Google Hits Play On Subscriptions

As expected Google just announced their music subscription service: Google Play Music All Access.  To cut a not-so-long story even shorter, it’s another $9.99 streaming subscription service.  To be fair it looks like a solid offering with clean, mobile optimized flat design aesthetics and some nice features, including:

• ‘radio without rules’: fully editable auto-programmed radio based on tracks your listening to
• blended algorithmic and curated programming
• 30 days free trial
• seamless integration with the cloud locker service

The locker service integration is a great move and transforms a relatively isolated product concept into a natural extension of the music experience.  Of course locker services are a transition product aimed at helping consumers migrate from the ownership mindset to remote access, so the life cycle of the product is inherently limited.

The ‘uniquely Google’ recommendations and discovery are designed to ‘know exactly what you want’.  The proof of the pudding will be in the eating, but there is a risk of creating an ever shrinking filter bubble where the range of recommendations narrows the more the service learns about you.

A Great v1.0 But….

Make no mistake, it looks like a great version 1.0, streets ahead of where its peers were at 1.0.  But is it enough?  There are many things that Google could have done to stand out, including innovative pricing, Google+ and YouTube integration, a Motorola device bundle etc.  But of course Google never needed to push the envelope on this one.

The streaming market is only just getting going with 20 million global paying subscribers in 2012 paling compared to Apple’s half a billion iTunes accounts.  Streaming and subscription accounted for just 20% of global digital revenues in 2012 and only 8% of US digital revenues.  So Google’s view, correctly, is that this is a market waiting to happen, so focus on refining the model rather than reinventing the wheel.  That’s exactly what Apple did in 2003 when it launched the iTunes Music Store.  The market was pretty crowded with download stores back then, but how many people remember any of them now?

But that’s not to say though that Google is going to do for streaming what Apple did for downloads.  In fact it faces a number of key challenges:

• Don’t pay won’t pay? Google’s consumer base is predominately built around ad-funded free access and associate Google with free. Even though it will not be offering a free tier, Google still face the freemium challenge of convincing swathes of free users that they should pay for something.  By contrast Apple has the largest single addressable audience of paid content consumers in the globe.
• Paid subscriptions don’t drive ad revenue: for all of Google’s desire to diversify its business and revenue streams, advertising pays the bills. Whereas initiatives like Android, Google+ and YouTube all help drive advertising, premium subscriptions do not. And given that premium subscriptions are a low margin business, the profit rate Google earns from subscription services will be less than it gets from ad supported consumers, even if total ARPU is higher.  So there seems little reason for All Access to become a strategic priority for Google.
• $9.99 is not a mass market price point: Google’s biggest asset for the labels is its unrivalled scale and reach, the potential to take digital music to the mainstream. But 9.99 is not a mainstream proposition, it is in fact what the top 10% of music buyers spend in the UK.  Spotify et al have done a great job of engaging the higher spending music aficionados, but there is a finite pool of them, especially in the increasingly crowded US market.  Unless Google plans on stealing everyone else’s subscribers it is going to find mid term growth potential limited (though expect some near term surge from pent-up demand among Google aficionados).
• Balkanized organizational siloes: on paper Google has the most fantastic combination of music service assets (Play, YouTube, Google+, Motorola, Android etc.).  Tie all of those assets together into a 360 degree music service and you have a world beater on your hands.  But Google can’t. It can’t because these business units operate so autonomously and because each one has business conflicts and commercial constraints that prevent them from being fully unified.  For example, ‘doing an Apple’ with Motorola and turning it into a closed Google Play ecosystem would alienate Android partners.  While YouTube’s music licenses are wholly different and distinct from Google Play licenses. 

 What’s In A Name?

Let’s assume that Google has got an ambitious roadmap for All Access that will include innovation on price, product and channel, perhaps even rolling version 2.0 within 6 to 9 months.  Even then, all of the above still apply, and it is the organizational challenge that clips Google’s wings the most.  Even the elongated name hints at the organizational quagmire: Google Play Music All Access. Doesn’t roll off the tongue in the way Spotify, Deezer, Rhapsody or Rdio do does it?  ‘All Access’ is the service, ‘Music’ is the division and ‘Play’ is the strategic overlay and of course ‘Google’ is the company.  Just to get to where it has, All Access has had to coalesce numerous internal Google fiefdoms.

Google is Becoming Microsoft

Google is beginning to look for music what Microsoft did 10 years ago.  Up to and beyond the launch of the iTunes Store everyone expected Microsoft to be the dominant player.  It held most of the cards in the deck, including the industry standard media player and DRM system.  Then along came Apple with the aces.  Try as Microsoft might to compete, it simply couldn’t get over itself.  It couldn’t pull together the disparate business units that needed to cooperate and it was scared of harming other revenue streams and relationships. Microsoft feared that if it pushed too hard with its own service it would alienate the business partners that relied on WDRM for their music services.  All this begat strategic paralysis.  Much the same is happening to Google.  Fear of alienating Android partners precludes them from doing-an-Apple with Motorola (which I suggested they should do).  Also, pulling together YouTube, Google+ and Android into the All Access mix appears to be a step too far.

Google is at a similar stage of its corporate evolution as Microsoft was ten years ago.  It is a big company that is still learning how to actually be a big company.  Before Google can fulfill its vast digital music potential it needs to learn how to get the best out of its organizational structure first.

Here’s looking forward to version 2.0.

The Challenges of Becoming a Subscription Business

Subscriptions are still only a small share of the music market but their time is coming. That time is long over due (I and my former Jupiter colleagues David Card and Aram Sinnreich first started making the case for subscriptions back in 2000) and a slew of big players are getting ready to play ball now that subscription look ready for primetime.  But they will find it far from plain sailing.

Spotify, Deezer, Rhapsody, Muve, Rdio, WiMP etc. have done much get the market moving and although there are still major challenges ahead (e.g. 9.99 not being a mass market price point) a host of new entrants are poised to make their moves.  The much mooted / touted (delete as appropriate) Daisy is one of the more eagerly anticipated ones (see my take here) but focus has recently turned to potential moves from big players like Amazon and Google, while Apple’s arrival in the subscription market is becoming Godot-esque.

All of these companies bring fantastic assets to the subscription market –scale being the most important – but they will all find the subscription transition difficult.  However good their technology assets, however big their marketing spend, however big their customer base, none of these companies have subscriptions running through the DNA of their products nor, most importantly, their customers.  Here are the key challenges each will face:

• Apple: Apple was the music industry’s digital beachhead but now Apple has a problem.  Downloads were a transition strategy with one foot in the digital future and one foot in the analogue past.  Apple has built a paid content customer base founded on ownership, a la carte transactions and downloads.  Meanwhile it tiers its hardware pricing by hard-drive capacity.  In some ways this latter point matters most: in the streaming era consumers download less which means there is less need for higher capacity devices, which in turn means that demand for the higher priced, higher capacity devices tails off.  Apple can use subscriptions to address this issue by creating bundles e.g. iPad Gold, a $200 price premium with device-lifetime access to an iTunes music, video and Apps subscription.   This sort of tactic will be crucial for Apple because the concept of digital content subscriptions is alien to the vast majority of its 400 million iTunes customers.  If anyone can make subscriptions work, it is Apple – and I believe they will – but currently its customer base, hardware pricing and content offerings (iMatch and movie rentals excepted) are simply not the right foundations for building a subscription service on.  A lot needs to change before Apple and its customers are ready for subscriptions.
• Amazon: Amazon’s content-device strategy is the mirror opposite of Apple’s: Amazon is selling devices to help sell content. Amazon needs to be a key player in the music and video business because these low price point items are the bottom rung on the purchase ladder that Amazon hooks new customers in with.  Subscriptions though, are high consideration items.  Amazon is hoping it can nudge customers up to monthly subscriptions in the same way it can nudge customers from a CD to a laptop.  But it isn’t the same transition.  Most Amazon customers have a lot of one-night stands with the retailer rather than a relationship: it is where they go to get stuff, not to immerse themselves in experiences.  Of course Amazon is trying to change that – particularly with video – but it requires a fundamental change in the relationship with its customers.  As with Apple, a device / subscription bundle strategy will deliver best near-term results.
• Google: Google has the most diverse set of assets at its disposal. In YouTube it has the most successful streaming music service on the planet and in Google Play it has, well, not the most successful digital content store on the planet.  Launching a subscription service on YouTube is an obvious option and the sheer scale of YouTube means that even with highly modest conversion rate it can easily become a major player very quickly.  But the fact that YouTube is free is core to why it is so popular, so the vast majority of its users have little interest in paying fees.  Thus Google will have to ‘think different’ to make subscriptions work on YouTube.  But where Google could really make the subscription play work is, well, on Play.  Not Play by itself though but instead as a tightly integrated subscription – device ecosystem with Motorola.  A while ago I wrote that Google ‘needs to do an Apple with Motorola’. It still does, but it should do so in a manner fit for the cloud era by hard bundling a Play subscription service into Motorola handsets. (You should be spotting the theme by now).
• Samsung / HTC / Nokia et al. By this stage any readers from a non-Apple and non-Motorola handset business might be beginning to wonder how on earth their companies are going able to squeeze themselves into the subscription equation.  It is a very good question.  Most mobile handset companies are at a crucial juncture, they now face the same problem as ISPs did in the mid-2000’s: unless something changes mobile handset companies are going to become ‘dumb devices’ just as ISPs ‘became dumb pipes’.  Nokia recognized this earlier than most but got the solution wrong – or at least the implementation – with Ovi and is slowly clawing its way back.  But all of them have a huge task ahead them if they are to avoid becoming helpless observers as other companies build robust digital businesses on the back of their hardware. If they can harness the carrier billing relationship then they have a truly unique asset for building a music subscription market, but that is much, much easier said then done (remember Comes With Music?).

All of these business have the potential to be successful subscription businesses but none of them will find it an easy transition and none of them are guaranteed success.  Not only will they have to transform their products, pricing and customer bases, but they will also have to develop entirely new business practices.  To some degree or another, all of these companies have to make the transition from being retail businesses to being subscription businesses.  Being in the subscription business is all about managing churn.  It doesn’t matter how good a job you do of acquiring customers if you can’t keep hold of them.  These are the skillsets that Rhapsody has been quietly perfecting for years and that Spotify is quickly learning.  A successful subscription business can appear like a duck, slow moving above the water line, but feet moving furiously fast below.

The Churn Killer: Device Subscription Bundles

Any business that is new to subscriptions – whatever they may say to the contrary and whatever talent they might hire in – is going to be learning the ropes.  Which is another reason why hard-bundling subscriptions with hardware makes so much sense for these new entrants. Besides the consumer benefits of turning an ethereal subscription into a tangible product, they allow the providers to plan for 12 to 24 months worth of customer life time value rather than worrying about subscribers churning out after just a month or two.

Even though downloads and CDs will still dominate global music revenues by the end of 2013, it is going to be a big year for subscriptions. Whether the new entrants can help turn that into a big decade remains to be seen.

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.

What Happens When Facebook Hits 1 Billion Users?

In the four short years since Facebook passed 100 million global active users back in August 2008, social networking has gone mainstream and Facebook’s own active user base now numbers in excess of 955 million. Facebook had many predecessors (MySpace, Hyves, Friendster, Orkut to name but a few) but it achieved what none of them did: it created a service that mainstream consumers adopted in their droves.  Yet despite this success, and as Facebook nears the 1 billion user mark, there remains a niggling worry which stubbornly refuses to go away: has Facebook actually taken social networking mainstream or has it just taken Facebook mainstream?

Facebook Has Created a Two-Speed Social Network Landscape

Facebook’ dominance of social networking is clear and its 955+ million user count stands head and shoulders above the rest (see figure).  Twitter is the closest challenger with less than a fifth of Facebook’s active user count, and Google+, despite bold early moves remains approximately a tenth of Facebook’s scale with 100 million active users.  Beyond those key players the social network long tail rapidly fragments into niche sites and also-rans.  What is becoming apparent is that a two-speed social network landscape is emerging with Facebook effectively a lap ahead of the best-of-the-rest.  In short, Facebook has won the race for the mainstream consumer.

The Importance of Network-Effect Scale

There are many reasons for Facebook’s success, but being all things to all people is centre stage, and in the mass-market scale game there is currently only space for one winner, with success intimately tied to ubiquity.  Facebook has the benefit of a crucially important asset: network -effect- scale. Because the majority of people’s contacts are on Facebook it is the network they opt into, thus increasing the number of other people’s contacts, and so on in a continual virtuous circle.  And as mainstream consumers don’t want the hassle of maintaining multiple social networks, a winner-takes-all scenario emerges.

Twitter and LinkedIn owe their success to not competing with Facebook for the mass market consumer: they deliver value to their users as a complement to Facebook rather than as an alternative (at least in most cases).  Long term success for generalist social networks such as Google+ though depends explicitly on taking users and user hours away from Facebook.  The challenge for Google+ is that those entrenched mainstream Facebook users are not going to be wowed by features or functionality.  If they will ever shift from Facebook it will be because of the same reason they went there in the first place: they will go where their friends and family are.

Facebook’s Velvet Handcuffs

Thus the network-effect acts as velvet handcuffs for mainstream Facebook fans.  What Google+ is banking on is that enough of the more sophisticated users get swayed by features and functionality, in turn starting the crank wheel of the network effect.  Which is exactly why Facebook is so actively integrating content partners such as Spotify into its platform: the more content experiences Facebook can funnel through its platform, the more reason there is for sophisticated users to remain loyal.  If friends and family are the velvet handcuffs for the mainstream user, then content plays the same role for the sophisticated user. (For more on Facebook’s Socially Integrated Web Strategy see this free Music Industry Blog report).

As things stand, when Facebook does hit 1 billion users it will say more about its own success than it will about the overall health of the social network landscape.  The catalyst for Facebook’s network-effect was the foundational principle of connecting people, and the human need to connect is the behavioural glue that ties Facebook together.  Mainstream consumer inertia is the most powerful force in the social network marketplace today, not innovation. This is not to say that social networking will remain defined by a mass market monopoly in perpetuity, but it will until (or if) mainstream consumers acquire the tolerance – or need – for more than one social network.  Until then, social networking will remain a two-speed marketplace.

I will be building upon these ideas and others in a forthcoming Giga Om Pro report ‘Facebook and the Two Speed Evolution of Social Networking’ Watch this space for more details.

 

Apple’s $1bn Settlement: a New Innovator’s Dilemma

Apple’s $1 billion patent infringement victory against Samsung raises a number of increasingly pressing issues about innovation in the consumer technology space. There is no doubt that Apple has done more than any other single company to shape the smartphone marketplace. It is also clear that the average smartphone form-factor and feature set look dramatically different post-iPhone than they did pre-iPhone.  And there is an argument to be had that those same form factors and feature sets bear more than passing resemblance to the iPhone. But this raises the issue of where the ‘a high tide raises all boats’ market evolution argument stops and the patent infringement one starts.

Samsung is the Buffer State in Apple’s Proxy War with Google

Apple’s case against Samsung was in effect a proxy war against Android.  Samsung became the target because it was doing a better job of making Android compete against Apple than anyone else.   While competitors like Nokia and HTC have laundry lists of product names and numbers, Apple’s elegantly simple iPhone brand cuts through the smartphone name clutter like the proverbial knife through warm butter.  Among numerous other factors Samsung recognized the supreme value of establishing such clear brands (such as the Galaxy) and pivoting their portfolio around them.  Samsung became competitor #1, the Android success story, racking up a 50% share of the smartphone market in Q2012 according to IDC, which compares to just 17% for Apple.

The final impact of the ruling is yet to be seen, with countless potential challenges and subsequent actions likely to come.  There are also interesting geopolitical issues at stake, not least of which is the degree to which a Californian jury and judge will be perceived on the international stage as having the requisite impartiality to rule upon competition between a South Korean and a Californian based company.  But leaving aside the legal permutations for a moment, let’s instead take a look at the known unknowns and their likely impact on the marketplace:

• Competitive patent strategy. Over the last couple of years we have seen an acceleration of the use of patents in the consumer technology and Internet arenas.  Patents have quickly become established as an extra part of competition strategy among big technology firms.  Now, instead of just relying on product development, marketing, pricing and positioning technology, companies can use patent claims to help strengthen their position at the direct expense of the competition.
• Patent arms race. With the rise of patent trolls (companies’ whose sole objective is to acquire patents and then try to sue established companies for patent infringement) the big established companies themselves have started to acquire patent arsenals.  For example, earlier this year Microsoft paid AOL $1.1bn for 925 patents, 650 of which it promptly sold to Facebook for $550m.  Before that, in 2011, Microsoft teamed up with long-time rival Apple as well as with just about anyone whose anyone in the smartphone business who isn’t Android (RIM, Sony, Ericsson et) to spend $4.5 bn on 6,000+ patents from bankrupt Canadian teleco equipment maker Nortel.  Google had been on the other side of the bidding war and lost out with what was seen by some as a whimsical bidding strategy.  Google promptly went onto to buy fading handset manufacturer Motorola for $12.5bn, a company that just happened to have c.17,000 patents in its archives.  There are uncanny echoes of the Cold War with both sides stockpiling nuclear weapons.  The difference here is that the arsenals are being thrown straight into battle rather than being held back for fear of Mutually Assured Destruction.
• Patents no longer fit for purpose? Patents raise as many questions as they provide answers for in the software and technology spaces.  Not only are they subject to legal challenge, the language used in them is often  inadequate.  What gives a piece of technology competitive edge is not having rounded corners, but the digital mechanics underneath the hood. It is the code inside a piece of software that gives it edge, not the broad user behaviour it supports.  That’s why we have market leaders in software and product categories that are crowded with lesser competitors that support the same basic user behaviour. And yet patents focus on the exact opposite of this equation.  Patents are typically vaguely worded affairs that talk about broad behaviours such as “a system for controlled distribution of user profiles over a network” (taken directly from a patent which forms the basis of Yahoo’s case against Facebook). Even the more detailed patents – such as Apple’s recent Haptics filing – have a procedural focus.  And of course they have to. Patent applications are exactly that: applications.  There is no guarantee they will be granted and so a filing company is going to be as secretive as they possibly can rather than give its competition edge.  But even if there was a guarantee there is no way in which a technology company is going to publish its source code on a publically accessible document.

And therein lies the problem, if a company is not ever going to include the secret sauce which gives its product the real edge, then what is a technology patent really going to be able to definitively cover?  If it inherently comes down to a discussion about supporting usage behaviours then we end up with an unusual and potentially restrictive lens placed upon innovation and invention.  The history of innovation and invention is that when something comes along that is good enough, it permeates through the entire market.   Sometimes this involves licensing of patents, more often than not it happens through creating similar but different inventions. Think about any consumer electronics purchase, whether that be a digital camera, a laptop or a TV: the products all have pretty much the same mix of features and form factor in their respective price tiers.  This is what has happened to date with smartphones.

However if the Apple ruling survives all challenges and is then extended it could have the effect of a forced and artificial split in innovation evolution. Instead of the touchscreen smartphone becoming another step on the innovation path it could become the sole domain of Apple and force the competition to pursue entirely different evolution paths.  Now there are obviously both positive and negative connotations of that.  But whatever your view point, it will be dramatically different from how other consumer electronics product categories have evolved.

With its origins in early 18^th century England, there is an increasingly strong case for a major review of the global patent system and whether it is the right tool to strike an appropriate balance between protecting intellectual property and fostering innovation in the 21^st century consumer technology marketplace.

Who’s Competing with Who?

An interesting post-script to the Apple-Samsung case is looking at who else will potentially benefit other than Apple.  Right now there will be a host of handset manufacturers who will be hurriedly looking for a Mobile OS Plan B.  An uncertain Android future doesn’t leave them many places to turn to other than Microsoft’s Windows 8. Historically no friend of Apple but these days of course part of Apple’s Patent Pact. How long that alliance will remain intact remains to be seen, though a cynic might argue that Apple would leave it in place just long enough for Microsoft to get enough of a foothold to fragment the OS marketplace before it renews hostilities between Cupertino and Redmond. By which stage Apple could have billions worth of patent settlement dollars to wage war with…

The YouTube Dilemma

Back in January 2011 in my Midem address I posited that YouTube was digital music’s  Killer App with about 25% monthly user penetration across all European adults in 2010, up a few percent from 2009.  I also explained that penetration for the under 25s was about double that.  The most important point though wasn’t the scale of adoption, but adoption relative to other digital music activities: the next most popular digital music activity was P-to-P (with about half the adoption rate of YouTube) and paid downloads were fourth with a paltry 11%.  The key takeaway was that YouTube is succeeding with digital music adoption where other services were not, that YouTube had got something right from a user experience perspective that others hadn’t, and that the industry should do a better job of understanding YouTube’s popularity.

19 months on and the latest Nielsen stats reveal it is still the same story.  In some quarters it’s being viewed as a dramatic sea change in the balance of digital power. It isn’t of course, instead it is the successful consolidation of a market leading position by YouTube.   Some of this has happened organically but much is down to sheer hard work by YouTube.

Plan V

Since my 2011 Midem speech, YouTube have upped their game strategically, adding functionality and investing heavily in content channels.  They’ve done so largely because of the V word…Vevo.  Vevo may have its challenges but strategically it was a master stroke by Universal Music: start pull the best music video out of YouTube, put it into an interface that is so deeply integrated into YouTube that it just feels like another YouTube channel to users, and all the while have YouTube deliver the audience. Unsurprisingly YouTube got nervous, particularly when Vevo started ruminating on taking the service out of YouTube entirely and into Facebook.

YouTube is No MySpace

Music matters massively to YouTube: they kick started the online video revolution with short-form video clips, but the momentum firmly shifted to mid-form video providers like Hulu and iPlayer.  If you scraped music video away YouTube was left with skateboarding dogs and ‘Charlie Bit My Finger’.  Hence YouTube’s investment in features like playlist functionality and $200 million in original content channels.  Back when MySpace was beginning to lose ground to Facebook I suggested that MySpace should stop pretending it was a social network anymore and start focusing instead on being a platform for bands and their fans.  They didn’t and they ended up losing out on both counts.  YouTube, to their credit, have recognized what their strengths are and are playing to them.

Why YouTube is Still Music’s Killer Digital App

YouTube is still digital music’s killer app because:

• It’s free. Of course so are Spotify and Pandora et al but YouTube is free and fully on-demand everywhere.  If you want Spotify on your iPhone you have to pay £/$/€9.99 to do so, but you can listen to unlimited on demand YouTube music for free on the iPhone, it’s even integrated into iOS (for now at least).  In fact nearly two thirds of iPhone users use the iOS YouTube app.
• It has all the catalogue in the world, and more. Because of the way YouTube entered music content licensing through the back door in the days before its acquisition by Google by selling stakes to the major labels, YouTube has ended up with effectively being given clearance for much much more content than every other licensed music service.  Granted YouTube have since implemented a largely effective takedown process, but the fact that YouTube’s catalogue is music uploaded by users means it doesn’t have the same restrictions other services do, such as territory restrictions, music not yet being officially available digitally etc.  If there’s a piece of music in the world then the odds are it is on YouTube.  Which cannot yet be said of other music services.
• It just works.  YouTube is available wherever you are in the world (in the main), on whatever device you own, and you don’t have to register or sign up.  It also has effective discovery tools such as user votes, comments and collaborative filtering, and features like playlists.
• You can download to keep too.  Streaming ripping might not be part of the official YouTube featureset, and recent action has been taken to block one such service, but there are dozens of stream ripping apps out there and they are actively used by a meaningful share of regular YouTube users.
• It’s an audio visual experience. And of course, YouTube is so much more than music.  It’s an interactive, social, audio visual experience designed for the digital age.  Whilst most other licensed music services have little or no video.

It would be pretty hard to compete against that combination of features if it had a 9.99 price tag on it, let alone when all of that is available for free, to all consumers in virtually every territory in the globe. Which brings us to the YouTube dilemma.

The YouTube Dilemma

YouTube is simultaneously the most important licensed digital music service on the planet and one of the biggest challenges to all the other licensed music services.  It used to be that YouTube was clearly a discovery mechanism, and indeed it still is, but it is now also firmly a consumption vehicle.  YouTube has become both the journey and the destination rolled into one.

Of course there are plenty of music fans who use YouTube as a complement to buying music or subscribing and as a means of finding and sampling new artists. But plenty more use it instead of those other options, particularly those young Digital Natives who value free, convenience and ubiquity over audio quality.

So the music industry has a difficult balance to maintain, between ensuring the most valuable digital discovery asset it has its disposal remains vibrant, but at the same time ensuring it doesn’t hinder the opportunity for services which generate much higher revenue per user.

YouTube and parent Google can do a lot to help.  They can accelerate their focus on making YouTube’s content unique with further investment in live concerts, exclusive sessions etc.  More importantly they can more deeply integrate with paid music services.  (And if integrating deeply with Apple and Spotify might be a step too far then this should be the development path for Google’s music strategy.)

Meanwhile the music industry can help redress the balance too.  YouTube has defined what the mass market digital consumer expects a music service to look and feel like: namely it needs to have video, work seamlessly on all devices (not just 1 extra device at a time), and have social features.  YouTube has set the blueprint for the next generation music product, the industry now needs to pick up the baton and transform that prototype into a high quality, premium product.

Why Google are Really Downgrading Pirate Sites

On Friday Google announced that it would start to downgrade the search results of sites which have “high numbers” of copyright takedown notices.  Make no mistake, this is a major step forward and is something record labels have been pushing for.  Over the last year labels and their trade bodies including the RIAA, IFPI and BPI, have shifted some of the emphasis of their anti-piracy efforts from pursuing the symptoms of piracy (e.g. suing file sharers themselves) to tackling piracy at source (e.g. blocking domains and search results).  Though there are ‘freedom-of-Internet-speech’ issues surrounding this approach, it makes sound strategic sense, with a much higher potential degree of effectiveness, and without the PR own-goal of taking your own consumers to court.

But just as domain blocking faces numerous technical challenges such as VPNs and proxy servers (see my previous post for more details) so Google’s search de-prioritization move has chink-filled armour:

• Google’s takedown process is imperfect.   Google has made major strides in working with copyright owners during the last year, with many labels reporting marked improvements in the takedown process.  But the process still has flaws, such as arbitrary limits on the number of claims.  Also the process is resources intensive, both for Google and rights owners.  So takedown efforts and the resulting list of key infringers is going to lean towards the short head rather than the long tail.  Which means the most popular destinations will be hit most while the new up-and-comers will have an opportunity to become established before they feel the effects of downgrading.
• Downgrading will impact individual site audiences relatively slowly. Search result downgrading will also be slow to impact the popular piracy sites whose established user bases will typically go direct to sites via bookmarks or use alternative discovery methods such as torrent trackers.  Downgrading will impact their new user acquisition but existing audiences will dwindle more slowly.
• Why downgrade when you can block? If Google genuinely believes that the target sites warrant downgrading because of copyright infringement, then why only go as far as downgrading?  Why not just all out block?  Just how effective will downgrading be?  Will the results drop down the page? Disappear off the front page?  Or disappear beyond page 20?  (I do not think, though, that there is a case for Google to proactively increase the performance of licensed services as some are pushing for.  Firstly these services should invest more heavily in SEO and SEM like everyone else has to.  Secondly prioritizing results would fly in the face of Google’s entire search business proposition.  And if music sites get a boost then why shouldn’t everyone else? There is strong precedent for Google downgrading – such as the recent link-farm downgrade – but not boosting).
• Some serial infringers are more equal than others. Veteran search guru Danny Sullivan, in typical fashion, managed to uncover a really interesting angle to the story: that Google-owned YouTube will not find itself on the downgrade ‘hitlist’ despite having more takedowns than probably any other site.  Though this certainly smacks of double standards –and raises issues about separation of church and state – there is a pretty compelling case for ensuring YouTube remains readily accessible: namely that it is the #1 digital music app in the world.  (Granted it may cannibalize many more valuable services, but that’s a separate issue that the industry and Google need to fix).

Of course, the entire takedown and downgrading strategy cannot be viewed in isolation.  Google are a reluctant copyright enforcement force, as they make clear by ensuring that every DMCA-complaint blocked search result links through to http://www.chillingeffects.org/  (an Electronic Frontier Federation backed site that helps sites who have had DMCA takedown notices strike back at content owners.)  Google are going down this path of ceding more ground to content owners not because of a strategic change of heart, but because they want something back. Whereas Apple has made paid content a success in the iTunes ecosystem, Google has thus far failed to achieve much in the Android ecosystem.  (Or to put it more accurately, in the various Android ecosystems – which is of course one of the core problems for Google).

You Scratch My Back…

Google Play is Google’s big content play (no pun intended) and they want more in it from content owners, and they want to take it to more territories.  Taking the action that they have done so is designed to make those prickly licensing conversations with rights owners that bit smoother.  And Google may well get a lot of what they want. They’ve pretty much played hard ball so far, taking the position that they can bring more scale to the music industry than any other partner and so should be given preferential terms.  And they back this position up with a pretty good poker face too, as illustrated by their refusal to meet label license fee demands for a point-and-play locker service and instead following Amazon’s lead in launching a DMCA compliant upload-and-play locker service.  Now they can come back to the table with the ‘we’ve done what you asked us to do’ card in their hand.

Music industry, over to you, raise or fold?

Google Consumer Surveys: A Third Way for Content Strategy

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

Google Consumer Surveys: A Third Way for Content Strategy

Google’s new Consumer Surveys product is a typically disruptive innovation from the search giant.  Leaving aside the massive disruptive threat to survey vendors, Google Consumer Surveys gives publishers a new consumer monetization tactic that will help reduce the recurring conflict between paid content and ad strategy.  A struggle which often begets strategic paralysis.  Freemium just doesn’t translate the same way for news as it does for music.

Read the full post here.

When the Media Industries Really Need to Start Worrying About Piracy (and it’s not yet)

I’ve been a digital media analyst pretty much as long as mainstream music piracy has been around.  I’ve tracked the rise and fall of many sites, services, networks, applications and protocols, including MP3.com, Napster, Music City Morpheus, iMesh, Audio Galaxy, Bear Share, eMule, Gnu Network, Kazaa, Limewire, Pirate Bay, Rapidshare, Megaupload etc etc.  The point I’m trying to make – other than my career’s slightly concerning alignment with the rise of music’s grey market – is that the sector is built upon reinvention.  And that power of reinvention is the key reason why the music industry has a bigger piracy now than it has ever had before.

Of course there are statistics that suggest the file sharing is on the wane in a few markets – notably Germany – but overall the problem is getting bigger because:

• Non-network piracy is in the ascendency. P2P is declining in importance as a medium for piracy.  Non-network sharing (hard drive swapping, darknets, Bluetoothing, mini-nets, digital lockers, forums, binary groups, Instant Messaging, music blogs) are collectively more widely adopted than P2P in many major markets and are growing fast.  All tactics of course which are much more difficult to track and police than P2P
• P2P is getting smarter.  And for those who still do use P2P there is an ever growing array of tools at their disposal that make it harder for their activity to be tracked, ranging from encrypted versions of mainstream P2P apps through to the Pirate Bay’s current shift from Torrents to Magnets

Of course media industries are upping their game too, with major legislative efforts in the US, UK and France, though all with mixed levels of success.   The lesson of the last decade plus though, is of course that whatever actions the media companies take, the piracy problem will be more than a step ahead.  Legislation, judiciary process and enforcement are all slow moving beasts.  Typically by the time media industries catch up technology and consumer needs have moved on.  For example the Pirate Bay looks like it could be blocked from consumers in the UK but a quick search on Google for the name of your content of choice followed by the word ‘torrent’ will serve you up an exhaustive list of alternatives.  Pirate Bay simply isn’t needed anymore.

Do we have the right services?

All of these dynamics are probably familiar to most, but I think we may be on the verge of something very different and of far greater concern for rights holders.  One of the key reasons – some would argue *the*key* reason – piracy is still growing is because the $0.99 cent download and the heavily delayed movie release  simply don’t appeal to most digital consumers.  US VC Fred Wilson recently stated in a Paley Centre debate that ‘we are all pirates’ and that if ‘99% of people are breaking the law then it is the wrong law’.  My twist on that statement would be that if ‘99% of people aren’t using the services that they are the wrong services’. (Of course more than 1% use legitimate services but we are still talking about a nice minority).

Don’t get me wrong, we have some absolutely fantastic services out there for the current installed base of digital music customers, but they are patently not the right services for majority of consumers who account for the 95% of total downloads which are illegal (according to the IFPI).  Regular readers will know that I have been building a case for a music format revolution (you can download my Music Format Bill of Rights report here for free).   There are some really promising first steps happening from some promising start ups but rights complexities are acting as a major decelerator on innovation in this space.

What happens if digital piracy starts to learn from the mobile App revolution?

Of course the grey market has no such problem.  They only ever concern themselves with rights issues if they get taken to court or decide to try to go legit (Napster, Limewire, iMesh, Kazaa etc).  To date the focus of piracy technology has been evading the music industry.  But now, with the revolution in high quality user experiences that the App market has created, there is a very real risk that much of this ethos will bleed through to the grey market.  Indeed there is undoubtedly some direct overlap between the App developer community and the piracy developer community.

The nightmare scenario for media companies is that the pirates turn their attentions to developing great user experiences rather than just secure means of acquiring content.  What if, for example, a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging?  If you though the paid content market was struggling now imagine how it would fare in the face of that sort of competition.

In the longer term one could hope that such a scenario would act as an accelerator for liberalization and innovation of rights owner practices, but in the nearer term it would be a death knell for many of the current services that have worked so hard to get achieve what they have within often suffocating confines.

Content monetization strategies need reworking too

I’ve said it many times before and I’ll say it again now, and many times again: fighting piracy requires a big fat carrot to go along with the stick.  More than 300 $0.99 download stores in Europe and North America alone is not a carrot.  Now is the time to give the legitimate sector the tools, licenses and support to innovate like never before.  It is also time to recognize that just because piracy users don’t always spend money does not mean that they are not spending.  In the digital age consumers transact in three equally valuable currencies:  Money, Data and Time. Those currencies however are not equally valuable to all industries (e.g. TV broadcasters value time more than record labels, online newspapers value data more than book publishers etc) But it is time for those three currencies to be equally tapped by digital content strategies across all industries (regardless of whether that currency is valuable to them), with supporting ‘virtual commodities’ trading marketplaces in the backend to ensure that all stakeholder ultimately end up getting paid in the currencies they value most.

Unless user experiences and monetization strategies are innovated beyond recognition then the grey market will do it instead, creating a wave of digital piracy that will do for media revenues what the iPhone did for Nokia’s smartphone business.

The Digital Music Year That Was: 2011 in Review and 2012 Predictions

Following the disappointment of 2010, 2011 was always going to need to pack more punch.  In some ways it did, and other ways it continued to underwhelm. On balance though the stage is set for an exciting 2012.

There were certainly lots of twists and turns in 2011, including: disquiet among the artist community regarding digital pay-outs, the passing of Steve Jobs, Nokia’s return to digital music,  EMI’s API play, and of course Universal Music’s acquisition of EMI.  Here are some of the 2011 developments that have most far reaching implications:

• The year of the ecosystems. With the launch of Facebook’s content dashboard, Android Music, the Amazon Fire (a name not designed to win over eco-warriors),  Apple’s iTunes Match and Spotify’s developer platform there was a surge in the number of competing ecosystem plays in the digital music arena.  Despite the risk of consumer confusion, some of these are exciting foundations for a new generation of music experiences.
• Cash for cache.  The ownership versus access debate raged fully in 2011, spurred by the rise of streaming services.  Although we are in an unprecedented period of transition, ownership and access will coexist for many years yet, and tactics such as charging users for cached-streams blur the lines between streams and downloads, and in turn between rental and ownership. (The analogy becomes less like renting a movie and more like renting a flat.)
• Subscriptions finally hit momentum.  Though the likes of rdio and MOG haven’t yet generated big user numbers Spotify certainly has, and Rhapsody’s acquisition of Napster saw the two grandaddys of the space consolidate.  Spotify hit 2.5 million paying users, Rhapsody 800,000 and Sony Music Unlimited 800,000.
• New services started coming to market.  After a year or so of relative inactivity in the digital music service space, 2011 saw the arrival of a raft of new players including Blackberry’s BBM Music, Android Music, Muve Music , and Rara.  The momentum looks set to continue in 2012 with further new entrants such as Beyond Oblivion and psonar.
• Total revenues still shrank.  By the end of 2011 the European and North American music markets will have shrunk by 7.8% to $13.5bn, with digital growing by 8% to reach $5 billion.  The mirror image growth rates illustrate the persistent problem of CD sales tanking too quickly to allow digital to pick up the slack.  Things will get a little better in 2012, with the total market contracting by just 4% and digital growing by 7% to hit $5.4 billion, and 41% of total revenues.

Now let’s take a look at what 2011 was like for three of digital music’s key players (Facebook, Spotify and Pandora) and what 2012 holds for them:

Facebook
2011.  Arguably the biggest winner in digital music in 2011, Facebook played a strategic masterstroke with the launch of its Digital Content Dashboard at the f8 conference.  Subtly brilliant, Facebook’s music strategy is underestimated at the observer’s peril.  Without investing a cent in music licenses, Facebook has put itself at the heart of access-based digital music experiences.   It even persuaded Spotify – the current darling of the music industry – to give it control of the login credentials of Spotify’s entire user base. Facebook’s Socially Integrated Web Strategy places Facebook at the heart of our digital lives.  And it’s not just Facebook that is benefiting: Spotify attributed much of its 500,00 new paying subs gained in October and November to the Facebook partnership.

2012. Facebook is quietly collecting unprecedentedly deep user data from the world’s leading streaming music services.  By mid-2012 Facebook should be in a position to take this to the record labels (along with artist profile page data) in the form of a series of product propositions.  Expect whatever is agreed upon to blend artist level content with music service content to create a 360 user experience.  But crucially one that does not require Facebook to pay a penny to the labels.

VERDICT: The sleeping giant of digital music finally stepped up to the plate in 2011 and will spend 2012 consolidating its new role as one of the (perhaps even *the*) most important conduit(s) in digital music history.

Spotify.
2011.  It would be puerile not to give Spotify credit for a fantastic year.  Doubts about the economics of the service and long term viability remain, but nonetheless 2011 was a great year for the Swedish streaming service.  It finally got its long-fought-for US launch and also became Facebook’s VIP music service partner. Spotify started the year with 840,000 paying subscribers and hit 2.5 million in November.  It should finish the year with around 200,000 more.  Its total active user base is now at 10 million. But perhaps the most significant development was Spotify’s Developer platform announcement,paving the way for the creation of a music experience ecosystem.  Spotify took an invaluable step towards making Music the API.

2012: Expect Spotify’s growth trajectory to remain strong in 2012.  It should break the 3 million pay subscribers mark in February and should finish the year with close to 5 million.  And it will need those numbers because the funnel of free users will grow even more dramatically, spurred by the Facebook integration.  But again it will be the developer platform that will be of greatest and most disruptive significance.  By the end of 2012 Spotify will have a catalogue of music apps that will only be rivalled by Apple’s App Store.  But even Apple won’t be able to come close to the number of Apps with unlimited music at their core.  More and more start ups will find themselves opting to develop within Spotify rather than getting bogged down with record label license negotiations.  Some will find the platform a natural extension of their strategy (e.g. Share My Playlists) but others will feel competitive threat (e.g. Turntable FM).  If Spotify can harness its current buzz and momentum to create the irresistible force of critical mass within the developer community, it will create a virtuous circle of momentum with Apps driving user uptake and vice versa.  And with such a great catalogue of Apps, who would bet against Spotify opening an App Store in 2012?

VERDICT: Not yet the coming of age year, but 2011 was nonetheless a pivotal year paving the way for potentially making 2012 the year in which Spotify lays the foundations for long term sustainability.

Pandora
2011.  Though 2011 wasn’t quite the coming of age year for Spotify it most certainly was for Pandora.  In June Pandora’s IPO saw 1^st day trading trends reminiscent of the dot.com boom years.    By July it had added more than 20 million registered users since the start of the year to hit 100 million in total and an active user base of 36 million, representing 3.6% of entire US radio listening hours.  But Pandora also felt the downs of being a publically listed company, with flippant traders demonstrating their fear that Spotify’s US launch would hurt Pandora.

2012: And those investors do have something of a point:  whatever founder Tim Westergren may say, Spotify will hurt Pandora.  A portion of Pandora’s users used Pandora because it was the best available (legal) free music service.  Those users will jump ship to Spotify.  This will mean that Pandora’s total registered user number will not get too much bigger than 100 million in 2012 and the active number will likely decline by mid-year.  After that though, expect things to pick up for Pandora and active user numbers to grow again.  The long term outlook is very strong.  Pandora is the future of radio.  It, and services like it, will get an increasingly large share of radio listening hours with every month that passes in 2012, and with it a bigger share of radio ad revenues.  Pandora will be better off without the Spotify-converts, leaving it with its core user base of true radio fans. Spotify’s new radio play will obviously be a concern for Pandora  but this is Pandora’s core competency, and only a side show for Spotify.  Expect Pandora to up their game.

VERDICT: Since launching in November 2005 Pandora have fought a long, dogged battle to establish themselves as part of the music establishment, and 2011 was finally the year they achieved that.  There will be choppy waters in 2012 but Pandora will come out of it stronger than it went in.