An update on mobile apps and the music industry

Most mobile music services use pay-per-track and subscription-based pricing models, but some operators have started offering music services bundled with their mobile subscriptions. Full tracks are sometimes thrown in as a “free” extra to motivate people to take out a mobile subscription or data plan or to top up their prepaid credit. An example of the latter is Orange’s Monkey prepaid plan in the UK, in which users get free music for topping up as little as £5 (US$7.75).

Statistics published in some European countries have shown sharp declines in mobile full-track music sales over the past year or two. These figures can be misleading, however, because they don’t take into account the proportion of full tracks downloaded or streamed via mobile devices from online services such as iTunes and Spotify, even though these services are the fastest-growing segment of the mobile-full-track market in developed countries. So rather than reflecting a shrinking mobile-full-track market, the statistics indicate the shrinking market share of traditional mobile music providers, i.e. operators and content aggregators.

The mobile app boom
For many years, mobile operators have tried to encourage content sales via their portals, but most have had limited success. The launch of mobile app stores has provided a much-needed boost to mobile content sales and is making a massive contribution in changing the way people interact with content and value-added services on their devices. According to Informa Telecoms & Media, publisher of Music & Copyright, about US$4 billion in revenues was generated from mobile apps in 2010.

A survey conducted late last year by Informa revealed that, globally, about 70 mobile application stores are in operation, and the figure totals 600 when localized versions for each country are counted. The app stores are deployed by handset/OS makers, mobile operators and application/content aggregators. About half of the stores are from application/content aggregators – many predating the Apple App Store – followed by operators, which account for about 30%, and handset/OS makers, which account for the rest.

Music in mobile app stores
The number of music apps in mobile app stores has been growing steadily. For example, there were 13,912 music apps in the Apple App Store – 4.1% of total apps – as of January, up from 496, or 3.2% of the total, in January 2009. Many music apps in the mobile app stores have become hugely popular among users. Spotify, Shazam, TuneWiki, Midomi, Last.fm, Pandora, LaDiDa and Turner Internet Radio are examples of successful ones.

Spotify has 10 million users, of whom about 1 million are paying customers. The company says 90% of its paying users subscribe to the more expensive €10 (US$14)-a-month plan, which includes use of the Spotify app on mobile phones, rather than the €5-a-month desktop-only option. It is reasonable to assume, therefore, that Spotify has more than 900,000 users paying to access the app on mobile, generating about €9 million in revenues for the company each month. In the UK, Spotify is priced at £9.99 a month for unlimited streaming.

Spotify is a good example of a service that benefits mobile operators. By entering into a long-term, exclusive partnership with Spotify, TeliaSonera managed to achieve outstanding results without needing to build its own music product. TeliaSonera offers Spotify Premium for just SEK29 (US$4.60) a month – about 70% less than the regular price – when taken with a new mobile subscription.

One of the benefits of the partnership is that it encourages customers to sign up for longer contracts. TeliaSonera offers Spotify only to customers who sign two-year contracts, making it an effective way of increasing the lifetime value of customers. In a survey of TeliaSonera subscribers on the Spotify price plan more than half said that Spotify was a factor in their decision to sign up with TeliaSonera. Moreover, 44.6% said that Spotify influenced their choice of mobile phone or subscription and 52.6% said that the Spotify service makes them less likely to leave TeliaSonera.

In December, Shazam announced that it had 100 million users in 200 countries, a major milestone. The Shazam app enables users to retrieve details about a song – including album, artist and title – by holding a mobile phone near the speakers of a device playing music.

In addition to its free music-discovery mobile app, Shazam has introduced a paid-for version of the app, Shazam Encore, which has become its core product. The free Shazam app limits users to five uses a month, but Shazam Encore – which costs US$2.99 – gives unlimited use and additional features. The Shazam app directs users to various a la carte music stores, largely depending on the type of device the application is installed on.

Artist-branded mobile apps
Even record labels are seeing the value of mobile applications as a means of encouraging music fans to interact with their artists. Pop star Lady Gaga launched an iPhone app as a means of interacting with her fans in the early stages of her career, which helped her build an intensely loyal fan base. Support from her fans, many of whom set up fan websites and participated in word-of-mouth marketing, helped propel her to international success with mainstream music audiences. Trent Reznor and 50 Cent are other examples of artists who have been particularly active in engaging with their fan bases through mobile apps, with great success.

Informa predicts that mobile music revenue will grow from an estimated US$14.4 billion in 2010 to US$25.3 billion in 2014. Mobile full-track downloads are expected to see the strongest growth over the next four years and generate more revenue than ring tones from 2013 onward. Mobile apps generated an estimated US$4 billion in revenue in 2010. Based on the proportion of music apps in mobile app stores, about US$156 million in revenue is likely to have come from the download of music apps in 2010. This is a conservative estimate, considering that the average price of paid-for music apps is higher than that of paid-for mobile apps on average. It’s also important to note that many music apps direct users to buy music from various a la carte stores, and revenues from such purchases are not included in the estimate. The figure also does not include subscription fees for music services such as Spotify and revenues from music services bundled with operator price plans.

The mobile music industry needs to adapt to new business models and find new ways to make money as more users expect to get free content. The success of service providers in the coming years will depend on how well they can integrate social and interactive features in their offerings and earn revenues from mobile apps, advertising and multiple platforms. In a short period of time, the mobile app market has exploded, and this swift growth will affect the music industry in a number of ways.

More D2C models for mobile music will emerge, driven by the app-store phenomenon. The smartphone users that mobile operators are concentrating on are the most likely to defect to the numerous over-the-top music services offered via native apps, or via the mobile app stores on their handsets. Mobile users will shift away from music services provided by operators and traditional mobile music companies to those provided by online players. More interesting and complex deals and partnerships – such as TeliaSonera’s deal with Spotify – will emerge as operators face tough competition and feel the need to develop new relationships. Mobile apps will also move to business models based on convergence, such as music services that can be accessed via mobile, online, in the car and on the home stereo system.

This blog post was written by Guillermo Escofet, Senior Analyst with Informa Telecoms & Media.

Music & Copyright is a fortnightly research service published by Informa Telecoms & Media.

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