The Future Music Forum

On September 18th I will be keynoting the Future Music Forum in Barcelona.  I will be featuring some new MIDiA Research data and analysis in a presentation about the future of digital growth.  I will focus on the importance of moving beyond the current binary choice between free and expensive and also look at the next frontiers for digital growth, such as emerging markets, in-car and in-home and engaging the mass market consumer.

I have been fortunate enough to speak at the FMF for a few years now and the event is growing into being a key date in the music conference calendar. The line up this year is their strongest yet, with speaking slots from the likes of Simon Wheeler (Beggars), Benji Rogers (Pledge), Scott Cohen (the Orchard) and Alex White (Next Big Sound).

Hope to see you there.

Media, Technology and The Innovator Hegemony

We are at critical juncture in the evolution of digital content. Digital consumption of content, spurred by accelerating adoption of smartphones and tablets, is crashing towards the mainstream, while traditional revenues and business models continue to buckle under the strain. Legal and business disputes between Amazon and book publishers, and Google and independent record labels are small but crucial parts of this process. This period of disruptive flux is giving way to a new era of content distribution in which a few large technology companies are assuming the role of distributor, retailer, channel and playback device as one single package. The emerging new world order is defined by concentration of power, reduction of competition and the subservience of traditional media companies. The 2000’s witnessed the ascendancy of digital innovators, now we are arriving at a new chapter: the Innovator Hegemony, the era of the all powerful, unregulated technology superpower.

Free Is Now the Business Model of Choice

We are mid way through the shift from the distribution era of selling units of stuff, be they newspapers, CDs, packaged games, books or DVDs, to the consumption era where consumers increasingly value access over ownership. This shift manifest itself as a meltdown of the traditional media industries and associated retailing channels. Out of the ruins of these crumbling nation states Amazon, Apple and Google have started to construct sprawling digital content empires. Until relatively recently it looked like Apple was the only company that had learned how to make digital content works as a business, albeit as a loss leading one. But during the last year the market has inevitably buckled under the pressure of Amazon’s willingness to give away access to content as bait for free shipping and Google’s endless appetite for giving content away for consumer data.

Amazon and Google realized they were never going to win if they played the game by the Apple’s rules, which had been transplanted from the analogue age, namely charging for ownership of content. Instead they have opted for the digital zeitgeist: free, or at least feels like free. It is beginning to look like iTunes was a historical anomaly, an isolated outpost for distribution era practices in the digital realm. What Amazon and Google have done is pick up the baton Napster dropped in the early 2000’s and they have run with it.

The Innovator Hegemony

There is little reason media companies would want to cede so much power and pay the inexorable price of devaluing digital content to the price point of zero. They do so because they allowed their partners to get too powerful. This is the Innovator Hegemony. Apple, Google and Amazon all used content as a stepping stone towards achieving global scale, scale that once gained they used to swap the balance of power. Labels, publishers, authors and artists suddenly found themselves beholden to companies they had helped succeed and that success now used against them.

When Competition Legislation Protects Monopolistic Behaviour

But there is an issue of even greater significance at play: the inability of market regulation to appropriately counter the increasingly monopolistic behaviours of the big technology companies’ content moves. Anti-trust and competition legislation neuters media companies but leaves technology companies to operate with near impunity. Dating back to the analogue era when media companies were all powerful, anti-trust legislation was designed to prevent media companies colluding and entering into monopolistic behaviour. But now that technology companies own the platform control points that media companies depend upon in the digital realm, anti-trust and competition legislation has the unintended consequence of consolidating the power of the technology monopolies by stymying media companies.

The three big technology companies have a greater concentration of influence and market share in digital content than any single media company did in the analogue era. Amazon, Apple and Google have become a single, effective monopoly in each of their respective marketplaces. Thus anti-trust legislation currently has the unintended consequence of reinforcing market concentration.

Matters are not helped by the fact that media companies have become something of a busted flush at the legislative level, having over reached with copyright and anti-piracy lobbying efforts. The dramatic collapse of SOPA and the failure of Hadopi illustrate how media companies have lost legislators’ hearts and minds. After years of media industry ascendency the lobbying balance has swung towards the technology companies who are winning over key influencers such as the European Commissioner Neelie Kroes.

Platforms As Integrated Monopolies

Right now Amazon and Google are testing the boundaries, seeing what they can get away with before they are reined in. Amazon is unashamedly abusing its platform to hurt sales of book publishers such as Hachette and Bonnier, while Google is equally brazenly threatening to turn off monetization of music videos of labels that will not sign its overweening YouTube contract.  Interestingly both Amazon and Google appear to be testing just how forceful they can be with the independent ends of the media business spectrum.  These actions show us how vertically integrated platforms have a tendency to become internal de facto monopolies with effectively limitless internal power. Power that corrupts, and that ultimately turns the ideologies of these once idealistic disruptive start ups into police states where dissension is no more tolerated than it is in North Korea.

It is time for media companies and policy makers to decide whether they are brave enough to stand up to the Innovator Hegemony. Every content company still has the nuclear option of pulling content from the services but few will ever dare to do so – the German YouTube stand off a rare exception. And therein lies the problem, media companies already feel they cannot exist without the big technology partners and the tech companies know it. Without appropriate macro checks and balances the outcome will always be the timeless, asymmetrical roles of bully and bullied.

What Acquiring Beats Could Do For Apple (And Everyone Else)

Stories emerged last night that Apple is in talks to buy Beats, citing well-placed sources. If true – and if it actually goes through – the acquisition has countless potential impacts of seismic proportions, particularly if the deal includes nascent subscription service Beats Music. Apple has always been in the business of selling music for the business of selling hardware, and the potential acquisition must be considered in those terms. With download sales declining and subscriptions gaining traction, Apple has been locked in a process of soul searching, trying to work out what it can do to remain relevant in the digital music business in order to remain relevant in the device business. Beats is a ‘if you can’t beat them, buy them’ solution.

download slow down

There are a number of key considerations and potential impacts:

  • Digital music Plan A has run its course: Despite dynamic growth in Northern European markets, digital music growth nearly shuddered to a halt in 2013, slowing from 11% year-on-year growth in 2012 to just 2% last year, and that is unlikely to be much higher than 4% in 2014. The reason is quite simple: streaming subscriptions are, outside of Northern Europe, predominately converting the most valuable download buyers – who are most often iTunes buyers – into subscribers. Aficionados who bought a few digital albums a month are instead spending 9.99 a month. So instead of bringing up the average spend of music buyers it is bringing down the spending of many – I’ll be publishing some data on this in the coming weeks. Digital music needs a Plan B to reinvigorate growth
  • Apple is paradoxically holding back digital growth: Apple almost singlehandedly created the global digital music in the 2000’s but it is now actually holding back growth in the 2000’s. Streaming has taken off most quickly where Apple never got a foothold (see figure). Where Apple is firmly established streaming is a transition story, of download revenue shifting to streaming. Where it is not, streaming is green field growth. An interesting side effect of this is that because English speaking Apple has prospered most in English speaking markets, it is in these countries – US, UK, Canada, Australia, all of which are top ten music markets – where digital growth is now slowest. Apple has inadvertently passed the digital baton to the non-English language world.
  • Apple’s go-slow streaming strategy is too slow: All this translates into weakening digital relevance for Apple, which infers weakening hardware relevance. Apple has been here before, back in the heyday of Last.FM when Apple was still predominately a computer business, it tried to steal the social music revolution’s clothes with the launch of the now-defunct Ping and the just-about-still-around Genius. Yet Apple came out of that era stronger than ever. Now though, portable devices are the beating heart of Apple’s business, and with the relentless onslaught of Android it cannot afford its next music move to be another Ping. However Apple has had to go slow with streaming. Its user base is more mainstream than ever – as the growing popularity of Now compilations in its store attests – so it has to introduce new features in a way that does not overwhelm its less tech-adventurous customers. iCloud and iTunes Radio are great transition technologies to help introduce streaming to Apple users at a steady pace and to demonstrate clear relevance in the iTunes context. Unfortunately this long-term strategy for its mainstream users has done little to halt the defection of its more sophisticated and, crucially, most valuable, customers. Beats Music could be the defensive strategic option for them.
  • Subscriptions don’t have to be AYCE 9.99: 9.99 AYCE services have done a great job of monetizing the super fans, but with less than 5% penetration in major music markets, there is a clear need for something else for the more mainstream fan in top 10 music markets. Cheap priced subscriptions and telco hard bundles are both solutions to this problem. Apple should not feel compelled to jump on the 9.99 bandwagon. Digital content stores are breaking down the genre walls – as Google’s Play demonstrates so well. Apple gets much more revenue from other content genres – see this figure – so a multi-content genre subscription would be a much cleaner fit for Apple. As would a subscription that gave users a certain amount of credit to use on any iTunes products, sort of a virtual iTunes Gift Card subscription. Pricing would be blissfully simple – e.g. $10, $20, $30 etc. – and would help protect Apple from revenue cannibalization until it makes the full switch to access from ownership. $10 could include ad-free iTunes Radio, $20 and upwards could include unlimited music streaming.
  • Apple could make hard bundling work, and some: If Apple does get Beats Music, it would have an unprecedented opportunity to make bundled subscriptions work. Hardware has always been key to making digital content work, whether that be the Kindle, Xbox, Playstation, iPhone or the new generation of Content Connectors like Chromecast. Subscriptions are working now because Apple opened up a chink in its vertically integrated ecosystem armour by allowing streaming services to exist on its devices. In fact mobile access is responsible for the majority of the 9.99 model’s growth. Retailing an iPhone / Beats headphones subscription bundle would communicate clear value to users, and with the cost largely hidden in the premium price point associated with the bundle, could help consumers get over the hump of committing to monthly spending.
  • Beats would redefine Apple as a CE company: The implications on Apple’s device portfolio are intriguing tool. The simplicity of Apple’s limited product range has always been key to its success. Being able to retail a single phone when competing with the excessively vast portfolios of incumbent smartphone companies was a major differentiation point. Since those first iPhone days though Apple has multiplied its number of product SKUs. Incorporating a range of headphones would take that to another level. Whether Apple has the ability to seamlessly transform from a computer company with a small range of portable computing devices, to a fully-fledged CE company remains an intriguing open question.

There is no doubt that if Apple does buy Beats and Beats Music, that the impact on the competition will be dramatic. Spotify will be rightly worrying about the impact on its impending IPO – though expect words to the effect that this is simply a resounding validation of the model. But the competition should be welcomed. To date most digital music services have been strategically lazy, focusing their efforts on trying to sell new products to already existing digital customers, the majority of whom, in the big markets at least, are Apple customers. Now digital music companies will have to start thinking much more creatively about how they can compete around, rather than with Apple. About how they can create revenue in new consumer segments, not simply trying to extract more revenue from the preexisting ones. Some companies are doing this already but they are in the distinct minority – this should be a good time for them. If Apple does buy Beats, it will bring some much needed momentum to market that was beginning to suffer from hubris.

MusicQubed Puts the Rise of Listen Services Into Numbers

Back in October I wrote about the emergence of a new wave of music services: ‘Listen Services’. Namely music services that sit at the opposite end of the sophistication spectrum to ‘Access Services’ like Spotify and Deezer.  While the on-demand Access Services are focused on immersive discovery experiences for the engaged music aficionado, Listen Services are aimed at the mainstream music fan that does not have the time nor appetite for searching out what to play from a catalogue of 30 million tracks.  Listen Services, and their addressable audience, are a key priority for the music industry as it is becoming increasingly clear that Access Services, while fantastic at monetizing the top tier of fans, are not the right fit for the mainstream. To date the main focus for this segment has been ad supported personalized radio from the likes of Pandora and Slacker.  New entrants have started trying to drive digital spending from these consumers with cheap subscriptions, players like MusicQubed, Bloom.fm, Blinkbox Music and Nokia Mix Radio (interestingly there is a distinctly European company bias in this sector). MusicQubed has released some figures to illustrate how this emerging segment is developing.

To celebrate the first anniversary of its launch into market, MusicQubed last week released a combination of performance metrics for its services and some related statistics:

  • 85% of UK radio play comes from the top 120 tracks
  • The Forgotten Fan (above average listening but below average spend) accounts for 30% of consumers
  • Daily listening time of MusicQubed users = 30 minutes
  • 30% of all active users are subscribers
  • 1.5 million consumers have used MusicQubed services to date
  • O2 Tracks (O2’s UK music service powered by MusicQubed) has 60% female users and an average lifetime value of £33, while 20% buy at least one download a month after having discovered it in the service

While MusicQubed is a long way yet from challenging Spotify in terms of total users and paying subscribers, the numbers do hint at a validation of this too easily neglected consumer segment. Of course everything starts small and it is worth remembering that a year after launch (i.e. by end August 2009) Spotify only had in the region of 100,000 paying subscribers.

Will Listen Services Define the Next Phase of Digital Music?

The history of digital music has evolved in roughly 5 year chapters, each defined by a key service and the problem it solved:

  • Phase 1: Napster gave consumers frictionless access to all the music in the world
  • Phase 2: iTunes made the paid download make sense
  • Phase 3: Spotify fixed buffering and gave frictionless (legal) access to all the music in the world (well most of it anyway)
  • Phase 4: Beats, Blinkbox, Bloom.FM, MusicQubed are all candidates for defining the next phase. Spotify gave access to 25 million songs and now these services are each doing at least one of a) trying to make sense of that 25 million via curation and b) making music subscriptions affordable for the mainstream

4th phase

Once we have another 12 months or so of market activity we should be in a position to make a more definitive conclusion on which service, or services, will emerge as the defining reference point for the next era of digital music.

Listen Services, affordable subscriptions and curation-centred services are only just getting going, but they will be key to long term sustainability.  As subscriptions eat into the spending of the most valuable download buyers, it is clear that a ‘digital plan B’ is required.  This new generation of services are part of that plan.

IFPI and RIAA 2013 Music Sales Figures: First Take

The IFPI and RIAA today released their annual music sales numbers.  Though there are positive signs, overall they make for troubling reading 

  • Total sales were down 3.9%.  Based on 2012 numbers the trend suggested that 2013 revenues should have registered a 2% growth, so that is a -6% swing in momentum.
  • Digital grew by 4.3% which was not enough to offset the impact of declining CD sales, which has been the story every year since 2000 except last.
  • Download sales declined by 1%. Continued competition from apps and other entertainment, coupled with subscriptions poaching the most valuable download buyers is finally taking its toll.
  • Subscriptions up by 51%: An impressively strong year for subscriptions but not enough to make the digital increase bigger than the physical decline on a global basis nor in key markets, including the US.

Global numbers of course can be misleading and there is a richly diverse mix of country level stories underneath them, ranging from streaming driven prosperity in the Nordics, through market stagnation in the US to crisis in Japan – where revenues collapsed by 16.8%.  The Nordic renaissance helped push Europe into growth but data from the RIAA, show that total US music revenues were down a fraction – 0.3%.  US download sales were down by 0.9% while subscriptions were up an impressive 57% to $628 million.

On the one hand this shows that Spotify has managed to kick the US subscription market into gear following half a decade or so of stagnation.  But on the other it shows that subscriptions take revenue from the most valuable download buyers.  This backs up the trend I previously noted, that streaming takes hold best in markets where downloads never really got started.  Thus markets like the US with robust download sectors will feel growth slowdown as high spending downloaders transition to streaming, while in markets like Sweden where there was no meaningful download sector to speak of, subscriptions can drive green field digital revenue growth.

The Download Is Not Dead Yet

Though subscriptions now account for 27% of digital revenue, the value trend obscures the consumer behavior trend.  For Spotify’s c.9.5 million paying subscribers (or 6 million last officially reported) Apple’s installed base of iTunes music buyers stands at c.200 million (see figure).  The IFPI report that there are now 28 million subscription customers globally.  In the US and UK this translates into 4 or 5% of consumers. Subscriptions do a fantastic job of monetizing the uber fans, just like deluxe vinyl boxsets and fan funding sites like Pledge do so also.  But they are inherently niche in reach.  This is why downloads remain the music industry’s most important digital tool.  Downloads are the most natural consumer entry point into digital music, and if anyone else had been able to come close to matching Apple’s peerless ability to seamlessly integrate downloads into the device experience, then the sector would be much bigger than it is now.

service bubbles

Do not confuse this with being a luddite view that streaming and subscriptions are not the future, they are, but there is a long, long journey to that destination that we are only just starting upon for most consumers.   And before that there is a far more important issue, namely how to get the remaining CD buyers to go digital.

Sleepwalking Into a Post-CD Collapse

Last year the IFPI numbers showed a modest globally recovery but despite the widespread optimism that surrounded those numbers I remained cautious and wrote that it was “a long way from mission accomplished.”  My overriding concern then was the same as it is now, namely that the music industry does not have a CD buyer migration strategy and it desperately needs one.  So much so that unless it develops one it will end up sleepwalking into a CD collapse.   In fact I predicted exactly what has happened:

“CD sales decline will likely accelerate.  Among the top 10 largest music markets in the world CD revenue decline will likely accelerate markedly in the next few years.  In France and the UK leading high street retailers are on their last legs while in Germany and Japan the vast majority (more than 70%) of sales are still physical.  So the challenge for digital is can it grow as quickly as the CD in those markets will decline?

The IFPI have stressed the fact that Japan’s dramatic 15% decline was the root cause of the global downturn.  While this is largely true – without Japan included global revenues still declined 0.1% – Japan’s problems are simply the global industry’s problems squared.  In 2012 a staggering 80% of Japanese music sales were physical but despite the digital market actually declining 4 successive years total revenues increased 4%.  As the world’s second biggest market, when Japan sneezes the global industry catches a cold.   But expect Japan to continue to drag down global revenues and also keep an eye on Germany.  Germany saw a modest 1.2% increase in revenues in 2013 but only 22.6% of sales were digital.  The most likely scenario is that Germany will follow the Japanese trend and go into a CD-driven dive in 2014 and / or 2015.

In conclusion, there is still cause for optimism from these numbers.  Subscriptions are going from strength to strength, at least in revenue terms, and the download sector remains robust in buyer number terms.  But unless the CD problem is fixed, the best both those digital revenue streams can hope to do is consolidate the market around a small rump of digital buyers.

Decoding the Digital Music Consumer: New Report

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

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

survey1

These are some of the key findings from the report:

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

survey2

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

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

 

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

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

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

Two Very Different Streaming Stories

se-use1

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

se-us2

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

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

The Impact on Total Digital Revenue

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

se-us3

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

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

The Artist Conundrum

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

us-se-4

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

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

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

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

The Cost of Democratization of Artist Income

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

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

How Downloads Will Determine the Future of Streaming

There is no doubt that streaming subscriptions will play a major role in the future of digital music, but their impact is going to be far from immediate. There also needs to be great caution applied to interpreting the encouraging early signs of the advanced streaming markets and the potential impact on total music sales.

Norway and Sweden both experienced an upturn in music sales in the first half of 2013 thanks largely to the impact of streaming subscriptions, while most of the rest of the global music market continued in its struggle to return to growth after more than a decade of decline.  The easy conclusion to draw is that when streaming subscriptions take hold across the globe, music revenue grow.  While there is some truth in the argument, it is too simplistic.

streaming 1

An analysis of the leading streaming markets (Sweden, Norway, France, Netherlands) and the leading download markets (US, UK, Germany, Japan) – see figure one – reveals that streaming took hold in markets where downloads had not.  The markets where downloads represented the lowest share of total music sales in 2010 (before streaming really kicked off) are those that in 2013 had the rates of streaming as a share of digital music revenue.  In markets where downloads were making the biggest contribution to total music income (not just digital) streaming did not get much of a look in in 2013.  In the US and UK streaming subscriptions were in market long before Spotify and Deezer, but most digital music consumers opted for downloads and have been unwilling to switch allegiances since.  It will happen over time, but right now downloads have a firm grip and that is largely because of Apple.

streaming 2

When we look at the same countries plotted by streaming share against Apple device penetration we see an even more pronounced trend – see figure two.  Here the relationship is clear: streaming has taken hold where Apple has not.  In short, there was no established mainstream digital music service and streaming subscriptions filled the void.  But of greatest significance is the impact on total music revenue.  These strong streaming markets contribute just 10% to global digital revenue, even though France and the Netherlands are two of the world’s top 10 music markets.  Meanwhile the UK and US alone count for 54%.  If you factor in Japan and Germany too you have 71% of all digital music income, and within these four countries (the four biggest music markets) streaming accounted for just 10% of digital revenue.

On the other side of the equation, streaming has brought unparalleled growth in its core markets: across Sweden, Norway and the Netherlands digital revenue grew by an average of 213% between 2010 and 2013, compared to an average of just 40% across the big four markets (though Japan’s declining digital sector pulls that average down).  And of course the Swedish and Norwegian music markets both grew in 2012 and 2013 while the rest did not.

While there is not a clear cut ‘answer’ to streaming’s likely long term impact we can however draw a few important conclusions:

  • Streaming will grow more slowly in markets where Apple and the download market are strong (which helps explain why growth of Spotify et al appears to have slowed in markets like the US and UK).
  • Streaming can make a digital market grow more quickly than downloads can (though it does so normally at the direct expense of downloads – download sales shrank in both Sweden and Norway in 2012 and 2013)
  • ‘Home turf’ counts.  Most of the big streaming markets have their own local heroes (Sweden – Spotify, Norway – WiMP, France – Deezer) – all of whom also benefited from hard bundles and marketing support from their incumbent telcos. Meanwhile Apple of course prospers on its home turf and that of the English speaking UK.
  • Consumer behavior and technology are all edging towards a more access based world and it is inevitable that the download will become less important.  So although these brakes on streaming adoption exist in many markets, they will slow rather than halt the transition. Streaming will near 50% of global digital revenues by 2018.

Streaming remains bedeviled by countless issues – not least artist payments – but what is clear is that it has the ability to transform the shape of the digital music market.  And while that change may be slower to come than the Swedish and Norwegian experiences might suggest, come it will.

 

 

Just How Much is Curation Actually Worth?

Dance music powerhouse Ministry of Sound have commenced legal action against Spotify for breach of copyright with regards to user generated Spotify playlists replicating Ministry compilations and sometimes including Ministry labeling.  The case obviously raises some important legal issues, but more significantly it raises the question of just how much is curation worth?

All of the big streaming services have been falling over themselves to state that curation is at the core of what they are and of what makes them different.  Unfortunately the term curation means nothing to most consumers other than conjuring up images of fusty old librarians.  But leaving that small inconvenience aside, the value of curation to the industry side of the equation is clear…or is it? The problem with 22 million songs is that the consumer is paralyzed by the tyranny of choice.  There is so much choice that there is effectively no choice at all.  Curation, editorial, programming, whatever you want to call it, is crucial.  People are sheep, they need leading.  Some need leading a little, some need leading a lot, but all of them – or at the very least the vast majority of them – need leading.

In the analogue era when media companies controlled the distribution channels most audiences relied upon professional ‘curators’ to show them what to consume.  These curators were radio DJs, newspaper and magazine editors, TV show hosts etc.  They were trusted voices whose influence status was validated by dint of the fact that they were paid to shape the tastes of millions. One of the founding ideologies of the internet was that these curators would be brushed aside in a groundswell of democratization of consumer choice.  These curators suddenly became labeled gatekeepers and became a symbol of the old control-era. The problem is that not only have those gatekeepers been replaced by the algorithms of technology companies, but the algorithms that have replaced them inherently lack the years of human experience and expertise the old curators brought.  Initiatives such as the Music Genome Project and the Echonest are standout examples of technology-driven recommendation best practice, but few would question that the human touch also plays a crucial role in curation, whether that be personal recommendations from friends or family, or playlists selected by Pitchfork. But wherever you stand on the human vs robot debate, the value of curated discovery in a boarder sense is universally recognized.

Which brings us to the Ministry of Sound situation.  Ministry have spent years building the expertise of knowing how to put together a dance compilation and as a result building a brand as a trusted curator of taste.  It is all too easy to dismiss the role of compilations as superficial and irrelevant in the age of the playlist, but there is a reason that some compilations, such as the ubiquitous Now series, do so well and others do not.  As a former DJ I know only too well the depth of thought and preparation that goes into building a set, into identifying which songs mixes well into the next, ensuring that one track does not play out of key with another when it is pitch shifted into the next, of how build a progression of sound that ebbs and flows, that balances consistency with variation.  There is a reason that Spotify users have been recreating Ministry of Sound playlists rather than creating their own dance music playlists.

As the Ministry court case progresses there will be a stern test of whether the copyright of a selection of songs holds legal water in the digital arena in the way that sound copyright does.  Whether it does or not though is almost not the issue.  The core question here is just how much do streaming services like Spotify truly value curation? Do they value it in terms of ‘yes it’s a nice little extra to have’ or do they view it as ‘it is a crucial part of our users’ experience and therefore of our future success and we thus value it at x’?  If it is the latter it is time for them to put the money where their proverbial mouth is.  If it is not then it is time for streaming services to stop talking about the value of curation.

Note: I am indebted to Eli Pariser’s ‘Filter Bubble’ TED speech for some of the ideas in this blog post