Here are a few highlights of the report:

Synopsis

The music industry is in dire need of a genuine successor to the CD, and the download is not it. The current debates over access versus ownership and of streaming services hurting download sales ring true because a stream is a decent like-for-like replacement for a download.  The premium product needs to be much more than a mere download.  It needs dramatically reinventing for the digital age, built around four fundamental and inalienable principles of being Dynamic, Interactive, Social and Curated (D.I.S.C.).  This is nothing less than an entire new music format that will enable the next generation of music products.  Products that will be radically different from their predecessors and that will crucially be artist-specific, not store or service specific.  Rights owners will have to overcome some major licensing and commercial issues, but the stakes are high enough to warrant the effort.  At risk is the entire future of premium music products.

D.I.S.C.: The Music Format Bill Of Rights

The opportunity for the next generation of music format is of the highest order but to fulfil that potential , lessons from the current digital music market must be learned and acted upon to ensure mistakes are not repeated.  The next generation of music format needs to be dictated by the objective of meeting consumer needs, not rights owner business affairs teams’ T&Cs.  It must be defined by consumer experiences not by business models.  This next generation of music format will in fact both increase rights owner revenue (at an unprecedented rate in the digital arena) and will fuel profitable businesses.  But to do so effectively, ‘the cart’ of commercial terms, rights complexities and stakeholder concerns must follow the ‘horse’ of user experience, not lead it. This coming wave of music format must also be grounded in a number of fundamental and inalienable principles.  And so, with no further ado, welcome to the Music Format Bill of Rights (see figure):

• Dynamic. In the physical era music formats had to be static, it was an inherent characteristic of the model.  But in the digital age in which consumers are perpetually online across a plethora of connected devices there is no such excuse for music format stasis.  The next generation of music format must leverage connectivity to the full, to ensure that relevant new content is dynamically pushed to the consumer, to make the product a living, breathing entity rather than the music experience dead-end that the download currently represents.
• Interactive. Similarly the uni-directional nature of physical music formats and radio was an unavoidable by-product of the broadcast and physical retail paradigms.  Consumers consumed. In the digital age they participate too.  Not only that, they make content experiences richer because of that participation, whether that be by helping drive recommendations and discovery or by creating cool mash-ups. Music products must place interactivity at their core, empowering the user to fully customize their experience.  We are in the age of Media Mass Customization, the lean-back paradigm of the analogue era has been superseded by the lean-forward mode of the digital age.  If music formats don’t embrace this basic principle they will find that no one embraces them.
• Social. Music has always been social, from the Neolithic campfire to the mixtape.  In the digital context music becomes massively social.  Spotify and Facebook’s partnering builds on the important foundations laid by the likes of Last.FM and MySpace.  Music services are learning to integrate social functionality, music products must have it in their core DNA.
• Curated. One of the costs of the digital age is clutter and confusion: there is so much choice that there is effectively no choice at all.  Consumers need guiding through the bewildering array of content, services and features.  High quality, convenient, curated and context aware experiences will be the secret sauce of the next generation of music formats. These quasi-ethereal elements provide the unique value that will differentiate paid from free, premium from ad supported, legal from illegal.  Digital piracy means that all content is available somewhere for free.  That fight is lost, we are inarguably in the post-content scarcity age.  But a music product that creates a uniquely programmed sequence of content, in a uniquely constructed framework of events and contexts will create a uniquely valuable experience that cannot be replicated simply by putting together the free pieces from illegal sources.  The sum will be much greater than its parts.

Table of Contents for the full 20 page report:

Setting The Scene

• Digital’s Failure To Drive a Format Replacement Cycle

Analysis

• Setting the Scene
• (Apparently) The Revolution Will Not Be Digitized
• The Music Consumption Landscape is Dangerously Out of Balance
• Tapping the Ownership Opportunity
• The Music Format Bill Of Rights
• Applying the Laws of Ecosystems to Music Formats
• Building the Future of Premium Music Products
• D.I.S.C. Products Will Be the Top Tier of Mainstream Music Products
• The Importance of a Multi-Channel Retail Strategy
• Learning Lessons from the Past and Present
• We Are In the Per-Person Age, Not the Per-Device Age

Next Steps

Conclusion

Megaupload’s closure has wreaked the wrath of the hacker community with Anonymous taking down various sites in retaliation.  But Anonymous’s anger is misjudged.  This is no blow against Internet Users’ rights, and Megaupload is no evangelist for the hacker community.  Napster’s Shawn Fanning thought he was changing the world, the Pirate Bay’s Peter Sunde thought he was leading a revolution in copyright.  But Megaupload’s Kim Schmitz (aka Kim Dotcom) had no such ideals, for him it was all about the cash.  Just take a look at the opulent excess of his mansion and fleet of luxury cars with registration plates such as ‘Mafia’ and ‘CEO’.   Schmitz earned his wealth not just through advertising but also by charging users premium fees for better download speeds, thus charging people to download illegal content.

Megaupload et al are an interesting anachronism in the digital piracy landscape.  The overriding trend has been for piracy destinations to get more sophisticated and more difficult to tackle each time the media industries take a step forward.  Think darknets, encrypted P2P applications, anonymous networks etc.  Commercial locker services though are easy targets, typically with central servers and clearly defined commercial operations.  If anything, it is surprising that it has taken so long to get Megaupload taken down.

But as with any piracy victory for the media companies, the sweet taste of triumph will be short lived.  Close down one upload site and another one will arise.  In fact there are already alternative IP addresses for Megaupload circulating around Twitter.

So Megaupload’s takedown is simultaneously a landmark victory and just another furry head smacked downwards in the never ending game of digital-piracy-whack-a-mole.

And the debate does need to take place in the mainstream.  The effects of the bills (if passed, upheld in the face of legal challenge and then successfully implemented) will be felt keenly by mainstream consumers.

However I am not going to add to the already vibrant and detailed discussion about the ethical and constitutional implications of the bills, nor the legion flaws and ambiguities in the proposed legislation. Instead I want to put Sopa and Pipa in the context of wider media industry strategy and response to digital change.

Sopa, Pipa and the Media Meltdown

Back in my days at Forrester I helped develop the concept of the media meltdown to describe the process of media industries responding to the impact of digitization.

The media meltdown occurs in three key stages:

• Stage 1: Audiences take control of their content consumption via new digital technology (think CD ripping, P2P, on demand video streaming, iPads etc).
• Stage 2: Traditional media industry business models crumble while media companies grapple with denial.  Instead of comprehending that a paradigm shift in consumer behaviour has occurred they think they can turn back the proverbial clock by fighting online piracy and restricting the disruptive threat of legal services.
• Stage 3: There are two potential conclusions, either the media industries comprehend that user behaviour has changed for ever and that they need to embrace that change with new business models, or they fail.  (For more on the media meltdown check Forrester’s CPS blog and the ever insightful James McQuivey)

Of course as with any analytical framework, this is a generalized world view but it provides a very useful lens through which to view media industry anti-piracy legal activity, lobbying and resultant legislation.  It is immediately apparent that Sopa and Pipa fall within stage 2 of the media meltdown but it would be disingenuous to suggest that the media companies that have lobbied for them – and for other acts such as the French Hadopi act and the British Digital Economy Bill – are in complete denial.  Rather what we have is a distortion of priorities.  These media companies and their industry bodies in particular rightly identify online piracy as a major disruptive threat to their businesses.  However,  instead of recognizing that behaviour shifts have occurred around which new businesses should be built, they reason that turning off the tap on piracy will starve piracy of oxygen, until it withers away.

Digital Piracy Perennially Outwits the Pursuer

As well intended as this thinking is, it is flawed.  Digital piracy (in its many, many guises) is all about innovation and change.  Every time media companies manage to finally catch up with digital piracy – either through enforcement, legislation or technical measures – the pirates have already moved on. Fighting piracy is akin to a game of whack-a-mole, but in this version of the game the moles learn.  Every time one is smacked down another one comes up that is smarter, harder to see and more difficult to reach.

Mainstream Consumers Become  the Effective Targets of Anti-Piracy

The simple and unavoidable fact is that piracy will always move more quickly and more effectively than its pursuers.  Technology improvements can be measured in days, even hours.  Legislation takes years.  This dynamic is one of the key reasons why acts like Sopa and Pipa have such far reaching implications for mainstream consumers: the hard core tech savvy pirates will always find ways of evading the counter measures, the mainstream will not.  Remember how DRM inconvenienced legitimate customers and did nothing to impact pirates?  The parallels here are clear.  Of course there are obvious and important differences between digital content buyers and passive pirates, but there are also similarities.  One of the most important of which is that they are often the same people.  Many paid content buyers also access free illegal content: they blend their content acquisition practices, often using free illegal sources for either discovery or the content they are just not willing to pay for, and then paying for the rest.

Legislation is Fully Necessary But Strategic Priorities Need Rebalancing

To be clear, this is not an apology for piracy, nor is it an argument against legislation – indeed it is crucial that laws evolve quickly enough to keep up with digital change so they can establish the frameworks in which legitimate content business models can prosper and illegal ones cannot.  Instead I am making the case for a rebalancing of strategic priorities and for taking the long view.  Consumer behaviour has changed for ever.  More people are consuming more content across more platforms than ever before, but fewer of them are paying for it.  Making free illegal content harder to get will only weaken consumption and demand unless game-changing legal alternatives simultaneously fill the vacuum.

For example, turning off access to the Pirate Bay and then pointing users  to iTunes will fall far, far short.  Media companies need to get brave, like never before, and quickly so.  They need to start looking at what makes the illegal services so threatening to them and then give legitimate companies licenses to do just the same, legally.  Some media industries get this more than others. For example the TV studios quickly realized the best way of fighting free was with free itself, launching Hulu, ABC.com and iPlayer as genuinely compelling (in fact even more convenient) alternatives to BitTorrent.

Legislators: Compel Media Companies to License to Identikit Legal Alternatives

If the US Congress wants to ensure that Sopa and Pipa are balanced in a way that will help drive digital innovation rather than stifling it in favour of analogue-era protectionism, they should look to baking-in binding innovation commitments from media companies.  To ensure that for every type of illegal service that is wiped out of the US-facing Internet, the opportunity is created for new companies to offer the same type of service legally, with guaranteed licenses from media companies (i.e. without being watered down to irrelevancy with usage restrictions).  Then Sopa and Pipa could become the foundation stones of a period of unprecedented media industry innovation that would finally recast the mould of media business models in the post-meltdown world.  The alternative is media industry failure.  Though they might not realize it, the media industry lobbyists are currently on track for hastening their industries’ demise, not safeguarding their futures.

Another year of digital stasis.  With 2011 sales figures beginning to come in, the scale of digital music’s recent underperformance is becoming increasingly clear.  In the UK overall music sales continued to decline with digital some way off yet from being able to pick up the slack.  The UK’s record label trade body the BPI reported that digital growth wasn’t enough to prevent a 5.4% decline in total album sales.  The picture was more positive in the US with Nielsen reporting that album sales actually grew for the first time since 2004, up 1.3% on last year.

But the US and UK numbers aren’t quite all they seem.  Both the BPI’s and Nielsen’s numbers are for unit sales.  One of the consumer benefits of the music industry meltdown has been aggressive discounting, with labels and retailers having to slash prices to persuade us to buy in numbers.  While this is great for music fans it means weaker profits for labels and that revenue sales trends are weaker than volume trends.  And that means that the UK revenue decline will likely be worse than 5.4% and that US revenues may well be down on 2011 despite the positive performance in units terms.  With a decade of digital sales already behind us this is the stage where digital sales growth should be rocketing and lifting the whole market with it.

The continued dominance of the CD. Albums are by far the most valuable component of music sales and despite positive digital growth the album remains largely unaffected by digital.  76% of album sales in UK are CDs and in the US the rate rises to a whopping 82%.  When the CD hurts the music industry hurts.   Nearly half of the growth in US albums sales came from increased CD sales.  Perhaps even more concerning is that three quarters of all US albums sales are offline.   Thus the music industry is depending on non-net-savvy consumers who don’t even buy online for the lion’s share of their income.  And CD buyers aren’t spring chickens either: nearly 40% of them are over 45.  On either count that is not exactly future-proofed revenue.  The echoes of the aging newspaper audience are depressingly obvious.

The CD: the Music Industry’s Heroin (and not in the female hero sense of the word).  Another similarity between the newspapers and record labels is their addiction to their respective dying formats. The direct consequence of poorly performing digital revenue strategies is that physical revenues become all the more important which in turn makes labels and newspapers less willing to pursue ambitious digital strategies that might hurt physical sales.  Which of course results in digital sales underperforming further and the whole thought process starts again.  This circular logic begets strategic paralysis.  Unless the record labels learn how to kick their CD habit they’re going to find themselves presiding over perennial long term decline.

The danger of ‘the Adele Effect’.  Both the UK and US sales numbers were dominated by Adele, with her landmark album ‘21’ topping charts in both markets and selling over 13 million copies (becoming the biggest selling album in a single year in the UK).  Uniquely well-performing albums like ‘21’ have a habit of creating reality distortion fields.  As I explained in a previous post Adele, along with Coldplay, is an increasingly rare breed: an album artist.  Adele and Coldplay both appeal to the older album buyer (which is exactly why Coldplay won’t let ‘Mylo Xyloto’ go on Spotify until sales have peaked).  The strong performance of both these artists’ albums in 2011 has helped boost albums sales, but more importantly they lend a veneer of vitality to the album market that is not accurate.  More typically 21^st century artists – the likes of Pitbull, Rihannna, Katy Perry and LMFAO – will be measuring their 2011 success in terms of singles sales, live sales, merchandize revenue, YouTube views and Facebook likes.

Rumours of the CDs’s demise are much exaggerated…perhaps. Of course the album is far from dead – after all, as we have seen, the CD remains the bedrock of music sales – but it is becoming just one, weakening, part of a broader mix of artist revenues.  In some ways artists are better protected from the music industry meltdown than record labels: they – along with their managers – are rapidly acquiring new skillsets and business acumen.  Record labels however are left having to put a positive spin on the album’s apparent longevity.  However the fundamental fact remains that the CD is a dying breed.  It may have a good few years left in it yet, but the long term prognosis is terminal.

Innovate, innovate, innovate! Newspapers and record labels are both at a crucial juncture: physical format revenues will continue to pay the bills for the coming years but paradoxically they must pursue radical format and product innovation strategies that will actually hasten the demise of those same physical revenues. If they don’t, record labels and newspapers will find themselves with the lose-lose scenario of depleted physical revenues and pitiful digital income.

Next week I’ll be publishing a free report that lays out the vision for exactly what that format and product innovation needs to look like.

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.

This is why I’ve put together a new unique methodology called the 360 Degree Music Service Assessment. The 360 Music Service Assessment is a holistic expert review tool that assesses all of the key elements of a music service, deploying a user needs based approach to address:

• Usability and user experience
• Ability to support multiple use cases
• Feature sets and functionality
• Market positioning
• Competitive strengths
• Branding
• Go-to-market and partner strategy
• Pricing
• Business model validity

Working with key stakeholders across different parts of your organization the 360 Degree Music Service Assessment assesses your music services strategy from consumer value proposition through to competitive integrity.  Using a structured methodology and process (see figure) it identifies strengths and weaknesses, competitive opportunity gaps and helps you prioritize next steps.

The 360 Degree Music Service Assessment  has been developed leveraging my decade+ of digital music expertise and has already been used successfully with a number of digital music services. The 360 Degree Music Service Assessment  can be employed either pre or post launch.

If you are interested in finding out more about the 360 Degree Music Service Assessment and how it could be used for your music service.  Whether you are operating a download store, subscription service, mobile app or social tool, or something else, find out how the 360 Degree Music Service Assessment  can work for you!

Take a look at this powerpoint presentation below for an overview and if you want to learn more, email me at musicindustryblog AT gmail DOT COM

360 Degree Service Assessment Powerpoint Overview

Targeting the mass market

Regular readers of this blog will know I have long argued that the paid digital music market is stagnating because it hasn’t got the tools to reach beyond the tech savvy music aficionado base it has addressed so far (mainly through iTunes).  Spotify’s recent US-and-Facebook -spurred growth has been encouraging but we are still talking about single millions of premium subscribers globally, most of whom are the same aficionado segment all other services have been chasing for the last 10+ years.  If digital music is ever going to break out of the confines of the few per cent of consumers per market that will pay for those services a new go-to-market strategy is required, as is a new series of music products.

This is where Rara come in.  They’re not bringing the new product (it will be years before anyone gets the licenses for the required next generation products from the record labels) but they are bringing a new approach to customer acquisition and a new approach to user experience.

Two key differences in approach

Rara’s target is unashamedly the mass market, the consumers the digital music bandwagon is increasingly leaving behind.  Rara uses two key tactics to reach these customers:

• Changing the funnel.  Spotify (with whom most people will rightly or wrongly benchmark Rara) use their free ad supported tier as their customer acquisition funnel.  The losses associated with supporting free Spotify users is their customer acquisition cost.   Rara’s funnel though is a combination of traditional marketing tactics (which will be backed by substantial marketing spend) and an innovative pricing strategy.  Taking a leaf out of some magazine subscription models, Rara gives consumers an introductory 3 month price of 99p / 99c which automatically switches to the full rate at the end of the period.  If this approach works, it will enable Rara to separate the wheat from the chaff, with prospective valuable customers self-selecting by submitting their payment details to get access to the heavily discounted rate.  The conversion rate for these consumers should be much higher than for ad supported free users (many of whom sign up simply to get free music).
• Changing the experience.  Digital music services and players are notorious for looking more like accountancy software than they do music software.  The ‘music collection as excel spreadsheet’ is a paradigm we have all grown used to.  But there in lies the rub.  Most of you reading this will be savvy users who have grown to tolerate a series of  inherently poor user experiences.  For the digital hold outs this just serves as another reason not to go digital.  Rara takes a different approach, giving users a highly visual experience, with colourful graphics and mood-based playlists at the core of the service.  Of course you can still dive into the excel spreadsheets but you can quite easily never need to.

Rara’s approach is not a radical departure, rather a series of welcome innovations on the current model.  Critics will argue that it is ‘just another streaming service’.  But streaming is the delivery vehicle for the experience rather than the product itself.  Think of streaming like cable TV infrastructure, and services like Rara, Spotify and Deezer as the cable companies that package channels over them.

Rara isn’t *the* answer to the music industry’s woes.  No single service is.  But with a fair wind, it could well become an important part of the answer.  The music industry desperately needs the mass market brought into the digital fold.  It needs more fresh thinking like Rara’s to help achieve that.

Ownership isn’t dead

7 Digital’s CEO Ben Drury used the data shows that ownership isn’t dead.  He has a point.  In these days of cloud and streaming dominated debates it is easy to be led to believe that ownership is an outdated legacy of the analogue era.  Of course in many ways it is, but the unavoidable fact is that we are in a transition phase in which both ownership and access matter and it is a stage which has many years to yet to run.

In simplistic terms there are two key dynamics which determine the pace of the shift from ownership to access:

• Technology-led change
• Generational-led change

Generational-led change

The generational changes are slowest moving, almost glacial in pace.  Yet they give the impression of being quicker than they actually are, because such a small subset of the total population is currently active in digital music.  These 10-20% of consumers (of which I and probably you are part) are not representative of the total consumer base.  But even among us there are discreet groups.  I am of the age group that grew up with CDs.  I am part of the transition generation that has enthusiastically adopted digital but still understands the value of physical media and ownership. The Digital Natives however (i.e. those consumers who have grown up in the digital age without ever having learned the habit of buying physical media) have entirely different concepts of ownership.  These are the true vanguard of the shift towards access based models.  But they are young, so time rich as they might be they are also currently cash poor.  Thus they are opting for free alternatives, such as YouTube, Pandora, Spotify Free.  Only when they start to acquire increased spending power will they start to be the dynamic force in adoption of paid access based services.

Meanwhile, the digital hold outs – i.e. the majority of the total population – are being left behind as the digital music bandwagon rolls on.  Out of habit some of them still buy CDs (some of them even buy a lot of CDs) but most are just falling out of the habit of buying music.  Their sense of ownership however remains unchanged.  In their world view you either buy music and own it, or you listen to it on the radio or TV.  Their worldview remains wholly un-muddied by cloud and streaming services.

Technology-led change

If Generational-led Change is the slow moving backdrop to the access / ownership debate, then Technology-led Change is the fast moving current, the rip tide.  It is technological change which underpins Spotify’s conversion of 2.5 million paying customers (Napster and Rhapsody both offered portable rentals years earlier, but not cached streams).  It is technological change which Pandora has to thank for its 100 million users (adoption only truly lifted off with the launch of the Pandora iPhone App).  Better technology and better connectivity are making the constraints of access based services less visible.

Yet almost paradoxically Technology (in both its advances and limitations) is simultaneously building the case of access and extending the life span of ownership (see figure):

• Pay once. Whether subscription fees are hidden or premium, users know that access to content ends when the subscription does.  Paying individually for a la carte downloads and CDs might be intrusive and clunky, but the fact remains that consumers know they then have guaranteed lifetime of product ownership.  Consumers still ‘get’ ownership and paying (or indeed downloading for free) once and owning for ever is an exceptionally easy concept to communicate. Score: Ownership 1, Access 0
• Play on anything. Subscription services have made great strides in device ubiquity, primarily via smartphone apps, but non-smartphone users are left out in the cold, as are non-paying streaming users. MP3 is the common currency of digital music.  MP3 files play on virtually every connected device consumers have.  Ownership gives the greatest chance of device ubiquity.  Score: Ownership 2, Access 0
• Play anywhere.  Consumers can take their MP3 playing devices with them most places and not have to worry about network connectivity.  However memory size restraints often mean they can only take a portion of their music with them.  Smart use of local device stream caching is freeing subscription services of the chain of the PC but network connectivity remains core to their value proposition and we are far away yet from the ephemeral promise of ubiquitous connectivity.  Score: Ownership 3, Access 0
• Play everything.  Download stores and CD stores have great catalogue, but access is as metered as it gets.  To fill your iPod with paid downloads costs tens of thousands of dollars.  To fill it with subscription music costs less than $10 a month.  It is in the context of unlimited access to vast catalogues of music that streaming services come alive, leaving ownership casting covetous glances from afar. Score: Ownership 3, Access 1
• Share with everyone.  Music has always been an inherently social experience (from the earliest prehistoric musicians playing around the fire through to mix tapes).  But in the digital age music is massively social.  Or at least it is for streaming services.  Sharing owned music means making or lending individual copies.  For streaming services, playlists, APIs and Facebook  place social connectivity at the core of the streaming experience.    Score: Ownership 3, Access 2

So it looks like a narrow victory for ownership, but I’d argue that a tie is a more accurate assessment, because ‘Play everything’ and ‘Share with everyone’ are so important that they carry extra weight.  These factors are core to what makes music different in the digital age.  They are foundations stones for building new pillars of value around music in the post-physical era.

Ownership and Access will co-exist for years to come

And so we have a situation where the case for Access is building all the time, driven by advances in technology (especially mobile), but those same advances also bring limits which extend the case for Ownership.  Mobile is becoming core to the digital music experience, and will only become more so over the coming years.  Right now it is simultaneously encouraging people to buy downloads to guarantee portable access to their music as well as allowing subscription users to take their streaming experience with them on the go.

There is no doubt that Access based models are the future of music, but there are many, many years yet in which Ownership based models will continue to play a pivotal role.  Ownership and Access better learn to get along together, because they are going to be roommates for a long time yet.

In the early days of the web, ISPs tried to control our entire online lives by building proprietary walls around users.  These so-called Walled Gardens were exemplified by  AOL.  But as Internet users got savvy  they banged away at those walls until they crumbled under the weight of inevitability in much the same manner as the Berlin Wall did.  Mobile carriers briefly brought Walled Gardens back from the dead (and there’s still an extended death rattle in some parts), but these days we expect our Internet journeys to be broadly free.  I say ‘broadly free’ because of course many of the destinations on our digital journeys are not open, and some of them are harder to get in and out of than others.  In fact the journey of the digital consumer is analogous to that of a traveller in Medieval Europe.  The highways are sometimes wild and unpredictable, while the coveted destinations are walled cities and heavily fortified castles.

Ecosystems are the success stories of paid content

The reasons the walls exist in the digital realm are not entirely different from that of Medieval Europe’s mercantile cities.   Walls protect their inhabitants from unwanted external intrusion, but most importantly they guarantee those inhabitants a quality of existence that could not happen externally.  This is why ecosystems are the success stories of paid content.  The xBox, Kindle and iTunes ecosystems have all succeeded in converting portions of their users into paid content buyers at rates unachievable elsewhere.

Walls alone though aren’t enough

As many a newspaper will tell you, simply throwing a pay wall up around your content doesn’t magically create a loyal paying audience.  The reason that iTunes et al work is because the priority of their walls is to create and guarantee a quality and consistency of experience within them.   Protecting against external intrusion is of secondary concern.  Once you have created a high quality experience within those walls, then you can start thinking about leveraging revenue.  Just in the same way a successful Medieval city state that could guarantee prosperous trade and commerce within its walls could also demand greater taxes from its subjects than one that could not.

Take the example of xBox Live, the networked gaming component of xBox.  When the service was first launched it was a gimmicky extra.  But when, years after launch, Microsoft turned off access to Live to xBox users who had pirated games on their consoles there was a massive outcry from jilted (pirate) users who claimed that their xBox experience was useless without Live.  What Microsoft had done was use the confines of their ecosystem to create a unique experience that could not exist externally and of which users quickly realized the emotional and monetary value.

A new generation of ecosystems

But as successful as closed, device-based ecosystems are, things are changing, quickly.  We are seeing the emergence of a new breed of ecosystem that doesn’t have the straightforward mechanism of a device operating system to define its boundaries.  Instead this new generation of ecosystem almost paradoxically uses openness to create its closedness.  These ecosystems use software developer APIs to create vibrant platforms in which a quality of experiences exist.  Nobody exemplifies this approach better than Facebook with their Socially Optimized Web Strategy. 

The net result is that we now have three key types of Content Ecosystem Models co-existing (see chart).

• Closed Door Ecosystems: these have the most impermeable walls, typically defined by the operating system of a family of devices.  Apple’s iTunes is the best of breed example.  User experiences and all externally developed experiences (typically Apps) can only exist within the ecosystem of supported devices. 
• One Way Ecosystems: these leverage software applications to define boundaries, but unlike Closed Door Ecosystems they do not have the benefit of proprietary hardware so rely upon the quality of the experience delivered by the software.  To help achieve this, One Way Ecosystems leverage developer communities via APIs.  This enables bite sized chunks of the  ecosystem’s experience to be delivered externally, though almost always with a view to ultimately encouraging users in, or back in, to the centre. Control is exercised by ensuring that a core level of experience, and Apps, can only be experienced internally.  A contemporary example is Spotify, who already support some externalization, but last week announced the creation of an internal, closed wall API platform.  Thus Spotify aims to benefit from the external reach of the API era while simultaneously reaping the rewards of the Closed Door model.
• Revolving Door Ecosystems: these are the true child of the API era.  Typically they exist without an OS or other proprietary software to define their boundaries.  Instead they leverage APIs to deliver a subtler but highly effective ecosystem that fully supports inward and outward flows of externally developed experiences and Apps.   What protects these ecosystems from disintegrating under this laissez-faire approach is tightly policing the flow of data, so that the ecosystem’s data and context is depended upon entirely to deliver the value of Apps and other experiences.  Facebook isn’t the only example of this approach but is simply leagues ahead of anyone else.

The value of uniqueness

The secret ingredient of success of any ecosystem is uniqueness,   a monopoly on control of uniqueness.  A uniqueness that consumers know they cannot experience anywhere else.  However uniqueness isn’t just valuable for the technology companies building ecosystems, it is a crucial commodity for media companies in the digital age.  Piracy and the wider Internet swept away media companies’ monopoly on supply, so now uniqueness is the most important tool they have left to create new senses of monetary value among audiences.  Only when uniqueness has been achieved, can other important assets such as context, convenience and curation be fully brought to bear.

It is easy to fear ecosystems (indeed there is much to give cause for concern) and there are growing issues about how competing  ecosystems will co-exist (if at all).  But they are also the key to successfully monetizing content in the digital age, and they will continue to evolve.  Devices transformed Walled Gardens into Ecosystems, and APIs have transformed Ecosystems into Platforms.  Change will inevitably continue at a bewildering pace, but  the challenge which media companies must rise to, is to become active participants in, nay, catalysts for that change, not shell-shocked observers.

This is the context into which Spotify’s App announcement was made.  To date Apple, Android and Facebook (each in different ways) have been at the forefront of the App revolution.  It is Facebook’s strategy though that has widest reaching implications.  In a previous post I wrote about Facebook’s Socially Optimized Web strategy, which aims to create a device-agnostic content ecosystem which embraces our entire digital lives.  This is what Spotify are plugging into via their Facebook integration and are also trying to do themselves with their app announcement.  Daniel Ek is trying to implement his own version of Mark Zuckerberg’s increasingly successful platform strategy.  Facebook are creating their digital content dashboard, now Spotify are creating their own music-specific one.  But more than just a me-too strategy, this music specific strategy is crucially important for the future of digital music.  It also matters because it is part of a wider process towards the next generation of music experiences.  Let me explain….

Turning music licensing from the town planner into the builders’ merchant

The challenges of services negotiating legal and commercial terms with rights holders are (overly) well documented. What needs to happen now is to remove that stumbling block, to make music the basic ingredient around which a new generation of services can be built.  Think of launching a music service like building a house.  Where we are now is that the small time builders aren’t able to afford the expensive planning process, and the big building companies are only getting the planning permission to build the same house design again and again. What needs to happen is for music licensing to move from being the ‘planning permission’ stage to becoming a ‘builders’ merchant’ where services simply go and stock up on the equipment they need to go and build their houses.

The importance of ubiquitous access

Music needs to become the API. This is where Spotify come in.  Spotify is making a play for being the ubiquitous music service, the base line music access around which everything else can be built.  They’re hoping establishing an ecosystem of App developers and users will help make them an indispensable part of the music industry. Of course they’re a long long way from being ubiquitous (10 million users is impressive but not exactly universal).  The bigger Spotify gets, the more reach their platform will have, but the industry needs more than just Spotify to take this approach.  EMI’s Open EMI announcement was a great step in this direction.  Spotify takes this approach to another level.

When music becomes the API, digital music will really step up to the next level.  Spotify won’t be able to do all of that by themselves, but they’ve set the lead for others to follow.