Unbundling and the App Store Economy
Originally posted in 2011 for Rachel Sterne’s Social Media & Entrepreneurship Columbia GSB class
A few weeks ago, Facebook announced that they would be expanding their movie rental business. It’s no surprise — Facebook’s stated mission is to be the singular online destination for content discovery and consumption. Yet the move signals the advent of a more interesting trend; namely, the “app store” model has emerged as the pre-eminent paradigm for content distribution, and not just for apps.
The app store economy, as opposed to direct distribution or subscription services, refers to a content distribution model wherein content creators delegate the point of sale to a third party, whose role is to curate a large corpus and then use a set of heuristics to optimize content discovery for the end user. As with the iOS App Store, this curation is often both manual and crowdsourced — exposure is determined by Apple personnel (featured apps, the app store submission process), but also by human provided ratings and reviewed.
With this in mind, then, the power structure inherent in the app store model is oddly reminiscent of the much-maligned “bundled” distribution structures of “old” media. In a January essay, Om Malik wrote,
“In reality, [media companies’] barrier to entry was ownership of distribution platforms. Just as telecoms of the past maintained their near monopoly by controlling the last mile of the network, the media companies maintained their money machine by controlling the distribution network: trucks, radio waves and television frequencies.”
His conclusion was that the internet has unbundled media, insofar as the barrier to creating an online distribution network for content is both low hanging and transparent. In other words, the power shifts to the content creators, and consumption becomes distribution-agnostic.
The fact that big social media companies are trying to control the distribution network through their own app stores reflects a collective belief that the pendulum is swinging back. With their movie deal, Facebook is trying to create a highly vertical distribution networks under the premise that they “own” a highly lucrative audience. YouTube had the same argument when they launched their (less successful) movie rental service. The same goes for Apple, Amazon, Mozilla, et al. If any of these services can monopolize their distribution vertical, they can also manipulate the price controls. For example, Apple takes a 30% cut of purchases, and Facebook wants to do something similar through their Facebook Credits policies. Yet Apple’s success may be an isolated instance, because the ecosystem has changed dramatically.
First, the technical barrier of self-distribution is increasingly trivial. Content hosting is getting exponentially cheaper, DRM technology can be licensed from third parties, and free content management systems (WordPress, Bandcamp, Drupal, etc) are both robust and well-maintained.
Second, in the long run, content will prove to be king. For high value content (think television shows, books from popular authors, titles from large game studios, or music from pop stars), it makes more fiscal sense for the content creator to distribute directly. Not only will a lack of a middleman mean that they get to keep that 30% cut, but they will also avoid the non-transparent, relatively arbitrary curation that may actually mitigate discovery of their content.
Third, the advances of social media mean that content creators can leverage network effects without resigning control to a third party. It’s not unforeseeable that EA, for example, would have a Facebook page and a Twitter account to promote a new Call of Duty game, which would then be sold directly from the EA website, as opposed to on Steam or the iPhone app store (caveat: at least in the short run, Apple’s control of the hardware represents an immovable barrier to external app distribution). This means that app stores have a non-unique value proposition — exposure is being increasingly democratized.
The lesson to entrepreneurs, then, is to carefully assess the value of any content distribution network that you want to create, because in the long run, viable content distribution networks will be focused on the long tail, as opposed to high value, high volume content. Content will only become increasingly unbundled.
