The fact they have a tablet indicates they are at the more sophisticated end of the Android phone user base so they probably already use their Android phone for listening to music on.  An iPad is a device purpose built for web surfing, video viewing and mobile app usage.  So it is to be expected that the lion’s share of content spending from these new iTunes converts will be on apps.  Music spending will however be a part of the mix and thus we can expect the influx of new-to-Apple iPad owners driving new music download spending that while it may not be enough to counteract the bigger decline it will help slow it.

What Is Really Cannibalising Download Sales

As 2013 music sales figures come in, the picture of streaming growing while download sales slow is coming sharply into focus. It is one of a clear phase  of transition/cannibalization (delete as appropriate depending on your point of view) taking place because the majority of paying music subscribers were already download buyers.  But that is not the whole picture.  There is an even fiercer form of competition for spend that, as far as the music industry is concerned, is inarguably driving cannibalization.

The iTunes Store accounts for the majority of the global music download market and has done so since its inception eleven years ago.  Back when it launched, the iTunes Music Store helped transform the iPod from a modestly performing device into a global hit.  Music was the killer app, music was what Apple used to sell the device and music is what iTunes customers spent all of their money on.  But all of that changed.  As Apple’s devices have done progressively more, Apple has introduced new content types into its store that better show off the capabilities of its devices.  When Apple launches a new iPad it doesn’t have a label exec holding up the new device playing a song with static artwork displayed…that simply would not showcase the device’s capabilities.  Instead an EA Games exec gets up on stage with a new game that fully leverages the capabilities of the iPad’s graphics accelerator, the accelerometer, the multi touch screen etc.

Music may still be the single most popular entertainment activity conducted on iDevices but it is no longer the app that fully harnesses the devices’ capabilities.  In fact because music products and services remain stuck in the rut of delivering static audio files – YouTube notably excepted – it is increasingly failing to compete at the top table in terms of connected device experiences.  Crucially, this is not just a behavioral trend, it is directly impacting spending too (see figure).

Back in 2003 music accounted for 100% of iTunes Store revenue because that was all that was available.  Over the years Apple introduced countless new content types, each of which progressively competed for the iTunes buyer’s wallet share.  The step change though occurred in 2008 with the launch of the App Store.  The impact was instant and by mid 2009 music already accounted for less than 50% of iTunes revenue.   By the end of 2003 the transformation was complete with Apps accounting for 62% of spending and music less than a quarter.  Quite a fall from grace for what was once the undisputed king of the iTunes castle.

Now it is clear that the app economy is a bubble that is likely to undergo some form of recalibration process soon (80%+ of revenues are in app, 90%+ of those are games, and the lion’s share of those revenues are concentrated in a handful of companies) but the damage has already been done to music spending.

If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps.  At least with streaming services consumer spending remains within music rather than seeping out to games.  Though the bulk of the app revenue is ‘found’ incremental revenue, apps are additionally competing for the share of the iTunes’ customers wallet i.e. growth is coming both from green field spend and at the expense of other content types.

So what can the music industry do?  It would be as foolish as it would be futile to try to hold back the tide. Instead, music product strategy needs to do more to embrace the app economy.  That means, among other things:

• More fully leverage in-app payments (and that means labels will have to take some of the hit on the 30% app store tax)
• Learn to harness the dynamics of games (that does not mean ‘gamify’ music products necessarily – though it can mean that too – but to understand what makes casual app games resonate)
• Develop digital era, multimedia products (see this report for some pointers on where music product strategy should go)

Though we are nowhere close to talking about the death of music downloads, apps have turned the tide for music spending.  The music industry can either sit back and feel sorry for itself, or seize the app opportunity by the scruff of the neck.

The Tale of Nokia, Mobile First and Sonic Augmented Reality

At Midem this last weekend Nokia announced the launch of Nokia Music Plus, a premium iteration of its free Nokia Mix Radio offering.  For €3.99 per month subscribers get an enhanced personalized radio service including unlimited track skips, unlimited offline playback and lyrics streaming.  From a pure specifications perspective none of that is particularly groundbreaking, but what is interesting is Nokia’s execution as a truly mobile first music service.

When Mobile First Means Anything But 

Many digital content providers are positioning themselves as being mobile first these days, but the results often suggest they are anything but.  Mobile first does not mean simply having most of your customer engagement happening via mobile, nor does it mean focusing your development costs on mobile, heck it doesn’t even mean only being available on mobile.  None of these factors constitute being mobile first, instead they should be natural outputs of a mobile first approach, success indicators of a mobile first strategy.  Being a mobile first consumer offering, at least if we use the term in a strategically meaningful sense, should be about meeting a consumer’s mobile needs in a uniquely mobile way. One that does not just leverage mobile functionality but instead has it at the core of its DNA.  That creates an experience that is so good on mobile that it would be an inferior experience on a PC.

Too often the mobile apps of music services either:

• look like little more than a PC screen squashed into a mobile screen
• repurpose the PC user journey for mobile, splitting it across multiple screens to create a fragmented and disjointed user experience

And When It Really Is

Despite being a mobile company first, Nokia hasn’t always delivered mobile first experiences.  Indeed one of the failings of the much maligned but nonetheless visionary Comes With Music was that it delivered a clumsy and squashed PC experience that masqueraded as a mobile music experience.  But with Mix Radio, Nokia have delivered a truly mobile first experience that sets the bar for others to follow. There is nothing particularly revolutionary in the service, but that misses the point. Nokia have taken the Apple mantra of delivering elegant, seamless user experiences and have run with it.  As the screen shots in figure one show, Mix Radio does not try to cram the screen with metadata and information but instead uses the screen inventory to deliver uncluttered, visually rich content.

I’ve been trying out Mix Radio on a Lumia 920 (which by the way is IMHO Nokia’s best device since the N95 8 Gig.  It is great to see that Nokia has got its hardware mojo back, let’s hope it isn’t too late). On the Lumia 920’s large screen, Mix Radio is a music experience that genuinely feels like a mobile music experience and that does not leave one wanting to switch to a PC screen as soon as is possible.  It isn’t a perfect service, and I am not convinced that the beefed up Music Plus offering will get much traction as a premium offering, but it does set a standard for what a mobile first music experience should be.

Sonic Augmented Reality 

One other feature that Nokia launched on Saturday, but with little or no fan fare, is one of the most fun digital music features I have seen in years: NFC Activated Mixes. The user simply points their phone at one of the NFC targets (see graphic below) and a mix starts playing instantly as soon as the he or she accepts the mix. NFC music is far from a brand new concept but the value of the feature is again all in the execution: point, touch, play.  All in an instant.  And this isn’t just for promoting music, users can use NFC stickers to create their own mixes and leave them anywhere they like.  It is also just as easy to dump a mix onto a sticker as to listen to one – with all the actual music files residing in the cloud so it is only metadata that is being transferred.   And of course, it is again a genuinely mobile first experience.

The opportunities for personal sharing as well as commercial uses are boundless. Cafes could have them at the counter so customers could chose a mix with their coffee. Bars and clubs could have them on their doors to give passing clientele the opportunity to hear what sort of music they can expect inside. (Use cases similar to those, by the way, that Swedish start up TunaSpot has also been working towards with its Spotify / 4 Square API mash-up app).

Though only a small and fun feature, Nokia’s NFC Activated Mixes nonetheless represent the potential of a profound extension of music consumption: making location and context genuine parts of the music experience.  Augmented Reality apps such as Layar have focused, understandably, on augmenting the visual world with mobile context, but this is Sonic Augmented Reality. The next obvious step for music experiences is to then blend sonic and visual elements, but in many ways that will detract from the elegant simplicity of Sonic Augmented Reality. Nokia’s NFC Activated Mixes work because they are quick, simple and non-intrusive.  It is as easy as picking up a free newspaper from the stand at a train station, whereas traditional Augmented Reality apps require a strong degree of consumer involvement.

Nokia are not necessarily reinventing the digital music market – after all they tried that with Comes With Music and got their fingers burnt through to the bone.  But what they are doing is using the already available assets in the digital music landscape to set new standards in mobile first music experiences. Welcome back to the fold Nokia.

How the App Economy Has Transformed Product Strategy

Mobile apps can stake a pretty solid claim to being the single most important shift in consumer product behaviour in the last 5 years.  Sure the devices themselves are pivotally important, but were it not for the apps consumers install on them, they would just be better versions of the feature phones and early smartphones from half a decade earlier.  Apps have transformed consumers’ expectations of what digital experiences should be, and not just on connected devices.  But Apps have also transformed product strategy, in two key ways:

• Apps have replaced product strategy with feature strategy
• Apps have created a renaissance in the consumer software market

Apps have replaced product strategy with feature strategy

Though there are a good number of apps which can be genuinely held up as fully fledged products (Google Maps, Angry Birds, WhatsApp etc.) many are in fact product features rather than products.  Shazam for example is a fantastic feature, so fantastic that it should be as ubiquitous in music products as a volume button, but it is nonetheless a feature not a product.  Don’t mistake this for a derogatory critique: indeed feature strategy is virtually the core DNA of the app model.  After all apps rely upon the core product of the smartphone or tablet itself to do much of the hard work.

Apps co-exist with the core functionality of the device in order to layer extra features on top.  Instagram uses a phone’s camera and web functionality, Layar uses the camera and GPS and so forth.  In short, apps add features and functionality to hardware products.  That does not make them inherently any less valuable for doing so, but it does make them dramatically different from pre-App products. Even the majority of utility apps, such as those that track rail and flight schedules, or the weather are at heart browser bookmarks on steroids.  Games are perhaps the only app category which in the main can be considered as self-contained products.

This shift from product strategy to feature strategy has slashed the time it takes for products to get to market and has dramatically reduced development overhead, but it is a model riven with risk.  Consumers and the device ecosystem companies are winners, but many app developers are exposed.  On the one hand they have the insecurity associated with platform dependency, on the other they know that if their features are that good that they will likely be integrated into the device’s core OS or into the featureset of another app with broader functionality.  Sometimes those scenarios will be achieved via favourable commercial avenues (such as an acquisition or licensing) but sometimes it will just be flat out plagiarism.

The lesson for app developers is clear: if your app is a feature and it is good, then you need to plan for how to turn it into a product, else plan for what to do when your app has become someone else’s feature.

Apps have created a renaissance in the consumer software market

It is sometimes easy to lose sight of just what apps are: software.  In the PC age software was for most people one of three things:

• Microsoft Windows and Office
• An anti-virus tool
• A bunch of free-trial bloatware shortcuts preinstalled on their desk top pre point of sale

Mainstream PC behaviour was defined by Microsoft functionality and browser based activity.  Sure, software from the likes of Real Networks and Adobe supported much of those browser based experiences, but they were to the consumer effectively extensions of the core OS rather than software products themselves.  A premium consumer software market did exist but never broke through to mainstream.  Consumers didn’t know where to look for software, whether it would install properly, whether it would work on their PC, and then on top of all this they were faced with having to provide credit card details to small companies they knew nothing about.

Mobile apps changed all of that.  App stores simultaneously fixed the discovery, billing, installation and compatibility issues in one fair swoop.  Apps have enabled the consumer software market to finally reach its true opportunity.  Just in the same way that the iPod allowed digital music to fulfil its potential.

Apps continue to transform consumer behaviour and expectations

So where will feature strategy and the reinvigorated consumer software business take us?  What is clear is that consumers are getting exposed to a wider array of digital experiences and are evolving more sophisticated digital behaviours due to apps.  Apps are also enabling consumers to do things more effectively and efficiently, and are empowering them with more information to make better decisions, whether that be getting the best flight price or choosing the best local plumber.  They are also making consumers expect a lot more from a device’s ecosystem than just the devices.  How often do you see a phone company advertise its handsets with the screen turned off? It is the apps that count.  For now, however good Nokia might be able to make its smartphones it knows that its app catalogue and ecosystem struggles to hold a candle to Apple’s App store and ecosystem (the same of course applies to all other handset manufacturers).

Apps have become velvet handcuffs for connected device owners

But what happens if/when consumers start to shift at scale between ecosystems?  For example, say Apple finds swathes of its iPhone and iPad customers switching to competitors in the future, what sort of backlash will occur when consumers find they have to expensively reassemble their app collections to reconstruct the features they grew used to on their Apple devices?  Perhaps a smart handset manufacturer would consider investing in an app amnesty, giving new customers the equivalents of their iOS apps for free on their new handsets.

For now though, Apple’s market leading app catalogue behaves like velvet handcuffs on its customers and gives it a product strategy grace period, in which it could get away with having a sub-par product generation, with customers staying loyal because of not wanting to lose their App collections.  But not even the strength of Apple’s app catalogue would not enable them to keep hold of disaffected customers much longer than that.  After all, apps are features, not the product itself.

Mobile Music, Beyond the AppMobile Music, Beyond the App

Yesterday I delivered a keynote at the Music 4.5 Mobile music conference.  My presentation was entitled ‘Mobile Music: Apps, Ecosystems and the Cloud’ and here are some of the highlights.

I’ve been a music industry analyst for more years than I care to remember and I recall my first mobile music experience being on a Wap 1.0 handset with a monochrome screen and no graphics.  Mobile music has obviously come on a long way since then but it remains hindered by the recurring error of trying to do too much too soon.  Mobile seems to be perennially burdened with developers’ aspirations being one step ahead of what contemporary mobile technology can deliver. Witness the continually delayed arrival of ‘NFC payments are about to go mainstream’ as a case in point.  Mobile music’s poster child Shazam, was itself far too early to market.  I remember being demoed the tech by the founder a decade ago.  It took the advent, many years later, of the iPhone and the iTunes App Store to enable Shazam to become the runaway success it currently is.  Most start ups aren’t lucky enough to manage to wait for the pieces to fall in place.

Mobile music is undoubtedly going through an unprecedented period of buoyancy, perhaps even prosperity, driven by two key dynamics: the rise of smartphones and the app boom.  46% of UK consumers have a smartphone (see figure 1) which at first glance presents a great addressable audience.  But as my former colleague Ian Fogg observed, as smartphones go mainstream we end up with the quasi-paradoxical situation of smartphones with dumb users.  (By way of illustration one panellist referred to a customer request supporting for his HTC iPhone). Most new smartphone users don’t even use a fraction of the functionality on their devices and this creates big problems for music strategy.  Because mobile music apps are inherently the domain of the tech savvy, not the tech-daunted majority.

It is easy to think that the future of mobile is apps.  But as a cautionary tale consider that UK ring tone revenues plummeted by 32% in 2011.  Once ring tones looked like the future of mobile music.  Things change, and quickly so.

Apps are just one step in the evolution of mobile

Mobile Music has had more than its fair share of false dawns, largely because of wrongly set expectations.  The App revolution appears to have finally kicked mobile music into market maturity, though in actual fact it is just one more step on the journey.

One of the key reasons apps have been such a runaway success (Apple just announced its 25^th billion App download) is because they play to the unique characteristics and strengths of mobile as a channel.  They deliver fun and convenient experiences that are typically also social, location sensitive and instantaneous.  All integral parts of the mobile phone’s DNA.

All of which is great of course, but there is a risk that the current infatuation with Apps is a focus on form over function.  Apps may have driven a paradigm shift in mobile behaviour but they are in the end just software.  They are a natural part of the evolution of the mobile platform and experience. They play just the same role as software does for the PC.  But of course we don’t excited about having McAfee and Excel icons on our desktop (see figure 2).  The reason why it feels so different for Apps is because of the channel strategy, namely App stores.  There’s just one place to go and get every type of software you could want, all of course with the same billing details and some guarantee of quality of experience.  A far cry from the PC experience of searching the web for the right software, reading reviews and creating a new user profile on yet another online store, hoping that the retailer is safe and secure.

The history of mobile music to date can be broken down into three key stages (see figure 3):

• Stores
• Apps
• Access

A lot of consumer got burned in that first stage of mobile music stores, finding themselves subjected to poor quality experiences that paled in comparison even to the supremely average contemporary online stores.  The main mistake made was to expect too much from the rudimentary technology that was available: handset memory and screens were both too small and connectivity was far too slow and patchy.  WAP 1.0 and GPRS simply weren’t music delivery technologies.  The first stage of mobile music development failed because mobile tried to be a ‘mini-me’ PC music and was doomed to never stand up to the test.

The wave of the current App boom has lots of force left in it yet.  But when it finally does subside, the marketplace is going to be left realizing that Apps are the tool not the endgame.  The next stage of mobile music will be putting into practice what the app revolution has taught us about what mobile should be, what role it should play and where it should sit.

Value chain conflicts

Perhaps one of the most challenging aspects of launching a mobile music service is the conflict across the value chain.  In highly simplistic terms there are three key constituencies in the consumer mobile value chain: the handset makers, the carriers and the retailers.  Of course sometimes one entity can play two or even all three roles.  Each wants to own as much of the customer  relationship as they possibly can.  Throw music in the mix and suddenly each of those stakeholders is busy trying to leap frog the other (see figure 4).  This of course is what Nokia found themselves up against when trying to take Comes With Music to market: the carriers simply saw Nokia trying to circumvent their own heavily funded digital music services and yet Nokia was still asking them to subsidize those very same handsets…

The mobile music service value chain has become a complex place to navigate, with not only competition but also a diversity of business models each with their own unique twist on carving up the revenue pie (see figure five).

Value Chain Conflict Translates into Consumer Confusion

But value chain conflict doesn’t just impact business, it hits consumers as well, with an increasingly confusing mish mash of music brands on any given phone. And then of course there is the added complexity of ecosystems and operating systems.  Consumers are inadvertently being forced into make bets on their long term mobile future.  Once a consumer has opted into an app store ecosystem, paid to download apps over a 2 year contract, uploaded their music to a locker, saved their playlists etc it becomes very hard to move.  Not so much velvet handcuffs as clapped in iron chains.  Add to that the complexity of handset operators developing their own app and music service ecosystems within each of the OS siloes (see figure 6) and an increasingly complex picture emerges.  All of which skews the field to music services which are not tied to any single operating system fiefdom.  Perhaps the biggest winner out of all of this mobile music fragmentation will be Facebook?  Currently quietly collecting the world’s most comprehensive set of music service user data, come the end of the year Facebook will be uniquely well positioned to act as cross-service, cross-OS conduit.  Spotify might be making a play for being the operating system for music (I say the API for music, though that’s probably semantics) but Facebook could become operating system for music *services*.

The Future’s Bright, Probably

There is no doubt that mobile brings a huge amount to the digital music equation, making music discovery, acquisition and consumption more immediate and fun than it has ever been.  With the help of the likes of TopSpin and Mobile Roadie it has become the ideal conduit for deepening direct to fan relationships.  And though mobile will play a key part in cloud focused music services it is the app developer community which has transformed mobile most. While paid mobile music services remain mired in internecine value chain conflict, Apps have transformed mobile as a music channel from an awkward, underperforming curiosity into something vibrant and truly differentiated.

Tablets add important context.  They turn the conversation from mobile music strategy to connected device music strategy.  (They  also do a better job at most music experiences than phones).  In fact talking about mobile as a separate channel is no longer that instructive, rather we should think about mobile as one consumer touch point in an integrated channel and platform strategy.

But, once again, it is crucial to consider that Apps are the enabler, not the objective.  Remember, ringtones were the future once too.  The challenge for developers is to navigate through the wild west gold rush, and establish long term learnings from the App boom experience.  Think of the App economy as one big market research project (that’s certainly how Apple views it).  When the wave subsides the mobile music landscape will have changed forever.  Artists, labels, managers, developers, carriers, handset makers all need to work together to ensure that that future is as positive a force for the music industry as the early signs suggest it could be. The depressing alternative is that we look back in 5 years at the App era as another ringtone bubble.