To understand Beats you need to understand Lady Gaga

The news are finally out — Apple is buying Beats for 3 Billion Dollars.

shutterstock_93393982

Headphone sales? Music streaming service? Wearables? Music label deals? None of the current Beats products look as a credible reason for a deal of that size. Something much bigger is going on. It is not about what Beats is today, but about what Beats can become in the future.

To understand what Beats can become we need to understand Lady Gaga first. Lady-Gaga-the-business-model.

Lady Gaga broke in with her August 2008 debut album, “The Fame”, and became an international megastar in a few short years. Gaga won Billboard magazine’s Artists of the Year title 2010, is ranked fourth in VH1’s list of 100 Greatest Women in Music, is the fourth best selling digital singles artist in US according to RIAA, is on Forbes magazine The World’s 100 Most Powerful Women list from 2010 to 2013, and was named one of the most influential people in the world by Time magazine.

Lady Gaga was the subject of numerous business case studies, including one by Harvard Business Review (Anita Elberse, Michael Christensen) and Business Strategy Review (Jamie Anderson, Jörg Reckhenrich and Martin Kupp). What makes Lady Gaga special is her pioneering use of social media to build a loyal community of fans to “sell the artist” in what the music industry calls a “360 deal”. The “360 deal” is reminiscent of a VC investment model, where a label invests more money up front in exchange for a piece of merchandise sales, touring revenue and other earnings that artists had long kept for themselves.

The HBR Lady Gaga (B) case study notes that as early as 2009 and 2010 Lady Gaga already had multiple consumer brand partnerships, including:

  • Beats by Dr. Dre selling branded Heart Beats model of the $100 in-ear headphones as “undeniably unique” and likely to “attract fashionistas far and wide.” (The story is much bigger here than this specific deal.)
  • Virgin Mobile sponsoring the U.S. tour dates of the Monster Ball tour.
  • Polaroid, which appointed Lady Gaga as creative director for a special line of products that would be released in the coming years.
  • MAC Cosmetics for which Lady Gaga joined 1980s pop legend Cyndi Lauper as the latest celebrities to feature in MAC Cosmetics’ Viva Glam advertising campaign.

In 2011, Amazon launched a promotional campaign selling at a loss Lady Gaga’s album “Born This Way”, essentially subsidizing distribution of the new album.

In an interview with The Wall Street Journal, Gaga was asked whether she believed that “Born This Way” was worth more than 99 cents. The answer is very telling:

“No. I absolutely do not, especially for MP3s and digital music. It’s invisible. It’s in space. If anything, I applaud a company like Amazon for equating the value of digital versus the physical copy, and giving the opportunity to everyone to buy music,” she said. “It also wasn’t really 99 cents, because Amazon paid the difference on all of those purchases as part of their promotional campaign for one of their new services. I think it’s amazing and it was a really nice surprise and I felt honored that they chose my record to be part of it.”

Troy Carter, who discovered Gaga and was her manager till November 2013 being widely credited for much of her business strategy sums it up nicely in his interview to FastCompany:

It was more about building a platform on top of music—because music, we realized, sells everything but music.

Gaga-the-business-model is a poster child of the new economics of digital era. Mike Masnik of TechDirt calls it the economics of abundance brilliantly explaining it in just minute and a half video here: http://www.techdirt.com/articles/20091020/1519476609.shtml.

(Note that Mike accurately predicted the rise of the new business models in music well before Gaga’s business success became known.)

Digital music is abundant (“It’s invisible. It’s in space” as Gaga puts it) and music industry whose business models were rooted in scarcity of vinyl records and later CDs were turned upside down by the need to deal with abundance of digital music. The good news, Mike says, is that for every abundance new scarcity is created. Gaga-the-business-model is an excellent example of how to benefit from these new scarcities created by the transition to digital.

The business people behind Gaga also saw the missing link in the digital music value chain. This missing link is also a huge opportunity to fill the void going much further that “selling the artist” to the loyal fan base.

In February 2013 Jimmy Iovine, Chairman of Interscope Records (Lady Gaga’s record company) and at the same time co-founder and CEO of Beats, gave very revealing interview to D:Dive Into Media. The most interesting bit comes in the Q&A section where Jimmy divulges his vision for BeatsMusic.com 35 min 15 sec in the interview (and it’s not about curation):

“But there something else going on our service that doesn’t go on anywhere. We have to make it user-friendly to the artist. They have to be able to build businesses on it. They have to be able to have the information who is using their music, where they are… That has to become a business for the artist as much as communicating with their fans. Right now, they (music services) have all the information and the artist have no information. No one knows… I don’t know. I own a record company. I would die to know who bought my records on iTunes or bought my tickets on TicketMaster.”

Jimmy Iovine sees the opportunity in changing the game and “building a communication between a fan and an artist.” In other words Beats Music is not yet another streaming service designed to sell music, but a platform for artists to build businesses and “sell everything but music” as Troy Carter says.

That brings us all the way from Gaga to Uber, where Troy is an investor. Steve Schlafman from RRE ventures says in “Uberification of the US Service Economy”:

“On-Demand Mobile Services (like Uber) deliver a “closed loop” experience by collapsing the value chain including discovery, order, payment, fulfillment (offline but within owned network) and confirmation.”

In essence, Beats aims to become Uber of music by aggregating demand, connecting listeners to artists and empowering the artists to build thriving business on top of the platform. Much like Uber, which promises to end the era of poorly paid cab drivers. Or like Apple App Store, which connects users with app developers allowing them to build business on top of the platform.

Pandora, Spotify, Play Music and Amazon that are all designed to sell music, will have very hard time to compete against a platform for building businesses on top of music. As Marshall Van Alstyne said in slightly underestimated way (pun intended):

“There is a strong argument that platforms beat products every time.”

The acquisition makes very good sense for both Apple and Beats. Beats gets the opportunity to kickstart network effects of the platform by bringing huge base of Apple users together with their credit cards to artists. Apple at the same time will benefit by bundling the music platform with its idevices, where the company makes most of its profits and badly needs to rejuvenate growth.

(I don’t think Apple will prevent BeatsMusic service from being available on Android devices. Having best experience with most fresh music reserved for Apple users will do just fine. “Apple-first” strategy works very well for both most mobile app developers and Apple.)

Interesting times ahead — As Troy Carter says in his interview to Guardian:

“Hollywood, record labels and tech giants such as Apple, Google and Samsung face immense risks and opportunities. Everybody should be afraid right now. We saw what happened to Nokia and BlackBerry and Motorola. Nobody saw Android coming. Nobody saw the iPhone coming. Nobody saw Samsung coming. No one is safe right now. Everything is moving so quickly.”

The music industry needs to brace for a deep and painful disruption, much like legacy taxi cartels and unions across the globe. Samsung needs to find a new source of differentiation after acknowledging defeat with its home-grown music service. Will health and wearables fill this void? Google will probably scramble to build a competitor to Apple/Beats refocusing YouTube Music from labels to artists. Amazon will need to find a solution if the company wants to stay relevant in the music distribution on which it relies for promotion.

Of course we haven’t heard much of it from Apple or Beats, but Jimmy Iovine said to Re/Code following the announcement of the acquisition:

“Obviously, we can’t talk about that, as you know. See, in the record business, you can show someone your song, and they don’t copy it. In the tech business, you show somebody your idea, and they steal it.”

The strategy lesson from Apple and Beats is this: Look for opportunities to build platforms connecting consumers with value-adding complementors. (Think a “connect-ing business”, and not a “connected business”.) Capture value through bundling with the platform that will buy you hyper-growth driven by network effects and insurmountable competitive advantage. (And of course don’t tell anybody what’s you are up to before it’s ready.)

How Samsung enlists developers to make sense of health data

Samsung unveiled its vision on mobile health. The company wants to provide the “voice of your body” with two new intiatives: a sensor-packed Simband device for protoyping next-gen wearables, and the SAMI cloud platform that enables developers to generate insights from health data. The vision is spot-on when it comes to making software entrepreneurs the new heroes of health. Analyst Stijn Schuermans asks the question: what’s next for mHealth? 

Samsung Simband Health Sensors

It used to be that the coach on the field or in the gym had all the wisdom to make you fitter and healthier. Ever since Moneyball, coaches have had a serious competitor: data. This trend has started to snowball in recent years with the advent of smartphones, wearable fitness trackers and connected devices (from scales and heart rate monitors to blood glucose meters).

Health IoT has moved from being a blue ocean market to red ocean status as competition increases. Fitness trackers, connected weight scales, sensorized running shoes… Already we see dozens of similar devices on the market. For example, Amazon.com shows 1,000+ results in the pedometer category; it lists products from Fitbit, Jawbone, Nike, Basis, Omron, iHeart, Striiv, Misfit and about 50 other known and less known brands. Even if many of these are not yet connected, they will be soon.

[tweetable]The current wave of health and fitness related IoT devices is just the beginning.[/tweetable] Once these devices become commonplace, what’s next?

From coder to coach: the role of software entrepreneurs in mHealth

It is well understood that the trend to approach fitness with devices and data will have far-reaching consequences for sports coaches, dietologists and medical professionals alike. If those professions want to remain the heroes of health in the future, they’ll need to partner up with new players in the game: software developers and data scientists.

[tweetable]The wheels are already in motion when it comes to making sense of health data.[/tweetable] There are already over 50K health apps on iOS and Android that help people to get fitter, increase their wellness or manage their disease. Insurance players like Aetna are working actively to get a full health picture. Their Carepass initiative helps their customers to get a full picture of all their app and device data in one place, and to set and track health goals. Propeller Health is combining IoT with environmental data to help patients to better manage asthma.

What’s being done for the developers who make all those apps? Programmable Web lists 100+ health APIs. Most of them are between 1 and 3 years old and will have matured quite a bit already. Companies like Human API and Validic provide middleware for health data, making it easier for software entrepreneurs to build interesting applications. Another company that has clearly understood the message is Samsung. Their “voice of the body” concept is spot on. With today’s announcement of the SAMI platform they’ve taken a big step in enabling developers to make sense of data. SAMI, an unwieldy acronym that stands for Samsung Architecture Multimodal Interactions, is described as an open cloud-based sensor data platform that helps developers to go “from big data to contextual insight”.

[tweetable]IoT and wearable will win by communities of software entrepreneurs that will make sense of all the data they generate[/tweetable] and help you improve your health, no matter what your current level of fitness is. The smartest of these entrepreneurs will combine data from many sources to arrive at the best possible recommendation or diagnosis. Platforms like Human API or Samsung’s SAMI will make that possible.

Incidentally, Samsung has signaled clearly today that developers and entrepreneurs are crucial to the future of mHealth. Developers being involved long before a consumer-ready device is available – the same developer-first strategy that Google followed with Android or, say, Google Glass. The Korean electronics giant is also putting its money where its mouth is: it will invest a handsome $50M in a Digital Health Challenge to stimulate innovation within the global developer ecosystem.

Next stop: users

Samsung’s Voice Of The Body announcements illustrate the evolution in IoT maturity nicely. First come sensors and devices, represented today by the Simband “investigational device”. (Simband is a wristband packed with novel sensors to measure your body. It’s more of a reference design rather than a commercial product.) Then, empower hardware makers, developers and entrepreneurs to experiment with the new technology (via Simband) and with the data it generates (via SAMI). Samsung obviously hopes that this will result in more component sales. But before that will happen, a final piece in the puzzle needs to fall into place.

Simband and SAMI, despite all the talk about developer-entrepreneurs, are still very much focused on solving technology challenges. The aim is to reduce the cost and complexity of building valuable applications. What’s missing is a vision on how to connect these developers and their apps to the users who needs them. Where will the demand for wearable health sensors and health apps come from?

We can draw an analogy with smartphone platforms. The Android ecosystem consist of a software platform (the Android Open Source Project, or AOSP), plus the Google Play app marketplace and a set of critical apps and APIs (more in our Naked Android article). AOSP is open, the Play store and Services are tightly controlled by Google, as they represent the connection with users. Demand for Android phones is driven by Android apps, which are built with Play APIs and available on the Play store. [tweetable]The SAMI platform represents the AOSP of wearables.[/tweetable] The equivalent of the Play services is nowhere to be seen (yet).

The crucial question for Samsung and other players in the space is this. Will they stop at technology? Or will they continue to evolve into a full-fledged computing platform and ecosystem that connects users with a community of software and hardware entrepreneurs?

Interestingly, more so than almost any of its competitors, Samsung has a large amount of existing users that could be connected to valuable health solutions. If Samsung pulls this off, they have an opportunity to start the network effects that will eventually lead to a winner-takes-all outcome. [tweetable]Will Samsung seize the day in IoT and create the next dominant computing platform?[/tweetable]

What do you think?

The cross-platform platform: Facebook’s developer strategy

When Facebook was first listed on the stock exchange in 2012, investors were concerned. Had the company missed the mobile wave? 5 years after the launch of the iPhone, most of Facebook’s revenues still came from desktop. Zuckerberg’s team recovered. Today mobile already represents 60% of revenues, and Facebook is about to double down. Apps will become a central part of the social network’s monetisation of mobile. Stijn Schuermans shines a light on Facebook’s new mobile developer strategy.

VM_OSWars

Two years ago we wrote that Facebook was a prime candidate to become the leader of the mobile web; the one who would take care of the missing platform ingredients (reach, discovery, monetization). It should come as no surprise then that over the past year Facebook has shown a renewed focus on helping developers to build – grow – monetize their apps across all mobile platforms. Zuckerberg himself called it the cross-platform platform in his keynote speech on f8. We couldn’t have said it better ourselves.

facebook-graph

The mobile platforms of Apple and Google became so successful because of the large amount of apps that they drew in. For developers, however, this meant heavy competition, few opportunities to stick out and a difficult environment to build a business on. [tweetable]Facebook now positions itself as the developer’s partner that helps to de-commoditize apps.[/tweetable] Facebook can lure mobile apps to its own camp by enabling developers to compete better. Apps will depend on Android and iOS to become available on the majority of handsets, and on Facebook to reach users, get discovered and make money.

Three aspects of Facebook’s strategy warrant a closer look.

Facebook builds a Mega-SDK

Facebook knows developers very well – hacker culture is deeply embedded in the company’s DNA. [tweetable]Facebook is now extending that developer DNA beyond company boundaries[/tweetable], just like Amazon has expanded its cloud operations DNA outside of the company by commercializing its Amazon Web Services (AWS). “Unlike their past developer efforts, which were all about pulling content onto Facebook, this year was about pushing Facebook’s infrastructure out into all kinds of mobile apps”, as Ben Thompson put it. It is a very natural way to empathise and connect with the developers who will build complements to Facebook and Amazon’s core businesses.

How is Facebook going to entice mobile developers? By building one of the first true Mega SDKs. [tweetable]As we predicted last July, Facebook’s Mega SDK will be built around app marketing services[/tweetable]:

  • analytics (relevant acquisitions include Parse, Monoidics, Little Eye Labs, Airlock)
  • promotion (more than 350 million app downloads through mobile app ads to date)
  • re-engagement (Engagement Ads were announced at f8)
  • monetization (the new Audience Network)

Half a dozen acquisitions in the past year, new products and a new developer incentive program (FbStart) all say that mobile developers are becoming incredibly important to Facebook. Although we have to stay careful of course: Mike Mace correctly points out that Facebook in the past has shown predatory behavior (incorporating 3rd party apps into the core product) and neglect for developers.

Digital identity is Facebook’s essence

Facebook’s new anonymous login and privacy features are not just about soothing the privacy pundits and the company’s most vocal users. They point to a deeper reality: digital identity is at the core of everything Facebook does.

[tweetable]Facebooks needs developers to make the Facebook digital identity ubiquitous across web and mobile[/tweetable]. The social network giant does that by reducing sign-up friction on the user side (hopefully also making developers more comfortable with integrating Facebook login). Social login was also a main feature of Parse. Several other highlights at the f8 conference (Send to Mobile, the mobile Like button, even Applinks) make most sense when viewing them as ways to increase the value of a Facebook login relative to a proprietary identity, another social login provider, or no identity at all.

[tweetable]Why this focus on identity? Because it’s crucial for Facebook’s survival[/tweetable]. A study from early 2014 claims that Facebook is about to lose 80% of its users, drawing a parallel with infectious diseases that spread, then flare out. Whether or not that comparison holds water, identity is a powerful antidote to this scenario. If users don’t just use Facebook as their social network, but also to access scores of unrelated services, then it will be hard for users to drop Facebook entirely. The company will still have to work hard to keep users active and engaged, but it will have an opportunity to try.

And, not to forget, Facebook gains a treasure trove of user behavior data that will reach far beyond its own services.

It was no accident that identity was the first item on the “cross-platform platform” list in the graph above, before social. On the web, Facebook also accounts for more than half of all social logins. It fully intends to achieve the same in mobile. The company’s future depends on it.

Facebook wants to become “Google for mobile”

Facebook and Google are mortal enemies, because they have the exact same business model.

  1. Create value for users by developing a score of valuable services (most of them free to use), and enlist developers to create thousands more.
  2. Deliver that value across all digital devices; on the web and on mobile.
  3. Capture value by selling user reach, engagement and hyper-targeting to advertisers.

It is no wonder then that there are many similarities between both companies. Facebook is taking that similarity to the next level with its new products.

The Audience Network is the AdMob of Facebook. It aims to become the key competitor for Google in mobile advertising.

But the boldest move is Applinks. [tweetable]In the most optimistic case, Applinks will allow Facebook to build the PageRank of mobile[/tweetable], a head-on attack on its arch rival. (Facebook has already kindly offered to host an index of all applinks.) At worst, Applinks can substantially boost Facebook’s app install business (CPI) through affiliate marketing schemes, earning revenue on each referral. That supports the Mega SDK for developers as well as Facebook’s own income statement.

Prize winners for the Apr/May developer survey

We’re happy to announce the winners of the prize draw from our April/May developer survey!
A big thanks to everyone who took the survey – results will be out in July, available for download from DeveloperEconomics.com, as usual.

Here are the prize draw winners:
– Galaxy S5: Emil Izgin (@ocjdev), Russia
– Lumia 930: Marius Hergel, Norway
– BlackBerry Z30: Luke A. (@lukeja)
– Sphero: Harry M.
– Lego MindStorm: Cristiano Sarti (@CristianoSarti)
– Raspberry Pi Starter Kit: Stratos Botsaris (@polydefkis12), Greece
– Das Keyboard: Daniel Midi (@danielmidi), USA

How much does it cost to create a successful app?

The app stores contain a range of apps from hobbyist creations built for fun to the carefully crafted output of venture backed startups and mega-corporations that have had millions of dollars spent on their development.

05 App Profit & Loss 2014

Even though the market is maturing and exceptionally well-funded developers have taken over the store charts, the occasional small independently developed app that goes viral can still break through and achieve a decent level of success. The question is, how likely is a small budget developer to succeed? What platforms give them the best chance of success? Where should the budget be spent? With all the competition out there, how much does a bigger budget improve your chances of turning a profit?

What are the odds?

In order to look at how budget can impact profitability it’s worth calibrating by the average chances of making a profit on each platform.

The figures in this chart are probably more positive than most industry observers would expect. Looking at the data it seems likely that many solo developers have valued their time at zero when reporting costs. For hobbyists and explorers, working in their spare time this might make rational sense. They don’t expect to be paid for the time anyway and their small app profits more than cover their other development costs. This is reflected in the slightly lower level of Android developers losing money versus iOS (there are far more hobbyists on Android than iOS).

Leading platforms

On the most popular platforms – iOS, Android and HTML5 – there’s a general correlation between spending more on an app and making more revenue. However, not all spending produces equal results. Spending more on development only slightly increases the chances of making a profit, while increased spending on design and marketing are strongly correlated with higher probability of making significant profits. Higher spending on customer service is almost always associated with greater profit probability but here the causation is almost certainly in the other direction; successful apps incur greater customer service costs because they have a lot of customers! These platforms show very similar patterns but they aren’t identical. The biggest difference between them is that spending more on design for HTML5 apps seems to produce much less of a boost to profit probability than for either of the leading native app platforms.

The second tier

BlackBerry 10 and Windows Phone show similar patterns of spending versus profit probability that are very different from the leading platforms. For small amounts of spending, there are similar patterns to the leading platforms. More investment, greater chance of a profit, with better returns from design and marketing spend. However, before reaching a level that would sustain a full-time designer or developer, the trend reverses; investing large amounts in any aspect of apps for these platforms reduces the probability of a profit and increases the chances of making a loss. This suggests that these platforms have not yet reached sufficient scale in terms of app revenues to sustain many highly complex or polished apps.

Opportunities everywhere

On the leading platforms, developers with budgets in the multiple thousands of dollars a month have roughly twice the chance of turning a profit on their apps as those spending minimal amounts. Even at lower spending levels, the probability of breaking even or better is reasonably high across all platforms, particularly for those investing in design and marketing. While it’s clear that only some of the platforms discussed above are likely to support scalable app businesses at the moment, there are plenty of opportunities to build profitable apps on any these top 5 platforms.

Want to know more?

I’ve only scratched the surface of our data here. What scale of profit or loss can be expected on different platforms with different levels of investment? Are there optimal investment levels to maximize the chances of success? Which app categories are most likely to product a profit. What do successful app development companies look like at different sizes? All this and more is covered in our App Economics report.