I am away on vacation at the moment but in the meantime here’s a new blog post we’ve just done over at MIDiA Research on the Digitally Native Music Consumer.
Recently BBC Radio 1’s head of music George Ergatoudis stirred up something of a storm with his claim that “albums are edging closer to extinction”. Nonetheless there is a growing body of evidence that the album does indeed seem to be losing its relevance in today’s track and playlist led world. And the implications stretch much further than the confines of the recorded music business. (Hint: live music industry, you need to be watching your back too.)
The Advent Of Grazing
When Napster emerged 15 years ago it kick started an irreversible transformation in music consumption. The music business had spent the previous three decades turning the singles dominated market of the 1950’s into the albums led market of the 1990’s, but with Napster consumers suddenly did not have to take the whole album package anymore. The labels had their own fair share of blame. When the vinyl LP had been the dominant format albums typically had 8 tracks, but with the CD labels felt compelled to fill every one of its 74 minutes’ capacity, resulting in a preponderance of filler tracks over killer tracks. Couple this with album price hyperinflation and you had the perfect recipe for consumer revolt. Little wonder that music fans cherry picked tracks, skipping the filler for the killer. Grazing replaced immersion.
Ironically the issue became even more pronounced with the advent of the iTunes Music Store. Whereas with file sharing many users downloaded entire albums – and as bandwidth and storage improved, entire discographies – listening still skewed towards the stand out tracks. Indeed the hoarding mentality of these digital immigrants was one borne out of being children of the age of scarcity, with a ‘fill up quick while you still can’ mentality. With iTunes, price was a limiting factor and so people focused on acquiring single tracks rather than albums. Labels and artists had been scared iTunes would cannibalise album sales, they were right.
Digital Natives Set A New Pace
In the subsequent decade new digital behavior patterns have become more clearly defined, particularly among the digital natives. Playlists and individual tracks have become the dominant consumption paradigm. Even music piracy has moved away from the album to smaller numbers of tracks, with free music downloader mobile apps and YouTube rippers now more widespread than P2P. This is the piracy behavior of the digital natives who have no need to hoard vast music collections because they know they can always find the music they want on YouTube or Soundcloud if they want it.
The behavior shift is clearly evidenced in revenue numbers. Since 2008 alone US album sales (CD and digital) have declined by 22% (IFPI), while digital track sales outpace digital album sales by a factor of 10 to 1. The top 10 selling albums in the US shifted 56.4 million units in 2000. In 2013 the number was 14.7 million (Nielsen SoundScan). Even more stark is the contrast between playlists and albums on streaming service. Spotify has 1.5 billion playlists but just 1.4 million albums (see figure). While the comparison is not exactly apples-to-apples (album count is a catalogue count and playlist count is a hybrid catalogue / consumption count) it is nonetheless a useful illustration of the disparity of scale. (In fact the 1.4 million album assumption is probably high due to a) duplicates b) singles and EPs c) compilations.)
Even the much heralded success of Ed Sheeran’s album ‘X’ does not exactly paint a robust argument for the album. ‘X’ set the record for first week global plays of an album on Spotify with 23.8 million streams. But that represents just 0.27% of weekly Spotify listening (based on Spotify’s reported 40 million active users, 110 minutes daily listening and an average song length of 3.5 minutes).
The Album As A Mainstream Consumption Paradigm Was A Historical Anomaly
This is the consumer behavior backdrop for the demise of the album. Creatively the album still represents the zenith of an artist’s creativity and many albums are still most often best appreciated as a creative whole. Core fans and music aficionados will still listen to albums but the majority of consumers will not. The album as the mainstream consumption paradigm was a historical anomaly of the 70’s, 80’s and 90’s. In the 50’s and the 60’s the single was the way the majority interacted with music, and now in the early 21st century it is once again. There has always been space for vast diversity of artists along the niche to mainstream spectrum but as a consumption format the album is closer to the Steve Reich end than it is the Katy Perry end.
Artists And Labels Need To Catch Up With Consumer Behaviour
The majority of artists will still make albums and labels will indulge them because their organizations and business models are built around the format. But therein lies the problem: the more that consumer behavior evolves, the more distant the gap between artists’ recorded output and their fans’ demand becomes.
There is more music released now than ever before and most likely more music listened to than ever before. But the amount of music listeners in the world’s top 10 music markets – which account for 91% of revenue – has not increased at anything like the same rate. People are spending less time with individual artists and albums. In the on-demand age with effectively limitless supply they flit from here to there, consuming more individual artists in a single playlist than an average music fan would have bought albums by in an entire year in the CD era. Fewer fans develop deep relationships with individual artists. Right now this translates into fewer album sales. In 10 years’ time it will manifest as a collapse in arena and stadium sized heritage live acts. In fact we are already witnessing the impact, after all what are festivals and DJ sets if not the playlist translated into a live experience?
As painful as it may be for many to accept, the tide has already turned against the album. The challenge to which artists and labels must now rise is to reinvent creativity in ways that meet the realities of the on-demand world.* If they do not, artists will eventually find the chasm between their wants and their audiences’ needs quite simply too wide to traverse.
*For those interested I wrote a couple of reports on this very topic a few years ago:
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Google yesterday confirmed the much rumoured purchase of curated music service Songza for somewhere between $15 and $39 million. While it is not a vast investment for a company with the recent $3.2 billion acquisition of Nest as a benchmark, it is nonetheless a significant one for a company that already has a couple of streaming music services of its own. It is not a Beats sized deal but then if Google had wanted one of those it would have bought Spotify. So just why did Google splash the cash on Songza?
Access to all the music in thee world can be overwhelming, with so much choice that there is effectively no choice at all. This is the Tyranny of Choice. For all the efforts and intent of music services to ‘fix’ discovery no one has yet nailed it. Listen Services like Nokia Mix Radio, O2 Tracks and Pandora present one solution: effectively removing the burden of excessive choice by delivering a curated stream of music that requires little or no effort from the user. But this approach does not translate well to All You Can Eat (AYCE) services like Spotify and Googles’ Play Music All Access. These services are built on the foundations of giving access to everything, the exact opposite of what Listen Services are about. Which is why AYCE services are doubling down on enhancing their internal curation and recommendation capabilities. Spotify moved first with its acquisition of the EchoNest, Rdio followed by acquiring TastemakerX and now this move from Google. Beats Music took a different route entirely, building its service on the foundations of programming rather than superimposing it.
Google should be able to extract great value from Songza but as with all of these technologies it is just part of the solution. Human programming, as resource intensive as it might be, remains a pivotally important part of the equation, and though all the AYCE services have teams of curators, only Beats so far has done it at large scale.
First, Show People How To Find What They Have Already Found
And still the discovery problem is not fixed. Progress has been made in the last few years, but in many respects it is a case running before learning to walk. Recommendations, discovery and programming are just one part of the music consumption journey i.e. discovering new music. Arguably the most important aspect of the journey is the one that is most neglected: navigating the music people have already discovered. As counter intuitive as it may sound, people first of all need to be shown how to find what they have already found…their pre-existing music collections but also the music they have listened to in a service. Creating playlists and tags of songs is an often burdensome task that requires no small amount of discipline. Which means that newly discovered gems can all too quickly disappear back into bottomless pit of 30 million songs, rendering a discovery journey wasted.
Smart of use of data can provide the foundations for the solution, ensuring that people’s streaming ‘collections’ are dynamically created and programmed. But data alone is not enough. What is needed is an entire new paradigm in music navigation. For all the faults of CDs they were visual reference points. A consumer might not remember the name of an artist or an album but would know roughly where the CD was on a shelf or what colour the cover was. (I remember as a DJ often identifying a record I was about to play only by the colour of the label on the centre of the vinyl).
Digital music lacks such visual reference points. iTunes transformed our music collections into featureless spreadsheets, with playlists emerging as simply another means of sorting the data. New visually rich interfaces in music services help enhance the user experience but most often simply try to shoe horn in the old album art approach into a digital context. This new navigation paradigm must start with a blank sheet and think in terms of multimedia, interactive, dynamic experiences. It will need to leverage rich visuals, touch, dynamic context aware programming, sound, voice control and Shazam, to create an immersive whole that gives the consumer clear, immediate results in a way that engages multiple senses. Only once we have fixed this first step of the music consumption journey can we really start thinking about ‘fixing discovery’.
We are at critical juncture in the evolution of digital content. Digital consumption of content, spurred by accelerating adoption of smartphones and tablets, is crashing towards the mainstream, while traditional revenues and business models continue to buckle under the strain. Legal and business disputes between Amazon and book publishers, and Google and independent record labels are small but crucial parts of this process. This period of disruptive flux is giving way to a new era of content distribution in which a few large technology companies are assuming the role of distributor, retailer, channel and playback device as one single package. The emerging new world order is defined by concentration of power, reduction of competition and the subservience of traditional media companies. The 2000’s witnessed the ascendancy of digital innovators, now we are arriving at a new chapter: the Innovator Hegemony, the era of the all powerful, unregulated technology superpower.
Free Is Now the Business Model of Choice
We are mid way through the shift from the distribution era of selling units of stuff, be they newspapers, CDs, packaged games, books or DVDs, to the consumption era where consumers increasingly value access over ownership. This shift manifest itself as a meltdown of the traditional media industries and associated retailing channels. Out of the ruins of these crumbling nation states Amazon, Apple and Google have started to construct sprawling digital content empires. Until relatively recently it looked like Apple was the only company that had learned how to make digital content works as a business, albeit as a loss leading one. But during the last year the market has inevitably buckled under the pressure of Amazon’s willingness to give away access to content as bait for free shipping and Google’s endless appetite for giving content away for consumer data.
Amazon and Google realized they were never going to win if they played the game by the Apple’s rules, which had been transplanted from the analogue age, namely charging for ownership of content. Instead they have opted for the digital zeitgeist: free, or at least feels like free. It is beginning to look like iTunes was a historical anomaly, an isolated outpost for distribution era practices in the digital realm. What Amazon and Google have done is pick up the baton Napster dropped in the early 2000’s and they have run with it.
The Innovator Hegemony
There is little reason media companies would want to cede so much power and pay the inexorable price of devaluing digital content to the price point of zero. They do so because they allowed their partners to get too powerful. This is the Innovator Hegemony. Apple, Google and Amazon all used content as a stepping stone towards achieving global scale, scale that once gained they used to swap the balance of power. Labels, publishers, authors and artists suddenly found themselves beholden to companies they had helped succeed and that success now used against them.
When Competition Legislation Protects Monopolistic Behaviour
But there is an issue of even greater significance at play: the inability of market regulation to appropriately counter the increasingly monopolistic behaviours of the big technology companies’ content moves. Anti-trust and competition legislation neuters media companies but leaves technology companies to operate with near impunity. Dating back to the analogue era when media companies were all powerful, anti-trust legislation was designed to prevent media companies colluding and entering into monopolistic behaviour. But now that technology companies own the platform control points that media companies depend upon in the digital realm, anti-trust and competition legislation has the unintended consequence of consolidating the power of the technology monopolies by stymying media companies.
The three big technology companies have a greater concentration of influence and market share in digital content than any single media company did in the analogue era. Amazon, Apple and Google have become a single, effective monopoly in each of their respective marketplaces. Thus anti-trust legislation currently has the unintended consequence of reinforcing market concentration.
Matters are not helped by the fact that media companies have become something of a busted flush at the legislative level, having over reached with copyright and anti-piracy lobbying efforts. The dramatic collapse of SOPA and the failure of Hadopi illustrate how media companies have lost legislators’ hearts and minds. After years of media industry ascendency the lobbying balance has swung towards the technology companies who are winning over key influencers such as the European Commissioner Neelie Kroes.
Platforms As Integrated Monopolies
Right now Amazon and Google are testing the boundaries, seeing what they can get away with before they are reined in. Amazon is unashamedly abusing its platform to hurt sales of book publishers such as Hachette and Bonnier, while Google is equally brazenly threatening to turn off monetization of music videos of labels that will not sign its overweening YouTube contract. Interestingly both Amazon and Google appear to be testing just how forceful they can be with the independent ends of the media business spectrum. These actions show us how vertically integrated platforms have a tendency to become internal de facto monopolies with effectively limitless internal power. Power that corrupts, and that ultimately turns the ideologies of these once idealistic disruptive start ups into police states where dissension is no more tolerated than it is in North Korea.
It is time for media companies and policy makers to decide whether they are brave enough to stand up to the Innovator Hegemony. Every content company still has the nuclear option of pulling content from the services but few will ever dare to do so – the German YouTube stand off a rare exception. And therein lies the problem, media companies already feel they cannot exist without the big technology partners and the tech companies know it. Without appropriate macro checks and balances the outcome will always be the timeless, asymmetrical roles of bully and bullied.
Amazon’s long anticipated Fire smartphone was launched to much fanfare last night and includes a host of features designed to make it stand out from the pack. But one detail that seems to have slipped beneath the radar is that, for now at least, it includes a year long access to Amazon Prime, which following last week’s music announcement, includes free access to an ad-free on demand streaming music service.
What this means is that Amazon have launched a smartphone that gives you a year’s worth of unlimited free music. Six years ago when Nokia tried to do the same with Comes With Music the concept was ground breaking and looked set to change the future of digital music. But Nokia’s flawed implementation of the proposition scared most of the marketplace away from the device bundle model. Beyond Oblivion nearly made it work before folding, and its subsequent offspring Boinc and Yonder are each still trying to prove the model. Rok Mobile are another new entrant.
I still maintain that the device bundle is the best way Apple can extract full value from its recently acquired Beats Music asset but for now all eyes will be on Amazon to see if the model is finally ready for prime time (pun sort of intended) now that it has been sneaked in through the back door.
YouTube (i.e. Google) has put itself in the midst of a music industry conflict that may yet turn into a much needed process of soul searching for the labels as they weigh up whether YouTube’s contribution to their business is net positive or net negative. The controversy surrounds the imminent-ish launch of YouTube’s premium subscription service and the refusal of some independent labels to sign the terms Google is offering them. Whereas normally this would just result in a service launching without a full complement of catalogue, in this instance YouTube is also the world’s second largest discovery platform after radio. YouTube execs have been quoted as stating that labels that do not sign their terms will have their videos blocked or removed. Exactly from where (i.e. the main YouTube service, or the premium offering) remains a matter of conjecture with both sides of the debate more than happy to allow the ambiguity cloud the debate. But the fundamental issue is clear either way: YouTube has become phenomenally powerful but delivers comparatively little back in terms of direct revenue and is now happy to flex its muscle to find out who is really boss.
The Retailer Hegemony
Google’s stance here fits into a broader phase in the evolution of digital content, with the big tech companies (Amazon, Apple, Google) testing how far they can push their content partners in order to consolidate and augment their already robust positions. It fits into the same trend as Amazon making life difficult for book publishers Hachette and movie studio Warner Bros. The big tech companies are becoming the three key powerhouses of digital content and each is fighting to own the customer. Media companies are becoming collateral damage as the new generation of retailer behemoths carve out new territory
The record labels, indies included, have to take much of the blame here. They let YouTube get too big, and on its terms. The big labels had been determined not to let anyone ‘do an MTV again’ and yet they let YouTube do exactly the same thing, getting rich and powerful off the back of their promotional videos. But this time YouTube’s resultant power is far more pervasive.
Stealing The Oxygen From The Streaming Market
Labels are beholden to YouTube as a promotional channel. They have turned a blind eye to whether its ‘unique’ licensing status might be stealing the oxygen out of the streaming market for all those services which have to pay far more for their licenses. The underlying question the labels must ask themselves is whether YouTube’s inarguably valuable promotional value outweighs the value it simultaneously extracts from music sales revenue. Indeed 25% of consumers state that they have no need to pay for a music subscription service because they get all the music they need for free from YouTube (see figure). This rises to 33% among 18 to 24 year olds and to 34% among all Brazilians.
Reversing Into Subscriptions Is No Easy Task
Of course the aspiration here is that YouTube is finally going to start driving premium spending, but reversing into a subscription business from being a free only service is far from straightforward. It is far easier to make things cheaper than it is to raise prices, let alone start charging for something that was previously free. Add to the mix that free music is not exactly a scarce commodity and you see just how challenging YouTube will find entering this market. Indeed, just 7% of consumers are interested in paying a monthly fee to access YouTube music videos with extras and without ads. The rate falls to just 2% in the UK.
The counter argument is that only a miniscule share of YouTube’s one billion regular users are needed to have a huge impact. But if the price the music industry pays to get there is to kill off the competition then it will have helped create an entity with such pervasive reach that it will truly be beholden unto it. If the music industry has hopes of retaining some semblance of power in this relationship, it must act now.
Amazon today entered the streaming music foray with the launch of its own bundled music service. Amazon Prime subscribers get free access to on demand streaming from a catalogue of 1 million tracks, the majority of which are older catalogue titles rather than frontline hits. Amazon’s move has received considerably less interest and hype than Apple’s acquisition of Beats but is in many respects every bit as important.
The future of digital content is going to be defined by the content and device strategies of three companies: Apple, Amazon and Google. Each has a very different approach resulting in an equally diverse set of products and audiences (see figure). Amazon and Apple have mirror opposite content strategies: Apple loss leads on content to sell devices whereas Amazon loss leads on devices to sell content. (Google loss leads on both because its end goal is your data). All three have a strong focus on music but all three understand clearly that the future of digital content lies in having multiple genre stores that traverse music, games, apps, video, books etc. All three also recognize the importance of hardware for delivering the crucial context for the content experience. Similarly, all three have a Content Connector strategy aimed at opening up the mass-market digital content opportunity in the home via the TV.
Amazon’s inclusion of music streaming in its Prime offering speaks volumes about the perceived importance of music as a product to the retailer. Music used to be the crucial first rung on the ladder for Amazon customers. Buyers would start off with a low consideration purchase item like a CD or DVD and the next thing they knew they were buying microwaves and computers. Music is still plays an important role in Amazon’s customer life cycle, but it is no longer a product needs paying for with a separate payment. Music has become the ‘feels like free’ soundtrack to a video subscription with the added benefit of free shipping for online shopping. Out of those three core value pillars of Amazon Prime, music streaming is probably the smaller. Music has become the National Geographic channel in the cable subscription: a nice part of the overall proposition but not something that carries inherent monetary value on its own.
The harsh reality is that this is probably a sound strategy for engaging the mainstream consumer with music streaming (the extensive selection of curated playlists on top of a modest 1 million track catalogue hints at the mass market positioning). But whether this is the best strategy for the mainstream is another thing entirely. Labels fear that free services like Spotify free and Pandora threaten to erode consumers’ perceptions of music as a paid for commodity. But at least in those environments they are actively adopting a music service in its own right. With Amazon Prime there is a real risk that music is being relegated to the role of muzak in the elevator.
The long drawn out demise of recorded music revenue is well documented, as is the story of artists, labels and managers all trying to make sense of a world in which music sales can no longer be counted upon. But the contraction of recorded revenue has occurred at the exact same time that the live music sector has undergone a renaissance. The net effect, when coupled with publishing revenue holding its own and the growth of albeit modest, merchandise revenue, is that the global music industry has largely held its own, contracting by just 3% between 2000 and 2013 (see figure). Compare and contrast with the 41% decline in (retail) recorded music revenue over the same period. Indeed it is the 60% growth in live revenue that has done most to offset the impact of declining music sales.
Perhaps most significantly of all, the contrasting fortunes of the music industry’s two main revenue streams is that the share of total revenues accounted for by recorded income has dropped from 60% in 2000 to just 36% in 2013. The balance of power has firmly shifted away from labels to the live value chain. Yet it is not as clear a picture as might first appear:
- Recorded music is still the main way people interact with music: Whether it be on the radio, YouTube, Spotify, an iTunes or a CD, the vast majority of consumers spend the vast majority of their music consumption time with the recorded product not the live product. In fact just 15% of people regularly go to gigs. And even for these consumers live is, in terms of total time spent, just a small fraction of their music consumption. So labels are faced with paradox of making less money from artists yet those same artists still needing the recording in order to drive live and merch income. This is why we ended up with 360 deals.
- Much of the market growth didn’t make it down to artists: The live music value chain is an incredibly complex one with multiple stakeholders taking their share (ticketing, secondary ticketing, venues, booking agents, promoters, tax, expenses etc.). The share of live revenue that artists make from live has declined every year since 2000. The impact on the total market is that total artist income (i.e. from all revenue sources) has declined every year too since 2009.
The Next Music Industry
It is probably fair to say that we are approximately half way through a huge period of transition for the music industry. The realignment of revenue is merely a precursor to the new business models, products and career paths that will emerge to capitalize on the new world order. It is in this next phase that the real ‘fun’ will start. Expect every traditional element of the industry to be challenged to its core, expect dots to be joined and old models to be broken. But be in no doubt that what we will end up with will be an industry set up for success in the digital era.
NOTE: the figures quoted in this post are taken from a forthcoming MIDiA report: The Superstar Artist Economy: Artist Income and the Top 1%. The report is a follow up to the previous MIDiA report ‘The Death of the Long Tail’
Although the Apple-Beats deal is about far more than just streaming music, it is nonetheless an important part of the puzzle. Apple has been going slow with streaming, introducing cloud experiences (iCloud, iTunes Match, iTunes Radio, Video rentals) slowly so as not to alienate its less tech-adventurous mainstream user base. That strategy remains valid and will continue, but it has failed to protect the defection of its core, high value, early adopters. This is why Apple has to get serious about streaming fast: it is scared of losing its best customers. It is also why all other streaming companies, whatever they may admit publically, are getting ready to run scared. This is streaming music’s mutual fear factor:
- Velvet handcuffs: Music downloads are monetized CRM for Apple, a means of enhancing the device experience. Purchased tracks and an iTunes managed library act as velvet handcuffs for Apple device owners. But for those consumers that use a streaming subscription app, the playlists and music collection can exist on any device. Suddenly the handcuffs slip off. This is why Apple has to get streaming right in short order. It simply cannot afford to lose swathes of its most valuable device customers at the next handset replacement cycle.
- Chinks in the iTunes armour: Until the launch of the App Store, 3rd party music services had no way of breaking into the iTunes ecosystem and were, in the main, doomed to the role of also rans. The App Store was the chink in the otherwise impregnable iTunes armour that allowed those 3rd parties to not just launch punitive raids but to set up camp in Apple’s heartlands. It was the price Apple had to pay to enter the next phase of its business, but now it is ready to shore up its defences once more.
- Eating from Apple’s table: The vast majority of streaming music subscribers were already digital download buyers first, and of those the majority were either current or past iTunes Store customers when they became subscribers. On a global scale, subscriptions have first and foremost been about transitioning existing spending rather than creating new digital customers. The picture is very different in Nordics, the Netherlands and South Korea but those markets contribute far less to global scale than the markets (US, UK, Australia etc.) where this trend dominates. Apple has provided the core addressable market for streaming services for the last five years. Now those companies worry over where will they be able to get new subscribers if Apple start taking subscriptions seriously.
- Apple will not have to play fair: Although Apple knows it is under the watchful eye of various regulatory authorities following the eBook price fixing episode, there is still plenty it can do to make life hard for 3rd party streaming services. Just take a look at what Amazon is reportedly getting away with in its book pricing dispute with Hachette: delaying shipments of the publisher’s books to customers, removing buy buttons from pre-ordered books, even pointing Amazon customers to competitive titles when searching for Hachette books. Fair play or foul, the power of the retailer is huge. Whether Apple simply ensures Spotify et al don’t appear in search results, or that they are never quite able to integrate seamlessly with iOS anymore for no specific reason that anyone can quite put their finger on….But even without resorting to such behavior, simply by deeply integrating an Apple (or Beats) branded subscription service natively into its devices and ecosystem, Apple will have the upper hand and 3rd parties will find it a whole lot harder to fish in Apple’s waters.
None of this is necessarily bad for the market either. In fact it could be just what the subscriptions business needs. To finally focus on green field opportunity beyond the confines of the Apple elite. Nor should Apple even limit its subscription focus to streaming or to music. The rise of the Content Connectors points to Apple, Amazon and Google pursuing digital content strategies in the round, that do not get bogged down with super serving any individual content type at the expense of the rest. Apple’s best mid-term subscription play may yet simply prove to be a monthly allowance of iTunes credit across all content types, bundled into the cost of the device. Put that on top of iCloud, iTunes Radio, Beats Music and suddenly you have a very compelling multi-content offering. Something far out of the reaches of the current product roadmaps of any of the stand alone music services.
Can Apple afford to loss lead with music subscriptions to pursue such a strategy? Well, remember Apple’s entire digital music business has been built on loss leading. Whatever the final outcome, the mutual fear factor balance looks set to tip in Apple’s favour for a while.