Streaming’s First Steps into 2014

2013 was a big year for streaming, with the IFPI reporting total trade revenues of $1.1 billion and a total of 28 million subscribers globally.  2014 will be a crucial year and today Rhapsody revealed its contribution to the growing global picture.

As of April 2014 there are 1.7 million global subscribers to Napster and Rhapsody, up from a little over 1 million in April 2013.  Those numbers were boosted in part by the transition of Sonora customers in Latin America from Rhapsody’s October deal with Telefonica in which the Spanish telco reported would amount to the transition of ‘hundreds of thousands of existing customers’. 

Digital Colonialism

Latin America is undergoing something of a digital gold rush with European and US companies seeking to ‘colonize’ the digital market like modern day conquistadors.  It is a real pity that more is not being done by indigenous services. ‘Digital colonialism’ aside, Rhapsody’s Lat Am focus is part of a wider recognition of the importance of emerging markets to the longer term viability of the digital market.  How these markets adopt digital will play an increasingly influential role in shaping global strategy.  In some markets the download will have a long term transition technology role, acting as the digital stepping stone between the CD and access based models.  In others, there will be a technology leapfrog effect with consumers going straight to access based models, in a similar way that many consumers in emerging markets skipped the PC web entirely and went straight to the mobile web.

Super Cheap Flat Rate Access

What is clear though, is that the available spending power of emerging market consumers is far lower than in US, Europe and especially than in the prosperous Nordics.  So the 9.99 model simply doesn’t apply.  Labels are already heavily discounting wholesale rates for emerging markets but the likelihood is that the majority of customers will be monetized with hard bundles, with the consumer paying nothing.  This is a different model from telco bundles in western markets where telcos invest heavily as strategic marketing efforts (and typically lose money).  Instead, emerging market bundles will be long term offers, a permanent feature of mobile packages.  Telcos pay far less to labels but get much bigger scale.  The risk of heavily devaluing music is moot, as in the territories this model works in, music already has zero value to consumers as a monetary proposition.

Scale Does Not Impact Everyone in the Same Way

Back over in the western world, where the vast majority of streaming revenues currently are  (c. 90% to be precise), some of the initial sheen is beginning to fade.  Beggars Group have long been positive exponents of the streaming model and have rightly earned plaudits for paying artists 50/50 net receipt deals. However last night Beggars’ head of strategy Simon Wheeler intimated that those rates may not be sustainable.  The main reason is that streaming is such a key part of digital revenues now that the 50/50 share damages under-pressure margins.  But it is also because of the operational costs of streaming for a label (vast quantities of data to account – ‘billions of lines of data’, bandwidth costs etc.).  This highlights an issue I have been talking about for a while, namely that the great bright hope of scale (i.e. ‘when we reach scale, streaming will make commercial sense to everyone’) does not apply equally across the digital music value chain.  If you are a big label or publisher with a big catalogue of repertoire you will measure the impact of a million new subscribers in terms of millions of new dollars each month.  Scale benefits you well.  But if you are a single artist with just a few albums you will measure the impact of that same 1 million new subscribers in terms of hundreds of dollars a month.  Beggars Group sits somewhere in the middle of that scale-impact continuum.

The counter balancing of good news story / bad news story is nothing new to streaming, and it will continue to characterize the evolution of the market in 2014.  The shift from distribution models to consumption models is arguably the most dramatic transition the recorded music industry has ever been through, and consequently the change will have seismic repercussions.  Streaming revenue will come of age in 2014, but as it does so expect more speed bumps along the way.

MusicQubed Puts the Rise of Listen Services Into Numbers

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

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

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

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

Will Listen Services Define the Next Phase of Digital Music?

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

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

4th phase

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

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

IFPI and RIAA 2013 Music Sales Figures: First Take

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

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

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

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

The Download Is Not Dead Yet

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

service bubbles

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

Sleepwalking Into a Post-CD Collapse

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

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

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

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

Media Companies: Your Nightmare Piracy Scenario has Arrived, And Its Called Popcorn Time

Two years ago I said that the nightmare piracy scenario for the media industries would be when the pirates gave up trying to fight enforcement and turned their attentions to build great user experiences.  Now with the arrival of Popcorn Time that scenario has come to pass.  However bad piracy might have been for media companies, it is just about to get a whole lot worse.  This is the new era of Experience-First Piracy.

Popcorn Time is an open source interface that sits on the top of pirated video content on torrents.  Instead of downloading the video Popcorn Time streams them to the end user, with titles selected from a neat Netflix-like interface.  In fact one might argue a ‘Netflix clone’ interface (see figure) but with new releases that Netflix does not even have.  On top of all this Popcorn Time is open source, with installer and project files all hosted on developer collaboration site GitHub, and with the app built on a series of APIs.  With multiple development forks already this is an entirely new beast in the piracy arena.  Forget whack-a-mole, this is potentially a drug-resistant, mutating contagion.

popcorn time

In fact Popcorn Time looks exactly like what I envisaged two years ago:

“What if 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 thought the paid content market was struggling now imagine how it would fare in the face of that sort of competition.”

Piracy for the Mainstream Consumer 

Until now, piracy was largely the domain of youngish tech savvy males (69% male, 50% under 35). Popcorn Time and the inevitable coming wave of new Experience-First piracy apps will give piracy truly mainstream appeal.  It looks and feels just like the real thing, only for free and with even better content.  What’s not to like?  Worse still – for media companies, not consumers – these sites might – even have a legal defense as they do not actually host any of the files.  The emphasis there is on the ‘might’ as it is an argument that ultimately the Pirate Bay was not able to defend in court.

Three Ways to Hit Back at Experience-First Piracy

So what can media companies do to respond to Experience-First Piracy? Legal action will be the first port of call but ultimately it is a pain killer, not a cure.  The problem itself needs addressing with three key strategic focuses:

  • Windowing: Netflix can only dream of having the content Popcorn Time has, just as early licensed music services could only dream of having the catalogue Napster had in 1999/2000.  The movie studios need to learn that lesson fast, and treat Netflix and Amazon Prime etc. as tier 1 release window partners.  As soon as a release is ready for its first post-theatre window it should go straight onto the paid video services.  BlueRay and DVD are fading yesteryear technology, the media industries’ most engaged and valuable audiences are online and using online services.  It is time to treat them as first class customers, not second class ones.
  • User Experience: Before Experience-First Piracy, the retort to media companies was that all they needed to do in order to stay ahead of piracy was to create more compelling alternatives.  Now the ante has been well and truly upped.  There will never ever be the user experience gulf again.  That time has gone.  This means licensed services have to be continually pushing the user experience envelope, using their capital to hire the very best designers and developers.  Which means that content companies need to saddle them with as little up front rights acquisition debt as possible, freeing them up to spend big on development and design.
  • Pricing: The harsh reality of the internet economy is that when something is widely available for free you have to make your paid-for product even cheaper than it was intended to be.  For Netflix and Spotify et al, that means getting below $5 a month.  Ironically this happens at just the time that Amazon increases its pricing for Prime and Netflix is considering increasing its pricing in order to cover higher rights costs.  Media companies have a crucial decision to make: do they want to get more revenue per user out of a user base that will quickly lose share to Experience-First Piracy, or instead do they want to take a near-term revenue hit in order to shore up their digital service partners’ longer term future?

The fact that piracy has spent so long locked in a user experience quagmire is testament to the media industries’ counter measures: pirate sites were just too busy figuring out how to evade enforcement to focus on user experience.  But now that era has come to a shuddering halt.  It is difficult to over state the dramatic effect Experience-First Piracy will have on the paid content landscape unless media companies do everything within their powers to help the nascent licensed services respond in kind.  The smart companies realized long ago that content is not the product, experience is.  Unfortunately the pirate’s just figured this out too.

How The iPad May Help Soften The Decline Of The Download

In this previous post I outlined how the rise in mobile app spending is directly cannibalising iTunes music spending.  That decline was only a few percentage points in 2013 because of a confluence of factors, not least the fact that the US download market (Apple’s biggest) only fell by 3% in 2013 while the UK (another key Apple market) grew by 3% and growth also came in other major music markets and a bunch of emerging markets with scale. Throughout the course of 2014 downloads however will probably decline more sharply due to both app competition and also to the fact many of the highest spending download buyers are now subscription service customers.  But there is a slither of light for the download market….the iPad.

Apple’s customer base has changed a lot over the years.  Once being an Apple customer meant being at the bleeding edge of innovation in consumer technology.  Now it is a much more mainstream user base that in turn compels Apple to innovate at a pace appropriate for their more timid tastes.  The evolution of the iPad customer base followed a similar path: once the device of the true Apple aficionado the iPad quickly developed a distinctly populist appeal, especially the iPad Mini.

The iPad Is An iTunes Beachhead Among Android Users

But what is most interesting about iPad owners from a music industry perspective is that so many of them are Android phone users, 32% of them to be precise (see figure).  The iPad is acting as an iTunes beachhead among Android phone users.  It is a less surprising trend than might at first appear because Tablets and smartphones have highly distinct purchase consideration cycles and retail chain dynamics.  A smartphone is most often intimately tied to a mobile carrier relationship and the sales process will have as much to do with what device a carrier is pushing as it will with consumer preference.  A tablet though is, most often, not tied to a carrier and the purchase consideration cycle is instead much more about aspiration and desirability.  Other tablets might beat the iPad in terms of price and specs, but the iPad is the aspirational tablet.

ipad users

The iPad Mini Effect

The trend is even more pronounced among iPad Mini owners: 48% of them are Android smartphone users, highlighting the success of this SKU to reach new consumer segments.  Meanwhile a whopping 68% of iPad Intenders – i.e. consumers that plan to buy an iPad – are Android smartphone users.  Although this figure has to be discounted to account for aspiration rather than likely intent, the directional trend is clear: Android smartphone users are a major share of iPad owners and iPad Intenders.  With all the perpetual talk of who will win the smartphone wars the iPad’s ability to grow Apple’s customer footprint almost goes unnoticed.  The fact 57% of iPad Mini customers are female indicates just how good a job the device does of reaching beyond the male dominated early adopter niche.

Because an iPad customer is also inherently an iTunes user significant opportunity exists for content providers.  For all Google Play’s valiant efforts – and extensive marketing spend – no one else manages to get people to buy music downloads the way Apple does.  More Android customers becoming iTunes users via the iPad presents the opportunity to grow the installed base of music download buyers.  And there are encouraging indicators: only 26% of iPad customers do not buy music, compared to 49% of all consumers and 47% of overall Android smartphone users.

iPad Owners Want Apps Too

But before we get too carried away with how a new wave of iPad owners are going to save the music download sector we also need to consider why consumers are buying these devices and what use cases they best serve. The fact they have a tablet indicates they are at the more sophisticated end of the Android phone user base so they probably already use their Android phone for listening to music on.  An iPad is a device purpose built for web surfing, video viewing and mobile app usage.  So it is to be expected that the lion’s share of content spending from these new iTunes converts will be on apps.  Music spending will however be a part of the mix and thus we can expect the influx of new-to-Apple iPad owners driving new music download spending that while it may not be enough to counteract the bigger decline it will help slow it.

What Is Really Cannibalising Download Sales

As 2013 music sales figures come in, the picture of streaming growing while download sales slow is coming sharply into focus. It is one of a clear phase  of transition/cannibalization (delete as appropriate depending on your point of view) taking place because the majority of paying music subscribers were already download buyers.  But that is not the whole picture.  There is an even fiercer form of competition for spend that, as far as the music industry is concerned, is inarguably driving cannibalization.

The iTunes Store accounts for the majority of the global music download market and has done so since its inception eleven years ago.  Back when it launched, the iTunes Music Store helped transform the iPod from a modestly performing device into a global hit.  Music was the killer app, music was what Apple used to sell the device and music is what iTunes customers spent all of their money on.  But all of that changed.  As Apple’s devices have done progressively more, Apple has introduced new content types into its store that better show off the capabilities of its devices.  When Apple launches a new iPad it doesn’t have a label exec holding up the new device playing a song with static artwork displayed…that simply would not showcase the device’s capabilities.  Instead an EA Games exec gets up on stage with a new game that fully leverages the capabilities of the iPad’s graphics accelerator, the accelerometer, the multi touch screen etc.

Music may still be the single most popular entertainment activity conducted on iDevices but it is no longer the app that fully harnesses the devices’ capabilities.  In fact because music products and services remain stuck in the rut of delivering static audio files – YouTube notably excepted – it is increasingly failing to compete at the top table in terms of connected device experiences.  Crucially, this is not just a behavioral trend, it is directly impacting spending too (see figure).

itunes spending shift

Back in 2003 music accounted for 100% of iTunes Store revenue because that was all that was available.  Over the years Apple introduced countless new content types, each of which progressively competed for the iTunes buyer’s wallet share.  The step change though occurred in 2008 with the launch of the App Store.  The impact was instant and by mid 2009 music already accounted for less than 50% of iTunes revenue.   By the end of 2003 the transformation was complete with Apps accounting for 62% of spending and music less than a quarter.  Quite a fall from grace for what was once the undisputed king of the iTunes castle.

Now it is clear that the app economy is a bubble that is likely to undergo some form of recalibration process soon (80%+ of revenues are in app, 90%+ of those are games, and the lion’s share of those revenues are concentrated in a handful of companies) but the damage has already been done to music spending.

If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps.  At least with streaming services consumer spending remains within music rather than seeping out to games.  Though the bulk of the app revenue is ‘found’ incremental revenue, apps are additionally competing for the share of the iTunes’ customers wallet i.e. growth is coming both from green field spend and at the expense of other content types.

So what can the music industry do?  It would be as foolish as it would be futile to try to hold back the tide. Instead, music product strategy needs to do more to embrace the app economy.  That means, among other things:

  • More fully leverage in-app payments (and that means labels will have to take some of the hit on the 30% app store tax)
  • Learn to harness the dynamics of games (that does not mean ‘gamify’ music products necessarily – though it can mean that too – but to understand what makes casual app games resonate)
  • Develop digital era, multimedia products (see this report for some pointers on where music product strategy should go)

Though we are nowhere close to talking about the death of music downloads, apps have turned the tide for music spending.  The music industry can either sit back and feel sorry for itself, or seize the app opportunity by the scruff of the neck.

What Beats Music Needs to Do to Be a Success

Next week Beats Music will finally launch, after arguably the most hyped music service launch in the history of digital music.  CEO Ian Rogers published a blog post over the weekend that dives into some of the thinking behind the service and some of its functionality.  Early signs are that it is a well designed and programmed service, but that alone will not be enough to make it a success.

Rogers cheekily labelled competitor services as ‘servers’ rather than services and there is no doubt that Beats Music has put addressing the Tyranny of Choice right at the heart of its strategic mission.  Beats Music has invested heavily in a host of cool features and top quality editorial and deserves great credit for doing so, but it still won’t be enough.  Beats Music is another 9.99 subscription service and 9.99 is still not, nor ever will be, a mass market consumer price point….at least not until years of inflation have taken effect. Just 5% of consumers currently pay for subscriptions in the US and the UK and the lion’s share of that is down to Spotify.

It is a massive – i.e. currently impossible – challenge for Beats or any of its soon-to-be competitor AYCE subscription services to get the headline pricing down – that is instead the domain of a new breed of innovative services such as MusicQubed, Bloom.fm and Psonar. But where Beats does have the ability to at least make their offering feel cheaper is with bundling.  On this front a lot has been made of Beats’ partnership with AT&T.  Though it is great to have such a high profile partner pushing subscriptions into the US it feels like a missed opportunity.

AT&T is a Missed Opportunity

Instead of being a long term bundle, the AT&T deal is in fact a promotional partnership, with three months free before reverting to a full priced $15 p/m deal.  As we recommended in our Telco Bundling White Paper last year, the best practice is to transition to a subsidized bundle with the end user paying either nothing or a discounted rate (much preferable to labels).  While a three month free trial is a fantastic way to deliver value and get users hooked, the leap from zero to $15 p/m is just too big.

Granted the deal is an innovative ‘Family Plan’ but I am not convinced consumers will see the value.  Core to the value proposition is being able to access the service across 5 people and 10 devices, which compared to other subscription services is strongly differentiated.  But multi-device value is actually the value of the label licenses not consumer value.  Apple and Samsung customers do not pay a premium for every additional device they want to play music downloads they purchased from the iTunes and Play Stores.  iTunes accounts are already inherently family plans in many households with no price premium.   As I have been saying for years: we are in the per-person age, not the per device age.  Consumers should not pay a premium for multiple device support. Labels need to accept the realities of the modern day multi device consumer and not try to slice the proverbial baloney.

Artists and Songwriters Will Feel the Family Plan Pinch

Also the Family Plan also raises the tricky issue of whether the fact that this would translate into $3 per head per month effectively means three times less rights pay out per track.  Big labels and publishers won’t feel the pinch so much as they’ll still be getting their 10%/20%/30% shares of revenue.  In fact they’ll be 50% better off as it will be a share of $15 not $10.  But artists and songwriters only have small catalogues of music so they’ll feel the impact of track play revenue being a share of $3 not $9.99.  And given that a family is likely to have diverse tastes, especially between parents and kids, artists are unlikely to get plays across all of the family members, where of course a label with a diverse portfolio of artists will.

It’s the Headphones, Stupid

But enough of the hurdles, I did promise with this blog entry’s title a solution. Despite all of the hype I do genuinely believe Beats Music could be a game changer if it is willing to properly leverage all of the assets at its disposal.  Beats has a hugely valuable brand and route to market in its core headphone business.  And although Beats is now facing fierce competition, it remains the stand out youth headphone brand, for now.   As great a partner as AT&T may be, they’ll still most likely only reach the same high value, data plan power user, music aficionado that all the other subscription services have been super serving.  And as such Beats Music will get far less bang for its buck than it should.

Instead Beats Music should focus on hard bundling into Beats headphones with a 3 month free trial followed by a subsidized $5 12 month commitment subscription. It really is that simple. ..well the commercials aren’t but the proposition is.

Among Beats’ headphone customer base are hundreds of thousands of young, brand conscious music consumers that value high quality music experiences and are not yet subscription converts.  If Beats fully embraces its new family member and puts it at the heart of its core product range then Beats Music might just reach a whole swathe of new consumers that the incumbent subscription services have not yet managed to.  If instead it treats Beats Music as an awkward digital appendage then it will wither on the vine.  Here’s hoping Beats opts for the former.

How Streaming Will Impact Music Sales

With 2013 now behind us we are beginning to see the first full year sales numbers come if for 2013 and the long anticipated ability to assess the impact of streaming on the market.  Until the IFPI annual revenue numbers come out we are mainly constrained to volume data which only paints half of the picture.  This is especially true for streaming given the massive difference in revenue per stream for free versus paid, YouTube versus Spotify etc.  But even within these constraints we have enough to start establishing a view, one that indicates the headline story may be more about transition than it is growth.

Nielsen’s numbers for the US show that digital track sales were down 5.7% and that digital albums were down 0.1% while albums as a whole were down 8.4%. In the UK the BPI reported that digital track sales were down 4.2% though digital albums were up 6.8%.  Nielsen also reported a 103% rise in audio streams.  Let’s assume that a significant portion of those increased streams will be coming from free users and that the impact on streaming revenue growth will therefore be around the 65% mark. That would translate into total US music market revenue growth of just under 1%, though if free usage is a bigger part of the picture then growth could be negative.

It is important to understand the appropriate context for the shift to streaming: it is fundamentally a transition of spending.  Just as the download was a transition from the CD so streaming subscriptions are a transition from the download.  This is because the majority of subscribers were already digital music buyers before becoming subscribers and the majority of those were iTunes customers.  50% of subscribers buy album downloads every month and 26% buy CDs every month (see figure).  On the one hand this can be interpreted as the fantastic capacity of streaming to drive discovery and music purchasing.  There is some truth in this, but it is an inherently temporary state of affairs.  If streaming services do their job well enough there should be little or no reason for a subscriber to additionally buy music.  They do so because consumers transition behaviour gradually not suddenly.  The fact that a third of download buyers still buy CDs illustrates the point.

subscriptions download overlap

In this respect streaming services are strongly competitive with music sales in a way that streaming radio services are not. However what is crucially different from the CD transition is that while downloads drove a decrease in ARPU with consumers cherry picking single tracks from albums, subscriptions drive ARPU upwards. So there is more of an opportunity for subscriptions to drive longer term revenue growth than downloads.  The two key questions that arise are:

  1. What download market will be left once/if subscriptions have reached scale?
  2. What will the net impact on digital music spending be?

1 – Impact on downloads: The answer to the first question is probably the most straight forward.  Looking at markets like Sweden and Denmark we have strong evidence that streaming subscriptions grew at the direct expense of downloads, but in doing so they transformed the total music markets.  In the US, where the download sector is much more entrenched, streaming has resulted in a worst of both worlds, with streaming eating into downloads but not having enough headway to transform the market Sweden style.  The outlook for downloads in big markets such as the US, UK, France and Germany will be one of subscriptions absorbing the spending of the most valuable download customers.  Downloads as a global sector though will remain strong because they are the natural transition technology from download and will thus have strong long term opportunity in emerging digital markets of scale such as Turkey, Brazil and Mexico.  Downloads will also remain the best tool for monetizing mid tier digital music consumers who like to buy a few singles and the occasional album but do not spend 9.99 a month on music.

2 – Net impact on music spending: This one is a tougher call to make.  If subscriptions only reach scale by converting the most engaged music consumers then there is a risk of reducing ARPU among some of them, changing their spending patterns from buying a few albums a month to spending the equivalent of just one.  This effect will be felt more strongly as the dual-consumption behavior of subscribing and buying naturally fades.  The net positive opportunity lies in converting large swathes of the ‘upper middle’ tier of music buyers with more competitive pricing and also with bundles. Though this will likely come at the expense of further erosion of downloads.

As the RIAA rightly highlighted, even in the US streaming is becoming a really important part of the music market, and there is no doubt that access based models of shapes and sizes are the future.  The next few years though will see some growing pains as we transition away from the old guard in some of the world’s biggest music markets.

Music Industry Predictions and Aspirations for 2014

2013 was a year of digital music milestones: 15 years since the arrival of Napster, 10 years since the launch of the iTunes Store and 5 years since the birth of Spotify.  Which begs the question, what will we looking back at in 5 years as the success stories of the ‘class of 2013’?   There have been some interesting arrivals with promise, such as WholeWorldBand, Soundwave, O2 Tracks, Bloom.fm, Google Play Music All Access (ahem)…. As is the nature of start ups many of the dozens that started in 2013 simply won’t go the distance.  Indeed many of Spotify’s ‘class of ‘08’ have fallen by the wayside: MXP4, MusiqueMax, Beyond Oblivion, Songbird etc.   If the ‘class of ‘13’ want to emulate collective success then it is the ‘class of ‘07’ they should look at: a bumper crop of success stories that included Songkick, Topspin, Deezer, Songza and Soundcloud (though Spiral Frog and Comes With Music were notable flops).

So what can the ‘class of ‘13’ and the rest of the music industry expect in 2014?  Well here are a few of my predictions and aspirations:

  • Label services will grow and grow (prediction): following the lead of the likes of Cooking Vinyl and Kobalt every label and his dog appears to be getting in on the act.  Which is no bad thing.  The choice used to be binary: DIY or label.  Now labels are borrowing some of the clothes of DIY and in turn transforming the artist relationship from one of employee to client.  Expect many established frontline artists coming to the end of their label deals in 2014 being persuaded to opt for a label services deal with their label rather than jumping ship.
  • Downloads will be flat globally (prediction): the download is still the dominant digital product globally but in the markets where streaming has got a strong foothold it is eating into downloads.  A key reason is that the majority of paid subscribers are also download buyers and their behavior is transitioning.  But in most of the big markets, and in most of the non-Northern European markets, downloads are the mainstay of digital and will grow further in 2014, cancelling out declines in the US and elsewhere.
  • Latin America and Africa will both grow in importance (prediction): these are two regions with hugely diverse national economies but both also contain a number of markets that are ripe for digital lift off, particularly in Latin America.  However the standard solutions for the western markets will only have limited success.  Expect innovative newcomers to do well here.
  • The streaming debate will NOT resolve (prediction): expect strong continued growth in streaming.  Spotify should hit 10 million paying subscribers soon – the free mobile offering may even push it to 100 million users.  Deezer should clock up another milestone soon too.  And Beats Music could get really serious scale if it does indeed bundle with headphone sales.  But the nature of the debate means the bigger streaming gets the more artists will perceive they are being short changed, because individual artists will feel the impact of scale more slowly than the market.  Expect things to really hot up if Spotify goes public, does well and the majors do not distribute meaningful portions of their earnings to artists.
  • Spotify, Deezer and Beats Music have a good year (aspiration): to be clear, this isn’t me breaking with years of tradition and suddenly jettisoning impartiality and objectivity.  Instead the reason for the inclusion is that the future of investment in digital music will be shaped by how well this streaming trio fare.  Between them they accounted for 70% of the music invested in music services between 2011 and 2013.  These big bets may not be leaving a lot of oxygen for other start ups, but if they do not succeed expect digital music service funding to get a whole lot more difficult than it is now.
  • Subscription pricing innovation accelerates (aspiration): regular readers will know that I have long advocated experimentation with pricing so that portable subscriptions can break out of the 9.99 niche.  In addition to more being done with cheaply priced subscriptions we need to see the introduction of Pay As You Go subscription pricing in 2014.  Pre-paid is what the mobile industry needed to kick start mobile subscriptions, now is the time for the music industry to follow suit.
  • More innovation around multimedia music products (aspiration): one of the most exciting things about Beyonce’s album last week was the fact it put video at its heart.  Since I wrote the Music Product Manifesto in 2009 depressingly little has happened with music product strategy.  Of course not every artist can afford to make an album’s worth of flashy videos, but hey, they don’t need to all be flashy.   Here’s hoping that a few more labels follow Sony’s lead and start really pushing the envelope for what music products should look like in the digital era.  Here’s a clue: it is not a static audio file.

P.S. If you’re wondering why I am so harsh on Google Play Music All Access it is because they can and should do so much better.  The market needs innovation from Google, not a ‘me too’ strategy.  Come on Google, up your game in 2014.

Decoding the Digital Music Consumer: New Report

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

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

survey1

These are some of the key findings from the report:

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

survey2

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

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