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.

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.

————————————————————————————————

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

What Beats Music Needs to Do to Be a Success

Next week Beats Music will finally launch, after arguably the most hyped music service launch in the history of digital music.  CEO Ian Rogers published a blog post over the weekend that dives into some of the thinking behind the service and some of its functionality.  Early signs are that it is a well designed and programmed service, but that alone will not be enough to make it a success.

Rogers cheekily labelled competitor services as ‘servers’ rather than services and there is no doubt that Beats Music has put addressing the Tyranny of Choice right at the heart of its strategic mission.  Beats Music has invested heavily in a host of cool features and top quality editorial and deserves great credit for doing so, but it still won’t be enough.  Beats Music is another 9.99 subscription service and 9.99 is still not, nor ever will be, a mass market consumer price point….at least not until years of inflation have taken effect. Just 5% of consumers currently pay for subscriptions in the US and the UK and the lion’s share of that is down to Spotify.

It is a massive – i.e. currently impossible – challenge for Beats or any of its soon-to-be competitor AYCE subscription services to get the headline pricing down – that is instead the domain of a new breed of innovative services such as MusicQubed, Bloom.fm and Psonar. But where Beats does have the ability to at least make their offering feel cheaper is with bundling.  On this front a lot has been made of Beats’ partnership with AT&T.  Though it is great to have such a high profile partner pushing subscriptions into the US it feels like a missed opportunity.

AT&T is a Missed Opportunity

Instead of being a long term bundle, the AT&T deal is in fact a promotional partnership, with three months free before reverting to a full priced $15 p/m deal.  As we recommended in our Telco Bundling White Paper last year, the best practice is to transition to a subsidized bundle with the end user paying either nothing or a discounted rate (much preferable to labels).  While a three month free trial is a fantastic way to deliver value and get users hooked, the leap from zero to $15 p/m is just too big.

Granted the deal is an innovative ‘Family Plan’ but I am not convinced consumers will see the value.  Core to the value proposition is being able to access the service across 5 people and 10 devices, which compared to other subscription services is strongly differentiated.  But multi-device value is actually the value of the label licenses not consumer value.  Apple and Samsung customers do not pay a premium for every additional device they want to play music downloads they purchased from the iTunes and Play Stores.  iTunes accounts are already inherently family plans in many households with no price premium.   As I have been saying for years: we are in the per-person age, not the per device age.  Consumers should not pay a premium for multiple device support. Labels need to accept the realities of the modern day multi device consumer and not try to slice the proverbial baloney.

Artists and Songwriters Will Feel the Family Plan Pinch

Also the Family Plan also raises the tricky issue of whether the fact that this would translate into $3 per head per month effectively means three times less rights pay out per track.  Big labels and publishers won’t feel the pinch so much as they’ll still be getting their 10%/20%/30% shares of revenue.  In fact they’ll be 50% better off as it will be a share of $15 not $10.  But artists and songwriters only have small catalogues of music so they’ll feel the impact of track play revenue being a share of $3 not $9.99.  And given that a family is likely to have diverse tastes, especially between parents and kids, artists are unlikely to get plays across all of the family members, where of course a label with a diverse portfolio of artists will.

It’s the Headphones, Stupid

But enough of the hurdles, I did promise with this blog entry’s title a solution. Despite all of the hype I do genuinely believe Beats Music could be a game changer if it is willing to properly leverage all of the assets at its disposal.  Beats has a hugely valuable brand and route to market in its core headphone business.  And although Beats is now facing fierce competition, it remains the stand out youth headphone brand, for now.   As great a partner as AT&T may be, they’ll still most likely only reach the same high value, data plan power user, music aficionado that all the other subscription services have been super serving.  And as such Beats Music will get far less bang for its buck than it should.

Instead Beats Music should focus on hard bundling into Beats headphones with a 3 month free trial followed by a subsidized $5 12 month commitment subscription. It really is that simple. ..well the commercials aren’t but the proposition is.

Among Beats’ headphone customer base are hundreds of thousands of young, brand conscious music consumers that value high quality music experiences and are not yet subscription converts.  If Beats fully embraces its new family member and puts it at the heart of its core product range then Beats Music might just reach a whole swathe of new consumers that the incumbent subscription services have not yet managed to.  If instead it treats Beats Music as an awkward digital appendage then it will wither on the vine.  Here’s hoping Beats opts for the former.

Sonos and the Digital Era Music Customer

Sonos recently announced its Play1 wifi speaker, a product that could be a great asset for the music industry if it is utilized properly.  Sonos have been pioneering the multi-room digital audio market for years now and continue to have a fairly clear run at things with neither Apple nor Google showing any truly concerted intent, nor any of the traditional CE companies sufficiently upping their games.  But for all its innovation excellence Sonos has predominately remained the domain of the higher spending tech enthusiast (though significantly below the audiophile segment).  With the Play 1 priced at $199/£169 Sonos is making a play for a much more mainstream flavor of customer and in doing so could help the music industry create a revenue beachhead among a new generation of music customers.

The Digital Era Consumer

We sit on the cusp of what will be a crucial five years, a period that will determine whether consumer music revenues will return to long term growth or instead migrate downwards to create a smaller market concentrated around high spending enthusiasts.  The first wave of digital music revenue growth was all about monetizing the highly engaged early adopters.  Revenues still shrank because, among many other reasons – not least piracy, these consumers were shifting their spending from albums to tracks. But at least it was a clear transition path.  Now streaming subscriptions are doing a solid job of migrating many of those same consumers back up to higher spending.  What they are not doing such a great job of is bringing new buyers into the fold.

Consumer recorded music revenues are facing a demographic pincer movement with older customers falling out of the habit of buying music (and not going digital) while many younger digital natives simply never acquired the habit of buying music.  Subscription services can, and should, be the natural entry point for these consumers but 9.99 remains a key stumbling block.  Now a new opportunity is emerging as these customers age, their lifestyles change and their disposable income increases.  The first cohort of Digital Era Consumers (i.e. those born since the late 1980’s who have had digital experiences since their teens) are now in their mid twenties and beginning to settle down with steady jobs, move in with partners, get their first apartment etc.  All of which most typically corresponds with spending less time out and more time at home.  Enter the opportunity for subscription services and devices like the Play1.

While older consumers have been abandoning the living room hi-fi in favour of spending ever more money on the TV and various boxes below it, Digital Era Consumer have less entrenched relationships with the TV and linear programmed viewing.  Get the timing, product mix and pricing right and there is a fantastic opportunity to persuade these consumers to start investing in next generation home hi-fi.  The sweet spot for music spending is the intersection of two lines: music engagement on average declines with age while spending power increases.  Digital Era Consumers represent that point where the two lines meet.  This is the time to ensure some of that spending is diverted from home TV technology to home music technology, thus establishing the foundations for future music spending.

The Play1 is such a good fit for this strategy because it delivers  a genuinely high quality experience (especially when used in a sensibly positioned stereo pair) for an eminently affordable price.  Bundle that device with 3 or 6 months worth of a free trial of a music subscription and suddenly you have a highly compelling holistic music solution for the home.  Of course this is not just a Sonos opportunity, bundling music subscriptions with affordable digital home audio equipment simply has to be the next step of digital music product strategy.  (And it doesn’t take a rocket scientist to deduce that Beats will most likely bundle their service with headphone sales).

Just Press Play…

The simplicity of user journey will be key though.  Relying on a consumer to buy a device, then go home and register for a subscription and then to hook that service up to the device just won’t cut it.  Retailers will need to be given allocations of subscription accounts that will be auto associated with a device at point of sale, where the consumer will also give their email address.  The subscription service will have to be natively integrated into the controller app (though not necessarily the circuitry of the hardware as Spotify has been doing as this limits future consumer choice). When the consumer gets home and hooks the device up to power and wi-fi the music service starts automatically.  The experience really should be as simple as ‘play’.

For CE retailers this is an opportunity to drive a new era of music hi-fi sales (particularly as the docking station segment seems to be struggling).  For music retailers – those that are left – it is a chance to create a new relationship with consumers.  Take the example of HMV in the UK who are currently locked in a Quixotic battle with Apple.  Trying to compete as a download store is fighting yesterday’s battle.  The traditional retailers lost that fight and reopening hostilities now is only going to serve to expend scarce resources. But a bundled hardware-subscription offering could bring in swathes of new Christmas / Holiday season customers, baked into a long term relationship not a one-off transaction.

It is time for the record labels and music services to invest in retailer partnerships to ensure that devices like Sonos’ Play1 deliver exactly that proposition to Digital Era Consumers: Play. For a device to be able to play unlimited music out of the box is a compelling proposition and a genuine opportunity to drive subscriptions out of the early adopter niche they currently occupy.

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.

Apple Hits 25 Billion Downloads: What it Means for the Music Industry

Yesterday Apple announced that it had reached the milestone of 25 billion songs sold.*  The number is impressive by any means and brings yet more important context to the current scale of streaming versus downloading.   But of course music downloads are just one part of Apple’s business, and not a hugely important one at that.  Apple sells downloads to improve its device proposition.  As I have written before, it is effectively monetized CRM, and interestingly in these days of increased investor scrutiny, music sales are actually a low margin revenue stream for a company which prides itself on high margins.  Which means the better that music sales do, the more they dent Apple’s profit margins.

apple device and download sales copy

But the really interesting trend that the 25 billion downloads reveals is that the surge in iPhone and iPad sales has brought a very significant boost to iTunes sales (see figure).  This has major implications for the music industry.  In 2008 digital music sales fell off a cliff when iPod sales started their long term decline (see my previous chart here).  But now, following an inter-product cycle lull, music sales are up again. The impact of Apple’s device sales on music sales is huge.  When declining iPod sales started pulling digital downloads growth down I wrote that ‘when Apple sneezes the music industry gets a cold’.  Now it is also clear that when Apple smiles, the music industry grins from ear to ear.

There are other factors at play too (such as the impact of all those new Apple stores coming on stream in markets such as Russia and India).  But the data does show that we are some way yet from streaming denting download sales. Largely because downloads are a much more natural entry point for new digital music consumers.

For some final context though, as significant as the surge in iPhone and iPad sales has been on music sales, it has had an even more marked impact on App downloads.  Which is a timely reminder that these devices are built for multimedia, interactive, visual experiences.  While the music industry’s main product for iPhones and iPads remains a static audio file.  That problem needs fixing fast.

 

*For long term Apple watchers the use of the word ‘sold’ is significant. The language Apple usually uses is that in the opening paragraph of the release ‘bought and download’ which has long been assumed to be worded to capture free downloads also.  The interesting question now is whether the use of the word ‘sold’ in the release headline is a clarification of terms, or an over eager copy editor.

How Xbox Music Could Become the World’s Biggest Streaming Music Service

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.

Why Apple’s Dividend Payment Is Actually a Product Strategy Story

I’ve just published a new post over on Media Industry Blog

Apple’s decision to use approximately half of its vast $97 billion cash surplus in a mix of dividends and stock repurchase says as much about the company from a strategic perspective as it does financially.

In these days of low interest rates on savings, having large reserves of cash isn’t the strategic plus it once was, which is why financial analysts and investors haven’t exactly been getting wildly excited about that $97 billion being left to sit in the bank.  By deciding to pay a dividend to shareholders and to repurchase stock, but to leave half the money untouched, Apple is able to have its cake and eat it. It has sent a positive message to the market, allowing investors to share further in the company’s current prosperity but at the same time it will retain approximately $50 billion, a vast chunk of working capital.  Read the full post here.

Is the UK Music Industry Sleepwalking into a CD Crisis?

An upfront note: though this post focuses on the UK market, the principles, as you will see, apply across most music markets.

At first glance the UK recorded music market isn’t in too bad shape: album sales declined by a not too worrying 5.6% in 2011 and digital grew solidly, including 26.6% growth in digital albums*.  And of course there was Adele.  So an end of term report card would probably read something like ‘Could do better but good signs of improvement’.  Unfortunately that is a case of papering over the cracks.  Here’s why:

  • CD sales are falling at an alarming rate: though digital album unit sales grew by 5.6 million, CD album sales fell by 12.3 million.  So the digital growth was less than half of the physical decline in absolute terms.  A worrying ratio at this stage in the development of the digital market (i.e. when it should be maturing, not just getting started).
  • The single continues to drag revenue growth down. Digital singles boomed to 176.6 million, a whopping 56% greater volume than combined physical and digital albums. And yet their value is close to just a fifth of album revenues.   Despite solid digital album growth, unit sales of digital singles increased by about 17 million, three times the units growth rate of digital albums.  And though the spend increment is much greater for albums – and this is of course the lens labels will typically view the trend – the unit growth is the best indication of consumer behaviour.  i.e.  music buyers are still throwing their weight behind digital single purchases at a quicker rate than they are digital albums.
  • The CD buyer is withering on the vine.  Most importantly of all, the CD buyer is becoming an increasingly rare breed.  There are fewer shops on the high street, which is where the majority of CD buyers still buy their albums. HMV – the UK’s leading music retailer by some distance – has been suffering well documented struggles.  It is possible that HMV will disappear from the high street entirely in the next couple of years.  Though this won’t be an extinction event for CD buyers, it will however leave a gaping hole in music revenues (possibly a quarter of all album sales).  The majority of these Digital Refusniks who haven’t seen any reason to start buying CDs online – let alone downloads – are unlikely to suddenly switch even if they have to.  More likely they will just drift out of the market entirely.  These are the passive music fans who only buy the occasional album, don’t have an iPod, don’t want to spend £9.99 a month on music and who listen to a lot of radio.  With so much more choice of high-ish quality music on digital radio and TV these consumers won’t even feel that much of a dent in their music behaviour when they no longer buy CDs.
  • The CD is disappearing from the living roomI’ve been beating this drum for years now but still don’t get the sense the risk is being taking seriously.  Living room tech spend has shifted firmly to the TV and music’s weakening foothold is either a docking station for the digital crowd, a streaming player for the really tech savvy or, in the vast majority of cases, a dusty old midi player which sooner or later is going to find itself in the bin or the garage.  When that happens music will have disappeared out of the living room (and before anyone makes the case for music on the TV, that permanently relegates music not so much to poor relation status, as crazy aunt locked away in the attic.  People buy TVs to watch stuff on them, not to have a blank screen while music plays on the poor quality speakers).

The Bottom Line

The music industry is being entrapped by a demographic pincer movement: on the left the emerging Digital Natives lack a product strategy that meets their needs, on the right the traditional CD buyers lack a format succession cycle.  This is why the industry is becoming obsessed with squeezing as much ‘ARPU’ as it can out of the remaining core of 20 somethings and 30 somethings.  But of course that strategy can only go so far.  I’ve written at length about strategies for the Digital Natives, but the case for the Digital Refusniks is even more pressing, if less glamorous.  The following needs to happen, and quickly:

  • Digitize the relationship.  Before an analogue customer base can be migrated to digital, the relationship with those customers must be digitized.  In fact most HMV music customers have no relationship with HMV at all, or rather it is a series of brief encounters that start and finish with a cash till transaction.  First HMV – and indeed high street music retailers anywhere – need to start finding a way to establish digital relationships with these customers and then use that as the platform for a digital revenue strategy.  As my astute former colleague James McQuivey is fond of pointing out, Netflix built is success on the platform of digitizing its customer relationships. It is time for high street music retail strategy to follow suit.  (And by the way, simply trying to push consumers to the online stores isn’t the answer).
  • A format succession strategy needs putting in place. The Digital Refusniks consumers need their hands holding as they are gently coaxed into the digital realm.   They need convincing that the ephemeral web has tangible benefits comparable to that of the CD. That might mean delivering things like better artwork etc. but to get this right we need to know a lot more about the emotional triggers that CDs press for this consumers.  A proper human needs assessment needs conducting, onto which a human-needs based product strategy can then be mapped.  In all likelihood this will result in a couple of hybrid physical-digital products which will deliver all the benefits of CDs with a steady – but not overwhelming – stream of digital content to allow digital to ‘show some leg’.
  • A new beachhead in the living room.  As I proposed 4 years ago, the music industry (principally the label and retailer elements) need a new living room strategy which should take the form of a new piece of highly affordable Hi-Fi equipment.   While its encouraging to hear that Google looks set to build upon the fine work of Sonos with some streaming music kit, the Digital Refusniks specifically need a hybrid device i.e. one that plays CDs too.  Something that looks contemporary enough to warrant replacing the old midi system and is cheap enough to shift millions of units.  You’ve probably guessed by now that this will need to follow an Amazon Fire approach of loss leading on the hardware to establish the Trojan horse for content sales.  But it is an investment that will pay off.

The Digital Refusniks are a challenging and unfashionable demographic and the counter-case for addressing them is that in 10 years or so they’ll have disappeared from the market anyway.  My conservative estimates put the loss in the region of 15% to 20% less total UK recorded music revenue in 2016.  The industry may well be able survive its revenue forecasts being that much smaller, but a) does it want to? and b) HMV can’t.

*All sales numbers are BPI trade values.  You can see the complete BPI release here: 

In Conversation With Sonos’ John MacFarlane

I recently had the opportunity to catch up Sonos’s CEO John MacFarlane, the video of our conversation is below.

In the video John and I discuss various key issues facing the digital music market, including:

  • what the next generation of music services will need to deliver
  • The role of experience in music products
  • getting digital music into the living room
  • Facebook’s content dashboard strategy

John is an insightful guy and hopefully this video will give you a sense of his vision.