Songkick Detour And The Middle Class Musician

 Songkick today announced the official launch of Detour, which it has been successfully trialing in a small invite-only beta until now.  At risk of over simplifying, the basic concept of Detour is enabling fans to help artists decide where to gig by pledging in advance for concert tickets, much in the same way PledgeMusic works but for live. In the trial 1,000 fans made 10 concerts happen in London (you can read Songkick’s Ian Hogarth’s blog here).

I am a big fan of Songkick and the company is one of a relatively small number of digital music start ups that are genuinely changing some of the fundamentals of the music industry.  With Detour, Songkick is harnessing the power of its highly engaged music fan audience and using it to deliver real value back into the business. 

Obviously it is still early days and Detour is still currently focused on London, but crowd funding of concerts is an area with growing momentum with specialist sites like Gigfunder and Queremos! all growing this emerging marketplace.  Crowd funding concerts is a very natural next step from crowd funding albums and EPs.  For middle ranking artists who aren’t big enough to be on a big label but are bigger than the amateur and semi-pro tiers of artists, tools like Songkick Detour and PledgeMusic are increasingly important.  They empower artists to build sustainable careers, making the most of scarce resources and squeezing out every last drop of their potential.

But perhaps most importantly of all these tools strengthen the bond between fans and artists.  Something that is inherently less easy for a superstar artist to do.  Sure the likes of Lady Gaga do a fantastic job of making their global fan bases feel close, but that proximity can never be as genuine as a band whose just come to London to play a gig off the back of 80 dedicated fans pledging their support and hard earned cash. So the long-term outlook becomes one of increasing divergence between the aristocracy of the superstar artists and the middle class of hard working, hard gigging artists.  Think of it as a democratization of music, with the intimacy of the artist-fan relationship the currency of success and authenticity.

Detour has got a long way to go, but that is only because it has so much potential.  Now the fun really starts.

PledgeMusic, Janet Devlin and Reinventing Scarcity in the Post-Scarcity Age

The analogue-era music business traded on scarcity.  It was the record labels and retailers’ absolute control of supply that created scarcity of music product.  If you wanted a high quality version of a song or album you had to buy it, when, where and for how much the labels and retailers decided.  In June 1999 Shawn Fanning launched Napster and in an instant scarcity was not only thrown out of the window, the window was instantaneously bricked up behind it.  The contagion of free has now reached epidemic proportions (due to both licensed and unlicensed sources).  Consequently we are now in the post-scarcity age, which has made music buying a lifestyle choice.  It has changed music buying from opt-out to opt-in.

If there is to be a mainstream future for music products, it will come from creating new scarcity that people want to pay for.  Of course it is no longer possible to ensure the music itself remains scarce, but it is possible to build scarce experiences around music and additional assets.  This is exactly what the guys at PledgeMusic have done in conjunction with former X Factor contestant Janet Devlin.

I’ve been a long term admirer of PledgeMusic’s model and approach, but I am particularly impressed with this release.  Firstly, fans get the option to select music from a typical Pledge menu of products ranging from the standard CD, through to highly personalized products like a Skype chat with the artist, a personally dedicated video performance and even appearing on the album.  Though the unit prices go high (£500 to appear on the album) these are scarce experiences that simply cannot be got on a torrent.  Of course many of these options don’t scale too well, but some of the intermediate products like exclusive concerts and signed albums most certainly do.  Also, all pledgers also get the download of the album before it is released anywhere else, a semi-scarce commodity, but nonetheless a great way to communicate value and exclusivity to fans.

What I like most about this release though, is the clever use of the pre-release cycle as an artist subscription. Anyone who pledges will get a steady stream of content from Devlin as she progresses on her work with the album.  She will release exclusive (i.e. scarce) content such as video, audio and photo blogs to these pledgers, giving them a window into the creative process, deepening their engagement with her and most importantly, building up interest and demand for the release of the album.  In many respects Devlin is taking a leaf out of the X Factor’s book, recognizing the immeasurable value of creating a community of fans and building their interest and engagement with exclusive content right up to a final release.

One of the reasons I like this release so much is of course because it ticks so many of the boxes of my Music Format Bill of Rights report (which you can download for free here).  But make no mistake, creating scarce experiences and seeding fan communities with scarce content is going to be at the centre of future music products.  Not everything here is entirely new or unique of course, but the unifying vision is most certainly that of the future. Janet Devlin and PledgeMusic are assuming the role of pioneers here and their peers will do well to pay heed.

Rara Sets Sights on the Global Streaming Opportunity

Today UK-headquartered streaming service Rara issued a slew of announcements (squeezed in just ahead of Apple’ iPad mini launch) including expanding from 20 to 27 markets, increasing their catalogue to 18 million tracks, iOS and Windows apps and a deal with Lenovo.  Rara have been in the market for some time now but have largely slipped under the radar.  Now though they appear to be ready for taking a shot at the big time.

There is of course no shortage of streaming music services (Spotify, Deezer, Rhapsody, Wimp, Simfy, Sony Music Unlimited etc etc) but there is also a massive amount of opportunity.  Streaming will become increasingly pervasive as the music world continues its steady switch from the distribution age of selling-units-of-stuff to the consumption era of access-trumping-ownership.  In fact streaming will become so ubiquitous that it will become anachronistic to talk of ‘streaming services’.  Streaming is merely the technology that enables on-demand, consumption based music experiences.   So when the leading on-demand services only number their total users in the low tens of millions and paying users in single digit millions, while Apple touts 450 million credit card iTunes accounts, the scale of the untapped opportunity is abundantly clear.

The challenge is how to sell streaming to the masses.  Personalized radio is one approach: Pandora have made a lot of progress, with more than 150 million registered users and 7Digital just announced a $10 million finance raise to (among other things) pursue their own personalized radio play.  Rara’s strategic ambition though, is to take on-demand streaming to the masses.  Rara has built its user experience and market strategy around targeting the mass market consumer, opting for moods and a visual navigation approach over the traditional list-based navigation.  But an inherent difficulty with selling premium subscriptions to the mass market (Rara do not have a free tier) is that those very consumers are the ones who are going to find renting streaming music an unfamiliar concept.

Rara have built a service designed to demystify streaming. The partnership with Lenovo (Rara will be pre-installed on laptops and tablets) will help.  But a new stealth competitor will be present on those devices, in the shape of Microsoft’s subsidized xBox Music on all Windows 8 devices.  When you consider the challenge of persuading a new laptop owner to pay for a music service when the device comes with a free music service embedded in the OS you realize just how disruptive Microsoft’s new music play is.  As I have said before, I’ll be very interested to see what the European Commission make of xBox Music’ Windows 8 bundle, considering that years ago they compelled Microsoft to unbundle Windows Media Player from Windows for being anti-competitive.

The xBox challenge is of course a hurdle all music service will have to navigate, but Rara will be hoping that being pre-installed on the devices of one of the world’s biggest PC manufacturers will give them an advantage over the rest.

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.

Deezer, Spotify and the Streaming Gold Rush

The music streaming world is one full of contrasts and inconsistencies.  At one end We7 and MOG sell for peanuts;  in the middle Rhapsody, Sony, Rdio, Wimp, Rara and others continue to steadily build a market; and at the other end Deezer and Spotify are sucking in investment with the force of a black hole. Spotify’s investment is well documented, but this week Deezer confirmed their seat on the fast train with a $100m investment from Access Industries, which also just happen to own Warner Music.

Leaving aside for a moment the intriguing fact that the two streaming global super powers are European, Deezer has managed to slip beneath the radar of the often US-skewed digital music world view by pointedly deciding to ignore the US market (for now).  Like a canny general who decides to march around a heavily fortified stronghold and thus effectively leave it stranded behind enemy lines, so Deezer expects the streaming war to waged on different shores.  They are both right and wrong.

The US is Saturated and Yet Potential Remains Untapped

There is no doubt that the US paid streaming market is overly catered for at present, and that Deezer would struggle to get any foothold.  Also there is clearly a much bigger scale opportunity in the remainder of the globe.  However, and somewhat paradoxically, the US market should also have much much more space, plenty enough for Deezer, Spotify and the rest to flourish in.  The problem is that the $9.99 streaming monthly subscription is not a mass market value proposition and it is not about to suddenly become one. We have had the product in market for over a decade, if it was going to hit hockey stick growth we’d have seen it by now.

To be clear, this is not to say streaming music is not a mainstream proposition, but that the $9.99 streaming subscription is not.  And that is a problem, because it is clear that for the economics of streaming to add up (for artists, services and labels alike) scale is key.  Pandora’s Tim Westergren has made the case for lower statutory streaming rates to drive scale, it is probably time to start a parallel dialogue for on-demand streaming.

But lower wholesale rates alone won’t fix the problem.  The market still desperately needs more mobile carriers, ISPs and device companies to start hiding in their core products some or all of the cost of subscriptions to consumers.  Cricket Wireless, Telia Sonera, France Telecom and of course TDC have all made solid starts but more, much more, is needed.

Price Is the Biggest Barrier to Streaming Going Mainstream

If streaming is to go mainstream the price point (for streaming with full mobile device support) has got to get towards $5, through a combination of bundling and rate discounting. Until then Spotify’s and Deezer’s gold rush millions will achieve little more than saturate the high end aficionados that the $9.99 price point appeals to.  Currently both companies look remarkably similar in terms of user metrics (see figure) but while they pursue somewhat distinct geographic priorities they will continue to find those few per cent of aficionados in each market.  Things will get really interesting when they reach $9.99’s adoption glass ceiling.

Apple: the Elephant in the Room

And of course there is an elephant in the room: Apple.  Apple have played their hand cautiously to date, conscious of their hugely influential role in the digital market and indeed in the music industry more broadly.  If they get their streaming play wrong (and there will be an Apple streaming play eventually) the results could be catastrophic for the music industry.  Apple’s 400 million credit card linked iTunes accounts dwarves Spotify and Deezer so it is understandable that the they each want to make hay while they can.  But the streaming pricing problem still needs fixing, and soon.

Omnifone and the Bundled Music Opportunity

I spent this morning listening to Omnifone’s CEO Jeff Hughes and CFO Matthew Bagley rounding up what has been a good year for the white label music service provider.  Omnifone have been in the game for a lot of years and have seen their fair share of ups and downs.  Now 10 years on from being founded they have turned their first annual operating profit, from a record full year revenue of £29.5 million.

When Omnifone first came to market it had no shortage of direct competitors. But as the first wave of digital music services, powered by Omnifone competitors such as OD2 and MusicNet, smashed against the rocks of the new upstart iTunes Music Store, the marketplace soon consolidated.  Omnifone wasn’t quite the last man standing, but it certainly had a lot more competitive leg room.  Over the intervening years it has managed to establish a solid reputation for providing the back end infrastructure for music services for global brands such as Sony, Blackberry and Vodafone.

Over the last year or two though, Omifone has been quietly repositioning around the streaming zeitgeist.  The most visible ouput of this strategy to date has been the formation of the direct to consumer streaming service Rara, which has since been spun out of the company.  Hughes says of streaming music that Omnifone has “built a racetrack and now we want to put horses on it”.   This, he adds, will not just mean working with big global companies but also starting to work with a select number of ‘interesting’ start-ups, up to 5 a year.

Hughes points to bullish streaming and cloud music revenue forecasts by the likes of Strategy Analytics and ABI Research as an indicator of the market opportunity.  Although these forecasts are optimistic (to put it mildly) there is clearly a pronounced pivoting towards streaming consumption.  As regular readers will know, I have little faith in 9.99 ever being established a mass market consumer price point and it will certainly never drive the numbers some people are forecasting.  But work with a hardware company to absorb some or all of the cost of the music into a device or car (or even a home as Hughes suggested) then you start to have the ability to drive mass market adoption.

Four years ago I proposed the creation of digital music box for the living room, to halt the steady demise of the home hi-fi.  Back then the economics of the proposition had to be engineered around pre-installed downloads, making it nigh on impossible to make the concept work at mass market price points without dramatic license rate discounting.  Streaming changes all of that.  Now the concept of a $/€/£250 hi-fi unit with a year’s worth of fully integrated unlimited music is a genuine opportunity (and one that some one should address with urgency).  Omnifone is exactly the sort of company who could make it happen with the right device brand.

Of course Omnifone no longer has as much competitive leg room as it once did, with the likes of 24/7, 7 Digital and Aspiro all contributing to an increasing competitive marketplace.  But as streaming continues to help drag digital music out of doldrums, Omnifone could yet play a key role in the future of digital music. Though the ISP bundle opportunity appears to be diminishing with every month that passes, mobile carriers (e.g. Cricket Wireless) and handset manufacturers (e.g. HTC) are showing growing enthusiasm for bundled music strategy.  Once the dust settles on Spotify’s stellar year, and it is clear just how much all the other streaming service ‘boats’ have been risen by Spotify’s ‘high tide’, I expect we’ll see an even stronger case for the bundled music service, and in turn more demand for the services of Omnifone et al.

Is the UK the Canary in the Mine for Digital Music?

It is beginning to look like we are at one of the most important junctures in the music industry’s history since the dawn of the digital age.  Ever since the rise of Napster the music industry has navigated a number of tricky and outlook-defining decision points, such as: how to tackle piracy, whether to license to music services, whether to go DRM free, whether to support ad-supported, what to do with mobile?  But now there is an even bigger question which straddles all of those sub-factors: Is Plan A working and if not, what is Plan B?

It is easy to get the impression that the music market is moving towards being in a good place, that the corner is slowly being turned.  Indeed US sales, in volume terms at least, showed a modest upturn in 2011.   However when the Adele factor is stripped out of the equation, music sales across most markets, US included, look a lot less rosy.  But even leaving Adele in the mix, the UK – the world’s 4^th largest music market – paints a concerning picture.

 

To illustrate the point, let’s compare the situation now compared to 2 years ago.  The view from 2010 (see chart) revealed full year 2009 trends of strong CD sales decline coupled with solid digital growth, but no enough to prevent overall market contraction. However the view from 2012 shows worryingly little progress.  Though CD sales decline did slow, the overall market continued to shrink (also H1 2012 numbers show an acceleration in CD decline once again). Most concerning of all though was digital: growth slowed not just in percentage terms but also in absolute terms, down from £75 million new digital revenue in 2009 to £63 million in 2011.  As a market grows it is expected that % growth slows too, but at this relatively early stage of the market’s development absolute growth should be continuing to grow too.

The UK music market has spent most of the last decade in decline but if the current metrics and dynamics remain in place the UK recorded music market could end up losing a cumulative total of £1.3 billion between 2012 and 2017, more than its entire current value (see figure two).  The good news is that digital will represent more than 70% of revenues, but that will be a larger slice of a much smaller pie.

There are many contributory factors (piracy, the lost music buyer generation etc.) but there are two observed trends which merit particular attention:

• Digital buyer growth has slowed.  Of the total UK digital music growth between 2008 and 2011, just 31% came from new buyers, the remainder came from increased spend per buyer.  Increasing spend per buyer is of course an important strategic objective, but in these early days of digital music more of the growth should be coming from new customers, not from consolidation around the early adopter niche. With Apple’s iTunes accounting for such a large share of the UK and US digital music markets, it is unsurprising that digital growth is closely aligned with the rates at which Apple acquire new device customers (which, to be clear, is a very different metric from the rate at which they sell new devices) and the rate at which they grow average music spend.
• Music buyers are disappearing.  Extrapolating from Kantar’s UK music panel (as reported in the BPI Yearbook) approximately 5 million music buyers have disappeared from the UK market since 2008.  Granted many of these buyers were probably low value customers and not all of them are necessarily lost for good, but it is clear that digital services are not doing a good enough job of converting music buyers from physical to digital and certainly nowhere near a good enough job of preventing lapsing CD buyers from disappearing out of the market all-together: against the total 7.9 million CD buyers ‘lost’ between 2008 and 2011, there were just 1.9 million new digital buyers.

What Can Be Learned from the British Experience?

The UK is not the same as the US, Japan, Germany, Sweden or any other music market.  Nor is it a direct predictor of what will happen in each of those markets.  However the overall direction of its market fundamentals are directionally similar – and in some cases functionally similar – to many other markets.  The UK is not a failing music state like Greece or Spain, it is a robust market (by music industry standards) with a mature and established digital sector and – for now – an established high street retail presence.  Over the last few years the UK’s story has been one of ‘steadying the ship’, of the corner slowly being turned.  So the UK trends should be viewed in the context of how quickly a solid market can potentially veer off course.

It is possible that the 2011 UK numbers will be followed by H2 upsurge in CD sales and an acceleration of digital growth, and I for one hope that this proves to be the case, but the safer bet is an evolution of the status quo. Across most key music markets it is clear that the current digital product mix is not delivering enough.  The US has passed the 50% digital mark and in the case of this market it is the sign of robust market fundamentals.  But passing the 50% mark in itself is not necessarily a measure of success.  It is only a commendable achievement if it is not an artefact of a shrinking overall market (as was the case with South Korea when it crossed that point with much fanfare in the mid 2000’s).

The UK’s music market is not about to implode, nor is the global market.  But it would be wise to view the UK as the canary in the mine for global digital music strategy, to assess whether the air is truly safe to breathe, whether Plan A is up to task.

Guest Post: What’s the Future for Ad-Funded Music Services?

Today we have the first in a short series of guest posts by leading music industry consultant Keith Jopling.

Keith is also one of the panel of judges for the Music Industry Blog Start Up Showcase and you can view Keith’s bio on the Start Up Showcase page here.

What’s the Future for Ad-Funded Music Services?

I recently gave a short talk at the IAB entitled “What could happen if the music market truly opened up to advertising?” The point of the talk wasn’t to answer that questions exactly (who could?), but to explore why ‘ad-funded’ music is less of a buzz these days. It was an opportunity to reflect why ad-funded hasn’t delivered on the heady expectations back when it all started in 2005/6.

The IAB event was back in May and since then there have been one or two developments and fresh comment. Most significantly, the UK’s number two ad-funded music streaming service, We7 was bought by Tesco for £10.8m – presumably in time, re-positioning the ad-funded pure-play music service to something of added-value to Tesco music buyers (and presumably, no longer funded by ads). Watch that space.

I also read something from Alexis van de Wyer, President of AdsWizz Inc, suggesting that Spotify had taken its eye firmly off the ad-funded ball and become too focused on premium subscriptions and partnerships for its API platform. I’m not one to doubt the brilliance of Spotify’s strategic plays but I thought this was an interesting viewpoint (even if it was a thinly disguised sales pitch from an advertising salesman).

In its early stages Spotify would wax lyrical about ‘new advertising products’ and various forms of innovation in online advertising. But did it sometimes feel like there really wasn’t much advertising on Spotify, or for that matter, innovation in ad formats? With several strategic shifts since it does to some extent look as though Spotify has accepted that ad-funding isn’t a primary revenue model – but more a springboard to other revenue streams (the so called freemium model).

Wherever this takes Spotify, the other question is – where does it leave ad-funded music as a ‘sector’.

The IAB talk highlighted a few facts of note, as follows:

• The UK online advertising market was worth £4.8 billion in 2001 (the IAB’s official figure)
• The UK online ads market grew by 14% year-on-year
• The BPI reported ad-funded music revenues to labels (therefore trade revenues at the labels’ agreed share) of just £11.4m in 2011
• From the BPI figure – adding in publishing and partner shares – the IAB estimated a total figure for ad-funded music in the UK of circa. £40m

Thus, music’s share of the online advertising market in the UK is well under 1%. As a share of revenues to the music industry (to labels anyway), ad-funded is just under 4%. And it hasn’t grown since 2010.

Why is ad-funded music so small and why is it no longer a growing revenue model?

In a way this is more a European problem. With Pandora generating $250m in advertising revenues in the 2011 and label-backed Vevo bringing in $150m, there are at least two cases studies of success across the pond (provided Pandora can keep it up!).

By mapping the existing music service landscape, it’s possible to make some observations:

• In music streaming – Spotify and ‘3^rd generation players like MOG (also now acquired) and Radio have shifted away from ad-funded
• In music video ad-funded is still the primary model (for You Tube, Muzu and Vevo for example)
• In discovery there is a range of models, but the latest buzz start-ups like Soundcloud and Songkick have stayed clear of ad-funded

What mapping current services doesn’t show is the number of promised or planned ad-funded services that have never materialised – including high-profile flops like the notorious Spiral Frog and Qtrax. More recently Oz-based Guvera’s arrival to market seems protracted even though it is still raising investment.

Is there opportunity to re-energise the sector? What is its real potential in Europe?

The IAB seems interested in this space and continues to examine it, so we may hear more views from the advertising camp. But there are at least a few possibilities:

• In video – original programming and digital music channel creation – exemplified in the UK by the massive successes of SBTV, UKF and the more recent indie play Noisey.com
• Format Innovation – audio ads have lagged behind other formats such as display and didn’t quite live up to early expectations, but perhaps there are breakthroughs still to come here
• New markets – with brands now becoming publishers and ‘Content Strategy’ the buzz section of digital marketing plans, it’s only a matter of time before online sync services such as Cue Songs or others can crack-open a scaleable new way to license music to the millions of small scale uses in corporate video, blogs and other branded content

Ad-funded has places to go then, but isn’t the buzz it used to be. But then part of the music industry’s ‘problem’ is the apparent need to pin big hopes on the next panacea. Currently, it’s cloud services enjoying some time in the sun. But what’s really unfolding is a patchwork economy for music, that’s far more interesting to view as a whole.

Why Tesco Just Bought We7

Today UK headquartered supermarket chain Tesco announced the acquisition of a 91% stake in UK streaming music service We7. It hasn’t been the easiest of journeys for We7, with the plucky English start-up simultaneously fighting off incursions onto its home turf from the Nordics (Spotify) and the French (Deezer). Which is an uncanny rerun of the last English King Harold I’s annus horibilis 1066 when he fought off the Vikings and before finally losing to the France based (though Viking origin) Normans at the Battle of Hastings. But whereas Harold ended up with an arrow in his eye this isn’t the end of the story for We7.

Tesco might at first sight seem something of an unusual bedfellow for We7, but Tesco has very big digital content aspirations. The We7 purchase follows the acquisition of streaming video service BlinkBox and is another building block in Tesco’s bid to build a paid content offering that appeals to its mass market, mainstream customer base. ‘Mass market paid content’ may be an oxymoron right now but if anyone is going to take paid content mainstream it will most likely be a mass market brand. And yet it will be far from plain sailing for Tesco.

Tesco’s paid content strategy is both aggressive and defensive.

Tesco has been aggressively – and in the main, successfully – pursuing non-grocery revenues for a number of years now. (Though a recent dip in overall revenues has seen a commitment to a renewed focus on core grocery products). Paid content is a product line which would clearly be new revenue opportunity for Tesco and music would be the obvious lowest common denominator hook for pulling consumers into a blended paid content offering. It is a strategy that has worked well for Apple and to some extent Amazon.

The role of Amazon brings us to the defensive play for Tesco. Tesco hasn’t always had the smoothest of relationships with the music industry, particularly the retailing element of it. Like supermarket chains in many other markets Tesco has pursued a strategy of loss leading with a relatively limited selection of front line and classic catalogue CD titles. Its aggressive pricing strategy has helped bring CD prices tumbling down (great for consumers, less good for record label margins) and it has sometimes tried to bend the rules to get stock cheaply (such as sourcing from Eastern Europe). Tesco does all of this because it helps footfall in store and because it helps migrate its customer base up the product ladder from baked beans, to CDs, to computers and so on. All of which is remarkably similar to Amazon’s strategy, the difference being that Amazon use CDs (and books and DVDs) as the entry point on the product ladder. As CD sales decline though the ability to use CDs as a customer acquisition hook diminishes. Amazon knows this all too well, hence its aggressive – but thus far only modestly successful – pursuit of an MP3 store strategy.Now Tesco can see the writing on the wall too.

Selling paid content from the supermarket aisle

The task is more robust for Tesco than it is for Amazon. All of Amazon’s customer relationships are digitized because it is an online retailer. Tesco though, despite being a global leader – at one time the global leader – in online retailing does not have a digital relationship with the majority of its customers transactions. As Amazon will attest, it is already challenging enough trying to persuade customers in an online environment to opt for digital versions of products even when they are positioned alongside physical versions and more cheaply. The task is nigh on impossible in a supermarket aisle. Which is where I think We7 will come in. It is a much more straightforward – though still not easy – task to get customers to visit a free online content destination, such as a streaming music offering, than it is to get them to dive straight into buying digital content.

A smart move for Tesco would be to use We7 to power a free music offering that is available only to holders of its Tesco Clubcard loyalty scheme. This would give customers another reason to opt into the Clubcard scheme if they haven’t yet, and for those that have it would give them reason to start engaging with it online. Once it has customers engaged with free streaming music Tesco then has a much easier task of migrating portions of those consumers to paid digital music, whether downloads or subscription. Tesco has a number of incredibly valuable assets at its disposal to promote usage in both a broad and targeted manner. For example users of the free streaming music offering could be given a free download with every £50 spent at the till. In store integration and promotion would be more challenging but various compelling options exist ranging from voucher cards to digital content bundled with CDs.

In short We7 could and should become the foundation stone of Tesco’s walled-freemium music strategy. Tesco have talked a decent digital music game for years now without notable success. A £10 million investment in We7 could well prove to be a very cheap pass to the big time.

Q1 UK Music Sales and the Role of the Post-Holiday Surge

Today UK music industry trade body the BPI announced the milestone of digital music revenues exceeding physical music revenues for the first time. At first glance the numbers are impressive but there is important context.  Although it might appear that the UK is closing the gap on US digital music ‘channel shift’ there still remains clear blue water.

Digital revenues surpassed 50% of total recorded music sales in the US last year, but almost reached that point in 2010, level pegging physical sales on 49% at year end (performing rights made up the rest according the IFPI).  By comparison full year digital revenues in the UK in 2011 made up 35.4% of total trade revenues according to the BPI’s (invaluable) 2012 Yearbook.

The BPI’s announcement today refers to 1^st quarter data alone.  In Q1 2012 digital accounted for 55% of income at £86.5 million, up from £70 million in Q1 2011 when it accounted for 46.1% of income.  The eagle eyed of you will have noticed that even in 2011 digital’s Q1 share was markedly above the annual total of 35.4%.  Underlying this disparity is the emergence of a new wave of seasonal purchase behaviour, what I call the Post-Holiday Surge.

Christmas / holiday period sales have always been by far the most important for record labels (highlighting why it is so important that someone somewhere gets digital gifting fixed – and iTunes vouchers are not the answer).  The advent of digital has created a second wave of festive spending: after the Christmas / holiday period we now see a surge in digital sales as people fill up their brand new MP3 players, tablets and smartphones with new music.  Although because Apple accounts for c.75% of digital download sales it is probably more accurate to restate that as ‘we now see a surge in digital sales as Apple customers fill up their brand new iPods, iPads and iPhones with new music from the iTunes Music Store’. (Other digital channels such as Spotify of course play a major role in digital revenue, but less so in the post-holiday boom).

This is why Q1 increasingly over reports for digital sales.  That is not to take anything away from the numbers reported by the BPI (it is a key milestone worthy of celebration) but it shouldn’t distract us from the fact that the UK remains somewhere between 1.5 and 2 years behind the US in terms of the shift to digital.  If trends continue at their current rate the end of year digital revenue share in the UK should hit somewhere in the region of 46% to 48% i.e. pretty much where the US was in 2010.

Digital sales are growing, but still not quickly enough across the entire year.  Full year 2011 UK trade data shows that physical income declined by £84.2 million while digital grew by £55.8 million (a net loss of £28.4 million).  In Q1 2012 a very different picture appears: year-on-year digital increased by £16.5 million while physical declined by £12.3 million, a net gain of £4.2 million.

The Post-Holiday Surge phenomenon illustrates where digital needs to be performing at now and for the whole year, namely growing more quickly than CD sales contract across 12 months of sales. In the UK, Q1 is digital’s quarter, now it needs to take ownership of the entire year just like it did in the US.