Making Freemium Add Up

Today at MIDiA Consulting we have released a new report on the digital content sector entitled ‘Making Freemium Add Up’.

The report combines an unprecedented appraisal of key freemium service metrics with market analysis and recommendations to create a definitive assessment of the freemium marketplace.  In the report we analyse an intentionally diverse selection of consumer web services, looking at the distribution and scale of their user bases and the relationship of these with their business models.  Services tracked range from music services like Slacker, through utility services like Skype to social services like Google+.  It also includes long term data trend analysis of Spotify, Deezer and Pandora.

The report is available for free to all subscribers to Music Industry Blog (to subscribe just add your email address in the Email Subscription box to the right of this post.  If you are already a subscriber but have not yet received a copy of the report by email please email mark AT midiaconsulting DOT COM).

Here are some of the key findings of the report:

  • Inactive users: inactive user rates range from 13% to 77%.  Social services have the highest rates (77% for Instagram and 66% for Twitter).  Inactive users are a key characteristic of all registration based services with free-to-consumer tiers, but the registered-to-active rate is below average for all freemium services However freemium inactive users are also often highly interested customers who simply need hooking up with the right pricing and product. In short, freemium inactive user bases are priceless qualified marketing lead databases.  The challenge is to separate the wheat from the chaff, to differentiate between disinterested freeloaders and potentially valuable paying customers.
  • Paid users: paid user rates range from less than 1% to 90%.  But both ends of the scale are outliers.  At the low end Soundcloud’s premium tiers are aimed at the smaller audience of creators that are just a small subset of its 180 million active users. While at the other end Valve’s gaming platform steam is more digital retail store than pure freemium destination.   The risk for all freemium services is ensuring the free tier isn’t too good, unless free users are your key revenue source (cf Hulu and Pandora). Spotify and Deezer appear to have hit a conversion sweet spot, a solid balance between compelling free tiers and better enough paid tiers.
  • Scarcity counts: a music service user risks little by churning because he can still easily get all the same music elsewhere if he cancels his Spotify subscription.  But if you stop playing Angry Birds you’ll find few other places where you can hurl bad tempered feathered missiles at egg-stealing green pigs.  Similarly churning out of a social network carries a high ‘churn risk’ for consumers as they will weaken their ability to connect with extended social circles online
  • The free-to-paid divide needs narrowing: the gap from free to paid is high, a significant leap of faith is required from the user.  Whereas the gap from zero to $0.99 for Angry Birds free to paid is a modest step, from zero to $9.99 for Spotify or Deezer portable is a much more sizeable hurdle.  Thus converting to paid for music subscription services is a more sizeable achievement than for low priced gaming apps. More needs to be done to bridge the divide.  This can be achieved in through bundles and innovative pricing. Though this must be set against the risk of cannibalizing full price tiers.

making freemium add up

We Need To Talk About Streaming (again)

Last night I participated in a Music Tank seminar on streaming music.  It was a vibrant and valuable debate with a healthy diversity of opinion.  Below are brief highlights of my opening keynote, including some exclusive data from record labels and from Spotify.

Streaming isn’t the paradigm shift, increased convenience of music access is

Streaming is no new thing.  Napster, Rhapsody, YouTube have been with us for many years.  What changed is that Spotify made it work with elegant simplicity, wrapped up in a consumer-friendly value proposition.  Of course Spotify had timing on its side too, coming to market once most of us already had broadband and at a time when a rapidly growing share of us were getting smartphones with data plans.  And of course timing is everything in business.

Timing aside though, we should be careful not to get hung up on the idea of streaming as an alternative format to the download.  It is not.  It is simply a different delivery mechanism for digital music, and when you factor in cached streams the distinction blurs further.  Streaming versus downloading is tech speak.  All music fans are interested in is being able to listen to the music they want, when they want, where they want.

Rebooting the conversation

Streaming music, and Spotify in particular, has been cause of much controversy and debate of late.  I’ll come on to some of the causes later but it is first worth taking stock of what we actually do and don’t know about streaming.

  • What we know. Streaming is proving popular with consumers at a time when download growth is slowing. But many artists are not fully comfortable with the model and feel that they don’t get a fair enough deal.  A dynamic which is complicated by the fact there are many different types of artist deals.  Scale is key to streaming being successful (you don’t make money off dozens or hundreds of streams).
  • What we don’t know.  We don’t know yet whether streaming cannibalizes sales.  Whatever data you see on either side of the argument we are simply too early in the evolution of streaming to draw conclusions.  There simply isn’t enough empirical data.  We need a few more years yet and even then separating cause from effect is challenging at best.
  • What we suspect.  It is looking like streaming does help reduce the amount people use file sharing.  Again, the evidence isn’t definitive and there certainly isn’t sufficient evidence to suggest that the number of people using P2P etc is declining due to streaming, but intensity of usage perhaps.  Smaller artists don’t seem to do that well out of streaming.

 

Access based services are the first post-transition technology products

Any new technology looks more like what came before than what will come next.  After all we only have the past and present as our reference points. Thus when a new set of technologies emerge they begin with transition technologies.  The first car was a steam powered horse-less carriage (see figure 2).  It was a transition to the first internal combustion engine vehicle and it wasn’t until the 1950’s that we really started to see automobile form factors that had fully thrown off the horse drawn carriage heritage.  Digital music is no different.  The download was the steam powered horse-less carriage, a really useful transition tool to help us bridge the gap between analogue and digital, but just that.  Access based services are the first steps towards the internal combustion engine, services that leverage some of the unique capabilities digital presents, rather than just using the web as a delivery mechanism.  But it is still very early days, we are not even at the Model-T yet.

Putting streaming income into context

A number of record labels provided Music Tank with data illustrating the level of income across various platforms which can see here at aggregate level (see figure 3). This chart uses the income from a download as a base of 1 and then income from other sources as a multiple thereof, shown for labels and for artists.  Note that the artist data is 3rd party licensing income only and does not reflect songwriter income etc.   The data suggests that an artist requires 80 streams to match the income from one download.  However data from artists suggests it is more than 200 streams.  And this rate varies massively depending on the nature of the deal an artist has struck with their label (e.g. whether they are paid on a share of net income basis or on points) and what share intermediaries such as distributors take.  It is also impacted by what deal the label has struck with a service.   One smaller label claims, somewhat dubiously, that the rate for them is closer to 2,000 times.  Whatever the exact rate (and there isn’t just one) you have to  stream a lot of music to get the same income as a download, but much, much less than a web radio stream or radio listens.  It take more than 5,500 national BBC radio listeners to generate the same income as one download in the UK

The labels’ take on streaming

Some record labels also provided Music Tank with some of their views on streaming and how they see it in the bigger revenue picture. Quickly summarized these are:

  • Markets with a strong streaming sector also often have stronger overall digital growth
  • Streaming is now growing more quickly than downloads
  • Streaming can be 50% of an artist’s digital revenue in some markets
  • Streaming consumers and download buyers do not strongly overlap
  • Streaming subscriber ARPU is often higher than download buyer ARPU


Spotify’s take on streaming

Spotify also put some data on the table (see figure 4) showing how a major global artist’s catalogue fared following the release of their album the same day to stores as to streaming.  Obviously this data is positioned in the context of the cannibalization and ‘windowing’ debates (which I’ve contributed to here). The data doesn’t prove anything either way in terms of cannibalization (i.e. it could be interpreted as streaming activity does well when an album does well or it could also be viewed as lost buyer activity).  However it does make a compelling case for the degree to which an artist’s back catalogue can be significantly boosted on streaming following an album release. There are some well voiced concerns that streaming favours big name artists, the head rather than the long tail, but if it does then it appears to do a good job of mining the long tail of the head!

The potential of Spotify’s Developer API strategy: an API for Music?

In the last 6 months digital music has two developments of potentially seismic proportions that through their subtle brilliance many haven’t yet appreciated their actual importance.  One was Facebook’s content dashboard strategy.  The other was Spotify’s Developer API.  Of course APIs are no new thing, but if Spotify can reach a hundred million plus total users then its API has the potential of becoming a de facto API for music.   Allowing developers to skip seeking licenses from rights owners and using Spotify’s instead.  It is a crucially well timed move, coming just as investors are turning away from investing in services that require licenses (you may have noticed by now that impecable timing is one of Spotify’s strengths).  Investors have tired of funding license advances for services that often, as in the case of Beyond Oblivion, don’t even make it to market.  The labels still get their digital income but investors are left with a debt write off.  Index’s highly influential Saul Klein went as far as stating that he won’t even invest in  start-ups that require rights owner licenses.

Making the right comparisons

Crucial to the streaming debate is making the right comparisons.

  • Streaming does not = a download
  • Streaming does not = radio
  • But Streaming does = (download + radio) ÷ ??

The exact balance is in flux but the conversation must recognize that a direct comparison with either is off the mark.  What we don’t yet know, and won’t for a couple of years, is whether streaming is pulling its users from green field and thus growing the market in a truly additive manner, or whether it is instead catalysing the organic digital transition, converting those consumers who would have gone digital anyway.  If it is the latter then questions about the income from streaming users compared to other digital customers becomes a more pressing one.  If it is the former then it frees us up to look at the scale picture with fewer reservations.  If these customers simply weren’t ever going to adopt a different digital service then we can start to discuss how low we can bring pricing to drive even great numbers.  The elephant in the room is that £/$10 is just too much for mainstream consumers.  It needs to be close to £/$5 to really break into the mainstream.  And you can only make that business case with genuine scale.

Conclusions

  • It is too early to make conclusive judgements about streaming affecting sales or piracy in the near-to-mid term
  • Long-term, music consumption will shift from ownership to access
  • The streaming debate is clouded by conflicting artist statistics and concerns
  • More artists need to be better sold the story by labels and by the services themselves, and some deals may even need revisiting.  Greater transparency is key and record labels have a big role to play here – there’s only so much services can do themselves
  • Streaming is neither a radio replacement or a download replacement, it has some of the best of both

As for the legacy of streaming?  Streaming will help make Facebook the most important player in the digital music market by 2013.

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

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

Music products and services need segmenting into distinct windows

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

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

 

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

 

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

Coldplay is already pioneering the window strategy

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

 

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

 

 

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

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

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

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

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

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

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

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

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

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

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

Pandora
2011.
 Though 2011 wasn’t quite the coming of age year for Spotify it most certainly was for Pandora.  In June Pandora’s IPO saw 1st 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.

Spotify Takes A Step Towards Making Music The API

So somewhat expectedly Spotify announced their app platform.  Spotify’s announcement didn’t happen in isolation though.  We are moving to the next stage of the evolution of the Internet, the age of the App-enabled web.  That doesn’t mean apps are replacing browsers, rather that Apps are complementing and enhancing web experiences.  Sometimes this means instead of the browser, more often it means in the context of.  Once software was something you bought in a box and loaded onto your PC on a disk.  Now that software has been freed of the straightjacket of physical retail it is supercharging our digital lives, creating previously impossible experiences and functions.

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.

Why It Doesn’t Really Matter Whether Adele Sells More Albums Than Lady Gaga This Year

You may have noticed the unattractive furore surrounding Adele’s contest with Lady Gaga to become the biggest selling artist of the year.  The momentum appears to be with Adele, with her hugely successful ‘21’ album yesterday becoming the first ever album to sell more than 1 million digital copies on iTunes in Europe.

But the simple fact is that albums are no longer the definitive marker of success that they once were.  The shift from the distribution era of the album to the consumption era of the stream and the download have seen a shift from buying to free, and from albums to singles.  The download store allowed music buyers to deconstruct the album into cherry-picked bite size chunk; file sharing enabled people to stop buying albums altogether; and streaming let fans assemble single tracks into their own personal albums (i.e. playlists).

The digital transition makes a case for new measures of success

Income from live, merchandize and other sources have been becoming increasingly important for artists and yet we still measure an artist’s success in terms of how many units of music they sell.  Live revenues are certainly one measure, and of course radio.  But Facebook likes and YouTube views are becoming an increasingly important indicator of success also. And yet, measuring success is not as simple as choosing between one metric or another.  The music industry is in a transition stage, as is consumer consumption of music.  Thus we have a mixture of artists ranging from those that are clearly of the digital age and those that are transition artists, who are entirely contemporary artists but are more at home on a CD than they are YouTube.  I’d put Lady Gaga in the first camp and Adele in the second:  just as measuring Adele solely on her YouTube views would miss the mark, so measuring Lady Gaga on album sales alone would miss the mark.

The chart directly below illustrates the point further.  Here artists are mapped according to their total YouTube views and total Facebook ‘Likes’, with the bubble size representing the total number of albums sold globally.  I have picked a sample of artists that are, or have been, top tier and that represent a range of different artist career models.

A number of trends become apparent:

  • A new generation of artist is emerging. Lady Gaga may be the poster girl for the YouTube generation but she also shifts a good number of album units too.    Artists like Cuban American rapper Pitbull are the sharp end of digital age artists. With 1.5 billion YouTube views to his name and tens of millions of singles sold PitBull is a mainstream success story of the highest order, and yet he has sold fewer than 10 million albums.
  • Target audience counts. Coldplay and Adele are both top tier contemporary artists, and yet their YouTube views pale compared to Pitbull.  What they have instead are big album sales (50 million for Coldplay, 15 million for Adele).  Why the difference? Because Coldplay and Adele appeal most strongly to people in the their late 20’s and upwards i.e. the people who still buy albums. While Pitbull is much more youth focused.
  • The 100 million selling album artist is a dying breed.  Just in case you were wondering why Sir Cliff is in the chart, he achieved the not insignificant feat of selling 100 million albums. He was at his peak during the album’s apogee and although his digital stats are pretty modest, it is hard to see the likes of Pitbull or, perhaps, even Lady Gaga ever matching Cliff’s album sales.  That is not a reflection on those artists but instead on the changing dynamics of the music market.
  • The exceptional success stories break the rules.  Lady Gaga and Michael Jackson break the rules.  Lady Gaga is – by contemporary measures at least – a strong album artist as well being in a different league in YouTube and Facebook.  Michael Jackson was firmly an artist of the album apogee era and yet his unique profile has ensured that his success continued into the digital age, and by the rules of the digital age.
  • Facebook is the better measure of sustained, organic success.  The problem with YouTube is that it is susceptible to the impact of flashes in the pan.  An artist can have one or two massive YouTube hits and then disappear, or simply be early on in their career.  Facebook ‘Likes’ however are a better measure of longer term, organic popularity.  Take the example of Dev who has close to 300 million YouTube views  - which is nearly as many views as Coldplay.  Yet take a look at Dev’s Facebook ‘Likes’ and you find that she has just 256,00 compared to Coldplay’s 15 million.  YouTube is the key digital popularity measure but needs to be blended with other measures to be truly effective.

Many, rightly, think of YouTube and other free streaming services such as Spotify and Pandora as promotional and discovery vehicles, a digital equivalent for radio.  And yet they are also much more than that: they are increasingly the ends as well as the means.  The chart below shows the number of albums sold per YouTube view.  Cliff Richard’s rate dwarves the rest because his peak was in the album era and his remaining fans aren’t exactly widespread among millennials. But the overall trend is nonetheless compelling: for the true ‘YouTube Generation’ artists, the ratio is dramatically weaker than for album artists.

6 years ago Paul Myers – then CEO of Mp3 download store Wippit – told me that “rock n’ roll was dead”, that the last great album was ‘Thriller’ and that we would never see an album that successful ever again. I was sceptical at the time, but those words are appearing ever more accurate as each year passes.  Looking at the first chart above it is clear that no artist is ever going to come close to selling the amount of albums Michael Jackson did.  But artists will still be successful: we will see artists break the 2 billion YouTube views and we will see artists break the 100 million Facebook ‘Likes’.  As this transition phase continues to play out, artists will evolve how their careers work and the industry will increasingly have to change how it measures their success.  Companies like Music Metric are already starting along this path and the traditional sources of measurement such as Nielsen and the Official Charts Company are also evolving their approaches.  These shifts are crucial, because measuring an artist’s success isn’t just a marketing trick, it is the litmus test with which their fans relate and by which history will remember them.

Facebook Fallout

As if to prove that Facebook’s F8 announcements were truly seismic we are still feeling the aftershocks now.  Interestingly though it is Spotify who is feeling most of the effect of Facebook’s moves towards becoming a 21st Century Portal.

When Spotify was positioned centre stage at F8 (literally in the case of Daniel Ek)  it wasn’t immediately apparent whether this was just Spotify as the first among equals of the dozen+ digital music services included at launch.  Now the dust is settling it is becoming apparent (to misquote Orwell) that

All digital music services are equal, but some digital music services are more equal than others.

Facebook, Guardian or Gatekeeper?

There are many quite logical strategic and financial reasons why Spotify’s bond with Facebook is so close (shared investors, scale, momentum of brands, closeness of Zuckerberg and Ek etc etc).  But in my opinion it is more interesting to look at what the long term effect of the fallout may be:

  • Facebook: Gatekeeper of the ‘Socially-Enabled Web’. Over recent years Facebook has slowly been flicking the switch on its strategy of integrating itself into the wider Internet, first with ‘Likes’ across external web sites and now with features such as the Timeline, and a play for the Universal Log In (see below for more).  What Facebook is doing is placing a social (i.e. Facebook) layer across more and more of our external web experiences and also bringing more of our external web experiences into Facebook.  This is what I term Facebook’s Socially-Enabled Web strategy. As leading content destinations such as Spotify, Vevo and Netflix jump on board they have their eyes firmly set on the 800 million potential customers and turn a blind eye to the longer term implications their collective activity is facilitating.
  • Facebook’s Digital Music Gentleman’s Club: Spotify’s tighter integration raises questions about Facebook’s role as a curator of out digital content experiences. Rdio and Mog for example appear to be given less prominence than Spotify within Facebook. Rdio users have complained that Spotify’s ‘featured music service’ status overrides some Rdio functionality within Facebook.  Facebook creating a social layer for content experiences is one thing, but choosing who gets in and who does not is an another thing entirely.
  • A Nail In The Coffin for Ownership? Universal Music’s UK Director of Digital Paul Smernicki said he saw the F8 announcements as a ‘coming of age’ for streaming services and a shift to access rather than ownership. The emergence of the consumption paradigm has been something I’ve long expounded, but it is interesting to hear it come from the world’s largest record label.  (And from a record label that typically doesn’t just let executive comment ‘slip out’.)  The addition I’d add to the argument is that we are in a transition phase where additional, complementary blended access / ownership models will be crucial to mass market revenue migration.
  • Facebook Boosts Spotify Usage, Though From What Base? New usage metrics (from a third party measurement company) suggest that active Facebook integrated usage of Spotify rose from 3.25 million to 4.5 million following the F8 announcements.   Spotify report their ‘active’ users at c. 6.5 million, which means that if these 3rd party numbers are broadly accurate that only 50% of Spotify’s ‘active’ users in a normal non-F8 month are active Facbook integrated users.  It also means that Spotify’s 2 million paying subs represent 61% of this user base.  There are some important caveats: the measurement company suggests their data should be considered as directional rather than absolute. Additionally ‘active Facebook integrated’ users is not the same as ‘active Facebook users’ but it is a decent proxy for the most engaged Spotify users. Which raises questions about just how many more potential new premium customers are left to convert. Which in turn helps explain why Spotify is widening out the funnel with a ‘6 months free Facebook streaming’ offer.
  • Facebook and the Universal Log-In.  Perhaps the most contentious issue of all has been Spotify’s insistence on all Spotify users using their Facebook log in details to access the music service.  Which of course means that if you are not on Facebook you cannot use Spotify.  Faceboook’s 21st Century Portal ambitions don’t stop with adding that social layer to content.  The Socially-Enabled Web strategy requires Facebook to become the lock and key for our digital lives.  The concept of the Universal Log In concept is far from new. Many have tried and failed.  Facebook’s scale gives it a great chance of success, and if implemented well (i.e. gradually and on an opt-in not force-in basis) it will deliver great convenience and benefit for consumers.  What Spotify are guilty of is rushing it through in a heavy handed manner.  But doing so was probably part of the price of the centre stage positioning Spotify got given.  Note that Rdio and Mog have no such requirements.  Interestingly some premium Spotify users indicate that it is possible to get around the requirement by opting out of the timeline functionality within Facebook.  It will be interesting to see whether this is a bug in need of a fix or indeed a benefit for paying users.

Expect more  fallout from the Facebook announcement, but don’t expect Spotify and Facebook to fall out

It is likely that the fallout will continue over the coming days and weeks and that Spotify and Facebook will both consider making changes (Daniel Ek even reached out to the Twitterverse to ask directly for their feedback and stated he would make changes if need be).  Indeed one survey suggested 20% of Swedes could leave Spotify in light of the changes.  But when the changes do come, don’t expect them to be a change in strategy, instead simply a slowing of the timeline (no pun intended).

The harsh reality is that Facebook’s Socially-Enabled Web strategy is simply too important to be put of course by a few disgruntled streaming music fans.

Why Digital’s Next Steps Can’t Be Baby Steps

What follows are highlights from my speech at the Westminster Forum on the UK Music Industry 2011 and Beyond

I want to spend the next few minutes building the case that digital music is in a period of transition, a stage that presents us with a unique and ever narrowing window of opportunity to drive truly transformational change within the music industry.  The fact that this panel focuses on both retailing and licensing is emblematic of the convergence, nay collision, of product models and business models.  Collisions that help explain the current turmoil the music industry faces and in which the foundations for future growth lie.

So what exactly has gone wrong?

Firstly, digital retailing is looking increasingly unfit for purpose. It has failed in its key objectives, included in which is a failure to generate a format succession cycle.  With the cases of the cassette and the CD, these formats were firmly in the ascendency by the time their predecessors were in terminal decline, and they then went on to drive periods of unprecedented prosperity.   The same though patently does not apply to the paid download.  However if you swapped out paid downloads for MP3s then the line would be off the chart.  Consumer demand is not the problem.  Current digital retailing formats failing to meet consumer demand is.  And of course Apple’s closed iTunes ecosystem plays a massive role here too.

And if you look at the licensing side of the equation we have problems there too.  Rights owners and artists both feel they don’t get enough from Freemium cloud services, and yet the services themselves feel that they pay too much to those very same parties to be financially sustainable.  With cracks appearing right across the value chain it is looking increasingly like there are too few levers left to pull to fix the model.

Now as concerning as all this may be it doesn’t mean the end of the music industry, nothing like that in fact.  Instead it is simply the end of the beginning: the end of the first chapter in the digital music business.

What we have now are transition products that did a great job of starting us on the path out of the analogue era but their usefulness is drawing to a close.  The paid download is a sustaining innovation.  For those of you not familiar with Clayton Christensen’s ‘Innovator’s Dilemma’ this refers to the principle that companies essentially have two ways to innovate their products.  The first is that they can play the safe game where they tweak features and pricing to defend market share and revenue growth.  These are sustaining innovations.  Or they can take a gamble with disruptive innovations that have huge potential but also massive risk and can even shatter their existing business models.

Unsurprisingly most incumbent companies opt for the safe bet.  But the safe bet is often anything but safe, as it leaves an innovation vacuum which is swiftly filled by the competition, or in the case of music, by the illegal sector.  File sharing was the disruptive and transformational innovation of digital music, not the paid download. Added to this, innovation has been too heavily focused on business models and not enough on user experience. Now the music industry needs to create its own transformational innovation, putting user experience to the fore, before the informal sector does so….again.

So how do we get out of this situation?

Here’s my uber edited solution: two segments and three monetization models.  Forget for a moment the complex multi variant segmentation schemes you’ve painstakingly constructed. Think instead of consumers as those who will pay and those who won’t.  On the free side we have those consumers who are falling out of the habit of buying CDs and either haven’t discovered digital alternatives yet, or if they have they are perfectly happy with free services such as Pandora, Spotify, We7 and of course their killer app: YouTube.  Here also are all those pesky freeloading pirates – they’re not lost customers, but they’re probably not about to start paying 9.99 a month for Spotify Premium either.  And on the other side we have the highly engaged music aficionados.  This used to just be the ‘50 quid bloke‘ but sites like Pledge Music are creating a new generation of younger music fans who will pay good money for recorded music when they establish a direct relationship with artists.

The way to monetize these three groups is threefold: at the bottom of the hierarchy are ad supported free services for the passive majority and the freeloaders, where the contagion of free is legion; at the top there are premium services for the much smaller numbers of engaged aficionados (but they need an entire new generation of music products that are interactive, social and connected, a true successor to the CD – if all they have to chose from is 9.99 a month streaming rentals then this segment will dwindle to the few percentage points of consumers who actually pay those services); and in the middle we have the best balance of scale and ARPU, with subsidized services where third parties such as telcos and car manufacturers pick up some or all of the wholesale cost to make music feel-like-free or close-to-free for end users.  This is the monetization model which will pull in many of those who won’t pay and also those who are in danger of falling out of the habit of paying.

So there you have it: 2 segments + 3 monetization models = the foundation for a prosperous music industry in 2012 and beyond.

Spotify’s US Launch: First Take

Spotify finally today announced their excessively anticipated US launch. Protracted negotiations with the US labels turned this into one of digital music’s longest running sagas.  And although the $100 million of extra funding for label guarantees and advances seems to have successfully assuaged concerns, the labels weren’t just digging in their heels for the sake of it:  the US digital music market has a lot at risk in the face of Spotify’s arrrival and of course there are growing doubts about the Freemium model.

The label negotiations resulted in the last year in  limits being put on the free element of Spotify so that the full unlimited free offering that got Spotify off to such a great start in Europe will only be available to an initial swathe of invited users in the US.  Once the invite-user phase is over, free users will get 20 hours a month for 6 months, falling to 10 hours thereafter, along with a 5 plays-per-track limit.

When Unlimited Isn’t Actually Unlimited

The 10 hours / 5 plays mix is clearly intended to make people use Spotify as a complement to other services, not as a replacement.  Many listeners simply won’t bump into those restrictions.  Those that do though will be the more engaged music aficionados who will either have the will and means to pay for the unlimited premium offering, or will be young kids and those who can’t pay 9.99 a month and they will look elsewhere i.e. to YouTube and to illegal alternatives.

There is evidence to suggest that both might have happened in Europe: in March Spotify announced it had 1 million paying subscribers (something that no other premium services has yet achieved).  But they also announced that only 6.7 million of their total 10 million subscribers are active.  So a third of Spotify’s users either a) just got tired of the novelty of the service b) don’t use it much c) got fed up of the new restrictions and voted with their feet.  The likelihood is all three play a role.

This all matters because ‘just how free’ Spotify actually is will play a major role in deciding how similar an impact it will have in the US compared to Europe.

Spotify Will Be Net-Positive for the US Digital Music Market

My take is that Spotify will be successful and will also be disruptive but on balance will be net positive for the US digital music market (see figure).

Spotify has that priceless commodity: momentum.  More than that, they have mastered the art of maintaining momentum.  Most other services would have seen their momentum fizzle out in the face of a yearlong delay to a US launch.  Not Spotify. Instead they actually managed to use it to sustain momentum.  How?  Because of another of Spotify’s core strengths: scarcity.  Nothing drives demand like scarcity of supply.  Spotify built its European growth upon a perception of scarcity through its invite-only launch. It is set to do the same in the US, but with additional boon of massive pent up demand from US digital music fans who have had to deal with absolute scarcity this last year.

Can Spotify Afford to Be Successful in the US?

Until Spotify ramps up its US ad sales business every free user will be proportionately more costly than free European users.  But Spotify has learned a lot from its European experience.  It has learned which levers to pull to manage growth.  I expect Spotify to plan and manage US growth on a ratio-target basis, with free users never being allowed to exceed a certain share of total users.  E.g. the 50 million users target touted by an over-zealous Spotify ad sales exec would require 5 million paying subscribers to have signed up.  Spotify can’t afford to screw this up.  Getting the economics right will be crucial to a successful exit, which has surely got to be the next move.

What Do US Music Services Have to Lose?

If Spotify can be successful, to what extent will their gains come at the expense of the incumbent services?

  • Rhapsody, Napster, MOG, Rdio et al: the incumbent premium subscription services are right to be nervous: some of them have had years to make the model work yet haven’t managed to reach the 1 million subscriber mark.  Rhapsody has announced that it just hit 800,000 paying subscribers, but despite being 150,000 up from the last tally it is only 25,000 more than Q4 2008 which equates to a net gain of just 833 new subscribers a month. Rhapsody’s position is reflective of the overall stagnant nature of the premium subscription sector in the US.  Prior to Spotify the European subscription market didn’t even get out of the starting blocks, let alone have the chance to become stagnant.  So the US subscription services have good reason to fear Spotify as a premium player.  With the restrictions on free plays I don’t anticipate them losing many subscribers to Spotify Free though.
  • Pandora: whatever Pandora’s Tim Westergren says, Pandora will see some of its users defect to Spotify.  Yes it is a different value proposition and yes there are many users for whom Spotify will be no alternative.  But there will be those who simply tolerate not being able to listen to exactly what they want rather than perceiving it as part of the value proposition.  Those users, for whom free is the key driver, will be at risk.  Once again though, the limits on Spotify’s free tier should contain this threat to some degree.
  • Apple, Amazon and Goole: none of the big three really have much to fear given their different positioning and products but will watch for new Spotify product features cautiously.  They may even feel the need to accelerate launch of free on-demand streaming in their locker services (i.e. not just of users’ existing music collections)

So it becomes clear that the record labels have a done a decent job of engineering Spotify’s licenses in such a way that the incumbent US services face minimum competitive risk.   One hopes that this doesn’t also mean that Spotify’s wings have been clipped so far that it won’t be able to truly shine in the US.  Because Spotify has done a huge amount in Europe: bringing digital music to the mainstream and freeing it from the chains of the iPod.

I actually hope that Pandora and Rhapsody et al do feel some serious competitive pressure, so that they can focus on what they need to do better and then lean on the labels to give them the licenses to do so.  Because the best way the labels can drive the market is by using licensing to empower services with more functionality rather than using it to restrict disruptive threats.

Making Freemium Pay: An Artist’s Perspective

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

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

Slicing the Digital Income Pie

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

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

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

What Happens If / When Downloads Go Away?

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

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

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

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

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

Is Freemium No Longer Fit for Purpose?

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

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

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

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