Mobile Apps for Music: Look Out, iTunes?

Low-cost apps that let users download music and other extras to their cell phones could help lure cash-strapped music fans

Just what the music industry needs: another way to distribute music at a fraction of the cost of a traditional CD. On Feb. 18, the twice Grammy-nominated Presidents of the United States of America became one of the pioneers of a new method for selling music online when it began bundling songs into software applications downloadable to the Apple (AAPL) iPhone and iPod touch.

The software lets fans stream tracks from four albums onto their wireless handsets. It also contains 10 songs from the band's demo tape and weekly exclusives, like audio from PUSA rehearsals. All that comes for only $2.99, compared with more than $40 the content would have cost if it were sold in CD form or downloaded through Apple's iTunes music store, which sells songs at 99¢ a pop and albums for $9.99.

Reaching New Fans

Music apps are likely to pose challenges to existing outlets such as radio and a musician's own Web site. At the same time, industry analysts see downloadable apps as a fresh way to court fans who might not otherwise pay for music. "Here's an entirely new model," says Dave Dederer, who co-founded and formerly was a singer in the band. "iTunes is great, we get an extremely high margin. But artists need to look for every way they can for merchandising music. It could revolutionize how music is marketed."

Mobile apps offer an opportunity to sell new content to hard-core fans who have already purchased all of a musician's albums. But PUSA sees them as a way to lure new buyers. "You might have never bought our songs [for 99¢ each]," Dederer says. "But you might go spend $2.99 for an app." Some of these mobile app users may eventually end up liking a particular song and buying the single off of iTunes to listen to it on a high-end home stereo or the home computer.

Music labels say they're not worried about cannibalization. "There was a time in record executives' minds where everything that was not a record was viewed as cannibalization," says Cynthia Sexton, executive vice-president for EMI Music brand partnership, licensing, and synchronization. "Now we think the more the merrier."

Getting the Price Right

Squeezing out the extra purchases is a big deal for artists and record labels nowadays. U.S. music sales tumbled 12% in 2007, according to the most recent data available from the Recording Industry Association of America. The industry probably didn't fare much better last year as the economy skidded into recession. "Consumers' sense is, the music is still overpriced," says Tom Conrad, chief technical officer of free online radio provider Pandora Media. "People feel the product on the table right now is highway robbery." In April, Apple will begin selling songs on iTunes for 69¢ to $1.29 apiece.

Amid rising unemployment and stock market losses, the cheap apps may sell better than pricier albums as consumers slash discretionary spending. "[Mobile apps] tend not to be hitting people's pocketbooks," says Jeff Orr, a senior analyst at consultant ABI Research. "The smaller app content costs should keep the spend relatively high." Of some 235 smartphone users recently surveyed by ABI, 17% said last year they spent between $100 and $499 on mobile content, such as games, entertainment, and productivity applications.

Other artists and record labels are warming to mobile apps. Dederer's employer, mobile podcaster Melodeo, has produced 23 compilations of hits, including a collection of the 100 greatest love songs of all time, available for $1.99 through the iTunes App Store. On Feb. 23, Universal Music Group's label Interscope Geffen A&M launched five free iPhone apps for artists such as Lady Gaga and the Pussycat Dolls that let users view videos and pictures and chat with other fans. Dederer is Melodeo's vice-president of business development.

"Tip of the Iceberg"

Record label EMI Group and application developer Tapulous recently released a music game called Tap Tap Dance, which offers 10 dance tracks from artists such as Moby and Sunny Levine and an exclusive track by Soul Magic Orchestra. A feature-rich version of the app costs $4.99. "I see expanding musical opportunities in this way as a big boom for the music business," Sexton says. "I do believe it's going to grow very quickly. Every game or application deserves to have great music attached to it. This is the very tip of the iceberg."

Analysts concur that the market for music apps is likely to grow. "It could get very big," says Mike McGuire, research vice-president at consultant Gartner (IT). "It could be a very powerful marketing and awareness tool." In the coming months, other mobile app stores are expected to gather steam or come online. Google (GOOG) is pushing Android Market, a store similar to Apple's but serving users of different smartphones. BlackBerry maker Research In Motion (RIMM) is due to launch its revamped mobile storefront in March. Microsoft (MSFT) is expected to launch an app store for Windows Mobile devices this spring as well.

Not all music apps will come with a price tag. Some artists will give music away in hopes of converting freeloaders into paying customers. Death Cab for Cutie's free iPhone and iPod touch app features nine full songs, videos, photos, and a tour schedule; it recently reached the ranks of the top 20 free app downloads on iTunes.

Tuning Out Radio?

Some analysts question whether the music apps could grab sales or users from higher-priced music downloads or subscription services like Rhapsody (RNWK), radio stations like Pandora or those owned by Clear Channel, or even social networks like News Corp.'s (NWS) MySpace. Some cheapskates may end up downloading the apps and forgoing the more expensive physical or digital albums. "We think it's great for bands to stream music onto Apple devices and that it provides a great way for the band to expose people to their music," Apple said in a statement.

Radio, historically one of the primary means of discovering new artists, could lose luster. After all, free iPhone apps could allow phone owners to sample new artists when they want, without extra cost. But Jonathan Sasse, senior vice-president for marketing at Slacker, which offers thousands of artist-specific digital radio stations, sees opportunity instead. He believes that the apps will eventually become intertwined with online radio: After listening to an artist's song on an app, a user may be offered to click on a link to a radio station for more. "If they compete with anything, it would be MySpace pages for the band," says Sasse, who adds that Slacker is talking to labels about creating artist-specific cell-phone applications. "It could start to limit the other places you might visit."

Less Competition at the App Store

The music apps have yet to prove themselves. In its first week on iTunes, the PUSA app has been selling in the high hundreds a day, on par with the band's full music tracks.

Independent musician Riley Weber has not been so lucky. His Romance Jukebox app, a collection of two original songs, has sold fewer than 10 copies. Undeterred, he is now preparing to release a $1.99 app that contains 50 original and humorous birthday songs. At the end of each song, the nifty app will display a birthday cake. The users can blow into the iPhone's mike to blow out the candles. Currently, the same songs are selling on iTunes for 99¢ apiece.

In his mind, he's more likely to get noticed at the app store, where only a few dozen of the more than 15,000 apps are related to music, than on iTunes, which boasts more than 10 million tracks. "There's a lot better chance of people learning about [me] through apps," Weber says. "I am building awareness of who I am."

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