Why 2014 Will Be the Year of Taking Digital Content into the Home

2014 is shaping up to be the year that the chasm that separates consumers digital content experiences and their home entertainment is bridged.  Amazon, Apple and Google have all embarked on a quest for the lower end of the market with Amazon Fire TV, Apple TV and Chromecast respectively.  Meanwhile a host of interesting new specialized music entrants are making waves, including Pure’s Jongo and forthcoming devices such as Fon’s Gramafon and Voxtok.  And then of course there’s the granddaddy of them all Sonos, that continues to go from strength to strength with an ever more diverse product range and list of integrated music services.

Regular readers will know that I have long held that the living room (along with the car) is one of the two final frontiers for digital music.  The great irony of digital music’s brief history to date is that it has transformed music from a highly social one-to-many experience across speakers into a highly insular and personal one delivered through ear buds on phones, MP3 players, tablets and PCs.  It is no coincidence that streaming music services desperately attempt to artificially recreate the missing social element with the blunt tool of pushing play data into people’s social streams.  To be clear this is not to take away from the personal consumption renaissance, but instead to illustrate that music is disappearing out of the living room and other home listening environments.  When the CD player disappears out of the home – and it is doing so at an accelerating rate – for many households music amplified music playback disappears too.  This is why digital music needs bringing into the living room, the den, the kitchen, right across the home.  It is a concept I first introduced in 2009 at Forrester, and revisited for Billboard early last year and again here later in 2013.

We Are Entering the Fourth Stage of Digital Content

Getting digital content into and throughout the home is the next stage of the evolution of web-based content.  The first stage was getting it there (Napster), the second was getting it onto consumers’ portable devices (iTunes), the third was providing frictionless access (YouTube, Spotify, Netflix) and now the fourth is getting it into the home.  This fourth stage is in many ways the most challenging.  All of the technology that underpinned the first three stages was computing related technology (PCs, MP3 players, smartphones, tablets).  All of those device types are a) highly personal and b) have evolved as computing enclaves within our homes.  Besides the niche of households that have smart TVs or web connected radios, the majority of the devices that the majority of households spend the majority of their prime media consumption time with (i.e. radios and TVs) remain separate and disconnected from the computing centric devices.  The fact that the computing devices are heralding a new paradigm of consumer behavior – media multitasking – only highlights the separation of the two device sets.  Indeed the vast majority of multitasking time is asynchronous (e.g. checking Facebook or email while watching TV) rather than being an extension of the primary media consumption behavior.

Efforts are Focused on the TV

Chromecast et al are all designed to bridge that divide, to turn our key non-computing home device – the TV – into a quasi computing device, so that we can bring our digital content experiences into the home entertainment fold.  This, as Amazon, Apple and Google all know, is where the battle for the digital entertainment wallet will be waged.  The downside for the music industry is that the TV device focus will naturally skew the dialogue to video content, which is why Sonos and the growing body of specialized music home devices are so important.  If the industry relies too heavily upon TV centric devices to lead the home charge, it will be left fighting for scraps rather than being centre stage.

Context is Everything

However labels, music services and hardware companies (including Amazon, Apple and Google) already need to start thinking beyond just getting digital music into the home.  They need to think about what extra relevance and context home music experiences should deliver.  The likelihood is that the rich UIs of PC, tablet and smartphone apps will have to recede, in the near term at least, to allow simple, elegant device experiences.  In effect they will need to almost get out of the way of the consumer and the music.  In some respects this echoes the ‘zero UI’ approach of app-of-the-moment Secret.  Which in turn means that curation and programming will become the key differentiation points.  Not in the sense of ‘here are three artists we think you’ll like based on your prior listening’ but real programming of the type that has helped radio remain the single most widespread music consumption platform throughout the digital onslaught.

2014 will be the year that the divide between the computing devices and the traditional entertainment devices in the home will start to be bridged.  But that is simply the enabler not the end game.  It is once the divide has been bridged that the real fun begins.

Got Milk?

milkPoor Samsung launched their latest punt at digital music success just as Spotify was stealing all the media oxygen with its acquisition of the Echo Nest.  Samsung’s latest venture, curiously called ‘Milk Music’, is another attempt from the smartphone giant to carve out some mindshare and consumer traction in the digital music space.  Like all but one smartphone manufacturer – you know, that one from Cupertino – Samsung does not have the best of track records when it comes to digital music, having recently culled its previous Hub service.  Milk is a Pandora-like mobile radio app and while it certainly suffers from ‘me-too syndrome’ it is not actually a terrible strategic fit.

With 200 stations and a catalogue of 13 million tracks, Milk Music has some muscle but it is hard not to see it as a thinly veiled attempt to ‘do an iTunes Radio’.  However there is not necessarily that much wrong in doing exactly that.  iTunes Radio is a very neat service that is well geared towards the mainstream, less engaged music fan.  That is exactly Samsung’s addressable audience.  Samsung has been at the vanguard of the mainstreaming of smartphone adoption, so much so that many of its devices are smartphones with dumb users.  Milk Music is however limited to the Galaxy range of handsets, which will to some degree filter its audience towards Samsung’s more engaged users.

No smartphone manufacturer has been able to make music work like Apple has.  In fact no smartphone manufacturer has been able to make content and services as a whole work like Apple has.  Apple’s ecosystem is a fascist state compared to Android’s federated democracy, but at least the trains ran on time in Mussolini’s Italy.  That absolute control of the user experience enables Apple to deliver on the single most important part of digital music product strategy: the service-to-device journey.  It just happens, and seamlessly so.  So many other phone companies have failed to understand the importance of this ineffable magic.

Samsung might be able to get it right with Milk Music, but because they are part of the federated states of Android, they will also have to tolerate a bunch of pre-installed incursions from fellow Android states, not least Google’s Play Store.  Apple meanwhile ensures there is just one place for music on its devices.

Samsung desperately wants to make music work and to its credit continues to throw money at trying to fix the problem.  Free radio might just be the best first step.  Especially considering that just 1% of Android consumers state they intend to start paying for a music subscription service and that a quarter of them say they have no need to pay for music because they get so much for free.  Milk Music might be feeding that free music habit, but it could also be the foundation for something bigger and better.  In the meantime, if you can’t beat them…

How The iPad May Help Soften The Decline Of The Download

In this previous post I outlined how the rise in mobile app spending is directly cannibalising iTunes music spending.  That decline was only a few percentage points in 2013 because of a confluence of factors, not least the fact that the US download market (Apple’s biggest) only fell by 3% in 2013 while the UK (another key Apple market) grew by 3% and growth also came in other major music markets and a bunch of emerging markets with scale. Throughout the course of 2014 downloads however will probably decline more sharply due to both app competition and also to the fact many of the highest spending download buyers are now subscription service customers.  But there is a slither of light for the download market….the iPad.

Apple’s customer base has changed a lot over the years.  Once being an Apple customer meant being at the bleeding edge of innovation in consumer technology.  Now it is a much more mainstream user base that in turn compels Apple to innovate at a pace appropriate for their more timid tastes.  The evolution of the iPad customer base followed a similar path: once the device of the true Apple aficionado the iPad quickly developed a distinctly populist appeal, especially the iPad Mini.

The iPad Is An iTunes Beachhead Among Android Users

But what is most interesting about iPad owners from a music industry perspective is that so many of them are Android phone users, 32% of them to be precise (see figure).  The iPad is acting as an iTunes beachhead among Android phone users.  It is a less surprising trend than might at first appear because Tablets and smartphones have highly distinct purchase consideration cycles and retail chain dynamics.  A smartphone is most often intimately tied to a mobile carrier relationship and the sales process will have as much to do with what device a carrier is pushing as it will with consumer preference.  A tablet though is, most often, not tied to a carrier and the purchase consideration cycle is instead much more about aspiration and desirability.  Other tablets might beat the iPad in terms of price and specs, but the iPad is the aspirational tablet.

ipad users

The iPad Mini Effect

The trend is even more pronounced among iPad Mini owners: 48% of them are Android smartphone users, highlighting the success of this SKU to reach new consumer segments.  Meanwhile a whopping 68% of iPad Intenders – i.e. consumers that plan to buy an iPad – are Android smartphone users.  Although this figure has to be discounted to account for aspiration rather than likely intent, the directional trend is clear: Android smartphone users are a major share of iPad owners and iPad Intenders.  With all the perpetual talk of who will win the smartphone wars the iPad’s ability to grow Apple’s customer footprint almost goes unnoticed.  The fact 57% of iPad Mini customers are female indicates just how good a job the device does of reaching beyond the male dominated early adopter niche.

Because an iPad customer is also inherently an iTunes user significant opportunity exists for content providers.  For all Google Play’s valiant efforts – and extensive marketing spend – no one else manages to get people to buy music downloads the way Apple does.  More Android customers becoming iTunes users via the iPad presents the opportunity to grow the installed base of music download buyers.  And there are encouraging indicators: only 26% of iPad customers do not buy music, compared to 49% of all consumers and 47% of overall Android smartphone users.

iPad Owners Want Apps Too

But before we get too carried away with how a new wave of iPad owners are going to save the music download sector we also need to consider why consumers are buying these devices and what use cases they best serve. The fact they have a tablet indicates they are at the more sophisticated end of the Android phone user base so they probably already use their Android phone for listening to music on.  An iPad is a device purpose built for web surfing, video viewing and mobile app usage.  So it is to be expected that the lion’s share of content spending from these new iTunes converts will be on apps.  Music spending will however be a part of the mix and thus we can expect the influx of new-to-Apple iPad owners driving new music download spending that while it may not be enough to counteract the bigger decline it will help slow it.

What Is Really Cannibalising Download Sales

As 2013 music sales figures come in, the picture of streaming growing while download sales slow is coming sharply into focus. It is one of a clear phase  of transition/cannibalization (delete as appropriate depending on your point of view) taking place because the majority of paying music subscribers were already download buyers.  But that is not the whole picture.  There is an even fiercer form of competition for spend that, as far as the music industry is concerned, is inarguably driving cannibalization.

The iTunes Store accounts for the majority of the global music download market and has done so since its inception eleven years ago.  Back when it launched, the iTunes Music Store helped transform the iPod from a modestly performing device into a global hit.  Music was the killer app, music was what Apple used to sell the device and music is what iTunes customers spent all of their money on.  But all of that changed.  As Apple’s devices have done progressively more, Apple has introduced new content types into its store that better show off the capabilities of its devices.  When Apple launches a new iPad it doesn’t have a label exec holding up the new device playing a song with static artwork displayed…that simply would not showcase the device’s capabilities.  Instead an EA Games exec gets up on stage with a new game that fully leverages the capabilities of the iPad’s graphics accelerator, the accelerometer, the multi touch screen etc.

Music may still be the single most popular entertainment activity conducted on iDevices but it is no longer the app that fully harnesses the devices’ capabilities.  In fact because music products and services remain stuck in the rut of delivering static audio files – YouTube notably excepted – it is increasingly failing to compete at the top table in terms of connected device experiences.  Crucially, this is not just a behavioral trend, it is directly impacting spending too (see figure).

itunes spending shift

Back in 2003 music accounted for 100% of iTunes Store revenue because that was all that was available.  Over the years Apple introduced countless new content types, each of which progressively competed for the iTunes buyer’s wallet share.  The step change though occurred in 2008 with the launch of the App Store.  The impact was instant and by mid 2009 music already accounted for less than 50% of iTunes revenue.   By the end of 2003 the transformation was complete with Apps accounting for 62% of spending and music less than a quarter.  Quite a fall from grace for what was once the undisputed king of the iTunes castle.

Now it is clear that the app economy is a bubble that is likely to undergo some form of recalibration process soon (80%+ of revenues are in app, 90%+ of those are games, and the lion’s share of those revenues are concentrated in a handful of companies) but the damage has already been done to music spending.

If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps.  At least with streaming services consumer spending remains within music rather than seeping out to games.  Though the bulk of the app revenue is ‘found’ incremental revenue, apps are additionally competing for the share of the iTunes’ customers wallet i.e. growth is coming both from green field spend and at the expense of other content types.

So what can the music industry do?  It would be as foolish as it would be futile to try to hold back the tide. Instead, music product strategy needs to do more to embrace the app economy.  That means, among other things:

  • More fully leverage in-app payments (and that means labels will have to take some of the hit on the 30% app store tax)
  • Learn to harness the dynamics of games (that does not mean ‘gamify’ music products necessarily – though it can mean that too – but to understand what makes casual app games resonate)
  • Develop digital era, multimedia products (see this report for some pointers on where music product strategy should go)

Though we are nowhere close to talking about the death of music downloads, apps have turned the tide for music spending.  The music industry can either sit back and feel sorry for itself, or seize the app opportunity by the scruff of the neck.

Why Radio is Stuck in the Middle of a Streaming Pincer Movement

2014 will be another year of growth and of controversy for streaming, with much of the debate set to focus on how streaming may, or may not, cannibalize download sales.  The evidence from Sweden and from the US so far suggests that streaming revenues may indeed grow at the direct expense of downloads.  But while we may be some way off from a definitive judgment on that issue, there is one cannibalization threat that is looking increasingly incontrovertible, yet has got far less attention: the cannibalization of radio.  In fact radio faces a two-pronged attack on its two heartlands, the home and the car.

The Home Front

There are many forms of streaming service and each sub-segment is eager to declare its uniqueness.  Spotify and Pandora practically fall over themselves to explain how different they are.  And indeed, in many ways they are, but what they have in common is that they are both direct competitors for radio listening time.  While they do not compete for all radio listening, nor for all radio listeners, they compete for much of the listening of some of the most valuable listeners.    Indeed streaming is looking more like radio with every passing day. The intensifying focus on curation as a means of making sense of 30 million songs is leading to on-demand services delivering a richer suite of lean-back, programmed and semi-programmed experiences.  In doing so the competitive threat to radio intensifies.  Whereas radio broadcasters can rightly claim that radio delivers a low effort, lean back listening experience, streaming services now wear those clothes too and they are not going to relinquish them.

Where things have really heated up though is the surge in streaming playback technology for the home.  Companies like Sonos and Pure have pioneered in-home streaming technology and CES saw this whole sector upping its game.  Music hi-fi is disappearing out of the home and these companies plan to bring it back with streaming at its core.  While radio is a key component of these devices, any hardware that gives a user the choice between traditional radio and interactive streaming is going to mean that radio is directly competing for listening time on that very device.  The home is one of radio’s heartlands, and broadcasters are now having to fend off the unwanted attentions of streaming music services establishing an in-home beachhead with consumer adoption of home streaming devices.

Digital Radio Fragmentation Plays Into the Hands of Streaming Services

Dedicated digital radio devices such as DAB and satellite radio players have only found traction in a handful of markets, with the US and UK notable exceptions at the forefront.  But international and domestic squabbles over competing digital radio standards mean that the global digital radio landscape is a fragmented mess of half-baked trials and aborted roll outs.  All the while internet streaming adoption accelerates on smartphones and tablets.  Radio may even buckle under the weight of this app invasion.  The more radio broadcasters rely on internet streaming for digital strategy, the more they put themselves directly in competition with streaming services, both on-demand and interactive radio.

The Battle for the Car

If the onslaught on the home was not enough, the growth of interactive car dashboards means that streaming services are getting straight into the car too.  In the US SiriusXM has long been held up as a standout success story for digital content with 25.6 million paying subscribers outshining any on demand music service by a country mile. But the same app invasion that is threating radio on smartphones and tablets is now pouring into the car via interactive dashboards. Car manufacturers are striking up deals at a bewildering rate with streaming providers with Pandora and Spotify being particularly active.  SiriusXM had a decent run at things, offering a truly national radio experience in the US, but now more and more consumers will start wondering why they need to pay $15 a month when they can get Pandora and Songza for free.

streaming pincer movement

The Free Music Land Grab

Thus radio finds itself locked in a streaming music technology pincer movement that threatens it like never before.  Radio broadcasters have countless assets at their disposal – talk radio, DJs, market-leading programming expertise – but they cannot rely on these alone anymore.  They have to up their innovation ante posthaste.  They also face a further and utterly crucial disruptive threat from streaming: the free music land grab.

Spotify and Apple only offer free music as a means to sell their core products.  Advertising revenue is a nice way of covering some costs but is not their lifeblood in the way it is for commercial broadcasters.  This means that they can be more cavalier in their ad sales strategies and undercut radio broadcasters for business with rates that might not be sustainable for a commercial broadcaster.  2014 will see these two powerhouses pursue aggressive advertiser strategies and when coupled with Pandora’s burgeoning ad sales record, traditional broadcasters may find themselves becoming collateral damage in the free music land grab.

Is 2014 a Napster Year for Radio?

2014 will be an important year for streaming, but it will be even more pivotal for radio.  It is far too early in the development of streaming to say that this is a make or break year for radio, but it is fair to say that 2014 looks and smells for radio a lot like 1999 did for the music industry.  Back then the labels failed to respond to Napster with innovation and they spent the next decade paying the price.  Radio broadcasters would be well served to –learn from the labels’ mistake.

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For those of you at Midem next week I will be giving a presentation on Monday entitled ‘Making Streaming Add Up’.  See you there.

How Streaming Will Impact Music Sales

With 2013 now behind us we are beginning to see the first full year sales numbers come if for 2013 and the long anticipated ability to assess the impact of streaming on the market.  Until the IFPI annual revenue numbers come out we are mainly constrained to volume data which only paints half of the picture.  This is especially true for streaming given the massive difference in revenue per stream for free versus paid, YouTube versus Spotify etc.  But even within these constraints we have enough to start establishing a view, one that indicates the headline story may be more about transition than it is growth.

Nielsen’s numbers for the US show that digital track sales were down 5.7% and that digital albums were down 0.1% while albums as a whole were down 8.4%. In the UK the BPI reported that digital track sales were down 4.2% though digital albums were up 6.8%.  Nielsen also reported a 103% rise in audio streams.  Let’s assume that a significant portion of those increased streams will be coming from free users and that the impact on streaming revenue growth will therefore be around the 65% mark. That would translate into total US music market revenue growth of just under 1%, though if free usage is a bigger part of the picture then growth could be negative.

It is important to understand the appropriate context for the shift to streaming: it is fundamentally a transition of spending.  Just as the download was a transition from the CD so streaming subscriptions are a transition from the download.  This is because the majority of subscribers were already digital music buyers before becoming subscribers and the majority of those were iTunes customers.  50% of subscribers buy album downloads every month and 26% buy CDs every month (see figure).  On the one hand this can be interpreted as the fantastic capacity of streaming to drive discovery and music purchasing.  There is some truth in this, but it is an inherently temporary state of affairs.  If streaming services do their job well enough there should be little or no reason for a subscriber to additionally buy music.  They do so because consumers transition behaviour gradually not suddenly.  The fact that a third of download buyers still buy CDs illustrates the point.

subscriptions download overlap

In this respect streaming services are strongly competitive with music sales in a way that streaming radio services are not. However what is crucially different from the CD transition is that while downloads drove a decrease in ARPU with consumers cherry picking single tracks from albums, subscriptions drive ARPU upwards. So there is more of an opportunity for subscriptions to drive longer term revenue growth than downloads.  The two key questions that arise are:

  1. What download market will be left once/if subscriptions have reached scale?
  2. What will the net impact on digital music spending be?

1 – Impact on downloads: The answer to the first question is probably the most straight forward.  Looking at markets like Sweden and Denmark we have strong evidence that streaming subscriptions grew at the direct expense of downloads, but in doing so they transformed the total music markets.  In the US, where the download sector is much more entrenched, streaming has resulted in a worst of both worlds, with streaming eating into downloads but not having enough headway to transform the market Sweden style.  The outlook for downloads in big markets such as the US, UK, France and Germany will be one of subscriptions absorbing the spending of the most valuable download customers.  Downloads as a global sector though will remain strong because they are the natural transition technology from download and will thus have strong long term opportunity in emerging digital markets of scale such as Turkey, Brazil and Mexico.  Downloads will also remain the best tool for monetizing mid tier digital music consumers who like to buy a few singles and the occasional album but do not spend 9.99 a month on music.

2 – Net impact on music spending: This one is a tougher call to make.  If subscriptions only reach scale by converting the most engaged music consumers then there is a risk of reducing ARPU among some of them, changing their spending patterns from buying a few albums a month to spending the equivalent of just one.  This effect will be felt more strongly as the dual-consumption behavior of subscribing and buying naturally fades.  The net positive opportunity lies in converting large swathes of the ‘upper middle’ tier of music buyers with more competitive pricing and also with bundles. Though this will likely come at the expense of further erosion of downloads.

As the RIAA rightly highlighted, even in the US streaming is becoming a really important part of the music market, and there is no doubt that access based models of shapes and sizes are the future.  The next few years though will see some growing pains as we transition away from the old guard in some of the world’s biggest music markets.

Music Industry Predictions and Aspirations for 2014

2013 was a year of digital music milestones: 15 years since the arrival of Napster, 10 years since the launch of the iTunes Store and 5 years since the birth of Spotify.  Which begs the question, what will we looking back at in 5 years as the success stories of the ‘class of 2013’?   There have been some interesting arrivals with promise, such as WholeWorldBand, Soundwave, O2 Tracks, Bloom.fm, Google Play Music All Access (ahem)…. As is the nature of start ups many of the dozens that started in 2013 simply won’t go the distance.  Indeed many of Spotify’s ‘class of ‘08’ have fallen by the wayside: MXP4, MusiqueMax, Beyond Oblivion, Songbird etc.   If the ‘class of ‘13’ want to emulate collective success then it is the ‘class of ‘07’ they should look at: a bumper crop of success stories that included Songkick, Topspin, Deezer, Songza and Soundcloud (though Spiral Frog and Comes With Music were notable flops).

So what can the ‘class of ‘13’ and the rest of the music industry expect in 2014?  Well here are a few of my predictions and aspirations:

  • Label services will grow and grow (prediction): following the lead of the likes of Cooking Vinyl and Kobalt every label and his dog appears to be getting in on the act.  Which is no bad thing.  The choice used to be binary: DIY or label.  Now labels are borrowing some of the clothes of DIY and in turn transforming the artist relationship from one of employee to client.  Expect many established frontline artists coming to the end of their label deals in 2014 being persuaded to opt for a label services deal with their label rather than jumping ship.
  • Downloads will be flat globally (prediction): the download is still the dominant digital product globally but in the markets where streaming has got a strong foothold it is eating into downloads.  A key reason is that the majority of paid subscribers are also download buyers and their behavior is transitioning.  But in most of the big markets, and in most of the non-Northern European markets, downloads are the mainstay of digital and will grow further in 2014, cancelling out declines in the US and elsewhere.
  • Latin America and Africa will both grow in importance (prediction): these are two regions with hugely diverse national economies but both also contain a number of markets that are ripe for digital lift off, particularly in Latin America.  However the standard solutions for the western markets will only have limited success.  Expect innovative newcomers to do well here.
  • The streaming debate will NOT resolve (prediction): expect strong continued growth in streaming.  Spotify should hit 10 million paying subscribers soon – the free mobile offering may even push it to 100 million users.  Deezer should clock up another milestone soon too.  And Beats Music could get really serious scale if it does indeed bundle with headphone sales.  But the nature of the debate means the bigger streaming gets the more artists will perceive they are being short changed, because individual artists will feel the impact of scale more slowly than the market.  Expect things to really hot up if Spotify goes public, does well and the majors do not distribute meaningful portions of their earnings to artists.
  • Spotify, Deezer and Beats Music have a good year (aspiration): to be clear, this isn’t me breaking with years of tradition and suddenly jettisoning impartiality and objectivity.  Instead the reason for the inclusion is that the future of investment in digital music will be shaped by how well this streaming trio fare.  Between them they accounted for 70% of the music invested in music services between 2011 and 2013.  These big bets may not be leaving a lot of oxygen for other start ups, but if they do not succeed expect digital music service funding to get a whole lot more difficult than it is now.
  • Subscription pricing innovation accelerates (aspiration): regular readers will know that I have long advocated experimentation with pricing so that portable subscriptions can break out of the 9.99 niche.  In addition to more being done with cheaply priced subscriptions we need to see the introduction of Pay As You Go subscription pricing in 2014.  Pre-paid is what the mobile industry needed to kick start mobile subscriptions, now is the time for the music industry to follow suit.
  • More innovation around multimedia music products (aspiration): one of the most exciting things about Beyonce’s album last week was the fact it put video at its heart.  Since I wrote the Music Product Manifesto in 2009 depressingly little has happened with music product strategy.  Of course not every artist can afford to make an album’s worth of flashy videos, but hey, they don’t need to all be flashy.   Here’s hoping that a few more labels follow Sony’s lead and start really pushing the envelope for what music products should look like in the digital era.  Here’s a clue: it is not a static audio file.

P.S. If you’re wondering why I am so harsh on Google Play Music All Access it is because they can and should do so much better.  The market needs innovation from Google, not a ‘me too’ strategy.  Come on Google, up your game in 2014.

Decoding the Digital Music Consumer: New Report

Today MIDiA Consulting published a report: Decoding the Digital Music Consumer. The report deep dives into the music activity of UK consumers leveraging data from a brand new MIDiA consumer survey.

The music industry is in a peculiar spot: digital is where all the momentum is and yet it remains but a small part of the equation. Across the globe digital accounted for just 25% of recorded music revenues outside of the UK and US in 2012 but even in the UK, one of the most digital markets, traditional consumption modes still dominate (see figure one).

survey1

These are some of the key findings from the report:

  • Radio and CD still outshine all digital music activities other than online music video
  • 10 years after the launch of the iTunes Store, music download buyer penetration is just 14%, though album purchasing is now just as widespread as single track buying
  • Music video is the only digital music activity that has gone mainstream so far
  • Streaming adoption is still relatively niche and paid subscriptions stand at just 4% penetration
  • Pricing, commitment issues and trepidation all act as barriers to consumer adoption of subscription services
  • The CD still reigns even for digital consumers, with 55% of digital music buyers and 45% of music subscribers buying CDs at least monthly
  • Non-Network Piracy is replacing P2P as the music sharing choice of Digital Natives, with Digital Immigrants still clinging to P2P
  • A quarter of music subscribers are also pirates
  • There is a music subscriber gender divide: 63% of subscribers are 
male
  • Subscription service churn is going to become a major component of the digital market: 46% of the entire subscriber audience have either churned or plan to churn

survey2

Churn from subscription services will become an increasingly important part of the digital music landscape (see figure two).   Looking at the entire base of consumers that have either previously been subscribers, currently are subscribers or plan to become one, 44% have either already churned or plan to do so. Just 32% are current subscribers that intend to remain so.  This base of churned music subscribers poses a key challenge for the digital marketplace: these consumers have tasted unlimited on-demand music without ads, on their phones, but are now going cold turkey. The question is where they will get their next fix? If it is not from subscribing to another service then the illegal sector beckons. This is the challenge that the music industry must meet over the next couple of years. It must ensure that these consumers either reengage with full fat music services or instead are nudged towards lower price point alternatives.

The report is available free of charge to MIDiA clients and subscribers to Music Industry Blog.  If you are not a subscriber to the blog but would like to subscribe please add your email address to the email subscription field on the right hand side of the blog home page.  If you would like to learn more about how MIDiA can help you with your digital music strategy please email info AT midiaconsulting DOT COM or visit our website here www.midiaconsulting.com  You can also find all previous free reports for download here: http://musicindustryblog.wordpress.com/free-reports/

 

A Tale of Two Cities: What Sweden and the US Tell Us About the Outlook for Streaming

Streaming is the digital zeitgeist, that much is clear.  How it will shape the future of the music business, from artists through to labels is less clear and things are not helped by an increasingly confusing and diverse set of data, each suggesting a slightly different outlook.  A look at two very different digital music markets – Sweden and the US – gives some sense of what the next couple of years should hold.

Notes: for sake of readability the term ‘streaming’ is used to refer to subscriptions and ad supported streaming combined. Also all current year figures are 2013, extrapolating half year figures to create full year estimates.

Two Very Different Streaming Stories

se-use1

Sweden is streaming’s heartland, home of Spotify and the stand out good news story for music subscriptions. Streaming now represents a whopping 95% of digital revenue in Sweden and 67% of all recorded music revenue while downloads make up a paltry 4%.  Streaming growth has been equally impressive (see figure one) and has propelled the total Swedish music market into growth for two successive years.  That growth came at the direct expense of downloads (which declined by 15%) and it accompanied a dramatic 51% collapse in CD sales.  But 2013 revenues look set to come in at just a little below 2003 levels, no mean feat.   Although we need to bear in mind that a surge in growth can easily reverse (as the experience of South Korea shows us) it is clear that streaming has been a strong positive force on total Swedish music revenues.

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The picture is very different in the US however, where streaming has grown less dynamically and only represents 23% of digital and 14% of overall spending.  As I previously noted, the strength of Apple and the download sector have acted as a pronounced brake on streaming growth in the US.  Neither, however are invincible, and some of Spotify’s 2013 growth has come at the direct expense of download spending which looks set to decline by a percentage point in 2013 (see figure two).  Little wonder Apple has launched iTunes Radio, though ironically the app may well spur a resurgence in download sales.  So in the US streaming is becoming an increasingly important part of the market but shows no sign of suddenly acquiring Sweden-like ubiquity.  Which in part explains a 5% decline in total music revenues between 2010 and 2013.

CONCLUSION: streaming can quickly drive strong growth in markets where downloads never got a foothold but takes more time to impact strong download markets.

The Impact on Total Digital Revenue

Streaming’s impact on the total digital market and indeed on total music sales is of course what counts most, and it is here we see a really interesting divergence between Sweden and the US. Over the last 6 years streaming drove a comparable rate of overall digital growth in Sweden that downloads powered in the US in the mid 2000’s.

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But when we plot the growth of digital as a percentage of total music sales in the US between 2005 and 2010 against the same data for Sweden between 2008 and 2013 a stark contrast is immediately apparent (see figure three). Whereas digital share growth remained strong throughout the 6 years in Sweden it slowed markedly in the US.  Though growth returned later it didn’t ever replicate those pre-2008 levels.  The number one slowdown factor was the end of iPod sales growth (see this figure to see just how strong the effect was).  Interestingly digital share growth looks likely to slow moderately for both Sweden and the US in 2013.  In Sweden some level of slowdown is to be expected (there isn’t much physical market left to transition!) but there is still a lot of CD ground to be made up in the US.

CONCLUSION: streaming has driven market growth in Sweden and accelerated transition away from the CD and the download. While in the US the CD and the download both still hold much greater sway, culminating in something of a worst of both worlds, with streaming apparently eating into downloads but not having enough headway to transform the market.

The Artist Conundrum

But what does all this mean for artists?  It often feels that something doesn’t quite seem to add up when artist income is brought into the equation. For all the growth in streaming income, a vocal minority of artists and songwriters feel that streaming is damaging, destroying even, their ability to earn a living from music sales.  As I have argued before, a rounded understanding of streaming income for artists must both put streaming in a revenue continuum (i.e. compare it to radio not just downloads) and consider the life time value of a song (i.e. think of the income it will generate over a period of years instead of the revenue full stop a download represents).  In this context streaming is still worth less than a download, but nearer to 5.5 times less valuable rather than 280 times (see my Consumption Analysis piece for more on this).

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There is however an added complexity, namely the amount of artists that get revenue from streaming versus downloads and streaming (see figure four).  If we take Spotify’s reported US metrics from 2012 as a benchmark and assume that the average subscriber listens to a modest 5 different artists a month then this is equal to 60 different artists per year per subscriber.  Working with an average total royalty pay out of $0.01 per stream this translates into an average royalty per artist per subscriber of $0.72 in the US.  When applied to the 3 million reported US Spotify subscribers this would equal an average annual royalty of $2.17 per artist.  (Though it is crucial to note that this refers to the total royalty payment made to rights holders and not to whatever share is eventually shared with the creators themselves). Also, there is of course no such thing as an average artist, and in practice a comparatively small number of artists would earn much more than that and most much less (there are after all 27 million tracks’ worth of artists so the tail is super long).

For downloads, extrapolating from Nielsen mid year numbers, the average downloader buys 2 albums and 27 single tracks.  If we assume each of these is for a different artist then we end up with 26 artists per downloader and an average royalty of $1.22 per artist per downloader (using a 70% royalty assumption).  This isn’t actually that much higher than streaming, but things change when it is applied to the total number of download buyers (which at 63 million far outstrips paying subscribers) and results in an average royalty per artist of $76.34 (again total royalty before distribution to creators).

In Sweden though, where there are more subscribers than downloaders the picture is very different.  Applying the same Spotify metrics to an assumed subscriber base of 2 million in Sweden (which feels about right based on survey data and IFPI numbers) we see an average royalty per artist of $1.44 compared to $1.22 for downloads.  (The average royalty per buyer is higher in Sweden because a smaller number of people are buying a smaller number of downloads resulting in the revenue being split fewer ways).

CONCLUSION: streaming can generate meaningful revenue at scale but will still be lower than downloads because of the above mentioned life time value factor and because revenue is split more ways across a wider selection of artists.

The Cost of Democratization of Artist Income

Thus artists are effectively paying the price for the democratization of music: more artists are getting listened to more regularly and as a consequence the pie gets cut into smaller slices. Which raises the interesting dilemma of whether artists speaking out against streaming are also indirectly speaking out against a more equitable distribution of income among artists?!  The core question though is whether the pie can get large enough for those slices to represent anything more than an apetizer for the average professional artist.

All of this extra data may appear to add as much fuddle as it does clarity to the debate, but it is crucial that debate is based upon reasoned understanding of the most complete grounding of data available.    The next couple of years will see streaming go from strength to strength but its impact on global music revenue will be less dramatic than it has been in Sweden, if perhaps more vibrant than it has in the US.

Spotify Connect: First Take

Spotify today announced an in-home strategy called Spotify Connect.  Spotify will be built itself into the chipsets of a number of digital home audio manufacturers’ audio systems and speakers, including Argon, Bang & Olufsen, Denon, Hama, Marantz, Philips, Pioneer, Revo, Teufel and Yamaha.  Integrated devices will have a Spotify Connect logo, sort of like Intel Inside for music.  It’s a smart move of the sort that I have been advocating for years.

The living room is in many ways the forgotten front in the digital music equation, and ground is being lost at an alarming rate, particularly consider it is also the home front. It was once the case that people used to focus most of their living room hardware spend on music audio equipment, changing their hi-fi simply because the manufacturer had changed the in-vogue colour from chrome to black etc.  Now though, that spend has migrated to the TV, which has got progressively bigger with an ever bigger pile of boxes underneath it.  The hi-fi is typically either a dusty old midi system, a docking station or nothing at all.  Music is disappearing out of the living room, and for all the possibilities connected TVs may present, the music industry does not want to rely upon a device that is designed for watching – not listening – as its prime living room device.

Back in 2009 I wrote a report at Forrester that laid out a theoretical concept for an in-home music service-integrated device.  I argued that this device needed to be able to deliver music even when offline; an extensive catalogue as soon as the device was turned on; and great discovery tools.  Spotify Connect ticks all of those boxes.  I also argued that the device should leverage telco partnerships, integration home audio into subsidized routers – I still want to see that happen.

This appears to be being seen as something of a competitor to Apple’s AirPlay home streaming technology but in reality they’ll not be overly concerned as paying Spotify users are such a tiny subset of iTunes customers (approximately 1% of the total iTunes customer base in fact).  And for as long as 9.99 remains the leading price point those proportions will hold largely true.  Besides, Apple have never shown the greatest appetite for AirPlay as a music play (though they should).

Sonos is the company who should be more concerned at this.  Sonos has done an incredible job of creating and building the in-home streaming audio market and continues to go from strength to strength.  However key to its longer-term value proposition is streaming music service integration.  (It first integrated Naspter back in 2007.) Now the biggest on-demand subscription service on the planet has just become native on a plethora of competitor device portfolios.   Sonos has always prided itself on being service-agnostic.  We are about to find out just how much consumers consider that to be an asset, particularly when many of the Spotify Connect devices will pushing at a slightly lower end of the market.

From the device companies’ perspective this is an interesting move: they’re making the bet that Spotify is going to be around for a long time.  Hardware R&D and marketing cycles are much longer than for software, so these companies will have been working on this for some time and will be planning years ahead.  Spotify will obviously have made assurances and guarantees to their partners, but as today’s news that Microsoft acquired Nokia shows, the technology company landscape can change in an instant.

All in all though, a welcome move, and hopefully the start of a wider industry push for reclaiming some of the living room.  I say ‘some’ because much of that ground is lost for good.  This is a window of opportunity that is closing fast.  Now is the time to seize the remainder of the opportunity.