Streaming Report Card 2014

2014 was the year streaming broke through to mainstream consciousness, not because of the marketing prowess of Spotify but because Taylor Swift decided to withdraw her content from the Swedish streaming heavyweight and other freemium services. It was a mixed year of momentous achievement and intensifying controversy, which makes it an opportune moment for an end of term report card.

Growth – 8/10

No complaints here. Impressive growth for both paid and free streaming with a likely combined annual growth of about 50% and total subscribers getting to about 35 million. Although there are some signs of slowdown this is to be expected as much of the addressable audience for the 9.99 price point is reached. In fact the growth slowdown was less pronounced than expected in some markets. If it hadn’t been for the fact that download sales for the year will be down about 10% this would have been a 9/10.

Transparency – 2/10

Two years ago I asked the CEOs of 10 leading streaming companies what the coming years would hold. Unfortunately for 5 of them it meant looking for a new job. One thing most were in agreement on however was the need to introduce far greater transparency for artists. Two years on and the issue is every bit as problematic. For the most part the discontent has been voiced by smaller artists or those later in their careers, but not by frontline artists in their prime. Until last week that is, when Ed Sheeran told the BBC that it is ‘fact’ that labels are holding money back from artists. Some time soon, some time very soon, labels are going to have to get on top of this if they want the model to work.

Platform – 5/10

I had high hopes for Spotify’s app platform, it looked like it was heralding the dawn of the ‘music platform’ that the digital market has needed, well, forever. Unfortunately label wrangling ensured that Spotify was not able to get the deals to allow app developers to monetize their apps so the venture was effectively still born, save for the highly credible efforts of some traditional media brands, such as the BBC, Now! And Deutsche Grammophon who didn’t have to worry about making money from the apps. Luckily the streaming companies haven’t given up on the ‘streaming as a platform’ vision and a host of integrations with the likes of Bandpage and PledgeMusic have the potential to help artists transform streaming cents into digital dollars.

Pricing – 3/10

I’ve been banging the pricing drum for so long the stick has broken. Unfortunately there was pitifully little progress in 2014, with label fears of cannibalising 9.99 dominating thoughts. On the plus side there is a huge amount of negotiating activity taking place right now and that should bear fruit in 2015. Expect Apple to try to get to market with the same 7.99 that YouTube’s Music Key is currently in market with (and expect that short term promotion for YouTube to eventually become permanent). And if 7.99 is the new 9.99 then prices will have to cascade. 4.99 will be the new 3.99, 3.99 will become 2.99 and so forth. And there remains the super urgent need for PAYG pricing leveraging in app payments. I predicted pricing innovation in 2012 and 2013 and it didn’t happen. Here’s to third time lucky.

Global expansion – 6/10

Deezer had already set a great precedent for rolling out into a vast number of global territories and Spotify played an admirable game of catch up in 2013 which continued with another five new countries in 2014. Rdio’s acquisition of Indian streaming service Dhingana was another interesting move.  Meaningful revenue is yet to follow in these Rest of World markets though – the US and Europe accounted for more than four fifths of global streaming revenue in 2014.  But the foundations have been laid and that in itself is an important step worthy of credit.

Sustainability – 4/10

The ripple effects of Taylor Swift’s windowing antics will be felt throughout 2015 with countless other big artists and their managers already making it very clear to labels that they want to do the same. The sooner Spotify can agree to having the free tier treated as a distinct window the sooner the streaming space can start rebuilding.   The whole ‘changing download dollars into streaming cents’ issue continues to haunt streaming though. And with streaming services struggling to see a route to operational profitability the perennial issue of sustainability remains a festering wound. The emerging generation of artists such as Avicii and Ed Sheeran who have never known a life of platinum album sales will learn how to prosper in the streaming era. The rest will have to learn to reinvent themselves, fast, really fast.

Overall Streaming gets a 6/10 for a year that saw huge progress but also the persistence of perennial problems that must be fixed for the sector to succeed.

Why It Is Time To Make YouTube Look Less Like Spotify And More Like Pandora

2014 has been a dramatic year for the music industry and may prove to be one of its most significant. The brief history of digital music is peppered with milestones such as Napster rising its head in 1999, the launch of the iTunes Music Store in 2003, Spotify in 2008. The 2014 legacy looks set to be more nuanced but equally important: it is the year in which streaming started to truly transform the music industry. The significance though lies in how the music industry is responding. With download sales tumbling, royalty rates still being questioned, and Taylor Swift’s hugely publicised windowing, the music industry is taking a long hard look at what role streaming should play. Spotify and Soundcloud will find themselves in the cross hairs, but there is also a case for redefining YouTube’s remit too.

Don’t Throw Out Freemium With the Windowing Bathwater 

Swift’s windowing move centred around free streaming. If Spotify had been willing to treat the free tier as a separate window from its paid tier, the odds are it would have got ‘1989’. Spotify’s argument that weakening the free tier could affect their ability to convert is logical. But ultimately the purpose of the free tier is to persuade people to pay to stream, not to deliver a fantastic free experience. I first made the case for windowing back in 2009 and I remain convinced it will be crucial to long term success.

By playing an all-or-nothing negotiating game freemium services risk being left with the latter. And it would be a tragedy if freemium got thrown out with the windowing bath water. Windowing will quite simply make free tiers more palatable. Windowing can drive huge success. Look at Netflix: with 50 million subscribes gloably Netflix has the traditional broadcast industry running scared yet is far more heavily windowed than Spotify – how many new movies do you find on Netflix?

One Rule For YouTube Another For The Rest

But the core problem is that Spotify does not exist in a vacuum. While Swift windowed Spotify her videos stayed on YouTube and Vevo. Unless YouTube is treated with a similar approach to other free services then any windowing efforts will simply drive more traffic to YouTube rather than drive more sales or subscriptions. 5 years ago a YouTube stream could be seen as driving sales, now a YouTube stream drives another YouTube stream.

Among the Top 10 fastest growing YouTube channels (in terms of views), half are music. More people are streaming more music on YouTube than ever. The reason YouTube remains untouchable has much to do with the fact labels still see it as a promotional vehicle despite the fact it has become a fully fledge consumption platform. Without doubt YouTube plays the discovery role for youth that radio does for older generations. But it is also the end point for youth.

Time For A New Role For YouTube

So what is the solution? Simple. If YouTube is the radio equivalent for youth, make it look and feel more like radio, not like Spotify premium with video. Instead, make YouTube look like Pandora with video. If YouTube is all about promotion then swap out unlimited on demand mobile plays for DMCA compliant stations. Let any user search and discover a new song but once they have discovered it the next few music videos are automatically selected related videos.

I remember Beggars’ Martin Mills quoting music industry veteran Rob Dickens:

‘If you play what I want when I want I’ll accept it is promotion. If it is what you want when you want it is business.’

That is at the core of what makes a streaming service additive versus substitutive. This is why Pandora stands out as a complement to ‘sales’ revenue and why YouTube no longer can. If YouTube’s core value to the music business is still discovery then this approach is how that role can be protected without damaging the ability of subscription services to proposer.

Do Not Conflate Music Key With YouTube

Now of course, YouTube has its own subscription service too in the form of Music Key, which is great: YouTube is a hugely welcome addition to the subscription market. But this does not mean YouTube music videos should be free on demand to all. Only 3% of UK and US consumers say they would pay for Music Key (and consumer surveys typically over report on intent to purchase).   Instead, YouTube’s free on demand music videos should be only available for users that register for Music Key. This would be Music Key’s freemium base, not the entire installed base of YouTube users.

With on demand free music it is all about the conversion path: how many of those consumers that listen for free are likely to pay. With YouTube’s 1 billion users it is a tiny per cent so there is little business rationale for letting them take the Ferrari out for a test drive when they are only ever going to get the bus.

Is 9.99 too expensive for most free music users? Of course it is. Should PAYG options be added in to the mix? Yes, absolutely. But none of those will work unless the music industry takes a consistent and fair approach to freemium.

Turning YouTube into a video enabled Pandora is clearly a controversial proposal and it will have huge opposition. It may even cause some meaningful disruption in the mid term, but unless equally meaningful change is made the music industry will remain locked on course to a future in which subscription services will never be able to realise their full potential.

How Data And Mobile Apps Shape Spotify’s Quest For Profitability

Spotify’s has announced the 2013 financial results for its global parent company. The headline is a -12% operating loss, down from a -19% loss in 2012. The numbers are in stark contrast to the small operating profits recently reported in Spotify’s UK and France subsidiaries. Both were able to do so because only a portion of Spotify’s costs reside in those businesses. This raises the interesting point of Spotify making efforts to report an operating profit where ever it possibly can to help build an evidence base that its model is sustainable. Which contrasts sharply with Pandora’s prolonged efforts to do what it can to not make a profit in order to help its rate lobby efforts.

Having spent the last few weeks knee deep in a client project exploring the profitability of digital music services I had a stronger than usual sense of ‘told you so’ when Spotify’s numbers came out. The headline of rights costs being the large cash drain on the subscription business model is well known, but there are other accelerating costs that are less well known. Spotify’s research and development costs rose by 92% between 2012 and 2013.

Music services find themselves running to keep up in the mobile world. Mobile apps are how the vast majority of subscribers interact with streaming services yet mobile app development is only an ancillary competence of subscription services. Unlike a King.com, a Supercell or a Mojang, Spotify’s core operating structures are built around cloud distribution, content management and music programming. Spotify and other subscription services are now having to develop mobile as core competence too and the rapid rate of innovation and change in mobile experiences mean that this more resembles an arms race that it does a standard operating cost.

The other big change is data. Streaming services generate vast quantities of usage data and making sense of that data is an ever more important task for streaming services of all kinds, not just music. Netflix spends $150 million on recommendations alone and has 150 staff just for this single data driven task.   Call it ‘big data’ if you will, but managing large data sets effectively is crucial to the success of streaming services for everything from managing churn through to rights holder reporting.

The key takeaway? Scale will definitely help streaming subscription services move closer towards profitability (as Spotify’s narrowing loss attests) but costs are also going to continue to rise for any streaming service that takes competencies such as app development and data intelligence seriously.

A Quick Note On Charts

Context: I spent a couple of years working in an Internet measurement company in the early 2000’s so I have some direct experience of measurement methodologies.

If streaming is changing the music industry then it is only logical that the way in which the market is measured should change too. We are in a transition phase where consumers are abandoning ownership for access, and also often swapping spending for free. It is a period of uncertainty and there is an understandable clamour to make sense of it with new approaches to measurement. Hence Billboard’s decision to incorporate streams into its album charts (with 1,500 streams equalling one ‘sale’) and other moves such as the UK’s Official Charts Company’s incorporation of streaming. But it is not just the methodologies of the charts that are changing, their entire purpose is shifting. In fact, before we reinvent charts we need to be clear about what purpose we want them to serve.

Sales charts have historically served a number of purposes:

  • Driving sales: securing a high 1st week chart position dramatically increases the chances of more sales because it unlocks opportunities such as (more) radio play, TV coverage, retailer promotion etc.
  • Driving awareness: by being in the charts music gets in front of consumers which matters because they typically exhibit herd like behaviour. Chart success can beget chart success.
  • Measuring popularity: charts give a snapshot of what is popular with music fans

Adding downloads was a very natural and entirely logical step for charts. Downloads after all are still a sale. So all of the objectives remained intact. But adding streaming changes things. You might be able to make a direct revenue comparison with sales (i.e. 1,500 streams = 1 sale) but that obscures a much more diverse consumption picture. The simple fact is that many streams are not a sales equivalent.

A subscriber listening to an album a few times through on a paid streaming tier can reasonably be considered analogous to an album purchase (in entirety in behavioural terms and in fraction in revenue terms). But a YouTube user that listens to a handful of tracks from an album just once cannot reasonably be considered anything like an album sale. Instead this is far more analogous to radio listening.

Using a revenue determined measure to define the link between streaming and sales changes the nature of a chart and in turn also what purposes it serves best. It becomes something that sits between sales and audience measurement. And, done carefully, that can be OK, but this needs to be recognized. A chart that includes free streams cannot though be considered a sales chart.

Capturing streaming activity is crucial but the issues are where and how. Radio play charts are a fantastic tool and help identify taste trends. This is where free streaming data most naturally sits, along with other inputs such as Shazams and also social data captured by the likes of Next Big Sound and musicmetric. In this increasingly complex consumption landscape a broad range of inputs are needed to paint an accurate measure of music fan interest and behaviour.

But try to do that simultaneously with measuring sales and you end up with a diluted mish mash that does not do either job properly.

Spotify, Apple, YouTube And The Streaming Pincer Movement

The Financial Times yesterday reported that Apple is planning on integrating Beats Music into an iOS update as early as the first quarter of 2015. Which means the entire base of Apple’s 500 odd million iOS devices suddenly become Apple’s acquisition funnel. As I wrote back in May, this was always the strategy Apple was most likely to pursue. Of course being available to 500 iTunes customers is not anything like converting them all. Just ask U2. But it does give Beats Music – if Apple keep the name – a reach like no other subscriptions service on the planet. Especially if Apple is willing to roll out free trials to them all.   Currently just 8% of consumers in the US and UK have experienced a subscription trial, which translates into approximately 30 million people. Even if Apple does not quickly succeed in taking subscriptions to the mainstream it is about to take subscription trials to the mainstream, which is the crucial first step.

streaming pincer

Add this to YouTube’s recently announced Music Key subscription service, which should be aspiring to get 5 million or so subscribers in its first year to be considered a success, and a picture emerges of Spotify squeezed in the middle of a streaming pincer movement (see figure). In the near term Apple will be hoping to win back a lot of its lost high spending iTunes customers from Spotify. Longer term it will be looking to grow the market.

None of this means anything like the end for Spotify. Instead it will force Spotify to up its already high quality game. Competitive markets thrive far more than ones in which one or two key players dominate. It could mean that Spotify’s potential flotation or sale value is tempered for a while, which could push out Spotify’s exit timelines until it has proven its worth in a more competitive marketplace. But Spotify has the distinct advantage of being a) the incumbent and b) a pure play. Spotify, Deezer and Rhapsody are all in this game simply for music. That means each and every one of them has a laser focus on making the best possible music service proposition they can. The same is quite simply not the case for either Apple or YouTube. They will need to leverage that asset in their conversations with rights holders to ensure they are given more flexibility in terms to drive true marketplace innovation and experimentation.

subs numbers 11 14

But Spotify et al would be foolish to underestimate the scale of the challenge they will face. Apple has the largest installed base of digital music buyers on the planet (see figure). As creditable as Spotify’s 12.5 million paying subscribers is, it pales compared to Apple’s 200 million iTunes music buyers. Also Apple has many additional assets at its disposal. Integrating into iOS is just one tactic it can employ. Spotify et al depend on Apple’s platform for much of their survival. But there is no reason Apple has to play truly fair. Amazon set a platform precedent with its treatment of Hachette that Apple will have been watching closely. Don’t expect anything too obvious, but little tricks like tilting app store optimizing in favour of Beats over Spotify can go a long way.

Things are hotting up, no doubt. But Apple’s arrival in the subscription market will take the sector to a whole new level, and a high tide should rise all boats.

10 Thoughts On YouTube Music Key

Google just announced its long anticipated YouTube Music Key. You can find out all you need to know about its potential impact on the wider market in MIDiA’s report ‘Unlocking YouTube: How YouTube Will Change Music Subscriptions’. Here are 10 further thoughts:

  1. Identity crisis: We are at a crucial juncture in YouTube’s life. As I wrote last week, artists and labels have a conflicted view of YouTube. 10 million streams on YouTube is a marketing success but 10 million Spotify streams are lost sales. So following that logic does that mean 10 million Music Key free streams are better than 10 million Music Key paid streams?! Either way it will force the industry to reconsider its views on YouTube as a marketing vs a consumption channel. Streaming in order to buy was a model with clear outcomes. Streaming in order to stream is not. Music Key will act as a catalyst for the broader narrative of reassessing YouTube’s music industry role now that the end destination is increasingly streaming itself.
  2. YouTube just got a fantastic upgrade to its free tier: As part of the deal for the paid tier YouTube got new discovery features and full album streaming. Full album streams on YouTube have always been a contentious issue, now they are there officially. This small but crucial product feature transforms YouTube free from a discovery service to a fully-fledged destination.
  3. Two services for the price of one: YouTube Music Key and Google Play Music All Access are for now bundled together but ultimately there is little sense in keeping them both. Just as Ian Rogers is busy trying to integrate iTunes Radio and Beats into a single value proposition, so some one will have to do the same at Google. Let’s just hope the result isn’t a service called Google’s YouTube Play Music Key All Access…
  4. Is 7.99 the new 9.99?: Last month I suggested that the main subscription price point of 9.99 should come down to 7.99. Music Key will be priced at 7.99 for an indeterminate period to its first wave of users. Expect Google to use this as a test case for 7.99 as the permanent price point.   And if it works, expect other services to get the same deal.
  5. Spotify competition: 1 year from now Spotify will still be the leading subscription service but it will be facing fierce competition from YouTube and from Apple. It will also most likely have lost a bunch of subscribers to both. Just as Apple stole Amazon’s music buyers and then Spotify stole them from Apple, expect YouTube and Apple to steal (and steal back) a number of them. Also, neither Apple nor Spotify have video, yet. So with the same catalogue and similar pricing they need something else to differentiate. For now Music Key has the differentiation upper hand.
  6. Vevo competition: Music Key’s core addressable market is super engaged YouTube and Vevo music fans. 15% of Vevo music consumers accounts for in the region of 67% of its music ad revenue. If Music Key converts even half of those users to Music Key, it will leave a gaping hole in Vevo’s ad revenue
  7. Windowing: Taylor Swift has taken the windowing debate to a new level, adding further weight to the argument that free tiers should be treated as a separate window from paid. Google made it clear at the launch of Music Key that a song is on free and paid, not one or the other. While a growing number of artists would willingly sacrifice being on both tiers of Spotify how many would risk not being on YouTube?
  8. Rippers: 12% of consumers and 25% of under 25’s use YouTube rippers like iMusic Tubee Free which effectively do what Music Key does (remove ads, offline caching, playlists etc.). These sorts of apps are of course readily available from the Google Play Store. If Google is serious about Music Key being success they will need to crack down hard on these apps.
  9. What does success look like?: YouTube has 1 billion monthly users and about 140 million weekly music video users. That’s a massive audience to covert from, approximately three times bigger than Spotify’s monthly user base. Given that YouTube already sucks so much revenue potential out of the subscription space (25% of all consumers say they don’t pay for subscriptions because they get all their music for free from YouTube) YouTube’s measure of success needs to be much higher than any other music service. 6 million or so subscribers in year one would be a good start.
  10. Too little innovation, for now: If YouTube can harness all of its unique assets it can create the best music subscription service on the planet. Music Key isn’t yet anywhere near that but it is only a beta product, so expect YouTube to up its innovation game and put further blue water between it and the rest.

MTV Trax And Fixing The Tyranny Of Choice

The subscription pricing debate is gaining momentum with serious dialogue occurring at high levels across the industry. Every consideration though occurs against the backdrop of fear, fear of disrupting the solid start subscriptions have made so far. It is clear that although the 9.99 price point has significant additional market opportunity, that potential has a finite scope. Once the ceiling of adoption has been reached the market will stagnate unless new price points are introduced.

One option for reducing risk is to tailor services at discreet segments that are not prospects for 9.99 services. By building highly distinct, curated services that deliver users curated, lean back experiences rather than bewildering them with the Tyranny of Choice of 30 million tracks. Music Aficionados are the driving force of current digital music, are less than a fifth of all consumers yet are the core target of every 9.99 subscription service.   By contrast Forgotten Fans – super engaged music fans who don’t yet spend much money on music – are hugely underserved. A handful of companies have been trying to unlock this segment, including Blinkbox Music, Mix Radio (formerly Nokia Mix Radio), Bloom.fm (RIP), Psonar (PAYG streams), MusicQubed (O2 Tracks, Vodafone Tracks), Zvook, as well as ‘Pandora One’, ‘Slacker Radio Plus’ and Rhapsody’s ‘unRadio’. Even Spotify is having a go. Now MusicQubed have upped the ante in the pursuit of the Forgotten Fan powering a new MTV music service: MTV Trax.

MTV: Digital Music’s Sleeping Giant

MTV is something of a sleeping giant in the digital music space. It is the sort of brand the marketplace has been waiting for. Spotify has done a fantastic job at creating a brand from scratch but outside of digital music circles it has minimal brand recognition. What MTV brings is immediate brand equity, the sort of instant familiarity that can help pull mainstream consumers into the digital fold.

Up to now, besides a couple of ill fated early efforts (remember MTV Urge anyone?) MTV has never seriously tried to convert its massive brand and reach. MTV has been biding its time. It is a mainstream brand for the masses so it has been waiting for the market to reach sufficient scale and for the right product for it to enter. MTV knows there is little point in trying to push its youthful, mass market audience towards Aficionado services that they are unlikely to be able to afford or have interest in.

MTV Needs To Put Mobile At The Heart Of Its Channel Strategy

There is an additional reason the time is now right for MTV, whether they realise it or not: their business model is stuck firmly in the confines of old, traditional media i.e. Pay TV. Though Pay TV is hardly in crisis, yet, the first cracks are beginning to appear with disruptive Over The Top (OTT) services like Netflix and Amazon Prime and cord cutting.  Of most concern for MTV is the new generation of ‘cord never’ consumers that may never take a Pay TV subscription, instead relying solely on the likes of Netlix, Hulu and iPlayer for their video needs. MTV is a youth brand yet ironically its current business model is rooted in an older world – the average age of a network TV viewer is 59. MTV needs a new channel for engaging with the next generation of audiences, and that channel is mobile. MTV Trax looks like it may be the first plank of that strategy.

mtv trax

MTV Trax itself is a visually rich mobile only app that delivers 8 curated playlists, branded around genres, charts and MTV shows. An Aficionado would probably find the selection too narrow and mainstream, but that’s entirely point, this isn’t built for them, it’s built for the mainstream. The app is being launched with MTV’s European Music Awards. Now it’s time to sit back and wait to see whether MTV’s brand can unlock the Forgotten Fan and take digital music to the mainstream.

Windowing, Shake It Off

The removal of all of Taylor Swift’s albums from Spotify and other streaming services is sending minor shockwaves through the music industry. Swift’s label Big Machine has long adhered to a streaming windowing strategy and there is pretty compelling evidence that the approach has paid dividends. Swift’s ‘1989’ is not only on track to be the only million selling US album this year it is also set to have the highest ever first week album sales for a female artist, again in the US. No mean feat considering how much album sales have tanked. While it is impossible to prove the exact degree of causality, it would be fatuous to claim that windowing had done anything less than not hurt those sales. Windowing is an issue that refuses to go away but is a natural effect of the transition phase we are in.

Some artists and labels were just as fearful of iTunes in the 2000’s as they are now of Spotify. Heck, it took the Beatles seven whole years to finally license their catalogue. Right now there is still a very sizeable music sales marketplace. 79% of all recorded music revenue in 2013 came from sales. So it is understandable that some labels want to protect that Golden Goose as long as they can. And it is little compensation for labels that declining music sales are made up by increased live revenues. In even the most label friendly 360 deals music sales are still the core revenue stream.

However the shift to consumption models is an inevitable process. In the short term expect copy cat actions. Labels and artists will see the run away success of ‘1989’ and conclude that windowing played a key role. This may hurt Spotify just as it was beginning to feel good about proving its model. But the long view shows us that licensed streaming music will be ubiquitous five years from now, music sales will not. Even if Taylor Swift is still at the top of her game in 2019 she won’t be selling any 1 million albums anymore.

Spotify though can’t wait five years for Swift to shake off her streaming inhibitions. It can however help itself by accepting that its free tier should be on a different release window from its paid tier. If it doesn’t it makes windowing a binary equation which in turn makes it easier for an entire blanket ban to be conceived.

Of course the biggest irony in all this is that the free streaming services face no such blocks. All of Swift’s videos are still on YouTube and you can find her music all over Soundcloud, let alone Grooveshark. As MIDiA revealed last week, YouTube is one of the largest threats to music revenue. But because the music industry still views it as a marketing channel rather than a consumption channel it is measured by different standards. Thus 10 million YouTube views is a promotional success, whereas 10 million Spotify streams is x thousand lost sales. This hypocritical inconsistency has to end. Spotify premium customers are some of the most valuable music fans there are, most YouTube users are not.

taylor swift youtube

And both YouTube and Soundcloud also fail to crack down on blatant misuse of their platforms. As the screen grab above shows, YouTube makes it easier than easy to access the full ‘1989’ album, which in this instance is fully monetized and has 400,000 views. Meanwhile Soundcloud also has the full album, this time conveniently presented as individual tracks. And even if / when UMG catches up with these infringing files, not only will more pop up, YouTube also has this, a full ‘1989’ playlist, full of non-infringing, Vevo videos.   The simple fact is that too much is given away for free on YouTube. If Big Machine and Taylor Swift are really worried about cannibalizing album sales, they should take a long hard look at their YouTube strategy before pulling their content from Spotify.

UPDATE: UMG caught up with the 400,000 views full album YouTube video of ‘1989’ (that was quick) but the very same user has multiple other instances of the full ‘1989’ album which have hundreds of thousands of views and are still live.

Why It’s Time For A Streaming Pricing Reset

There is a growing realization that that streaming revenue is not growing quickly enough to offset the impact of declining download sales. It is an eerily familiar echo of the recurring narrative of the noughties that download sales were not growing quickly enough to offset the impact of declining CD sales. The situation is very different now in that the industry licenses the disruptive force. Back in the noughties the combined impact of changing consumer behavior patterns, growing piracy adoption and the loss of content scarcity were factors the industry had little control over. Yet this present shift is more fundamental and will have much bigger long term impact. This is the shift to the consumption era. Streaming happens to be the tool of the moment for harnessing that shift but with current pricing strategy the industry’s toolset is woefully unable to fully harness the massive potential that exists.

Zero to 9.99 Is Too Big A Leap

The single biggest issue is the binary nature of streaming pricing: 9.99 or free. (Sure there are desktop versions for less but the desktop is yesterday’s consumption platform and is no longer a useful differentiator for price.) The leap from zero to 9.99 is simply too big. Even a 30 day trial still leaves the consumer with the same zero to 9.99 leap at the end.

streaming pricing

Streaming pricing strategy is simply not aligned with consumer music spending (see figure):

  • Super fan aficionados tend to spend between $10 and $30 a month but many are now shifting down to $9.99 a month
  • Mainstream music fans spend less frequently and at best average less than $10 a month, most typically just a few $. $9.99 is just too much for them as is regular spending, so they end up streaming for free
  • Passive fans used to spend occasionally now typically spend nothing and are core users of free streaming, YouTube especially

So streaming is bringing down the spending of the super fans and missing the spending of the mainstream fans.

Most music fans (i.e. not the super fan aficionados who by definition most of the people reading this blog are) engage with music in a very event driven manner. They have their favourite artists and they engage with them when they are in cycle with a new single, album, tour etc. That used to mean buying an album or some tracks, and it still means buying concert tickets. But these days for the digitally engaged mainstream fans it most often does not include buying anything. Instead they stream for free from YouTube, Soundcloud, Pandora.

Just to make things worse, the super fan aficionados are now spending less because of streaming. 23% of them used to buy more than an album a month, now they spend 9.99 a month and that spending is spread across a far greater quantity of music, meaning a smaller pie is being divided into even smaller slices.

Three Ways To Fix Streaming Pricing

It wasn’t meant to be this way. A high tide was meant to rise all boats. Mass market music fans were meant to increase their spending to 9.99. The aspiration is reasonable enough, these same consumers have been persuaded to pay for mobile phone subscriptions over the last decade, and many have adopted Netflix and Amazon Prime too. But it will take some time to get them there and they need a helping hand in the meantime.

There are a number of tactics that will set up streaming to capitalize on the mainstream music fan opportunity:

  1. More price tier differentiation: this means cheaper tiers ($2, $3, $5) to capture spending across a broad a range of consumers as possible
  2. Reduce the main $9.99 price point to $7.99: to capture the upper band of mainstream fans, while adding a $12.99 tier for super fan aficionados who want extras like high quality audio, bios, photos, exclusives etc.
  3. Introduce PAYG / Top Ups: the mobile phone business needed PAYG to take phone subscriptions to the mainstream – they were an unfamiliar concept consumers needed to experience to understand the value of. The same applies to music. But also it gives tentative consumers the benefit of the long term relationship without the commitment

Universal’s Lucian Grainge stated at the WSJD conference this week that revenue from subscription services is simply not enough to stem the decline of downloads and CDs. As things stand he is absolutely right. But fill the chasm between free and paid with a diverse range of pricing options and that will change. Virtually every consumer market, whether it is phones, supermarkets or cars has a segmented pricing strategy, now it is time for streaming to benefit from the same approach. The alternative is leaving most of the potential spend on the table.