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.

Why Losing Free Customers is a Good Thing for Spotify’s Business Model

In my Future Music Forum keynote last week I discussed some Spotify metrics which were picked up by Paid Content and have stirred up a bit of a debate.  Here is a little more context to those numbers.

The headline statistic is that in 2011 Spotify had to acquire approximately 1.8 million users per month to retain just 400,000 a month (i.e. ‘losing’ 1.4 million a month), resulting in a total monthly churn rate of approximately 20%.  These estimates are based upon the following reported numbers:

• Spotify’s end of year accounts for 2011 reported a total of 32.8 million registered users.
• In December 2011 Spotify reported 10 million active users on its developer blog.
• In March 2011 Spotify reported 1 million paying subscribers, representing 15% of active users, which put the active user count at 6.7 million.
• In September 2010 Spotify held a press event to announce 10 million registered users.

The headline numbers give a ‘gap’ of 22.8 million between registered users and active users at the end of 2011.  Using all of the reported numbers and applying flat rate growth assumptions for intervening months we can calculate the total number of active and registered user gains throughout calendar year 2011 (see figure 1).  All of which gives approximately 1.8 million new registered users per month but only 400,000 active users per month.

Figure 1

Now of course there will be monthly and seasonal variations in those numbers so the exact count will be different for each calendar month.  Also many of those 1.4 million new monthly inactive users (i.e. the gap between new registered and new active) may well become active later in the year.  But the headline trend remains that Spotify has to gain a lot more users than it holds onto (or at least did in 2011 – though I would expect similar metrics to apply in 2012).

Losing Low-Value Free Users Actually Helps Spotify’s Business Model

None of this is necessarily a reflection of a flawed business model for Spotify.  In fact, in my view, it reflects positively.  Let me explain.  Spotify’s business is all about selling premium subscriptions.  That’s where the money is for Spotify, labels, publishers and artists alike. The free tier of its business is simply a marketing funnel.  Ultimately it doesn’t actually matter that much how many of those free users stay on board as free users, what matters is how many convert to paid.  In fact, it benefits Spotify if those users who have no intention of paying churn out early on from the free service as it means less cost to Spotify’s bottom line.  As challenging a path towards profitability as Spotify may find itself on, it would be a dramatically more difficult road if all of those 32.8 million users were active.  So Spotify’s business model and margins actually benefit from the majority of those new free users churning out of the service early, allowing Spotify to focus on migrating the remaining engaged free users to paid.

Figure 2

Free Churn Does However Raise Questions About the Wider Streaming Market

All in all Spotify has brought a huge amount of value to the digital music market and has achieved many credit-worthy milestones (see figure 2).  But as much sense as the free-user-leakage makes sense to Spotify’s business model, it does raise challenging questions about the streaming model more broadly.

For so many users (two thirds of Spotify’s 2011 total) to effectively say “no to free” indicates that streaming audio, even when free, does not resonate strongly enough with mass market music fans.  There are multiple potential reasons that Spotify free users churn out, such as: usage caps, advertising, being PC only, not being able to burn to CD, even just being a stream rather than a download.  Many of those can be fixed with a 9.99 subscription, but the simple fact is that most consumers do not spend that kind of money on music.  9.99 is actually the average monthly spend of the top 20% of music buyers. So it is a price point for the aficionados not the mainstream, which means that most consumers will never get a proper taste of the ‘complete’ streaming audio experience.  Which is why I continue to argue strongly that subsidized subscriptions and cheaper price points are the crucial routes to the mainstream music fan that need pursuing with haste.

Spotify, Rhapsody, Deezer, rDio etc are all doing a great job of trying to take premium subscriptions to the masses, but until they can work out a way to get cost-to-consumer price points down, the addressable audience remains a subset of that top 20% of music buyers.

The Elephant in the Room

And all of their cases are challenged further by an uneven playing field.  While all those music services have to charge for mobile access and have some gaps in their catalogues, YouTube provides unlimited access, on all mobile devices, with the world’s largest music catalogue, with video, for absolutely no cost at all to the consumer.  As far as streaming goes, there is one rule for YouTube, and another for the rest.  Until that anomaly is fixed, the rest will be swimming against the tide.

The Tale of Emily White, Scarcity and the Future of Music Products

Unless you spent the first half of this week on the digital music equivalent of planet Mars, you will have noticed the Emily White furore. The long and short of which was NPR (US public radio) Intern Emily White blogging that she owned 11,000 songs of which just 15 were albums that she had purchased and pining for a universally available universal database of music.  The post was swiftly followed by reasoned critiques against, for, against, and for, and also by vacuous foul mouthed grandstanding. What surprised me wasn’t the strength of feeling on the topic, but a view by some that this was somehow a watershed moment, a changing in collective perspective.  It wasn’t.  For anyone who has followed this space closely for more than a few years this debate will be seen as another chapter in a long-running discourse.  An important chapter, but just a chapter nonetheless.  Long time readers of my blog will remember a series of posts on ‘why music can’t just be free’ and the heated debate that surrounded them.  For those who didn’t, some of the posts are here and here.  (And for an insight into how ‘free’ impacts an artist take a look at this evergreen artists’ post.)

But the point of this post isn’t just to pour another layer of opinion into the simmering cauldron.  Instead I want to try to move the debate on from diagnosing the symptoms onto identifying a potential cure, or at the very least some palliative care.

For argument’s sake let’s assume the following:

• A large share of consumers have fallen out of the habit of buying music and a larger share of younger consumers have simply never learned the habit
• Fewer people place a monetary value on music than used to and yet more people listen to more music than ever before
• High spending music consumers do exist though, and across all age groups, albeit in declining numbers

Understanding the Role of Scarcity

The key reason fewer people buy music is because they don’t have to.  In the analogue age there was a monopoly on supply of music: if you wanted to get new music you had to buy it in high street shops when record labels decided you could, paying the price they and retailers decided you should. The alternative was making a poor quality cassette copy from the radio or friends.  People who liked music had little choice but to associate a very specific monetary value to music.  Napster threw that scarcity model out the window.  With paying for music now a life style choice the monetary value of music has been subjected to hyper deflation.  The ‘price it and they will come’ logic now only applies to a small subset of music fans, a subset that is at risk of becoming an endangered species.

This doesn’t mean people don’t value music anymore, but instead that a majority no longer value it monetarily.  This dynamic is beautifully encapsulated in a response from a 12 year old file sharer that Feargal Sharky was fond of quoting

“I love music and if I could download my Nike I would pay for my music”.

Nike still has scarcity, that’s why so many kids pay for their trainers but not their music.  Like it or loathe it, as far as music products are concerned,  we are in the post-scarcity age.

What, if Anything, Can Be Monetized in the Post-Scarcity Age?

So if scarcity has gone – and it is gone for good – how can recorded music revenues ever be rebuilt?  Indeed should they?  Some argue that charging for music is an outdated model, but you will find that 99.999% of those people also believe that they should still be able to get that exact same music which they don’t think should be paid for i.e. they value the product, just not the price.  Their world view is shaped by the last decade of experience but lacks grounding in basic economics.  The music needs making and that costs money.  Whether that is the money the label invests when it takes a punt on an artist or the cost of an artist getting by on an often very modest income.

Arguing that artists should make their real money in ‘ancillary services’ misses the bigger picture.  Only a tiny subset of music fans pay for merchandize and only about half of music buyers go to concerts.  And the number 1 music consumption channel?  It’s still radio.  So those ancillary revenues are a much smaller addressable market.  They are also largely irrelevant if you are a songwriter rather than a performer.

Recorded music is still the core product. 95% of us listen to music most days.  The vast majority of music consumption (by all people) is recorded music.  Why shouldn’t it also be the core revenue stream?  Scarcity has been disrupted, not market demand.  None of us would reasonably expect a plumber to fix our washing machine for free and then go out into the street and make his money by selling overalls and tools.  Also let’s not forget that most artists make music because they love making music, not T-Shirts.

Why the Flat-Rate Isn’t the Answer

Don’t get me wrong: of course artists have to learn how to make money across a much wider range of income streams than ever before, but there is no inherent reason that they should have to accept that their core creative asset is no longer monetize-able.  The channel, product and pricing strategies may be broken, but the creative heartbeat of music is not.  Simply applying a ‘flat rate’ fee on all the music in the world might seem like an elegant and ‘convenient’ solution.  But it will only exacerbate the problem.  It will formalize and legitimize the concept that music has little value.  It will also accelerate the demise of those music fans who still like to support their favourite artists by buying their music. ‘Flat Rate’ is a pricing strategy for the low end of the music market, not all of it. Even if music has to end up like water, there should still be a market for bottled mineral water.

Of course unlimited access to music in the cloud will play a really important part of the future of music, it will probably be how most people consume music.  But that is a service which should have clear monetary value.  Everyone accepts that premium Cable and Satellite TV packages are paid for commodities.  In fact consumers pay more to have some of that content provided on-demand.  The reason it is different for music (and indeed news) is of course scarcity.

The New Wave of Scarcity

Scarcity still exists for music, predominately in the form of live, and consumers pay premiums accordingly.  If recorded music spending is ever going to rebound, scarcity must be reintroduced to music product strategy.   Not, however, scarcity in the sense of building walls around content (it will always leak out) but instead by creating scarcity of experience. The success stories of paid content to date (iTunes, Kindle, xBox, PlayStation etc) may be walled gardens but their success is derived from the quality of experience that is delivered within them and cannot be experienced externally.  Music products must learn how to create uniquely valuable experiences around music, fully leveraging the interactivity, connectivity and sociality of the contemporary digital world.  Current digital music products do not do so.  As I outlined in my Music Format Bill of Rights report (which you can download for free here) music products must be:

• Dynamic
• Interactive
• Social
• Connected

The future of music products will be app like experiences that deliver unique, interactive and curated music experiences where the whole will be far greater than the sum of the parts (see figure).  Pirating the individual components will lack the context rich, curated and programmed environments in which the music experiences will occur, and will consequently have massively diminished value.  Scarcity will have returned to music products.

Waiting for an iPad Moment

Monetizing convenience only accelerates a race to the bottom.  Convenience should be an inherent part of the value of music products, but only one part.  Just because current music products don’t deliver enough tangible extra value to persuade the likes of Emily White to pay for music does not mean that it must always be thus.  Until 26 months ago the market between smartphones and laptops was that of netbooks.  At that stage most consumers not only did not own a netbook, they would have reported that they never intended to buy one either.  Then along came the iPad and suddenly we have a product revolution on our hands.  An apparently dead market segment transformed virtually overnight into gold-rush prosperity.

The music industry needs an iPad moment.  When it does come (and it will) even the likes of Emily White may finally start to see the value in paying for music again.

Deezer and Digital Music’s Squeezed Middle

It’s been a busy week for Deezer: first came the announcement of an browser-based streaming partnership with niche music publication Artrocker, then came Deezer’s launch in Canada, New Zealand and Australia – the next chapter in Deezer’s world domination plan.  Now to complete a hat-trick of announcements the French streaming service has announced a partnership with T-Mobile in Austria, with the possibility of further Central European roll outs.  Of the three announcements this is the one with the greatest strategic significance.

The Third Way for Digital Music

Regular readers will know that I’ve been advocating subsidized and bundled music services for many years now.  Bundled services square the circle of more people listening to more music than ever but fewer of them paying than ever before.  Bundled music services are the ‘Third Way’ for digital music (see figure).  Currently the digital music market is polarized between a fight for the top and a fight for the bottom.  iTunes, Rhapsody et al have built businesses around the relatively small group of tech-savvy music aficionados who pay for digital music, while We7, Pandora et al are catering for the appetite of free music fans (though still grappling with how to create profitable businesses with such large chunks revenue going on royalty payments). Lost in between are those music fans who are engaged enough to want more than ad supported, PC-tethered music but who don’t want to pay 4.99 upwards for the privilege.  For as long as the squeezed middle remains un-catered for, the total market will remain stuck in decline or stodgily slow growth.

But this macro concept is a business-critical problem for companies Deezer and Spotify who target the top tier but rely on the bottom layer for customer acquisition and brand extension.  The problem with using free music as your marketing funnel is that you attract lots of music fans who love unlimited streaming but have no interest or ability to pay a monthly subscription fee.  Freemium services need something between free and paid – without it half of their marketing efforts are wasted.

Bundled Services More Often Than Not Don’t Add Up for Telcos

The solution for Deezer and Spotify, as well as for the wider market, is to create bundled services where the consumer pays little or no direct fee for the music.  (Fighting free with free itself). Instead the cost is hidden within another subscription fee and / or subsidized by a third party looking for gains to their core products. Telcos have long been the best fit, but nearly exactly four years since TDC’s Play service was launched, telco subsidized music services are conspicuously thin on the ground.  Spotify’s partnerships with Telia Sonera and 3, along with Deezer’s France Telecom tie-in and Cricket Wireless’ Muve Music are lonely examples.

So if the concept makes so much sense to the music industry and to the music services, why haven’t more bundled services come to market?  The simple answer is economics: telcos (ISPs in particular) just can’t make the business case work.  Margins are already tight, and in highly competitive marketplaces pricing is often locked into a race to the bottom.  It is often just too difficult for a telco to build a consumer pricing package that doesn’t price it out of the mainstream market but at the same time covers the wholesale costs of rights licenses.

Of course music is viewed as a marketing tool rather than an ARPU tool by most telcos, so it is typical for a portion (sometimes all) of the costs are funded out of marketing budgets.  But experience shows us that few telcos have been willing to swallow enough of the costs, seeing much better ROI on alternatives such as Apps and Games.  A number of European ISPs have told me that they could only build a business case around a cost to the consumer of 2 euros a month, far south of what rights fees for unlimited music services require.

So how have Deezer managed to pull off the T-Mobile partnership?  Here’s how:

• Deezer have deep experience of integrating with telcos, knowing how their businesses work and understanding their needs
• Deezer have a track record of making bundled telco offerings work
• T-Mobile have identified the Austrian market as one in which they can achieve differentiation and market advantage through a bundled play.  T-Mobile gets to call itself “the first operator in Austria to offer an unlimited music service in its mobile tariffs”, to gain and retain young mobile audiences.

The third factor is the key one.  Without having a telco partner willing to go out on a limb, all of experience and assets in the digital music world add up to naught. But even once you’ve got a telco on board, making the project a success is no easy task.  I’ve seen up close a number of telco music services nearly but not quite get to market because of complications with commercials and because of conflicting interests among partners.  I sincerely hope that the T-Mobile and Deezer partnership is fruitful – the marketplace desperately needs more proofs of concept of the bundled music model.  Without the ‘Third Way’ the music market will continue its unhealthy polarization between premium and free, leaving the squeezed middle high and dry.

Is the UK Music Industry Sleepwalking into a CD Crisis?

An upfront note: though this post focuses on the UK market, the principles, as you will see, apply across most music markets.

At first glance the UK recorded music market isn’t in too bad shape: album sales declined by a not too worrying 5.6% in 2011 and digital grew solidly, including 26.6% growth in digital albums*.  And of course there was Adele.  So an end of term report card would probably read something like ‘Could do better but good signs of improvement’.  Unfortunately that is a case of papering over the cracks.  Here’s why:

• CD sales are falling at an alarming rate: though digital album unit sales grew by 5.6 million, CD album sales fell by 12.3 million.  So the digital growth was less than half of the physical decline in absolute terms.  A worrying ratio at this stage in the development of the digital market (i.e. when it should be maturing, not just getting started).
• The single continues to drag revenue growth down. Digital singles boomed to 176.6 million, a whopping 56% greater volume than combined physical and digital albums. And yet their value is close to just a fifth of album revenues.   Despite solid digital album growth, unit sales of digital singles increased by about 17 million, three times the units growth rate of digital albums.  And though the spend increment is much greater for albums – and this is of course the lens labels will typically view the trend – the unit growth is the best indication of consumer behaviour.  i.e.  music buyers are still throwing their weight behind digital single purchases at a quicker rate than they are digital albums.
• The CD buyer is withering on the vine.  Most importantly of all, the CD buyer is becoming an increasingly rare breed.  There are fewer shops on the high street, which is where the majority of CD buyers still buy their albums. HMV – the UK’s leading music retailer by some distance – has been suffering well documented struggles.  It is possible that HMV will disappear from the high street entirely in the next couple of years.  Though this won’t be an extinction event for CD buyers, it will however leave a gaping hole in music revenues (possibly a quarter of all album sales).  The majority of these Digital Refusniks who haven’t seen any reason to start buying CDs online – let alone downloads – are unlikely to suddenly switch even if they have to.  More likely they will just drift out of the market entirely.  These are the passive music fans who only buy the occasional album, don’t have an iPod, don’t want to spend £9.99 a month on music and who listen to a lot of radio.  With so much more choice of high-ish quality music on digital radio and TV these consumers won’t even feel that much of a dent in their music behaviour when they no longer buy CDs.
• The CD is disappearing from the living room.  I’ve been beating this drum for years now but still don’t get the sense the risk is being taking seriously.  Living room tech spend has shifted firmly to the TV and music’s weakening foothold is either a docking station for the digital crowd, a streaming player for the really tech savvy or, in the vast majority of cases, a dusty old midi player which sooner or later is going to find itself in the bin or the garage.  When that happens music will have disappeared out of the living room (and before anyone makes the case for music on the TV, that permanently relegates music not so much to poor relation status, as crazy aunt locked away in the attic.  People buy TVs to watch stuff on them, not to have a blank screen while music plays on the poor quality speakers).

The Bottom Line

The music industry is being entrapped by a demographic pincer movement: on the left the emerging Digital Natives lack a product strategy that meets their needs, on the right the traditional CD buyers lack a format succession cycle.  This is why the industry is becoming obsessed with squeezing as much ‘ARPU’ as it can out of the remaining core of 20 somethings and 30 somethings.  But of course that strategy can only go so far.  I’ve written at length about strategies for the Digital Natives, but the case for the Digital Refusniks is even more pressing, if less glamorous.  The following needs to happen, and quickly:

• Digitize the relationship.  Before an analogue customer base can be migrated to digital, the relationship with those customers must be digitized.  In fact most HMV music customers have no relationship with HMV at all, or rather it is a series of brief encounters that start and finish with a cash till transaction.  First HMV – and indeed high street music retailers anywhere – need to start finding a way to establish digital relationships with these customers and then use that as the platform for a digital revenue strategy.  As my astute former colleague James McQuivey is fond of pointing out, Netflix built is success on the platform of digitizing its customer relationships. It is time for high street music retail strategy to follow suit.  (And by the way, simply trying to push consumers to the online stores isn’t the answer).
• A format succession strategy needs putting in place. The Digital Refusniks consumers need their hands holding as they are gently coaxed into the digital realm.   They need convincing that the ephemeral web has tangible benefits comparable to that of the CD. That might mean delivering things like better artwork etc. but to get this right we need to know a lot more about the emotional triggers that CDs press for this consumers.  A proper human needs assessment needs conducting, onto which a human-needs based product strategy can then be mapped.  In all likelihood this will result in a couple of hybrid physical-digital products which will deliver all the benefits of CDs with a steady – but not overwhelming – stream of digital content to allow digital to ‘show some leg’.
• A new beachhead in the living room.  As I proposed 4 years ago, the music industry (principally the label and retailer elements) need a new living room strategy which should take the form of a new piece of highly affordable Hi-Fi equipment.   While its encouraging to hear that Google looks set to build upon the fine work of Sonos with some streaming music kit, the Digital Refusniks specifically need a hybrid device i.e. one that plays CDs too.  Something that looks contemporary enough to warrant replacing the old midi system and is cheap enough to shift millions of units.  You’ve probably guessed by now that this will need to follow an Amazon Fire approach of loss leading on the hardware to establish the Trojan horse for content sales.  But it is an investment that will pay off.

The Digital Refusniks are a challenging and unfashionable demographic and the counter-case for addressing them is that in 10 years or so they’ll have disappeared from the market anyway.  My conservative estimates put the loss in the region of 15% to 20% less total UK recorded music revenue in 2016.  The industry may well be able survive its revenue forecasts being that much smaller, but a) does it want to? and b) HMV can’t.

*All sales numbers are BPI trade values.  You can see the complete BPI release here: 

Release Windows, the Cure for the Access vs Ownership Debate?

Back in early 2009 when I was at Forrester Research I wrote a report proposing that the Music Industry should adopt release windows.  It seemed to many something of an anachronistic concept, written just at the time with the Movie Industry – that bastion of release windows – was deeply engaged in a dialogue about compressing windows.  But now, with the growing debate over whether streaming services are cannibalizing CD and download sales, the idea is beginning to look highly relevant.  Because the simple fact is that a structured release window strategy for the music industry would do away with much of the access versus ownership debate once and for all.

Music products and services need segmenting into distinct windows

The basic structure of my release window argument was that music products and services should be segmented into tiers of priority and then each of those tiers be allocated a release window.  The tiering would work something like this:

• Window 1, week 1: CDs, downloads and premium subscriptions
• Window 2, week 3: Radio (excluding web-only radio)
• Window 3, week 4: Subsidized subscriptions and web radio
• Window 4, week 5: Ad supported streaming services

 

All of the new releases would go straight to Window 1 and be available there, and there alone, for a 2 week period, with terrestrial and digital radio coming after that.  This is a contentious point as radio is of course intended to act as a discovery and marketing tool but the time has come for the top tier of the music product pyramid to be held up as exactly that.  After all, why should passive music fans who don’t pay for music get to hear new songs as soon as those who pay 9.99 a month or buy downloads or CDs?  Users of free ad supported streaming services would have to wait a full 4 weeks before they get to hear the latest new music.

 

The problem with differentiating a free stream from a paid download is that there simply isn’t that much difference.  Release windows however, put clear blue water between the download and the free stream.

Coldplay is already pioneering the window strategy

Coldplay’s decision to keep ‘Mylo Xyloto’ off Spotify until album sales have peaked is effectively artist level windowing in practice.  The alternative strategy of just putting the odd track on there – such as Adele’s ‘Rolling In The Deep – treats streaming as a radio-like promo vehicle but if all artists did that then its promotional value would soon disappear as people would stop using streaming services.  A structured, industry level windowing strategy however would bring consistency and effective results.

 

Of course the windowing approach isn’t free of problems.  For example pushing radio to the second window will require a new approach to marketing music and a revision of assumptions of sales cycles.  However both of those things are already in effect happening, forced along by the current streaming status-quo, and of course unlicensed free music.  Windowing is an opportunity for record labels to take control of the situation and simultaneously protect music sales and define a long term, complementary role for streaming services.  The alternative is a prolonged and unproductive debate about cannibalization that will cause deep fault lines across the music industry and may ultimately kill off streaming all together.

 

 

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In Conversation With Boinc’s Adam Kidron

Here is the video of my conversation yesterday with the CEO and founder of the forthcoming music service Boinc.  We discuss a number of things, including:

• the state of digital music
• Facebook’s potential impact on the space
• reestablishing value in music
• addressing the emerging market challenge

Adam also shares his vision for the music industry annd his concept of ‘creating an API around the entirity of music’.

Take a look and let me know your thoughts and comments.

Samsung and Meeting The Device Use Orbit Challenge

Two pieces of Samsung related news hit the wires this week:

• UK based music ASP 7 Digital (who powers the Music Hub app on Samsung’s Galaxy Tab) announced it has hit 1 million active mobile users (across all channel partners) and that 20% of its sales are now via mobile
• Leap Wireless announced that they have hit 200,000 subscribers on their Muve Music bundled subscription service that is available only on the Samsung Suede feature phone (Android smartphone version is coming).

Samsung might not be one of the big players in digital music but this mixed service portfolio approach indicates a strategic pragmatism that is crucial for anyone trying to compete with Digital Music’s Triple A of Apple, Android and Apple.

But the approach – and 7 Digital’s broader mobile success – is also indicative of an increasingly important strategic imperative for digital music services: namely navigating consumers multiple and interrelated device orbits (see figure).

Ubiquitous connectivity is, to put it mildly, some way off and the stream isn’t going to fully replace the download anytime soon.   And yet, more people are using more devices to listen to music in more places than ever before, and these usage patterns are creating an increasingly complex mesh of usage orbits.  Consumers are becoming more and more adept at developing specific and distinct use cases for their growing number of devices.

Historically, music allowed itself to be pulled across different devices, responding to consumer needs.  This was a perfectly adequate first stage but now music services need to do more than just deliver music to where consumers are.  To prosper in the next stage, music services need to tailor music experiences and value propositions both to specific use cases and be designed for co-existence within multiple, interrelated device orbits.

Coexistence Strategies

Of course some services will hope to simultaneously address every device use orbit (good luck on getting the licenses for that).  But the smart services will design nuanced co-existence strategies that ensure the core use case not only fits alongside a consumer’s wider digital music activity but establishes itself as an indispensible complement to it.  For example getting onto Sonos’ new Play:3 will likely be a more valuable route to the living room than trying to develop integrated hardware from scratch.  Similarly delivering mobile Facebook playlist support and integrating discovery tools like the Hype Machine will prove every bit as important to the consumer experiences as securing the rights to deliver the music itself.

Consumers will continue to have more devices, more content and more music service choices. The challenge that music services and device manufacturers such as Samsung must meet is helping join those digital dots by navigating consumers’ device use orbits.

Making Freemium Pay: An Artist’s Perspective

With the much anticipated US launch of Spotify and the successful IPO of Pandora there’s a very palpable sense of momentum in streaming music.  And that’s great news, the future of music revenues will depend upon a successful transition from distribution based models (downloads, CDs etc) to consumption-era models (on-demand streaming etc.).  Yet, there’s a growing sense that the current Freemium business model just isn’t fit for purpose.

I’ve written before about the challenges of squaring the consumption circle (see my post here for more).  There is a direct tension arising from record labels feeling they don’t get enough from ad-supported music, and from the services themselves feeling that they actually pay too.  To complicate matters even further, it is becoming increasingly apparent that artists aren’t getting enough out of ad-supported music either.

Slicing the Digital Income Pie

Singer / songwriter Benji Rogers of Marwood (and who also happens to be the founder of the great direct-to-fan funding music site Pledge Music) generously offered to share his digital revenue data to illustrate how his income spreads between different music services.

Looking at Benji’s digital music revenue for March and April (see figure 1) the glaring disparity between download stores and streaming services is immediately apparent.  In terms of units of activity (i.e. a stream or a paid download) streaming services are way out in front, with 92% of total units for the period, yet in revenue terms the relationship is reversed, with them accounting for just 3% of total income.  (You can read more about Benji’s digital music income here).

Now of course streaming based services are always going to generate a significantly lower unit of income than a download, but the inverse income-to-unit relationship here is misaligned to the extreme.

What Happens If / When Downloads Go Away?

The other side of this equation is the vastly important role that downloads play in artists’ recorded music income. The download revenue is effectively bringing the income dynamics of the old CD model into the digital equation.

But there is also massive risk with the download dependency.  Download sales growth is slowing and there is little evidence that the 99 cents download model translates well outside of the iTunes ecosystem.  Worse still, the current momentum in digital music business models and behaviour is in streaming not downloads.  Take a look around: Amazon, Google and of course Apple have all jumped on the locker bandwagon.  And as Benji’s data illustrates painfully well, streaming is where consumers are going too.  While downloads may not disappear entirely, their role is set to lessen markedly in the midterm future and most of the alternatives in play from the big three players generate much lower income for artists.

Premium, Ad Supported, Freemium…Streaming Just Isn’t Adding Up for Artists

And to be clear, this isn’t just a problem with Freemium.  Streaming services as a whole just aren’t delivering enough income for artists.  Spotify is much maligned for the raw deal it is perceived to give artists, yet when you look at the average-pay-per stream Spotify actually pays out more than that darling of premium services Rhapsody (see figure 2) despite the majority of Spotify’s streams being ad supported rather than premium (something feels broken there).

The simple fact is that the disparity between paid downloads and streaming is unsustainable.   It just isn’t tenable that 3 paid downloads from Amazon can still deliver 50% more revenue than all the streaming services combined over the same period and yet have less than 1% the activity level of those services.

Is Freemium No Longer Fit for Purpose?

No one in the Freemium value chain thinks that they’re getting enough income: not labels, not publishers, not artists, not the services themselves. It looks increasingly like the Freemium model itself is fundamentally flawed, that any fix will do little more than paper over the cracks.  And the new wave of locker services are only marginally better.  They share the same fundamental revenue share dynamics when compared to download income (for all parties).

So what is the answer?   As I said in my June Midem post (click here to read more), first and foremost business models and products must be innovated.  There simply aren’t enough levers left to pull in the ad supported streaming business models to fix the problem.  That doesn’t mean that services such as Spotify, Pandora and We7 don’t have a future, they absolutely do, but their future lies in successfully bringing in business partners to subsidize  premium tiers of their businesses to make music feel-like-free or close-to-free for  mainstream customers (see my previous post on Digital Music’s Third Way for more on this).  Spotify’s US launch will bring a great new music experience to US music fans, but Spotify will need partnerships like it has struck with Virgin Media, 3 and Telia Sonera in Europe if it is going to be sustainable.

But most importantly we need a new generation of music products that leverage social, user participation, access models, multimedia and device connectivity to the full.

Ad supported streaming can evolve, it doesn’t need to be the Neanderthal of digital music’s evolutionary chain, but unless evolution happens quickly there is a very real risk that many artists will start seeing their recorded music careers face extinction.