The 10 highest-grossing apps in the iTunes App Store are all free. But that doesn’t mean they don’t make money. In fact, most of them are rolling in revenue — just not from selling downloads.
For example, as of Oct. 29, the top app was “Candy Crush Saga,” which generates an estimated $875,000 per day in sales, according to Think Gaming. Developer King.com has reportedly filed preliminary papers with the Securities and Exchange Commission for an initial public offering. The No. 2 grossing app, “Clash of Clans,” rakes in about $691,000 per day, and its publisher, Supercell, was valued at $770 million in April when it raised $130 million in funding.
All of that revenue comes from in-app purchases that occur after players download the free game. In fact, spending on games that are free to download is estimated to hit $31.9 billion worldwide this year, according to International Development Group. That would be more than the $26.2 billion in sales that IDG expects from sales of traditional game-console hardware and software this year through traditional retail channels.
Spending on in-app purchases accounted for 76% of Apple’s U.S. App Store revenue in February, according to the latest publicly available estimate from Distimo. The ratio is even higher in Asian countries.
“There’s a big consumer opportunity in ‘freemium,'” says Mark Mulligan, a music analyst with MIDiA Consulting, which recently surveyed music consumers about their preferred method of paying for content. While MIDiA’s report isn’t yet complete, Mulligan says preliminary results show “in-app purchasing is far more popular with consumers than subscription models, so the demand is absolutely there.”
One of the opportunities for music to leverage in-app purchasing lies in migrating users from a la carte to subscriptions, where the revenue stream is more predictable, Mulligan says. That means packaging virtual goods or experiences for which consumers will pay 99 cents at a time, then allowing them to use their spending as credits toward a subscription model.
Unfortunately, current music licensing regimes don’t accommodate such sales tactics.
“This requires labels to reconsider how they license content to take advantage of this opportunity,” Mulligan says, “because there’s evidence that vast amounts of money are being left on the table.”
Most leading music services provide access and convenience — access to tens of millions of clips and the convenience of being able to get to any song users want to hear on any device at any time. Games, however, revolve around interactions, community and personalization-mechanics that have been successfully deployed to move billions of dollars in spending.
At its core, a game is a behavioral feedback loop, says Frank Gibeau, executive VP of EA Mobile, a division within Electronic Arts. “The trick is to deconstruct how people engage with music,” he says, “especially the whales with the highest engagement and spending patterns.”
For music, this could be interactions with the artist in the form of messages or “virtual roses.” China-based social network YY.com sells virtual roses that its users can “toss” to karaoke singers as they webcast their live performances, with top performers earning $20,000 per month from cashing in the roses. Such interactions helped generate $27.8 million in the second quarter for YY’s music vertical, roughly 41% of the Guangzhou-based company’s total revenue.
What keeps players coming back to games like “World of Warcraft” is often the network of people bound by a common interest. Trey Songz’ free app, developed by Handmade Mobile, is nothing if not a community of fans who call themselves “Trey’s Angels.” The interactions in the app are deceptively simple — chats, virtual gifts, leader boards and messages to each other and to Songz personally. Members each spend more than $1.10 per month to engage in these social mechanics.
Remember the $3.99 ringtone? For a short period, revenue for 15-second ringtones rivaled full downloads of the same song that sold for 99 cents. Mayfield Fund partner Tim Chang says that was because “ringtones were personal branding events” while song downloads were “just content.” Top-grossing apps like “The Sims,” “Campus Life” and “Hay Day” generate revenue by selling virtual decorations that players buy in order to personalize their games. One could argue that music has a similar potential for self-expression.
What music companies need to keep in mind, however, is that not all game mechanics are transferrable. One of the most popular in-game purchases, the ability to speed up a time-consuming process like growing virtual crops, doesn’t have a corollary in music. In fact, interactions with music have to be instant or risk being abandoned by a frustrated listener.
Finding the right mechanics and creating clever experiences that leverage those interactive levers will be a key challenge.
“There’s a need for music products to become more interactive,” Mulligan says. “Think about what an iPad or Android tablet can do. They have multi-touch screens, accelerometers, microphones and cameras. But music is still delivered as a passive audio file. Once you crack the puzzle of how to have cool interactions through music, you enable the in-app purchasing opportunity and allow music to thrive on connected devices. At the moment, music only survives rather than thrives.”