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 Spotify’s Acquisition of the Echo Nest is a Test Case for the Age of the API

Spotify’s acquisition of music data and recommendation company the Echo Nest is a clear statement from a pre-IPO Spotify to the market that it takes the challenge of the Tyranny of Choice seriously.  In doing so it has established ideological fault lines between it and rival Beats Music. While Beats has put its faith in human curation Spotify has bet big on algorithms. It’s men against machines.  But the most important implication is neither this nor even the fact that Spotify now powers the discovery tools of many of its competitors, but instead the shockwaves that Spotify could send throughout the entire tech start up ecosystem if its screws up how it deals with the Echo Nest’s API.  This is the first major text case for the Age of the API.

Over the last half decade open APIs have become a central component of the technology space with countless start ups opening up their code and data for other start ups to riff off.  It has been a win-win for start ups on both sides of the equation: the givers more quickly permeate throughout their target marketplaces while the takers get to short cut to functionality that might be otherwise unobtainable.  Consequently we now have countless companies that are built upon a patchwork of interconnected APIs and a richer seam of products and services.

This is the exact strategy the Echo Nest pursued, aggressively pushing their API out into the digital music market place with very liberal usage terms and putting themselves at the heart of the Music Hackday movement.  (Few Hackday entrants worth their salt will be found without the Echo Nets API coursing through their virtual veins.)  Only Soundcloud can lay claim to having been more successful in the music API game.

But now that the Echo Nest is deeply embedded in the digital music marketplace what happens if it turns off or dials back its API? Currently it is making all the right noises, that its API will remain both “free and open”.  But there is a big difference between the aspirations of a newly acquired company and the actual behavior of the buyer 12 months or so down the line.  Indeed, a highly plausible scenario is that Spotify will eventually wind down the Echo Nest as a distinct entity, bringing all of its functionality behind the walls.  After all, if you break down what motivated Spotify’s acquisition, other than the prime motive of sending the right message to the street, the core assets are not the data itself – Spotify has plenty enough of that – but instead the expertise and the technology.  Data is worthless if you cannot interpret it properly.  Why let competitors benefit from that?

So right now the technology sector as a whole should be paying close attention to what Spotify does with the Echo Nest’s API.  If it does indeed eventually turn off the tap then it will rightly make investors and start ups alike question the strategic integrity of building businesses on the foundations of third party APIs.  Spotify needs to get this one right because the implications are far bigger than Spotify’s IPO, or indeed even the broader digital music market.  Instead this is the future of the entire technology start up marketplace.

 

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.

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.

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.

iTunes @ 10

On Sunday 28th April Apple’s iTunes Store will celebrate its 10th birthday.  It is arguably the single most important milestone in the digital music market to date.  In these days of cloud and streaming dominated industry discourse it easy to forget just how important Apple has been in the history of digital music and how equally important it remains today.  In 2012, iTunes generated approximately $3 billion in trade revenues for the recorded music industry, equivalent to around  55% of all digital trade income and close to a fifth of all global recorded music trade revenue.  By comparison Spotify was closer to 10% of digital trade revenues and 4% of all global trade revenue.  Spotify is clearly at a much earlier stage of growth and represents the future, but iTunes is far, far from being a historical footnote.

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

  • Baby Steps: On January 9th 2001 Apple launched its iTunes music management software, and later that year in November came the first ever iPod.  Back then there was no iTunes Store and Apple made it very clear how they expected their customers to acquire digital music with their ad campaign slogan: ‘Rip Mix Burn’.  Revolutionary as it was though, the iPod got off to a modest start: despite multiple product updates, by the end of 2002 Apple had still only shifted 600,000 iPods. iTunes wasn’t changing the world, not yet.
  • Changing the Tune: In April 2003 Apple launched the iTunes Music Store in the US, and then in 2004 in the UK, Germany, France and Canada, as well as an EU Store.  There were plenty of download stores already of course – Apple is always an early follower not a first mover – but they were crippled by restrictive DRM, cumbersome technology and lack of interoperability.  Most stores didn’t even allow buyers to transfer to MP3 players or burn to CD. And if you were lucky enough to be allowed to transfer to an MP3 player, your device probably didn’t even support the store’s DRM it probably also relied on incompatible 3rd party music management software.  Apple changed all of that in an instant, delivering an end-to-end integrated experience.  Steve Jobs, through a combination of sheer force of personality and a commitment to spend big on marketing (really big) managed to persuade the big labels to support unlimited iPods, CD burning and multiple PCs.  Digital music hadn’t so much been stuck in the starting blocks as having its feet nailed to them.  Jobs set digital music free.  By July 2004 the iTunes Music Store had hit 100 million downloads, but more significantly by the end of 2005 Apple had sold 42.2 million iPods. iTunes was now selling iPods, and fast.
  • Beyond Music: When Apple was in the business of selling monochrome screen iPods, music was the killer app and iTunes was the marketing tool. But that changed on June 29 2007 with the launch of the iPhone.  Apple soon needed more than music to market its multimedia, touch screen, accelerometer enabled devices. Movies were proving difficult to license and TV shows faced free competition from Hulu, iPlayer, ABC.com et al. The solution of course was the App Store.  The App Store took just 3 months to hit 100 million downloads – it had taken the iTunes Music Store 15 months to hit the same milestone.  Apple remained, and remains, firmly committed to music but its attention is inherently diluted by all of the other content types that iPhones and iPads cater for.  When Apple launches a new device it is EA Games you see demonstrating a new game to showcase the device’s capabilities, not a new music track.  (And of course the word ‘music’ got dropped from the iTunes Store name long ago.)
  • The Platform Challenge: The App Store turned the iTunes Store into a platform, albeit it a highly controlled one.  This created an unprecedented window of opportunity for competing digital music services, suddenly they could break into the previously impenetrable iTunes ecosystem.  Pandora was an early mover and within a year of launching its iPhone app had acquired 6 million iPhone users, 60% of its then 10 million active users.  Shazam was another beneficiary, with the iPhone app finally giving Shazam relevancy and context it had long lacked.  And now of course we have Spotify, Deezer, Rhapsody, Rdio et al all hugely dependent on the iPhone, using it as the central reason subscribers pay 9.99.

Responding to Streaming

Strong iPhone and iPad Sales Have Reinvigorated iTunes Music Sales

Many commentators suggest Apple is being left behind in the streaming era.  It echoes comments that Apple was getting left behind by the social age, and its responses then (Ping! and Genius) are not the most compelling of evidence for Apple jumping on the latest digital music bandwagon.  Apple will of course have to eventually move towards a more consumption and access based model but it will wait, as it always does, until streaming and is ready for primetime.  (A radio service is a logical interim step). Spotify’s 6 million paying subscribers are impressive but pale compared to Apple’s 450 million credit card linked iTunes account.  And besides, iTunes is enjoying its most successful period ever (see figure).  For all the need of interactive multimedia products to market iPhones and iPads, music remains one of the key use cases and the iTunes Store has seen an unprecedented surge in music downloads as millions of new music fans enter the iTunes ecosystem as iPad and iPhone buyers.

Apple Still Underpins the Growth of the Digital Music Market

Interestingly Apple’s music download growth appears to be strongly outpacing the overall digital music market (see figure).  According to the IFPI total global digital trade revenue grew by 8% in 2012 but Apple’s iTunes downloads grew by about 50% during the same period, culminating in 25 billion cumulative downloads in Q4 2012.  Multiple factors are at play: iTunes has rolled out to new territories and a portion of the downloads will also be free.  Nonetheless, iTunes remains the beating heart of digital music.

The Next Chapter

Apple’s next big digital music move will have major strategic ramifications that will go far beyond the iTunes Store.  Currently Apple’s device pricing model is driven by storage capacity.  And of course in a streaming age consumers will store less and less content on their devices, so the ability to charge a premium for extra storage capacity will diminish.  This is a key reason why Apple has to go slow with the cloud.  Music however also presents an opportunity to safeguard price premiums.  Apple has shied away from subscriptions (Steve Jobs famously baited then-Rhapsody owner Rob Glaser that subscriptions were mere rentals) but device-bundled-subscriptions are now an opportunity that Apple simply has to take seriously.  Instead of charging a monthly fee for subscriptions Apple could create ‘iTunes-Unlimited’ editions’ of iPads and iPhones that would include ‘device lifetime’ access to either unlimited music streams or a monthly allowance of iTunes credits (for use on all forms of iTunes content).  The latter probably sits most comfortably with Apple as it presents the opportunity for tiers of access (e.g. $5 of monthly iTunes credit, $10 of monthly credit etc.) and so would enable Apple to support multiple product price tiers.

Whatever Apple decides to do with iTunes in the next 10 years, it will remain a key player and do not bet against it still being the preeminent force a decade from now.

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.

Why Google Needs to ‘Do an Apple With Motorola’ to Make Play a Success

2012 has been a fantastic year for smartphones, with penetration pushing past the 50% mark in key markets such as the UK and US (some estimates even put US penetration as high as 70%).  Apple’s iPhone is the leading smartphone in most key markets but Google’s Android Operating System (OS) has much larger market share: c. 70% compared to c. 20% for iOS (Gartner estimated global market shares to be 64% and 19% respectively back in Q2 2012).  But these market share statistics can be misleading, particularly when it comes to understanding the digital content and services marketplaces.

Android Fragmentation Complicates Content Strategy

The fragmented nature of the Android landscape is well documented but close analysis of key metrics reveals some startling trends with significant implications for content providers (see figure):

Of course there are many mitigating factors, but that simply does not matter from a consumer perspective nor indeed from a content owner’s perspective.  Both iOS and Android have got vast App catalogues (750k and 650k respectively) and both have vast numbers of apps downloaded (35 billion and 25 billion respectively).  Both also have huge installed bases of devices: 450 million iOS devices and 600 million Android devices.  But there is only one clear leader in paid content: Apple.

Looking just at music sales, Apple’s music annual music sales (based on the last reported 12 months) equate to approximately $4.00 per iOS device, compared to just 50 cents per Android device.  Apple wins in part because of its longer presence in market, but more importantly because it exercises complete control of the user journey in a closed ecosystem.

The Importance of Closed Ecosystems

The success stories of paid content to date are closed ecosystems: iTunes / iOS, Playstation, xBox, Kindle.  Though the controlled nature of these ecosystems may limit user freedom, they guarantee a quality of user experience.  In these post-scarcity days of content, the quality of experience becomes a scarce experience which people are willing to pay for.  Google simply cannot exercise that degree of control because of its pursuit of a less-closed (but not wholly open) ecosystem strategy.  It depends upon device manufacturers to determine the user experience and also gives other value chain members much more control, such as allowing operators (Vodafone) and retailers (Amazon) to open their own Android stores, as well as, of course handset manufacturers (Sony).

Smartphones with Dumb Users

In a pure mobile handset analysis this doesn’t matter too much.  But from a content strategy perspective it matters massively so.    The problem is compounded by the fact that that as smartphones go mainstream the user base sophistication dilutes.   With so many consumers increasingly buying smartphones because they are cheap and on a good tariff, rather than for their smartphone functionality we are ending up with a scenario of smartphones with dumb users.  (I am indebted to my former Jupiter colleague Ian Fogg for this phrase). This factor arguably affects Android devices more than it does Apple devices because a) they are more mainstream b) they are often cheaper.  This matters for content owners because the more engaged, more tech savvy smartphone owners are also the ones most likely to pay for content.

Google Needs to ‘Do An Apple’ and Not ‘A Microsoft’

With growth slowing in the digital music space, it is clear that new momentum is needed.  Google is potentially the strongest opportunity to bring mass market traction to the digital music space, but currently its music strategy, and paid content strategy in general, is falling short due to all of the reasons outlined above.

Google does however have an incredibly strong set of assets at its disposal, in terms of installed based and growing adoption.  If Google is serious about making its Play strategy a success then it needs to start putting itself first.  Back in the early 2000’s Microsoft expected to be the dominant force in digital music because Windows Media Player was the #1 music player and Windows DRM was the industry standard rights protection.  But instead of pushing ahead with a bold Microsoft music offering it relied upon its hardware and services partners to do it for them.  Just as Google now is sensitive to the concerns of its commercial partners, so Microsoft was then.  Of course Microsoft lost the battle and their softly-softly approach was powerless to fight off the rapid onslaught of iTunes.   Microsoft eventually realized that it needed to go it alone, launching Zune, but it was too little, too late.  Interestingly there wasn’t much of a backlash from commercial partners when it did so. Launching a standalone music strategy was actually compatible with being a platform partner.

Now Google has an opportunity to learn from both Microsoft’s mistakes and Apple’s success by turning its recently acquired asset Motorola into a closed Play ecosystem to rival iTunes.  This doesn’t preclude Android partners from continuing to build their own devices and app stores, but it does create a paid content beachhead for Google, from which it can build a base of highly engaged digital consumers who will quickly learn to value the benefits of a high quality, unified content and device experience.  In a Motorola ecosystem Google can truly allow Google+ and Play to become the glue that binds together its diverse set of valuable assets.  Without it though, Play will continue to struggle for relevance in a fragmented and confusing Android user journey.

How the App Economy Has Transformed Product Strategy

Mobile apps can stake a pretty solid claim to being the single most important shift in consumer product behaviour in the last 5 years.  Sure the devices themselves are pivotally important, but were it not for the apps consumers install on them, they would just be better versions of the feature phones and early smartphones from half a decade earlier.  Apps have transformed consumers’ expectations of what digital experiences should be, and not just on connected devices.  But Apps have also transformed product strategy, in two key ways:

  • Apps have replaced product strategy with feature strategy
  • Apps have created a renaissance in the consumer software market

Apps have replaced product strategy with feature strategy

Though there are a good number of apps which can be genuinely held up as fully fledged products (Google Maps, Angry Birds, WhatsApp etc.) many are in fact product features rather than products.  Shazam for example is a fantastic feature, so fantastic that it should be as ubiquitous in music products as a volume button, but it is nonetheless a feature not a product.  Don’t mistake this for a derogatory critique: indeed feature strategy is virtually the core DNA of the app model.  After all apps rely upon the core product of the smartphone or tablet itself to do much of the hard work.

Apps co-exist with the core functionality of the device in order to layer extra features on top.  Instagram uses a phone’s camera and web functionality, Layar uses the camera and GPS and so forth.  In short, apps add features and functionality to hardware products.  That does not make them inherently any less valuable for doing so, but it does make them dramatically different from pre-App products. Even the majority of utility apps, such as those that track rail and flight schedules, or the weather are at heart browser bookmarks on steroids.  Games are perhaps the only app category which in the main can be considered as self-contained products.

This shift from product strategy to feature strategy has slashed the time it takes for products to get to market and has dramatically reduced development overhead, but it is a model riven with risk.  Consumers and the device ecosystem companies are winners, but many app developers are exposed.  On the one hand they have the insecurity associated with platform dependency, on the other they know that if their features are that good that they will likely be integrated into the device’s core OS or into the featureset of another app with broader functionality.  Sometimes those scenarios will be achieved via favourable commercial avenues (such as an acquisition or licensing) but sometimes it will just be flat out plagiarism.

The lesson for app developers is clear: if your app is a feature and it is good, then you need to plan for how to turn it into a product, else plan for what to do when your app has become someone else’s feature.

Apps have created a renaissance in the consumer software market

It is sometimes easy to lose sight of just what apps are: software.  In the PC age software was for most people one of three things:

  • Microsoft Windows and Office
  • An anti-virus tool
  • A bunch of free-trial bloatware shortcuts preinstalled on their desk top pre point of sale

Mainstream PC behaviour was defined by Microsoft functionality and browser based activity.  Sure, software from the likes of Real Networks and Adobe supported much of those browser based experiences, but they were to the consumer effectively extensions of the core OS rather than software products themselves.  A premium consumer software market did exist but never broke through to mainstream.  Consumers didn’t know where to look for software, whether it would install properly, whether it would work on their PC, and then on top of all this they were faced with having to provide credit card details to small companies they knew nothing about.

Mobile apps changed all of that.  App stores simultaneously fixed the discovery, billing, installation and compatibility issues in one fair swoop.  Apps have enabled the consumer software market to finally reach its true opportunity.  Just in the same way that the iPod allowed digital music to fulfil its potential.

Apps continue to transform consumer behaviour and expectations

So where will feature strategy and the reinvigorated consumer software business take us?  What is clear is that consumers are getting exposed to a wider array of digital experiences and are evolving more sophisticated digital behaviours due to apps.  Apps are also enabling consumers to do things more effectively and efficiently, and are empowering them with more information to make better decisions, whether that be getting the best flight price or choosing the best local plumber.  They are also making consumers expect a lot more from a device’s ecosystem than just the devices.  How often do you see a phone company advertise its handsets with the screen turned off? It is the apps that count.  For now, however good Nokia might be able to make its smartphones it knows that its app catalogue and ecosystem struggles to hold a candle to Apple’s App store and ecosystem (the same of course applies to all other handset manufacturers).

Apps have become velvet handcuffs for connected device owners

But what happens if/when consumers start to shift at scale between ecosystems?  For example, say Apple finds swathes of its iPhone and iPad customers switching to competitors in the future, what sort of backlash will occur when consumers find they have to expensively reassemble their app collections to reconstruct the features they grew used to on their Apple devices?  Perhaps a smart handset manufacturer would consider investing in an app amnesty, giving new customers the equivalents of their iOS apps for free on their new handsets.

For now though, Apple’s market leading app catalogue behaves like velvet handcuffs on its customers and gives it a product strategy grace period, in which it could get away with having a sub-par product generation, with customers staying loyal because of not wanting to lose their App collections.  But not even the strength of Apple’s app catalogue would not enable them to keep hold of disaffected customers much longer than that.  After all, apps are features, not the product itself.