How the Music Industry Explains the Weird Economics of the App World

When the economics of superstars meets the Internet, your reach is much bigger than your revenue

615 iphone.jpg

Here's a big (and basically defensible) statement: The App Economy is today's most successful broad-scale innovation revolution. The iPhone, which didn't exist in early 2007, unleashed an international competition to fill our phone screens with square baubles that used the phone's Internet connection, location-based technology, camera, and design intelligence to creates applications that far exceeded even Steve Jobs' wildest dreams. As a result, our smart phones today are better little computers than practically any of the big computers that existed just five years ago.

The App Economy isn't merely delightful, it's also an economic juggernaut that's created more than 400,000 jobs and a multi-billion-dollar business where there was, very recently, nothing. That's the good news. The bad news is that in the App Economy, as in every hit-making business, there is the top 1% and there is everybody else. For a taste of the App Economy's inequality: Of the $6.5 billion that Apple has paid to app developers, only 25% made more than $30,000 and 4% made more than $1 million.

It's the Economics of Superstars law, applied to apps: In a crowded international field, small differences in talent can translate to huge differences in outcomes. The most popular photo app, Instagram, was bought by Facebook for $1 billion. The 10th best photo program probably isn't worth 1% of that figure, since networking effects will encourage users to cluster around the most popular apps. But the wealth is in the reach. Just as in music, where a global audience for the top artists vastly increases the number of markets where they will make money, the international market for smart phones (Apple sells more than 60% of its iPhones outside the Americas) means that the small number of big hits will find an audience around the world.

There's the Internet Corollary to the Economics of Superstars law, which is as true for apps as it is for music. When you're selling something very cheap, or even free, over the Internet, there is an unpredictable relationship between audience size and income. A New York magazine profile of the band Grizzly Bear showed that, in the brave new world of music-everywhere, you can simultaneously be popular enough to sell out Radio City Music Hall and middle-class enough to live in a small Brooklyn apartment without health care thanks to the paltry returns of music popularity. Here was the magazine's breakdown of the expected income of a beloved indie band (at $0.005 per stream, you could hit 1 million streams before making as much as getting a song attached to one small indie film):

Screen Shot 2012-11-19 at 11.37.26 AM.png
Fortunately for developers, the App Economy has something that the music industry doesn't: The support of venture capital firms who buy equity in promising apps with the expectation that ad money, or something else, will follow audience. Some of these bets will pay off for VC firms, and some won't (venture capital is in the hit-making business, too). But since many of these bets are made with the expectations that somebody somewhere will figure out the model for monetizing mobile attention, it's not alarmist to suggest that the longer big companies like Google and Facebook struggle with mobile ads, the smaller VC's appetite for some apps will become. In that case, the bright and growing app economy will learn what the music industry is learning: Your big audience doesn't mean what you think it means if nobody is paying.