The in-app economy mirroring the music industry? For real growth to happen there needs to be long-term investment. Is the infrastructure in place for selling music to be a profitable standalone business? Are the appropriate commercial rewards established? Or is the in-app economy just a micro-cosmos mirror image of the overall recorded music industry? What are the implications?

1. The Music In-App Economy must break
with the past to leverage the accelerating
growth of the Internet
Martin Kummer, Head Of Digital Channels
& Group Marketing, Ministry of Sound
Group
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2. Promising beginnings, poor execution
Music and Tech looked liked the perfect match:
• Great start when ringtones sold en masse at £3
• General feeling that if ringtones sold well at £3 then full-tracks would
sell even better for £1
It turned out to be different:
• Marketers ignored the difference between personalisation and
consumption products. The result were loveless stores hardly better
than pirate sites
• DRM complexity made legal downloads inferior to legal ones
• Wrong decisions and arrogance caused failure
Apple are the only ones who’ve made digital downloads work...
...but with far reaching implications: digital music commercials have
been coined by a market leader that doesn’t need to make money from
selling music
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3. Value perception gap
There is a significant gap between how tech companies and major labels value
music
Reasons why Tech companies think music is overpriced:
• breakage (paying for customers who don’t use it)
• lack of margins
• extra commitments
• monopolistic power
Reasons that concern the labels dislike about big tech companies:
• lack of long-term commitment/not dependent on music
• poor marketing & product execution (“not music people!”)/no priority at POS
• frequently changing interfaces/slow to react
• the risk of creating significant value without being paid enough
As a result of these often fractious discussions Tech companies have sought
alternatives:
• meal deals as loyalty rewards
• sponsorship of music venues/priority tickets, e.g. O2
• partnerships to move the risk to third parties, e.g. Vodafone & Spotify
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4. Three dominating music services, but no viable business model for standalone music
Would not exist if it wasn’t part of Apple’s highly profitable hardware ecosystem
Six years in the game and, despite improving margins, no profit yet, relying on
investors to pour in more money
1bn customers but only “$1bn music payout over the last several years” and
questions remain on how much this discovery service cannibalises consumption
services
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5. The growing Internet is a second chance for digital music
Internet Accessing Devices (m)
4,000
3,500
3,000
2,500
2,000
1,500
1,000
500
0
June 2010
Ipad
June 2013
IOS/Android phones
PCs
Source: Enders, Twitter
and the Internet Graph,
21 January 2014
• The rise of smartphones (replaced after 2 years vs. PCs replaced after 4-5
years) and tablets have increased the size and innovation speed of the Internet
significantly
• Mobile access is fastest growing and apps are the dominant way of interaction
on mobile
• Apps are now cannibalising music downloads on iTunes
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6. To leverage the Internet growth the in-app economy needs to be more attractive
• current in–app economics reflect commercial models coined by the
challenging digital music environment of the past 10 years
• revenue shares don’t fully reflect the value contribution from R&D
• the music in-app economy needs to make distributing & selling music a
worthwhile business
Music labels and tech companies have to overcome the baggage of the past
and have to create an environment that protects the value of music, but also
makes it worthwhile to invest in music as a standalone business.
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