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.

iTunes @ 10

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

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

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

Responding to Streaming

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

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

The Next Chapter

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

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

Here’s What Daisy Could, and Should, Look Like

Beats’ codenamed Daisy subscription service has been getting a puzzlingly large amount of coverage for a service that isn’t even launched yet. Beats’ Jimmy Iovine has somewhat smartly positioned Daisy as a challenger in what he has portrayed as a dysfunctional market in which the incumbents are flailing around, unable to even understand what the big issues are, let alone try to solve them.  Discovery, transparency, reporting, these are all great issues that do need addressing but they are also the exact issues Spotify et al are all busy trying to fix right now. The fact they haven’t points to the complexity and scale of the problems, and also the limitations of what any one music service can achieve on its own.

But rather than get distracted by the grandstanding and hyperbole (from all sides) it is worth taking a look at the what the next generation of music subscription service could look like, building upon some of the challenges that are faced today. These could be done by any streaming service, but they are also all natural extensions of Daisy’s already unique set of assets and DNA. These features are:

• Artist Led Discovery: one of the big issues with streaming services is that they subjugate the artist brand.  In the single or album model (physical or digital) the fan is seeking out an artist specific experience.  With streaming services the value proposition is all the music in the world so the artist brand and relationship is inherently diluted.  So the next generation of music subscription service will be a confederation of artist sub-sites, combining the benefits of vast catalogue with mainstaining artists’ profile.  Back in the day, MySpace understood the value of unifying disparate artist specific communities with portal-like navigation.  So in the next-generation service you will still be able to use traditional tools like searching by genre, but you will also follow individual artists. This, combined with Spotify-artist app-like experiences would give Daisy a genuinely unique take on streaming discovery and navigation.
• Artist Communities: again taking a lead from MySpace, the natural next step of artist-led discovery is to let users gravitate around their favourite artists.  To follow them, join communities, join discussions, chat with the artist, get virtual-VIP access.  Currently this sort of fan engagement happens one step removed from the music on Facebook and artist pages. Bring it all together and you turn a disjointed discovery-to-engagement-to-consumption/purchase journey into a seamlessly integrated experience, where each of those previously discreet activities becomes an indistinguishable part of a new whole.
• Empower the Artist: and a further logical next step would be to then allow artists to plug directly into this platform and engage with their fans here just like they do on Facebook. This would not mean giving them full exposure to how often their tracks are getting played or how much they’re getting paid (labels deals just don’t permit this) but it would translate into self-serve analytics dashboards and powerful CRM functionality.
• Merchandize and live: and if you’ve got your fans engaging with your music then of course you are going to want the ability to sell them other stuff like vinyl, box sets, merchandize and tickets for gigs. This is where Ian C Rogers’ expertise and the TopSpin hook up will become core assets for Daisy. Expect full eCommerce integration. Also don’t be surprised to see full Songkick integration either.

So what emerges is a picture of a MySpace / Spotify / TopSpin / SongKick / Facebook mashup, as 360 degree music experience platform, joining the dots in a fragmented digital landscape.  If Daisy, or anyone else, pulls this off, we will have a true next generation music subscription service.  One that recognizes that streaming is not a business model, but instead simply a technology means of getting music to people on the devices of their choice. A service that understands streaming is the foundation stone upon which rich, immersive music experiences can be built, but not the product itself.

What Angry Birds Teaches Us About the Future of Media Products

At Midem this weekend I spent some time talking with Peter Vesterbacka, CMO of Rovio, the company behind the phenomenally successful Angry Birds game.  Angry Birds continues to enjoy approximately 1 million downloads a day and as Peter pointed out, that daily download count is more than the majority of music singles ever reach. The conversation got me thinking about why a mobile game can have so much more success than the majority of artists.

Digital Era Products are Tailor Made for Digital Era Devices

To be clear, Angry Birds is not the representative sample of mobile games, to the contrary it is the runaway success story.  And the fact that Rovio hasn’t yet been able to build a new brand franchise to rival Angry Birds emphasizes the uniqueness of the brand.  Nonetheless, Angry Birds illustrates what happens when you build a content product that is tailor made for the digital devices it is intended to be consumed on.  Angry Birds is a content product that does not just utilize the functionality of the smartphones and tablets but depends upon them.  Angry Birds is a 21^st Century content product build for 21^st Century content devices.

Think about when Apple launch a new iPad, they don’t wheel out a senior record label exec with a hot new artist to show off the device, instead they get EA Games to show off a new game that leverages the functionality of the device: graphics accelerator, Retina Display, Accelerometer, Multi Touch etc.  Even the best iTunes LPs do not come close to doing that job, let alone a static audio file, which remains the dominant product that the music industry sells on iTunes and other stores.

Analogue Era Products in Digital Era Clothes

But there is something more fundamental at play rather than simply a technology skills gap between record labels and games publishers, and it isn’t just a record label problem either. The inescapable fact is that record labels, publishers of books, magazines and newspapers and even TV and movie studios are trying to shoehorn analogue era products into digital era technology.  These companies’ products were built for sitting on shelves and for being consumed in single purpose, non-interactive devices.  Games and apps though, are digital era products at home in digital technology while traditional media products are lodgers not yet quite able to keep up the rent payments.

This does not mean that traditional media products cannot have a vibrant future. They can, but they have to truly understand what makes digital era content products work:

• Interactive and Dynamic: digital era content products don’t just leverage the functionality of the devices they are consumed on. They make that functionality core to the content experience itself, to the extent that the content product would not be able to exist without it.
• Visual Experience: digital era content has a visual element at its core. This puts video products at a distinct advantage, but video is an asset that print and music products can leverage too. No coincidence that YouTube is the most successful digital music product in the globe.
• Context and Relevance: digital era content products are increasingly embracing the context of location, social group and time.  They both understand the consumer demand-gaps that these factors combine to create, and they also enrich their experiences by meshing these factors into the products themselves.

None of these three areas are insurmountable hurdles for traditional media companies, but at the same time they are not natural paths for many of their products.  Embracing these objectives often requires an entirely different approach to product development, rethinking what makes the content valuable in the digital age.  For example the audio file in the YouTube video is much less valuable to young teens without the video than with.  The video is as important in that product as the music itself.  Yet the music product development cycle revolves around creating the audio file, not the video.

Embracing digital era product principles also requires an understanding that just because you can does not always mean that you should.  Not all features are appropriate for all types of content.  Not even digital era content products use all the device features available to them e.g. Real Racing relies more on accelerometer functionality while Angry Birds leans towards multi-touch.

Learning lessons from digital era products is a must for all traditional media products.  Most digital versions of traditional media products are digital adaptations, not genuinely new products. Trying to squeeze the round peg of analogue era products into the square hole of digital era devices clearly is not a long-term solution. Until the circle is squared though, digital era products will continue to leave digital adaptions of analogue era products in their slipstream.

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

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

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

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

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

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

Why the Music Industry Needs Another iPod Moment

The importance of Apple to the digital music market cannot be overstated.  Without Apple the digital market would be vastly smaller than it is now.  With all of the talk of streaming services and the shift to the consumption era it is easy to think of Apple’s iTunes Store as yesterday’s game.  Such an assumption is as dangerous as looking upon the CD as an irrelevance in the present era.  The CD and iTunes combined account for approximately 78% of total recorded music revenue in the world’s 10 largest music markets.   And yet neither look like they are going to provide the momentum the music industry needs over the next few years.  Despite its vast importance to music revenue today, the CD is obviously on a fixed downward path.  And the download is not so dramatically different in profile in that it is the dominate revenue source yet is not delivering the dynamic growth the digital market needs.  Key to this is of course the role of Apple.

Apple CEO Tim Cook told us at the launch of the iPhone 5 that ‘Apple still loves music’ and so it does.  But music is inherently less central to Apple’s content and device strategy than it was 5 years ago.  When the iPod launched it had a monochrome screen and did little else than play audio.  Music was the killer app with which to market iPods.  Now games, apps, video and books show off the capabilities of colour touch screen iPads and iPhones much better than a static audio file (even if music remains one of the key activities on both those devices).    In the early days of the iPod Apple needed the record labels more than they did Apple.  Indeed, to begin with the iPod was far from a runaway success.  By the end of 2002, one year after launch, the iPod had only sold 625,000 units.  The iTunes Music Store changed the story, delivering not only unprecedented digital music milestones, but also record iPod sales. After the first full year of the iTunes Music Store, sales of the iPod had quintupled from 2 million to 10 million, and one year later they surpassed 40 million. The iPod and the iTunes Music Store had a clear symbiotic relationship.  Now though, Apple’s devices benefit from a much broader array of content and services from the iTunes Store, which pointedly is no longer called the iTunes MUSIC Store.

Apple’s diversification of device and content strategy heralded a brave new chapter in Apple’s history but it has also left the digital music market without the fiercely energized catalyst that kicked it into motion.  By the time Apple launched the iPhone in 2007, the installed base of iPods was already slowing.  Though sales were still increasing, the majority of those were either replacement or additional purchases.  So although iPod sales were booming still, the number of new iTunes Music Store customers was not.  Throughout 2008 I presented the data to a number of senior record label executives at the time and I argued that they needed to start planning for a post-iPod slow down.  Some of them didn’t take me too seriously, and who could blame them, after all iPod sales were growing strongly and iTunes downloads were growing at a stellar rate. But now, with a few years of market data behind us, the true scale of the post-iPod slowdown is clear (see figure).  As soon as iPod sales slowed, so did the digital music market.  Prior to 2008 the digital music market had grown by an average annual rate of 85.2%, after 2008 that rate dropped to 7.5%.  In many markets the 2009 slowdown was of falling-off-a-cliff proportions: in the US digital growth slipped from 30% in 2008 to a near flat-lining 1% in 2009.

Streaming services have started to bring some welcome momentum to digital music.  But much more is needed from them if growth is to be reinvigorated.  That growth may also be helped by new music formats like the forthcoming Lady Gaga album app.  Whatever the source of it, it is clear that the music needs another iPod momentum to kick the digital market back into life.

What are an Artist’s Metrics for Success in the Digital Age?

Last night I was fortunate enough to be on stage with Talking Head David Byrne and legendary DJ Dave Haslam at the Royal Northern College of Music discussing Byrne’s latest book ‘How Music Works’.  It was a fun event with a lot of thoughtful debate and also insight into Byrne’s approach to making and performing music.  Prior to our discussion I gave a short presentation on the state of the digital music nation to help illustrate how the music market is so dramatically different after the music industry’s first digital decade.

One of the slides I updated for my presentation was that of artist ‘success metrics’ in the digital age (see figure).

Prior to the advent of digital, and more specifically the spread of the contagion of free, the way in which artist’s measured their success was primarily through sales of albums.  But in the digital era, with album sales becoming less and less important to many artists, metrics such as total YouTube views and number of Facebook likes are becoming just as important measures of success.

As we are still in the early days of digital, the shift in success metrics does not apply in a uniform manner.  Some artists’ success metrics still look more like those of artists from the analogue age than they do the digital age.  Take a look at two of the UK’s most successful contemporary artists: Adele and Coldplay.  Both of these artists are still predominately album artists and both have had huge success with their latest albums.  Yet look at their YouTube views and Facebook likes, and they significantly trail more canonically digital-age artists such as Rihanna and Lady Gaga.  This is illustrated even more starkly by the case of Pitbull who has sold a relatively modest 8 million albums but has a staggering 2.95 billion YouTube views.

A key factor that underpins this diversity is the age of the core audiences of the artists.  Coldplay and Adele appeal more to older audiences who are still in the habit of buying albums, or who do not buy many albums anymore but do so on occasion when an album like ‘21’ comes along.

Does this mean that as we progress more deeply into the music industry’s second digital decade that the success metric balance will tilt more firmly in the favour of YouTube and Facebook?  Quite probably.  Which inherently means that album sales will continue to dwindle.  A key reason for this is that the majority of album buyers are still CD buyers, and more of these consumers are stopping buying music entirely rather than going digital.  In the UK the total number of people buying music dropped by 5.1 million between 2008 and 2011.  Against a population of 61 million that is a vast number to lose in such a short period of time.  In the US the numbers are similar but slightly lower on a per capita basis.

Until a clear path is carved for physical album buyers into the digital realm, album sales will continue to dwindle.  And that not only matters in industry revenue terms, it matters from a creative perspective as well.  I am not arguing that we try to turn back the tide of album atomization (many consumers will forever more only want individual tracks from many artists).  But what must happen is the emergence of a new generation of album products that deliver not just as much, but more value to music fans than CD albums currently do.  This means leveraging the principles of DISC (Dynamic, Interactive, Social, Curated) to create a new breed of album experiences.  Because the alternative is swapping albums sales for YouTube views and Facebook likes, neither of which pay the bills.

Deezer, Spotify and the Streaming Gold Rush

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

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

The US is Saturated and Yet Potential Remains Untapped

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

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

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

Price Is the Biggest Barrier to Streaming Going Mainstream

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

Apple: the Elephant in the Room

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

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

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

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

 

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

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

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

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

What Can Be Learned from the British Experience?

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

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

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

Music Industry: ‘Product’ Isn’t a Dirty Word

This morning I made a keynote presentation to a Westminster Forum conference on the UK music industry.  Though the focus of my presentation was intentionally gloomy (look out for a post on the key themes later this week) I finished with what I thought was the positive outlook: a call for a new generation of music products.  Regular readers will know that I beat this particular drum with near demented insistency and have been doing so for a few years now.  I used to get strange, puzzled looks but nowadays there is widespread recognition that product innovation is key to the long term health of media businesses.   (Much as I’d love to, I’m not claiming sole credit for the change in outlook permeating media industries).

This morning though caught me by surprise.  A couple of panellists took umbrage with ‘product’ having anything to do with the music industry, that the music industry was about music, not product. In many ways they are right of course, but they also ignore the basic economics of the music industry.   (I say ‘ignore’ rather than ‘misunderstand’ because these particular panellists have been around the music industry long enough to know it inside out and to know exactly what oils its wheels).

Of course the music industry is first and foremost about music. As a musician and a former (small time) recording artist and someone who spends way too many hours each week playing guitar and in his recording studio, I know this as well as anyone.  But product is the beating heart of the recorded music industry.   CDs, vinyl, downloads, apps or subscription services, these are the products which generate the income that allow some artists to give up the day job and focus on making great music.  It is the product wrapped around the music that creates that income that helps support creativity.

Of course recorded music products are not the be-all-and-end-all, and things are changing rapidly, with other revenue streams becoming part of the mix, but many of those are also products (games, clothing, memorabilia etc.).  Live, which incidentally is feeling the pinch of the recession, most of the time depends on the recorded music product as its marketing vehicle.  It doesn’t matter so much whether you choose to give your content away as digital files on BitTorrent (as one artist manager explained they plan to do) or sell it as a CD in a supermarket, both are music products.  And the more of those music products you can get in consumers’ hands, the more chance you will have of selling more concert tickets.

The role of music product in driving live success was underscored this morning when one panellist commented that nowadays there is only a handful of really big rock acts that can headline the major festivals.  The examples he gave were bands who built their success on selling millions of albums in healthier days for the music industry.  Could it be that the slowdown in music sales is moving us away from repeat-multi-platinum artists and thus in turn away from the days of ready-made large addressable audiences for arena tours?  Could the decline in recorded music sales end up dragging down live with it? There are many other moving parts (not least the quality of the artists in the marketplace) but it is an interesting question to consider.

The term ‘product’ seems to have uncomfortable corporate connotations of cynical commercialism for some.  It is an unusual hang up.  Carpenters, jewellers and fashion designers don’t have such hang ups about selling their products.  Some long for the patronage era, when the Prince of Salzburg commissioned Mozart to compose operas for him, or Eleanor of Aquitaine patronized court musicians.  But outside of certain niches (including some classical music), those days are long gone.  To have a paying career as a performing musician usually involves selling music products somewhere along the way.  That doesn’t mean that artists are selling their creative souls to corporate greed.  Indeed there is an argument that creating music-to-order like Mozart did was more of a creative compromise than signing a deal to get your music distributed across the globe.

If Mozart had had music products (other than the occasional sale of dance music score) with which to monetize his creativity he may well have not ended his life in poverty. Creating a set of next generation music products that play to the strengths of the digital age will be crucial to the long term health of the music industry, recorded and otherwise.  Giving consumers products which exceed their expectations rather than just meeting them can only help drive creativity.  Product isn’t a dirty word.