The Great Music Industry Power Shift

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.

music industry revenuePerhaps 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’

 

 

Apple, Beats and Streaming’s Mutual Fear Factor

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.

What 10 Million Spotify Subscribers Actually Means

Spotify today announced that it had hit its much anticipated milestone of 10 million premium subscribers.  Make no mistake this is a highly significant achievement for Spotify itself and for the broader digital marketplace.  But it is a long way from mission accomplished. Here’s why:

  • Paid growth is flat: When a new technology enters into the marketplace it goes through a few stages of growth. Initial uptake is driven by the early adopters.  If it succeeds with them it breaks through to the early followers where growth really accelerates through to mainstream before slowing as the market saturates, creating the well know s-curve – see this graphic for how this process works.  Not all technologies follow this pattern though, some never break out of that early adopter niche.  Right now Spotify’s paid subscriber count looks firmly locked in that early adopter segment.  If growth rates sustain at this level it will be late 2016 before we see the 20 million mark hit.
  • Free however is booming: Spotify’s free user count though is showing dynamic growth.  In fact it is following the right trajectory for a technology breaking through.  What’s more the growth is uncannily similar to that of Pandora during the same stage of its growth (see figure below).  In fact by its 66th month Pandora had 39 million active users, while Spotify now has 40 million, also after 66 months.  If Spotify’s free and paid user bases continue to grow at their current rates the currently impressive 3-to-1 free-to-paid ratio will widen markedly.  Free is where the action is.  Just ask potential Twitter suitor Soundcloud with its 250 million active users or YouTube with its 1 billion active users.
  • Paid users still biased to the aficionado: Key to the paid growth problem is that 9.99 subscriptions are the domain of the super fan, the engaged, high spending music aficionado.  And this is very much a music subscription phenomenon rather than an issue with digital subscriptions more broadly. While 60% of music subscribers are male and 48% of them are aged 25-34, 54% of video subscribers (Netflix, Amazon Prime) are female and just 35% are aged 25-34.
  • Churn is likely slowing growth: Being an early stage growth company is great fun but when your business starts to mature attention switches to the much more mundane task of managing churn i.e. making sure the rate at which people stop paying for your product is slower than the rate at which they join.  It sounds deceptively easy but it is in fact a vastly complex discipline and Spotify will be focussing an ever larger share of its resources on it.
  • Twitter’s depressed stock price may slow an IPO: An IPO remains Spotify’s most likely exit and hitting the 10 million mark with an impressive free-to-paid ratio was always going to be a prerequisite for that process.  However as I wrote last year, the performance of Twitter’s stock price will play a key role.  As illogical as it may seem, many investors will look at Twitter’s stock performance as an indicator of how Spotify may fare.  Right now Twitter’s stock is bombing.  Spotify will probably want to wait for that to hit a positive trajectory before moving ahead with an IPO, should that be its planned course of action.  Though I’m sure Spotify will be keen to point to the much better long term story of Pandora’s stock as a reference point.

So, 10 million premium subscribers is a fantastic milestone for Spotify and for the digital music marketplace, but it raises as many questions about the 9.99 model as it answers.

free steraming growth

Apple: The Bigger Beat

As a music industry analyst, my post last Friday on the rumoured Apple / Beats deal focused squarely on the Beats Music part of the equation – if you are a hammer everything looks like a nail right?  There are of course much bigger pieces in play than an unproven music service, so to illuminate some of the bigger picture, here are some of the broader product strategy implications of what the deal could mean if it does close:

  • Wearable tech: Apple is a consumer tech company whose reputation for innovation was dented in recent years while it grappled with the challenge of retaining relevance for the mass market with a limited device portfolio while at the same time trying to nudge the innovation needle forward.  Wearable technology is an area in which Apple can innovate bravely while leaving its more mainstream phone and tablet product lines to evolve at more conservative paces.  The nascent nature of the wearable tech space means that there is much that Apple can do to both push the boundaries and gain innovation kudos.  Beats is a wearable products company, Apple is a portable technology company.  It is a wearable tech partnership waiting to happen.  Beats could even conceivably be the Apple brand / division for wearable tech, keeping it cleanly differentiated from the core device business.Whether the outcomes would be smart headphones, fitness devices, smart watches etc. almost doesn’t matter.  The important implication would be that Apple would have a fantastic platform and brand for opening up new markets.    For more on the wearable tech angle, watch this fantastic video blog from my former Forrester colleague James McQuivey
  • Segmenting music consumers: When Apple’s portable device business portfolio consisted of iPods alone it was immediately obvious who the music fans were within its customer base.  Now it is far more difficult for Apple to identify the media preferences of potential customers until they have actually started using an Apple device.  That is one of the retailing implications of producing multi-purpose devices. But start selling device-headphone bundles, or even device-headphone-music service bundles and Apple will find itself with a highly effective tool for targeting the music aficionados.  These super fans can be sold premium music products without the risk of alienating other customers with premium price points in the main product portfolio.
  • Reinvigorating the brand: Apple is not a high-end brand and never has been.  Instead Apple plays in the same brand space Sony did in the 1980s and 1990s, namely that of the aspirational premium mainstream: the top end of the mass market and just scraping the lower reaches of the upper echelons.  But the price Apple has paid for large-scale success is that its user base and brand have crept downwards.  No product can take more blame than the iPhone: the smartphone market is the most commoditized of sectors, with fixed replacement cycles, carrier subsidies, fierce competition, aggressive marketing all reducing brand loyalty and value.  Beats, for all the criticism of the technical quality of its headphones, has created an aspirational, youth focused brand built on the foundations of the aesthetics of quality.  Like Apple, Beats is a brand focused on the upper end of the mainstream and would be a great strategic complement, presenting the opportunity for Apple to reinvigorate its core brand values and at the same time enhance youth resonance.
  • Putting cash to work: Apple is a very cash generative business with an investor community that has consistently higher expectations than Apple is able to deliver on.  Consequently Apple has had to face the paradoxical situation of delivering results of unprecedented quality only to see tepid investor response.  Couple that with ever growing demands to redistribute its vast cash reserves to investors in the form of dividends and it is little wonder that Apple has been on something of a spending spree of late.  Spending big on Beats kills two birds with one stone: it puts cash to work and sends a strong message to investors.

Whatever happens to the prospective deal, what it clear is that there are countless potential benefits to Apple.  And if the deal does not transpire then it is equally clear that Apple either needs another such partner quick, or instead needs to put its cash to work right away on addressing each and every of these strategic permutations.

What Acquiring Beats Could Do For Apple (And Everyone Else)

Stories emerged last night that Apple is in talks to buy Beats, citing well-placed sources. If true – and if it actually goes through – the acquisition has countless potential impacts of seismic proportions, particularly if the deal includes nascent subscription service Beats Music. Apple has always been in the business of selling music for the business of selling hardware, and the potential acquisition must be considered in those terms. With download sales declining and subscriptions gaining traction, Apple has been locked in a process of soul searching, trying to work out what it can do to remain relevant in the digital music business in order to remain relevant in the device business. Beats is a ‘if you can’t beat them, buy them’ solution.

download slow down

There are a number of key considerations and potential impacts:

  • Digital music Plan A has run its course: Despite dynamic growth in Northern European markets, digital music growth nearly shuddered to a halt in 2013, slowing from 11% year-on-year growth in 2012 to just 2% last year, and that is unlikely to be much higher than 4% in 2014. The reason is quite simple: streaming subscriptions are, outside of Northern Europe, predominately converting the most valuable download buyers – who are most often iTunes buyers – into subscribers. Aficionados who bought a few digital albums a month are instead spending 9.99 a month. So instead of bringing up the average spend of music buyers it is bringing down the spending of many – I’ll be publishing some data on this in the coming weeks. Digital music needs a Plan B to reinvigorate growth
  • Apple is paradoxically holding back digital growth: Apple almost singlehandedly created the global digital music in the 2000’s but it is now actually holding back growth in the 2000’s. Streaming has taken off most quickly where Apple never got a foothold (see figure). Where Apple is firmly established streaming is a transition story, of download revenue shifting to streaming. Where it is not, streaming is green field growth. An interesting side effect of this is that because English speaking Apple has prospered most in English speaking markets, it is in these countries – US, UK, Canada, Australia, all of which are top ten music markets – where digital growth is now slowest. Apple has inadvertently passed the digital baton to the non-English language world.
  • Apple’s go-slow streaming strategy is too slow: All this translates into weakening digital relevance for Apple, which infers weakening hardware relevance. Apple has been here before, back in the heyday of Last.FM when Apple was still predominately a computer business, it tried to steal the social music revolution’s clothes with the launch of the now-defunct Ping and the just-about-still-around Genius. Yet Apple came out of that era stronger than ever. Now though, portable devices are the beating heart of Apple’s business, and with the relentless onslaught of Android it cannot afford its next music move to be another Ping. However Apple has had to go slow with streaming. Its user base is more mainstream than ever – as the growing popularity of Now compilations in its store attests – so it has to introduce new features in a way that does not overwhelm its less tech-adventurous customers. iCloud and iTunes Radio are great transition technologies to help introduce streaming to Apple users at a steady pace and to demonstrate clear relevance in the iTunes context. Unfortunately this long-term strategy for its mainstream users has done little to halt the defection of its more sophisticated and, crucially, most valuable, customers. Beats Music could be the defensive strategic option for them.
  • Subscriptions don’t have to be AYCE 9.99: 9.99 AYCE services have done a great job of monetizing the super fans, but with less than 5% penetration in major music markets, there is a clear need for something else for the more mainstream fan in top 10 music markets. Cheap priced subscriptions and telco hard bundles are both solutions to this problem. Apple should not feel compelled to jump on the 9.99 bandwagon. Digital content stores are breaking down the genre walls – as Google’s Play demonstrates so well. Apple gets much more revenue from other content genres – see this figure – so a multi-content genre subscription would be a much cleaner fit for Apple. As would a subscription that gave users a certain amount of credit to use on any iTunes products, sort of a virtual iTunes Gift Card subscription. Pricing would be blissfully simple – e.g. $10, $20, $30 etc. – and would help protect Apple from revenue cannibalization until it makes the full switch to access from ownership. $10 could include ad-free iTunes Radio, $20 and upwards could include unlimited music streaming.
  • Apple could make hard bundling work, and some: If Apple does get Beats Music, it would have an unprecedented opportunity to make bundled subscriptions work. Hardware has always been key to making digital content work, whether that be the Kindle, Xbox, Playstation, iPhone or the new generation of Content Connectors like Chromecast. Subscriptions are working now because Apple opened up a chink in its vertically integrated ecosystem armour by allowing streaming services to exist on its devices. In fact mobile access is responsible for the majority of the 9.99 model’s growth. Retailing an iPhone / Beats headphones subscription bundle would communicate clear value to users, and with the cost largely hidden in the premium price point associated with the bundle, could help consumers get over the hump of committing to monthly spending.
  • Beats would redefine Apple as a CE company: The implications on Apple’s device portfolio are intriguing tool. The simplicity of Apple’s limited product range has always been key to its success. Being able to retail a single phone when competing with the excessively vast portfolios of incumbent smartphone companies was a major differentiation point. Since those first iPhone days though Apple has multiplied its number of product SKUs. Incorporating a range of headphones would take that to another level. Whether Apple has the ability to seamlessly transform from a computer company with a small range of portable computing devices, to a fully-fledged CE company remains an intriguing open question.

There is no doubt that if Apple does buy Beats and Beats Music, that the impact on the competition will be dramatic. Spotify will be rightly worrying about the impact on its impending IPO – though expect words to the effect that this is simply a resounding validation of the model. But the competition should be welcomed. To date most digital music services have been strategically lazy, focusing their efforts on trying to sell new products to already existing digital customers, the majority of whom, in the big markets at least, are Apple customers. Now digital music companies will have to start thinking much more creatively about how they can compete around, rather than with Apple. About how they can create revenue in new consumer segments, not simply trying to extract more revenue from the preexisting ones. Some companies are doing this already but they are in the distinct minority – this should be a good time for them. If Apple does buy Beats, it will bring some much needed momentum to market that was beginning to suffer from hubris.

Content Connectors: How the Coming Digital Content Revolution Will Change Everything

In my previous blog post I explained that 2014 was going to be the year of taking digital content into the home.  That affordable devices such as Google Chromecast, Apple Kindle Fire TV, Apple TV and Roku are set to drive a digital content revolution by connecting digital content with the familiar context it needs for the mass market.  These Content Connectors will transform consumers’ relationship with digital content but they will also turn the existing digital content marketplace on its head:

  • Breaking down the home entertainment silos: our digital content experiences have evolved entirely isolated from our other media experiences.  We multitask because one device is connected and one is not.  Our homes have become a collection of content experience silos.  Content Connectors break down those walls, brining our digital content experiences onto that most un-connected of devices, the TV.
  • On-boarding late adopters: In most developed markets, most consumers are digitally engaged, using Facebook, YouTube, email, tablets etc. on a daily basis. These are digitally savvy later adopters, where their behavior lags is in paying for content.  Sure, some will never pay, but others simply haven’t yet been given a solution that makes sense to them.  Content Connectors can change that by giving digital content experiences familiar context in the home.
  • Smart boxes will leave smart TV’s still born: TV manufacturers are still figuring out how to deal with the hangover of having accelerated the TV set replacement cycle too aggressively with HD.  Too many homes have perfectly good HD ready flat screen sets that they won’t need to replace anytime soon.  So manufacturers are desperately pushing 3D and Smart TVs as a reason to replace.  The problem, for TV makers not consumers, is that Content Connectors turn ‘dumb’ TVs into Smart TVs for a fraction of the cost. A TV isn’t a computing device but plug a Content Connector into it and it becomes one.
  • Breaking down media industry walls: Hardware used to create great big walls between different content genres. TVs were for broadcast video, DVDs for recorded video, CDs for audio, games consoles for games.  Multifunction devices such as smartphones and tablets started to erode those barriers by being content genre agnostic.  Apple’s iTunes Music Store became the generic ‘iTunes Store’ and now Content Connectors want to take this paradigm shift even further by freeing the biggest screen in the home form the constraints of broadcast video.
  • Leaving stand-alone stores and services stranded: The disruptive threat of the TV’s liberation is immense.  Broadcasters instantly lose their monopolistic hold on the TV and find themselves in the middle of a disruptive threat pincer movement: first non-traditional broadcasters like Netflix and YouTube can get themselves right into the traditional TV heartland; secondly non-video content suddenly finds a home on the TV, whether that be music, photos or games.  No matter, all of it competes for TV viewing time.  And no coincidence that Amazon’s Kindle Fire TV is equipped with a game controller.  What’s more, if you only offer video – which of course applies to most TV broadcasters – you look decidedly limited in the Content Connector era of multi-genre content offerings.
  • Using the TV to get consumers over the ‘ownership hump’: While industry leaders obsess over how to make subscription business models work, most mainstream consumers have not even started thinking about moving from the ownership paradigm to a consumption one.  That shift will need a generation to truly play out but Content Connectors will give the process an initial adrenaline shot.  How?  By putting digital content onto the device that consumers already associate with ephemerality.  The TV is not an ownership device nor has it ever been one.  At most it is a device on which temporary copies are viewed before being deleted.  But the majority of the time it is purely access based content consumption.  So getting mainstream consumers used to accessing but not owning digital content via the TV is the perfect environment for making an entirely alien concept feel strangely familiar.
  • Another changing of the guard: The reversing into the CE market by internet, software and PC companies was the biggest disruption the CE sector ever endured.  The likes of Sony and Yamaha used to compete in an almost chivalric manner, agreeing on standards and then competing on implementation.  Google, Apple and Amazon pursue no such niceties and compete with incompatible platforms and technology, and in doing so are wining the CE war.  The Content Connector revolution is helping the same thing happen to content distribution.  A new generation of content providers are emerging that collectively have their eyes set on world domination.

The coming shift in the digital content markets could occur at breakneck pace.  Within five years Hulu and Netflix could easily have a 100 million paying subscribers and YouTube’s ad revenue could easily be near $8 billion.  If the transition process goes the whole distance traditional content walls could disappear entirely.  Google Play could move from selling video, apps or music to simply asking consumers: “How would you like to enjoy this content? Watch? Listen? Or Play?”  Traditional broadcasters and media retailers should be scared, very scared.

Why 2014 Will Be the Year of Taking Digital Content into the Home

2014 is shaping up to be the year that the chasm that separates consumers digital content experiences and their home entertainment is bridged.  Amazon, Apple and Google have all embarked on a quest for the lower end of the market with Amazon Fire TV, Apple TV and Chromecast respectively.  Meanwhile a host of interesting new specialized music entrants are making waves, including Pure’s Jongo and forthcoming devices such as Fon’s Gramafon and Voxtok.  And then of course there’s the granddaddy of them all Sonos, that continues to go from strength to strength with an ever more diverse product range and list of integrated music services.

Regular readers will know that I have long held that the living room (along with the car) is one of the two final frontiers for digital music.  The great irony of digital music’s brief history to date is that it has transformed music from a highly social one-to-many experience across speakers into a highly insular and personal one delivered through ear buds on phones, MP3 players, tablets and PCs.  It is no coincidence that streaming music services desperately attempt to artificially recreate the missing social element with the blunt tool of pushing play data into people’s social streams.  To be clear this is not to take away from the personal consumption renaissance, but instead to illustrate that music is disappearing out of the living room and other home listening environments.  When the CD player disappears out of the home – and it is doing so at an accelerating rate – for many households music amplified music playback disappears too.  This is why digital music needs bringing into the living room, the den, the kitchen, right across the home.  It is a concept I first introduced in 2009 at Forrester, and revisited for Billboard early last year and again here later in 2013.

We Are Entering the Fourth Stage of Digital Content

Getting digital content into and throughout the home is the next stage of the evolution of web-based content.  The first stage was getting it there (Napster), the second was getting it onto consumers’ portable devices (iTunes), the third was providing frictionless access (YouTube, Spotify, Netflix) and now the fourth is getting it into the home.  This fourth stage is in many ways the most challenging.  All of the technology that underpinned the first three stages was computing related technology (PCs, MP3 players, smartphones, tablets).  All of those device types are a) highly personal and b) have evolved as computing enclaves within our homes.  Besides the niche of households that have smart TVs or web connected radios, the majority of the devices that the majority of households spend the majority of their prime media consumption time with (i.e. radios and TVs) remain separate and disconnected from the computing centric devices.  The fact that the computing devices are heralding a new paradigm of consumer behavior – media multitasking – only highlights the separation of the two device sets.  Indeed the vast majority of multitasking time is asynchronous (e.g. checking Facebook or email while watching TV) rather than being an extension of the primary media consumption behavior.

Efforts are Focused on the TV

Chromecast et al are all designed to bridge that divide, to turn our key non-computing home device – the TV – into a quasi computing device, so that we can bring our digital content experiences into the home entertainment fold.  This, as Amazon, Apple and Google all know, is where the battle for the digital entertainment wallet will be waged.  The downside for the music industry is that the TV device focus will naturally skew the dialogue to video content, which is why Sonos and the growing body of specialized music home devices are so important.  If the industry relies too heavily upon TV centric devices to lead the home charge, it will be left fighting for scraps rather than being centre stage.

Context is Everything

However labels, music services and hardware companies (including Amazon, Apple and Google) already need to start thinking beyond just getting digital music into the home.  They need to think about what extra relevance and context home music experiences should deliver.  The likelihood is that the rich UIs of PC, tablet and smartphone apps will have to recede, in the near term at least, to allow simple, elegant device experiences.  In effect they will need to almost get out of the way of the consumer and the music.  In some respects this echoes the ‘zero UI’ approach of app-of-the-moment Secret.  Which in turn means that curation and programming will become the key differentiation points.  Not in the sense of ‘here are three artists we think you’ll like based on your prior listening’ but real programming of the type that has helped radio remain the single most widespread music consumption platform throughout the digital onslaught.

2014 will be the year that the divide between the computing devices and the traditional entertainment devices in the home will start to be bridged.  But that is simply the enabler not the end game.  It is once the divide has been bridged that the real fun begins.

Streaming’s First Steps into 2014

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

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

Digital Colonialism

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

Super Cheap Flat Rate Access

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

Scale Does Not Impact Everyone in the Same Way

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

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

MusicQubed Puts the Rise of Listen Services Into Numbers

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

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

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

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

Will Listen Services Define the Next Phase of Digital Music?

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

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

4th phase

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

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

IFPI and RIAA 2013 Music Sales Figures: First Take

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

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

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

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

The Download Is Not Dead Yet

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

service bubbles

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

Sleepwalking Into a Post-CD Collapse

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

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

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

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