…and it means it: the pictures below are of Deezer branded bus stops in rural Mauritius. With Spotify also having announced a bunch of new markets this week, and Apple and Nokia already having an extensive network of global digital stores, 2013 really is the year that digital music should start to see some meaningful ‘rest of world’ traction.
UPDATED 28/3/13 (see sections labelled ‘UPDATED’
During my SXSW panel I presented a slide that showed the distribution of paid, active free, and inactive users of the two big streaming services Spotify and Deezer based upon the latest data for both services. What the numbers show is that inactive users is a big problem for streaming services, which in actual fact means that churn is a bid problem for streaming services. (Something I discussed last week).
Paul Resnikoff at Digital Music News and Stuart Dredge at MusicAlly have since written pieces about the data and something of a debate is emerging. But the important point is not whether Deezer has more inactive users than Spotify, but that streaming services as a whole have a problem with churn.
To illustrate the fact that this is not a Deezer problem I have created a new chart (below) that uses the latest available official numbers for all three types of users from both services. The most recent total user numbers for Spotify are Facebook app users and are therefore not official stats. The most recent official Spotify data for all three metrics is from year-end 2011 – when these numbers were filed in a company report – and for Deezer this means early 2013 when the numbers were quoted in the press.
UPDATED: Note that Spotify only ever mentions its total registered user number in company reports while Deezer have quoted theirs more frequently. So the Deezer numbers below are a more accurate representation of the current scenario whereas Spotify’s user base dynamics have changed markedly since end-2011. (Whether that translates into more or fewer inactive users we’ll have to wait and see.)
Retention is a Freemium Issue not a Spotify or Deezer Issue
What is clear is that both services have essentially the same distribution of users, with the vast majority of both services’ installed bases being inactive users. If you spread Spotify’s 2011 numbers over the course of the year, from the end of 2010 base numbers, this translates into Spotify acquiring 1.9 million new users every month but only keeping hold of 200,000 of them.
Again, this is not a Spotify problem, it is a fundamental issue with the freemium music model: many more people decide its not for them than continue using the service. Over time this effect will soften, as people become more familiar with the idea of on-demand streaming. But it will always be a key part of the mix for both free and paid users.
UPDATED: It is also not even just a music service issue. As I discussed in a previous blog post about Facebook, social networks like Google+ and Twitter also have a big issue with inactive users, as this chart illustrates. In fact only a quarter of Google+ users are active, as are less than half of Twitter users. As Daniel Ek correctly identified on Twitter, this is a problem that affects all businesses that have a free tier that requires registration.
Currently Deezer and Spotify are in growth stage and are more focused on acquisition than retention, but sooner or later they’re going to have to recalibrate their metrics if they want to move towards sustainable financial models. It can be done, as Rhapsody shows us, but it is not an easy task, and it also doesn’t leave a lot of spare cash in the kitty for aggressive growth.
Any established subscription business – such as a cable or satellite TV provider – will tell you that managing churn is the overriding strategic objective. Any subscription service – especially a nice-to-have like music – is going to be vulnerable to churn. But this does not mean that the music subscription business is fundamentally flawed, rather that the industry needs to start thinking in terms of a much more fluid movement of users than was ever the case for downloads. In the download model Apple locked in its customers with devices. Streaming services have no such asset – at least not yet.
Playlists Belong to Users not Services
With time, clear blue water will emerge between the value proposition of streaming services, and this should be considered not just as a loyalty driver, but also as reason for people to swap and change subscription services just as people swap and change cars. And for that to happen streaming services need to stop thinking about users’ playlists and libraries as the property of the streaming service to be used as velvet handcuffs and instead as the transferable property of the user, and by extension, the communal property of the marketplace.
Locking music consumers into devices sort of made sense for companies like Apple that were largely using music to sell hardware. But for companies like Deezer and Spotify that are just in the business of selling music – or at least access to it – there is no such justification. The subscription market is only just getting going and there is far too much green-field opportunity for services to get bogged down in internecine conflict. As MusicAlly’s Dredge correctly identifies, opening up Playlists could prove to be crucial to the long term validity of streaming and subscriptions (and Tomahawk is a great first step). But to really work, streaming services need to stop thinking about Playlists as their property and instead as the property of their users. That’s when services like Tomahawk could come into their own and it is when mainstream music fans will view streaming services with less scepticism. In the words of ShareMyPlaylists: Long Live The Playlist!
A special feature for the end of what has a been a big and often controversial year for streaming. Here are the views of 10 CEO’s of of the top streaming services and of the leading multi-room streaming system, on the following two questions:
1 – What was the most important thing to happen to the streaming market in 2012
2 – What is the most important issue that the streaming market must address in 2013
2012: Growth – both in terms of the number of people who are now paying for music again and the growth in payments back to artists as a result. 2012 was the year when people realised the future growth in the music industry is coming from streaming services.
2013: The abundance of choice. How do you make sense out of 20 million songs?
2012: The streaming market continues to progress at breathtaking speed and we’ve seen some incredibly positive developments in 2012. Most exciting for us, is the fact that targeted online content has developed into something much, much more sophisticated than just algorithm-generated recommendations. We’re seeing the focus now shift towards personalised music curation. At Deezer we’ve gone a step further, developing really bold new product innovations that are designed to put integration with apps, social media and digital services at the forefront of our new user experience. Our aim is to help music fans discover and share music and promote new artists. That’s why our local editorial teams work hard to create suggested playlists and recommendations to give music fans a more personal and individual service.
2013: Getting as many people as possible to find out about services such as ours! We’re convinced that the future of digital music will rely on music discovery and re-establishing the emotional connection between music and people. Our mantra is to help people rediscover music, through recommendations by real people all over the world. Our locally-based editorial teams share new music from upcoming local artists, not just in their own countries, but with the other editorial guys around the world – another example of Deezer taking music even further regardless of boundaries. Now our biggest challenge is to get people everywhere to find out how intuitive – and fun! – it is to use Deezer, and we hope to make great strides on this in 2013.
2012: Looking back, 2012 was the year that streaming became mainstream. We’ve seen a rapid evolution since streaming music was freed from the PC and became a constant companion via smartphones, to this year, when streaming made its way into the living room and into cars—the two places where people listen to the most music. Streaming services are everywhere! This heightened awareness has resulted in more consumers embracing the model and eschewing their old beliefs around the need to own their media; which has given rise to more investment in the sector, innovation around business models and M&A activity. After spending the past 10 years forging the path and taking those proverbial arrows, we are finally seeing the realization of streaming music’s promise.
2013: The most important issue of the mainstreaming of streaming is that artists are paying more attention to how they’re being paid on the various streaming services. Artists are seeing a lot of streams, but are not seeing a lot of cash for them. This makes them justifiably nervous that streaming services are getting popular at the expense of digital sales–and in some cases withholding their music from streaming–a detriment to the growth of these services, just as they become popular. The solution of the problem is twofold. First, we need to do a much better job at education about how artists are compensated and creating transparency around where streaming revenues flow. Streaming services have a responsibility to innovate around artist compensation to get more money into artists’ pockets and help them understand how their music is being consumed. I think there is a lot more that we can—and should—do to ensure that artists are fairly compensated for their music and are extracting maximum value from streaming services.
2012: Two things, in the UK, the silent landmark in 2012 was the launch of the BBC iPlayer Radio app this has the potential in 2013 to be the catalyst for mainstream adoption of streaming, without the need to know its streaming and secondly the driving momentum of smart phone and tablet adoption reaching what I believe was a tipping point in 2012.
2013: In 2013 the dream would be easier licensing, more flexible pricing plans removing the artificial technical and commercial barriers with the ability to demonstrate clear ROI’s but in reality for any of the models to work they need the true internet scale that is possible and to achieve that we need to find the means to enable mass market adoption. This is the elusive jewel in the crown that we all should be really seeking to solve.
2012: Streaming cloud locker services from Google and Amazon
2013: Globalised rights
2012: Social media has had a profound impact on the way music is shared, which is something we anticipated when we first built Rdio. 2012 also saw the entry of services into global markets (with our own service expanding to 17 countries). The continued growth of mobile around the world with faster speeds and better phones also contributed to the rise of music streaming in 2012.
2013: Awareness is still a key factor moving into 2013. We’ve seen a big shift in 2012 with more services opening up globally, but we aren’t truly mainstream yet. Innovating on discovery is a key focus as well. With all the songs in the world at your fingertips, creating fun ways to decide what to play next is a challenge. We built Rdio with human powered music discovery at the heart of the experience and we’ll continue to enhance discovery across platforms moving into 2013. Another key issue moving into the new year is the our responsibility to the artist community. We’ve started to address this through the recently launched Artist Program and will continue to work closely with artists to help them create new revenue streams and tap into new opportunities generated by the streaming music model.
2012: The introduction of frictionless music sharing across social networks has led to a massive increase in the adoption of music streaming in 2012. 62.6 million tracks were played 22 billion times across Facebook in the first 12 months of open graph coming to the network. In the UK UMG reported that 7.5bn tracks had been streamed in 2012 to mid November; a 700% increase on the 1.1bn tracks streamed in 2011.
2013: Despite the huge rise in popularity of streaming, there’s a lot more work to do before the mass market transitions from music ownership to the access based streaming music services. Increasing adoption of tablet computing is making it easier for people to consume digital entertainment content while high speed broadband and 4G mobile networks deliver more data to us faster. However it will be the ways in which streaming services enable simple but engaging access to music through recommendations, sharing and curation which will be key to driving wider consumer uptake in 2013.
2012: 2012 was a year when many of the mainstream music service providers realized that the typical mobile music consumer is seeking more effortless and delightful entertainment. This is something we had already understood and rolled out to over 20 markets around the globe with Nokia Music, the most satisfying and compelling mobile music experience to date.
2013: In 2013, we expect others will follow our lead and work hard to remove barriers to usage and some have already announced that they also need to solve the consumer issues that we identified long ago. Rest assured that Nokia Music will continue to innovate and deliver the music that people love in the most satisfying and intriguing mobile experiences. We welcome all to discover and enjoy it.
2012: The beginning of consolidation in the industry, which I believe we will see more of in the coming year.
2013: The big discussion on sustainability of the business model throughout the value chain.
2012: In 2012 we’ve seen streaming services go mainstream. With the proliferation of innovative services such as Spotify, RDIO, Pandora, Rhapsody and QQ, we now have access to more music than ever before. At Sonos we’re dedicated to providing music lovers with the simplest way to enjoy all the music on earth in every room and our partnership with such popular music services has ultimately seen our customers consume twice as much music.
2013: 2013 must bring a healthy debate on the value chain of artist to consumer within streaming, and it’s essential that this is resolved to ensure the artist gets paid and the consumer gets a great experience. We are just beginning this dialogue but it absolutely needs to be continued in earnest over the next year.
2012: It was streaming’s big year. Finally the confluence of ubiquitous connectivity, and smartphones and tablets going mainstream has created the necessary market conditions for streaming to step up to the plate. It is still very early days and streaming revenues are dwarfed by download and CD revenue, but finally there is the glimmer of a ‘digital plan B’. The artist streaming debate was a useful coming of age for artists, but too much data has too often been misinterpreted, creating a confused marketplace.
2013: 9.99 is not a mass market price point, somehow (bundling, discounts, pricing innovation, partnerships etc) that price must come down to drive wider adoption. Also the value chain must work out a transparency solution that can work within the restrictions set by commercial relationships. Artists may never get the full picture, but it is in the interest of all parties that they get as much of it as is possible to help them make informed opinions. Finally, the elephant in the room remains YouTube. More catalogue than any of the other services, video (of course), great functionality, on every smartphone and tablet, and all for absolutely nothing. That creates a playing field that is anything but level for the rest.
Spotify today gave an update on the year to date and announced a host of new features.
5 Million Paying Subscribers
As expected Spotify has managed to hit the 5 million paying subscriber mark which is a fantastic achievement, as is the 1 million US paying subs also announced. That translates to 1 million new paying subscribers in just 3 months. Back in May I predicted that Spotify would hit 8 million paying subscriber in May 2013. It looks like that prediction is going to be in the right ball park. Spotify’s official active user count is now 20 million, which interestingly is much closer to the Facebook reported 24 million – those numbers have been very far apart for the last 9 months or so. Which indicates that Spotify’s marketing funnel has got bigger as its profile in the US has grown. i.e. more people are trying out the free service. (See the graphic at the bottom of the page for a summary of Spotify’s numbers).
Spotify also announced it has paid out $500 million to rights owners, which is impressive, but to keep a sense of perspective is about 2% of all digital music service money paid to record labels globally since 2009 when Spotify burst onto the scene.
A Bold New User Experience
But of more interest, to me at least, was a slew of new features that collectively transform the Spotify experience. Spotify has made a bold UI transformation from a list-based approach to a rich visual experience with modules of music content (which visually looks like a cross between Rdio and Pinterest). These include music, artwork, bio information, reviews from Pitchfork, Songkick gig information, recommendations based on your behaviour. In doing this, Spotify has made a subtle but powerful transition from streaming music player to immersive music platform.
Spotify Thinks the Discovery Question Does Need Answering
Spotify also announced, as TechCrunch had correctly predicted, a new social discovery tool called Follow, whereby users can follow people’s whose music tastes they want to keep up with. People can follow friends or music influencers such as artists, music bloggers, music journos etc. pretty much in the way they would on Twitter, but here they get sent playlists of music to listen to instantly rather than 140 characters of static text.
Spotify are trying to answer the big discovery question which has so far gone largely unanswered, despite plenty of well-intentioned efforts to come up with a solution. Discovery has been the centre of some pretty heated debate of late – as this and this post show – but whether or not it gets fixed in the wider music industry it is a huge issue for streaming music services. What is the point of having all the music in the world at your fingertips if a search bar is all you have to find your way around.
Good music discovery happens in two main ways:
- Someone who’s reputation we trust (DJ, cool friend, family) makes a recommendation
- We serendipitously fall upon a piece of music that we love
Why Discovery Matters So Much to Streaming Services
Unlimited music services face the paradox of their being so much choice that there is in effect no choice at all. People need a way to navigate through immensity of the music world. Spotify’s Follow function is a way of addressing this issue. It’s a smart way to do it, because good music discovery isn’t ‘we’ve seen you like this song, so we think you’ll like these three songs too’. It’s much subtler than that. Following people who have great music taste can be exactly that sort of subtle discovery. But this isn’t a new idea. Beyond Oblivion had built their entire service around the concept of following influencers (and they had a pretty cool atom-like visual navigation to let you get from influencer to influencer too). Of course Beyond never got to market, but Spotify have picked up the idea and run with it. Rdio also have the feature. In fact if I were Rdio I’d be feeling a little as if some of my clothes had been stolen.
Spotify’s Follow feature gets really interesting in an artist context. If an artist posts a music playlist to his followers it gets delivered straight into their music collections. A great way to launch a new album direct to your fans. Though it does raise some interesting questions about whether this will increase or decrease album sales? Does getting your favourite artists’ latest album delivered straight into your Spotify player sate your appetite straight away or simply whet it?
Spotify’s Follow feature is not the answer to the discovery question, but it is certainly one important step in the right direction. In fact there won’t be a single answer to discovery, because we all like to discover music in different ways. Some of us want to dive in and have an immersive experience, others want something music less. Some of us want both, but at different times. And Spotify recognize that by offering multiple other new ways of recommending music, ranging from recommendations based upon user behaviour, collaborative thinking and context such as the age of the user.
Spotify is Now A Music Platform
This set of new features is the most important change in Spotify’s user experience, period. It transforms Spotify from an excel spread-sheet streaming app into an immersive, multimedia, context rich music experience platform and app ecosystem. Back in November 2011 I suggested that with the launch of its API platform that Spotify was taking the first step towards making music the API, and towards transforming Spotify into a music platform. Now just over one year on we can see the fruits of that labour.
Much of what Spotify has done isn’t unique, but they have executed it in a manner akin to Apple in its digital music prime. Execution is everything. Spotify has just set the digital music experience standard for other music services to aspire to.
You wait months for a streaming music app announcement and then three come along on the same day….buses come to mind.
Deezer App Studio
Deezer have just announced the launch of a Spotify-like app platform ‘App Studio’ for third party developers and will soon also launch an ‘App Centre’ for users to discover apps. It is a welcome development from Deezer and as I have said for some time, streaming services can play an invaluable role of providing the infrastructure and music content on which third parties can then develop innovative and differentiated user experiences. Streaming itself is not a product, it is a delivery mechanism. Streaming apps turn the streaming user proposition into a rich set of products and features. Of course Spotify set the agenda here and Deezer’s announcement is almost a year to the day later than Spotify’s app announcement (read my take here on Spotify’s bid to turn music into the API). This isn’t the first time that Deezer have followed Spotify’s lead and they need to be careful they do not develop a reputation for shadowing Spotify’s strategy.
Meanwhile on Spotify’s app platform comes the launch of David Guetta’s ‘PLAY GUETTA’ app. Back when Spotify launched artist apps back in June I said that they were a great start on the rod to relevance for streaming music services and music discovery but that there was a long distance to go (which was a polite way of saying that the first wave of apps weren’t very good). The David Guetta app is a different kettle of fish altogether. Whereas the first wave of apps had an air of unfulfilled promised ‘PLAY GUETTA’ is a rich, immersive and – crucially – massively social app. As a testament to the importance of Spotify’s app ecosystem, ‘PLAY GUETTA’ is built using the Soundrop SDK, itself a Spotify app. ‘PLAY GUETTA’ demonstrates three crucial elements of value that streaming apps can deliver:
- Coalesce fan communities of likeminded fans: leveraging some of the core Soundrop functionality Guetta fans can help shape what music is played and recommended, even at a country level (see graphic).
- Create immersive experiences: apps allow streaming services to focus on the business of acquiring customers while third party developers can develop cutting edge user experiences.
- Open up the long tail: for an artist like Guetta who has an extensive back catalogue, artist apps create a fantastic opportunity for connecting fans with older material. For the consumer, because they have unlimited music access, listening to older albums is a pure added value rather than added cost, but for the artist and the label it is extra revenue.
‘PLAY GUETTA’ shows the potential of what streaming music apps can achieve.
Rdio iOS and Android Apps
The third and final streaming app announcement of the day was the launch of refreshed iOS and Android clients for Rdio. Though obviously a different type of app announcement than the previous two, Rdio deserves credit for forging their own way in the streaming space, focusing on building a differentiated user experience. Rdio do also have their own API, but they have worked hard to create a user experience that is rich and immersive out of the box.
It is perhaps a little overblown to claim that the future of streaming music depends upon apps, but be in no doubt, apps will play a major role. Expect this space to hot up in 2012.
Microsoft this week announced the launch of XBox music, a blended music subscription, personalized radio and download service available on Xbox, Windows mobiles and tablets, and soon Windows 8 on PCs. Microsoft does not have the strongest of track records in digital music, with ill-fated previous efforts such as MSN Music and Zune. However this latest foray could possibly, just possibly be a game changer.
From a user experience perspective Xbox music ticks a lot of boxes:
- It is multiplatform, working across Xbox, tablets, smartphones and PCs. i.e. most of the device types consumers want to get music on
- It blurs the distinction between access and ownership by integrating radio, on demand streaming and downloads
- It combines free and paid
In fact there is an argument to be had the what Microsoft have done with Xbox music is what Apple should have done (should do?) with iTunes. But this isn’t what gives Xbox Music such disruptive potential and indeed Apple won’t be overly concerned yet. Apple has managed to make music work in a way that no other device company has because it exercised near absolute control across its tightly integrated ecosystem, from top to bottom. Microsoft might be able to exercise that sort of control on Xbox, but nothing close to it on phones, tablets or PCs. So do not expect Xbox music to turn Microsoft into a music device and service powerhouse that will usurp Apple.
The PC Beachhead
So just where does the disruptive threat come from? From the little old PC. In my view the boldest move Microsoft have made here is to commit to hard bundle free streaming music with Windows 8. Think about that for a moment. Every single copy of the latest update to the world’s most ubiquitous PC operating system will have a Spotify equivalent included for free. The last version of Windows will have shipped 350 million units by the end of this year. When you start looking at that sort of scale Deezer’s 26 million users and Spotify’s 24 million users start to look positively modest in comparison.
Microsoft have not yet revealed details of how many weekly hours of free music a Windows 8 free music user can expect to get, but have stated that the allowance will scale back after 6 months, which suggests that the initial allowance will be meaningful. Which of course is hugely disruptive to the incumbent streaming services. Suddenly a competitor’s massive marketing funnel will be preinstalled on the PCs of their target and existing customers. Microsoft will have paid handsomely for this free music allowance and it should be viewed as a hard cash investment in Steve Ballmer’s recently publicly aired mission to ‘make Microsoft cool’.
Microsoft Must Get Its House in Order if it Wants Digital Music Success
But before we get too carried away, we need to remember that Microsoft has tried and failed numerous times before to make music work and so the odds are not necessarily stacked its favour. Microsoft has a number of key hurdles it must clear if it is going to make this big music investment payoff:
- Microsoft needs to join its organizational dots. Part of the reason Microsoft’s previous music initiatives faltered is because it failed to break through its internal organizational silos. For example, the last time Microsoft launched a streaming music service (via MSN) it wasn’t compatible with its Zune music player or Zune store. Xbox looks like a brave effort to join the organizational dots, in much the same manner as Sony Music Unlimited, a brave effort to try to follow Apple’s iTunes model. Both Sony and Microsoft will have to reverse decades of organizational thinking and process if they are to truly transcend their organizational silos.
- The user journey has to be truly seamless. Consumers have long grown weary of bloatware shortcuts on the desktops of their newly purchased PCs, attempting to entice them with 3 months free trial of some service or another. Microsoft will have to make the user signup and activation journey for Xbox music truly seamless and as deeply integrated into the Windows experience as is possible.
- Europe may not play ball. One key force will pull against deep integration: regulatory oversight. In 2004 the European Commission expensively forced Microsoft to unbundle Windows Media Player from Windows and to pay a massive $761 million compensation package to Real Networks. And that was just for hard bundling a music player. How will the European competition commissioner look at a hard bundled US music service that could seriously disrupt two European streaming music services (Spotify and Deezer)?
So Xbox music has the potential to be a game changing play, bringing digital music to the non-Apple masses. But Microsoft will have to get over itself and some major market challenges first to fulfil that potential.
The music streaming world is one full of contrasts and inconsistencies. At one end We7 and MOG sell for peanuts; in the middle Rhapsody, Sony, Rdio, Wimp, Rara and others continue to steadily build a market; and at the other end Deezer and Spotify are sucking in investment with the force of a black hole. Spotify’s investment is well documented, but this week Deezer confirmed their seat on the fast train with a $100m investment from Access Industries, which also just happen to own Warner Music.
Leaving aside for a moment the intriguing fact that the two streaming global super powers are European, Deezer has managed to slip beneath the radar of the often US-skewed digital music world view by pointedly deciding to ignore the US market (for now). Like a canny general who decides to march around a heavily fortified stronghold and thus effectively leave it stranded behind enemy lines, so Deezer expects the streaming war to waged on different shores. They are both right and wrong.
The US is Saturated and Yet Potential Remains Untapped
There is no doubt that the US paid streaming market is overly catered for at present, and that Deezer would struggle to get any foothold. Also there is clearly a much bigger scale opportunity in the remainder of the globe. However, and somewhat paradoxically, the US market should also have much much more space, plenty enough for Deezer, Spotify and the rest to flourish in. The problem is that the $9.99 streaming monthly subscription is not a mass market value proposition and it is not about to suddenly become one. We have had the product in market for over a decade, if it was going to hit hockey stick growth we’d have seen it by now.
To be clear, this is not to say streaming music is not a mainstream proposition, but that the $9.99 streaming subscription is not. And that is a problem, because it is clear that for the economics of streaming to add up (for artists, services and labels alike) scale is key. Pandora’s Tim Westergren has made the case for lower statutory streaming rates to drive scale, it is probably time to start a parallel dialogue for on-demand streaming.
But lower wholesale rates alone won’t fix the problem. The market still desperately needs more mobile carriers, ISPs and device companies to start hiding in their core products some or all of the cost of subscriptions to consumers. Cricket Wireless, Telia Sonera, France Telecom and of course TDC have all made solid starts but more, much more, is needed.
Price Is the Biggest Barrier to Streaming Going Mainstream
Apple: the Elephant in the Room
And of course there is an elephant in the room: Apple. Apple have played their hand cautiously to date, conscious of their hugely influential role in the digital market and indeed in the music industry more broadly. If they get their streaming play wrong (and there will be an Apple streaming play eventually) the results could be catastrophic for the music industry. Apple’s 400 million credit card linked iTunes accounts dwarves Spotify and Deezer so it is understandable that the they each want to make hay while they can. But the streaming pricing problem still needs fixing, and soon.
The headline statistic is that in 2011 Spotify had to acquire approximately 1.8 million users per month to retain just 400,000 a month (i.e. ‘losing’ 1.4 million a month), resulting in a total monthly churn rate of approximately 20%. These estimates are based upon the following reported numbers:
- Spotify’s end of year accounts for 2011 reported a total of 32.8 million registered users.
- In December 2011 Spotify reported 10 million active users on its developer blog.
- In March 2011 Spotify reported 1 million paying subscribers, representing 15% of active users, which put the active user count at 6.7 million.
- In September 2010 Spotify held a press event to announce 10 million registered users.
The headline numbers give a ‘gap’ of 22.8 million between registered users and active users at the end of 2011. Using all of the reported numbers and applying flat rate growth assumptions for intervening months we can calculate the total number of active and registered user gains throughout calendar year 2011 (see figure 1). All of which gives approximately 1.8 million new registered users per month but only 400,000 active users per month.
Now of course there will be monthly and seasonal variations in those numbers so the exact count will be different for each calendar month. Also many of those 1.4 million new monthly inactive users (i.e. the gap between new registered and new active) may well become active later in the year. But the headline trend remains that Spotify has to gain a lot more users than it holds onto (or at least did in 2011 – though I would expect similar metrics to apply in 2012).
Losing Low-Value Free Users Actually Helps Spotify’s Business Model
None of this is necessarily a reflection of a flawed business model for Spotify. In fact, in my view, it reflects positively. Let me explain. Spotify’s business is all about selling premium subscriptions. That’s where the money is for Spotify, labels, publishers and artists alike. The free tier of its business is simply a marketing funnel. Ultimately it doesn’t actually matter that much how many of those free users stay on board as free users, what matters is how many convert to paid. In fact, it benefits Spotify if those users who have no intention of paying churn out early on from the free service as it means less cost to Spotify’s bottom line. As challenging a path towards profitability as Spotify may find itself on, it would be a dramatically more difficult road if all of those 32.8 million users were active. So Spotify’s business model and margins actually benefit from the majority of those new free users churning out of the service early, allowing Spotify to focus on migrating the remaining engaged free users to paid.
Free Churn Does However Raise Questions About the Wider Streaming Market
All in all Spotify has brought a huge amount of value to the digital music market and has achieved many credit-worthy milestones (see figure 2). But as much sense as the free-user-leakage makes sense to Spotify’s business model, it does raise challenging questions about the streaming model more broadly.
For so many users (two thirds of Spotify’s 2011 total) to effectively say “no to free” indicates that streaming audio, even when free, does not resonate strongly enough with mass market music fans. There are multiple potential reasons that Spotify free users churn out, such as: usage caps, advertising, being PC only, not being able to burn to CD, even just being a stream rather than a download. Many of those can be fixed with a 9.99 subscription, but the simple fact is that most consumers do not spend that kind of money on music. 9.99 is actually the average monthly spend of the top 20% of music buyers. So it is a price point for the aficionados not the mainstream, which means that most consumers will never get a proper taste of the ‘complete’ streaming audio experience. Which is why I continue to argue strongly that subsidized subscriptions and cheaper price points are the crucial routes to the mainstream music fan that need pursuing with haste.
Spotify, Rhapsody, Deezer, rDio etc are all doing a great job of trying to take premium subscriptions to the masses, but until they can work out a way to get cost-to-consumer price points down, the addressable audience remains a subset of that top 20% of music buyers.
The Elephant in the Room
And all of their cases are challenged further by an uneven playing field. While all those music services have to charge for mobile access and have some gaps in their catalogues, YouTube provides unlimited access, on all mobile devices, with the world’s largest music catalogue, with video, for absolutely no cost at all to the consumer. As far as streaming goes, there is one rule for YouTube, and another for the rest. Until that anomaly is fixed, the rest will be swimming against the tide.
Back in January 2011 in my Midem address I posited that YouTube was digital music’s Killer App with about 25% monthly user penetration across all European adults in 2010, up a few percent from 2009. I also explained that penetration for the under 25s was about double that. The most important point though wasn’t the scale of adoption, but adoption relative to other digital music activities: the next most popular digital music activity was P-to-P (with about half the adoption rate of YouTube) and paid downloads were fourth with a paltry 11%. The key takeaway was that YouTube is succeeding with digital music adoption where other services were not, that YouTube had got something right from a user experience perspective that others hadn’t, and that the industry should do a better job of understanding YouTube’s popularity.
19 months on and the latest Nielsen stats reveal it is still the same story. In some quarters it’s being viewed as a dramatic sea change in the balance of digital power. It isn’t of course, instead it is the successful consolidation of a market leading position by YouTube. Some of this has happened organically but much is down to sheer hard work by YouTube.
Since my 2011 Midem speech, YouTube have upped their game strategically, adding functionality and investing heavily in content channels. They’ve done so largely because of the V word…Vevo. Vevo may have its challenges but strategically it was a master stroke by Universal Music: start pull the best music video out of YouTube, put it into an interface that is so deeply integrated into YouTube that it just feels like another YouTube channel to users, and all the while have YouTube deliver the audience. Unsurprisingly YouTube got nervous, particularly when Vevo started ruminating on taking the service out of YouTube entirely and into Facebook.
YouTube is No MySpace
Music matters massively to YouTube: they kick started the online video revolution with short-form video clips, but the momentum firmly shifted to mid-form video providers like Hulu and iPlayer. If you scraped music video away YouTube was left with skateboarding dogs and ‘Charlie Bit My Finger’. Hence YouTube’s investment in features like playlist functionality and $200 million in original content channels. Back when MySpace was beginning to lose ground to Facebook I suggested that MySpace should stop pretending it was a social network anymore and start focusing instead on being a platform for bands and their fans. They didn’t and they ended up losing out on both counts. YouTube, to their credit, have recognized what their strengths are and are playing to them.
Why YouTube is Still Music’s Killer Digital App
YouTube is still digital music’s killer app because:
- It’s free. Of course so are Spotify and Pandora et al but YouTube is free and fully on-demand everywhere. If you want Spotify on your iPhone you have to pay £/$/€9.99 to do so, but you can listen to unlimited on demand YouTube music for free on the iPhone, it’s even integrated into iOS (for now at least). In fact nearly two thirds of iPhone users use the iOS YouTube app.
- It has all the catalogue in the world, and more. Because of the way YouTube entered music content licensing through the back door in the days before its acquisition by Google by selling stakes to the major labels, YouTube has ended up with effectively being given clearance for much much more content than every other licensed music service. Granted YouTube have since implemented a largely effective takedown process, but the fact that YouTube’s catalogue is music uploaded by users means it doesn’t have the same restrictions other services do, such as territory restrictions, music not yet being officially available digitally etc. If there’s a piece of music in the world then the odds are it is on YouTube. Which cannot yet be said of other music services.
- It just works. YouTube is available wherever you are in the world (in the main), on whatever device you own, and you don’t have to register or sign up. It also has effective discovery tools such as user votes, comments and collaborative filtering, and features like playlists.
- You can download to keep too. Streaming ripping might not be part of the official YouTube featureset, and recent action has been taken to block one such service, but there are dozens of stream ripping apps out there and they are actively used by a meaningful share of regular YouTube users.
- It’s an audio visual experience. And of course, YouTube is so much more than music. It’s an interactive, social, audio visual experience designed for the digital age. Whilst most other licensed music services have little or no video.
It would be pretty hard to compete against that combination of features if it had a 9.99 price tag on it, let alone when all of that is available for free, to all consumers in virtually every territory in the globe. Which brings us to the YouTube dilemma.
The YouTube Dilemma
YouTube is simultaneously the most important licensed digital music service on the planet and one of the biggest challenges to all the other licensed music services. It used to be that YouTube was clearly a discovery mechanism, and indeed it still is, but it is now also firmly a consumption vehicle. YouTube has become both the journey and the destination rolled into one.
Of course there are plenty of music fans who use YouTube as a complement to buying music or subscribing and as a means of finding and sampling new artists. But plenty more use it instead of those other options, particularly those young Digital Natives who value free, convenience and ubiquity over audio quality.
So the music industry has a difficult balance to maintain, between ensuring the most valuable digital discovery asset it has its disposal remains vibrant, but at the same time ensuring it doesn’t hinder the opportunity for services which generate much higher revenue per user.
YouTube and parent Google can do a lot to help. They can accelerate their focus on making YouTube’s content unique with further investment in live concerts, exclusive sessions etc. More importantly they can more deeply integrate with paid music services. (And if integrating deeply with Apple and Spotify might be a step too far then this should be the development path for Google’s music strategy.)
Meanwhile the music industry can help redress the balance too. YouTube has defined what the mass market digital consumer expects a music service to look and feel like: namely it needs to have video, work seamlessly on all devices (not just 1 extra device at a time), and have social features. YouTube has set the blueprint for the next generation music product, the industry now needs to pick up the baton and transform that prototype into a high quality, premium product.
This July EMI’s Insight division launched an unprecedented initiative to share data from their 850,000 interview Global Consumer Insight data. This dataset covers 25 countries and over 7,400 artists, with twelve people being interviewed at any given moment, 24 hours a day, 7 days a week.
The data is being shared with the data science community in a range of initiatives including forthcoming Music Data Science Hackcamps.
As hard data continues to be something of a scarce commodity for the streaming music debate I decided to mine EMI’s dataset to create a snapshot of global streaming music adoption, and its influence on the broader music market. I have written up a report which you can download for free here. Additionally EMI have given me permission to post the data here so that you can play around the data yourselves. In fact I invite you to go and play around with the data and see if you can find any trends that I missed in my analysis.
Here are some of the key findings from the report (which of course, along with all of the opinions and interpretations are my own and are not, necessarily, EMI’s)
- Streaming has a firm foothold. 32% of consumers across the globe are now using streaming services (see figure 1). However, adoption is far from uniform.
- Nordics lead the way. Norway and Sweden (the home of Spotify) are respectively the 1st and 3rd most active streaming markets globally. Key to this trend is the relative sophistication of Internet users in these markets. 48% of Norwegians are now streaming music users, as are 43% of Swedes.
- Streaming is a good fit for piracy riddled Spain. Spain is the 2nd most active market with 44% streaming penetration. But whereas consumer sophistication was key to Nordic adoption, in Spain piracy and the legacy of free were the most important drivers.
- Free is a good fit for France too. The role of piracy and free have also been important in France. French authorities have pushed through the controversial Hadopi legislation but the carrot of Spotify and local streaming success Deezer has delivered immediate results. Translating streaming usage into purchases though is less successful: just 13%.
- Purchase conversion rates are higher in lower penetration markets. The US, Canada, UK, Germany and Denmark have lower streaming penetration but these markets have much higher streaming-to-paid downloads conversion rates, averaging 23% of streaming users.
- Streaming Drives Music Discovery and Consumption. Although it is still too early to draw definitive conclusions about exactly how much streaming impacts piracy and sales, the case for driving discovery and consumption is much clearer. 55% of global streaming music users state that they now discover new artists and new music as a result of streaming.
- Usage is steady among existing users. Usage among existing streaming users is broadly steady with 19% using streaming more than 12 months previously and 20% more.