Why It’s Time For A Streaming Pricing Reset

There is a growing realization that that streaming revenue is not growing quickly enough to offset the impact of declining download sales. It is an eerily familiar echo of the recurring narrative of the noughties that download sales were not growing quickly enough to offset the impact of declining CD sales. The situation is very different now in that the industry licenses the disruptive force. Back in the noughties the combined impact of changing consumer behavior patterns, growing piracy adoption and the loss of content scarcity were factors the industry had little control over. Yet this present shift is more fundamental and will have much bigger long term impact. This is the shift to the consumption era. Streaming happens to be the tool of the moment for harnessing that shift but with current pricing strategy the industry’s toolset is woefully unable to fully harness the massive potential that exists.

Zero to 9.99 Is Too Big A Leap

The single biggest issue is the binary nature of streaming pricing: 9.99 or free. (Sure there are desktop versions for less but the desktop is yesterday’s consumption platform and is no longer a useful differentiator for price.) The leap from zero to 9.99 is simply too big. Even a 30 day trial still leaves the consumer with the same zero to 9.99 leap at the end.

streaming pricing

Streaming pricing strategy is simply not aligned with consumer music spending (see figure):

  • Super fan aficionados tend to spend between $10 and $30 a month but many are now shifting down to $9.99 a month
  • Mainstream music fans spend less frequently and at best average less than $10 a month, most typically just a few $. $9.99 is just too much for them as is regular spending, so they end up streaming for free
  • Passive fans used to spend occasionally now typically spend nothing and are core users of free streaming, YouTube especially

So streaming is bringing down the spending of the super fans and missing the spending of the mainstream fans.

Most music fans (i.e. not the super fan aficionados who by definition most of the people reading this blog are) engage with music in a very event driven manner. They have their favourite artists and they engage with them when they are in cycle with a new single, album, tour etc. That used to mean buying an album or some tracks, and it still means buying concert tickets. But these days for the digitally engaged mainstream fans it most often does not include buying anything. Instead they stream for free from YouTube, Soundcloud, Pandora.

Just to make things worse, the super fan aficionados are now spending less because of streaming. 23% of them used to buy more than an album a month, now they spend 9.99 a month and that spending is spread across a far greater quantity of music, meaning a smaller pie is being divided into even smaller slices.

Three Ways To Fix Streaming Pricing

It wasn’t meant to be this way. A high tide was meant to rise all boats. Mass market music fans were meant to increase their spending to 9.99. The aspiration is reasonable enough, these same consumers have been persuaded to pay for mobile phone subscriptions over the last decade, and many have adopted Netflix and Amazon Prime too. But it will take some time to get them there and they need a helping hand in the meantime.

There are a number of tactics that will set up streaming to capitalize on the mainstream music fan opportunity:

  1. More price tier differentiation: this means cheaper tiers ($2, $3, $5) to capture spending across a broad a range of consumers as possible
  2. Reduce the main $9.99 price point to $7.99: to capture the upper band of mainstream fans, while adding a $12.99 tier for super fan aficionados who want extras like high quality audio, bios, photos, exclusives etc.
  3. Introduce PAYG / Top Ups: the mobile phone business needed PAYG to take phone subscriptions to the mainstream – they were an unfamiliar concept consumers needed to experience to understand the value of. The same applies to music. But also it gives tentative consumers the benefit of the long term relationship without the commitment

Universal’s Lucian Grainge stated at the WSJD conference this week that revenue from subscription services is simply not enough to stem the decline of downloads and CDs. As things stand he is absolutely right. But fill the chasm between free and paid with a diverse range of pricing options and that will change. Virtually every consumer market, whether it is phones, supermarkets or cars has a segmented pricing strategy, now it is time for streaming to benefit from the same approach. The alternative is leaving most of the potential spend on the table.

What the Numbers Tell Us About Streaming in 2014

By the end of 2014 streaming revenues will account for $3.3 billion, up 37% from 2013. However headline market value numbers only ever tell part of the story. Just as important are the numbers on the ground that give us some sense of where the money is flowing and of the sustainability of the business models. During the last two weeks we have been fortunate to have four different sets of data that go a long way to filling in those gaps:

Each is interesting enough in isolation but it is the way that they interact and interdepend that gets really interesting:

  • Sustainability: A lot is rightly made of whether the subscription business model is sustainable. Spotify has showed us that, at least in a local subsidiary, an operational profit can be turned. However that profit rate was just 2.5%, does not account for previously acquired losses and also does not account for the broader company’s cost base where many of Spotify’s other costs lie. 2.5% is a wafer thin margin that leaves little margin for error and would be wiped out in an instant with the sort of the advertising Spotify has been using in the US. Meanwhile Soundcloud have demonstrated that it is also entirely possible to post a heavy loss even without rights costs. Soundcloud is going to need every ounce of its investor money and new revenue streams when it adds a 73.2% rights cost to its bottom line (though Soundcloud is doing all it can to ensure it doesn’t have to play by those rules and instead hopes to operate under YouTube’s far more preferable rates).
  • Transition: Nielsen’s US numbers should finally remove any lingering doubt about whether streaming is eating directly into download revenue. As MIDiA Research revealed last month, 23% of streamers used to buy more than an album a month but no longer do so. Streaming is converting the most valuable downloaders into subscribers and in doing so is reducing their monthly spending from $20 or $30 to $9.99. The combined effect of the perpetual decline of the CD and now of the download make it hard for streaming to turn the total market around. That won’t happen globally until 2018, though in many individual markets streaming driven growth is already here. Spotify pointed to bundles with the Times of London newspaper and mobile carrier Vodafone as key sources of growth in the UK. This sort of deal points to how subscriptions can break out of the early adopter beachhead and drive incremental ‘found’ revenue.
  • The Ubiquity of Free: YouTube, Pandora, Soundcloud and Spofity free are among the largest contributors to streaming’s scale. Some business models are more proven than others – Pandora looks better placed than ever to be a central part of the long term future of radio. YouTube’s role remains controversial though. Its proudly announced $1bn payout milestone is less impressive when one considers Content ID was launched in 2007 and that this is all rights holders, not just music. So let’s say 60% was to music rights holders, over the course of seven years that averages out at $0.07 per year for each of YouTube’s current one billion monthly users. That’s a pretty small return for the globe’s biggest music service.

We are clearly still some distance away from a definitive set of evidence that can tell us exactly what streaming’s impact will be. But in many ways it is wrong to wait for that. There will never be a truly definitive argument. Instead the world will continue to change in ways that will better fit the streaming market. It is a case of streaming and the industry meeting half way. This is exactly what happened with downloads. Early fears that downloads would accelerate the demise of the CD and instigate the decline of the album were both confirmed but the music industry learned how to build a new set of businesses around these new digital realities. The same process will take place with streaming.

We are already seeing some remarkable resilience and appetite for change from artists, from DIY success stories like Zoe Keating, through veteran rockers like Iggy Pop, right up to corporate megastars like Ed Sheeran. These are as diverse a collection of artists as you could wish for but they are united in an understanding that the music industry is changing, again, and that simply bemoaning the decline in sales revenue will not achieve anything. Of course it sucks that sales revenue is falling and of course its infinitesimally easier for me to write these words than to live them. But that sort willingness to evolve to the realities of today’s rapidly changing market will set up an artist with the best chance of surviving the cull. The old adage rings truer than ever: adapt or die.

Digital Ascendency: The Future Music Forum Keynote

I recently keynoted the annual Future Music Forum in Barcelona.  These are some highlights of the keynote.  If you would like the full slide deck please email me at mark AT midia research DOT COM.

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Streaming is turning years of music business accepted wisdom on its head but did not arrive unannounced, it is just one chapter in the evolution of digital music. Each of the four phases of digital music have been shaped by technologies that solved problems. Now we are entering the fourth phase, bringing meaning to the 30 million tracks Spotify et al gave us access to. This might look like a simple honing of the model but it is every bit as important as the previous three stages. 30 million tracks is a meaningless quantity of music. It would take three lifetimes to listen to every track once. There is so much choice that there is effectively no choice at all. This is the Tyranny of Choice.

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But the for all the evolution, today’s digital music marketplace is an unbalanced one. We have more than 500 music services across the globe but too many of them are chasing after the same customers with weakly differentiated offerings. This wouldn’t matter so much is if the competition was focused on where the consumer scale is, but this is anything but the case. The majority of paid music services are targeting the engaged, high spending Music Aficionados who represent just 17% of all consumers.

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The consequences of the imbalance in digital music strategy are also easy to see in total revenues. The last decade has been one of persistent decline in recorded music revenue and by 2018 the most likely scenario is one of stabilization rather than growth. This is because of a) the CD and b) the download.

No one has taken the demise of the CD seriously enough. It still accounts for more than half of global revenue and more than three quarters of revenue in two of the world’s biggest music markets. Yet far too many CD buyers are being left to simply stop buying entirely because they see no natural entry point into the digital services market. No one appears to be putting up a serious fight for them. Meanwhile the streaming services that have been chasing those same aficionados that Apple engaged are now busy turning that download spending into streaming spending, which ends up being, at best, revenue transition rather than growth. Consequently CDs and downloads will end up declining at almost the same rate over the next five years.

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Nonetheless the imbalance remains. Part of the reason we got into this state of affairs is the music industry’s obsession with revenue metrics: chart positions, market share and ARPU. Compare and contrast with the TV industry’s focus on audiences. It is time for the music industry to start thinking in audience terms too.

When we do so we see a very different picture. Here we have the US digital music market plotted by revenue and by audience size. Subscriptions pack a big revenue punch but reach only a tiny segment of the market while YouTube has vast reach but delivers remarkably little in terms of direct revenue. Meanwhile downloads, for all their doomed future, are still by far the best combination of scale and revenue.

The issue of free services stealing the oxygen from paid ones is a perennial one and is effectively a digital rerun of the never-to-be-resolved radio driving or reducing music sales debate. But it has far more impact in digital. With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination. When they don’t lead to sales can they really be called discovery anymore?

Free is of course the language of the web. The contagion of free is legion. And free is where the audience growth is. This is the circle the music industry must square.

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For 15+ years the music industry has been running to catch up, never quite able to get ahead of the game, an unavoidable feature of the process of digital disruption.   But although the consumer behaviour shift is inevitable the future direction of the music business is not and it will be shaped most by three key factors:

  1. The continued evolution of consumer behaviour
  2. Technology company strategy
  3. Income distribution

Consumer behaviour. The most important consumer behaviour trends are not the steady transition of the Aficionados or even the Forgotten Fans but of the next generation of music consumers, the Digital Natives. Free and mobile are the two defining elements of their music behaviour. Of course younger people always have less disposable income, but there is a very real chance that we are beginning to see demographic trends locking in as cohort trends that will stay with these consumers as they age. For a generation weaned on free, the more free you give them, the more they will crave it. Whatever course is plotted, success will depend upon deeply understanding the needs of Digital Natives and not simply trying to shoe horn them into the products we have now that are built for the older transition generation.

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Technology companies: Apple, Amazon and Google each in their own ways dominate digital music. But most importantly they all want very different things from it. For each of them music is a means to an end. All are willing to some degree to loss lead on music to achieve ulterior business objectives. All of which is great for labels and publishers as they get their royalties, advances and equity stakes. But for the pure play start up it means competing on an uneven footing with giant companies who don’t even need music to generate a revenue return for them.

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Revenue distribution: Artists and songwriters found their voices in recent years. Partly because of the rise in social media but also because so many are now paying much more attention to the business side of their careers. The fact they are watching download dollars being replaced by streaming cents only intensifies matters, as does the fact that the top 1% of creators get a disproportionately large share of revenue. It has always been thus but the signs are that the disparity is becoming even more pronounced in the streaming age, with the effects felt all the more keenly because unless you have vast scale streaming can too easily look like chicken feed to an artist compared to download income.

But artist and songwriter discontent alone is not going to change the world. Their voices are just not powerful enough, nor do most fans care enough. Also labels and publishers remain the most viable route to market for most artists. Matters aren’t helped by the fact that artists who demand an audit of their accounts to work out where their streaming revenue has gone swiftly accept their label’s hefty silence payment and the accompanying NDA. Artist discontent while not decisive in impact is beginning to apply important pressure to the supply end of the music business.

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So those are the three big challenges, now here are three sets of solutions. And I should warn you in advance that I am going to use the P word. Yes, ‘Product’.

I get why product sounds like an ugly word. It’s a term you use for baked beans, for fridges for phones. Not a cultural creation like music right? True enough, when we’re talking about the song itself, or the performance of it, product is irrelevant. But as soon as we’re talking about trying to make money out of it as a CD, download, stream or however, then we’re firmly in the territory of product. It is both naïve and archaic to think otherwise. When artists got megabucks advances and never had to worry about the sustainability of their careers and everything revolved around the simplicity of CD sales you could perhaps be forgiven for turning a blind eye. But now there is no excuse.

So with that little diatribe out of the way, on to the first solution.

Music product: The harsh reality is that music as a product has hardly evolved in the digital realm. A lot has been done around retailer and business model innovation, but the underlying product is the same static audio file that we found in the CD. Meanwhile the devices we are spending every growing shares of our media consumption have high definition touch screens, graphics accelerators, accelerometers…audio hardly scratches the surface of what tablets and smartphones do.

Music is always going to be about the song, but it is also about the artist and their story. That’s what a quarter of consumers think, and 45% of aficionados and a third of digital natives. Video, lyrics, photos, reviews, interviews, acoustic sets, art, these are all ways in which the artist can tell their story and they all need to be part of the product. Most of this stuff is already created by labels, artists and managers but it is labelled marketing. Putting this together into a curated, context aware whole is what will constitute a 21st century music product.

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Fans: Artists and fans are closer than ever but this journey is only getting going and artists need to get smarter about how to monetize their fan bases. Artists need to find their popcorn. What do I mean by this? Well when the cinema industry started out it was a loss making business. To try to fix this cinemas started by experimenting with the product, putting on double bills but that wasn’t enough. Then came innovation in the format by adding sound. Then the experience itself by co-opting the new technology of air conditioning from the meat packing industry. Still no profit. Finally cinemas found the solution: popcorn. With a 97% operating margin, popcorn along with soda and sweets quickly became how cinemas become profitable entities. Artists need to find their popcorn. To find out what other value they can deliver their fans to subsidize releasing music. It’s what newspapers are doing with wine clubs and travel clubs, and in some instances even with Spotify bundles!

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Labels: Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Kobalt and Essential and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.

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And finally, the grand unifying concept to pull all this together: experience. Experience is the product. The internet did away with content scarcity. Now the challenge that must be met is to create scarce, sought after experiences that give people reasons to spend money on the artists and music they love.

The Three Things Streaming Needs To Fix Next

I spent a couple of days last week in Barcelona for the annual Future Music Forum, which is developing into an important date on the music conference circuit.   Later this week I will post some of the highlights of my opening address but first I am going to spend some time developing some of the white hot issues surrounding streaming that were raised at the conference.

In a really strong field, two speakers in particular stood out: Beggars head of strategy Simon Wheeler and PledgeMusic founder Benji Rogers.   Their presentations and the conference as a whole were infused with a sense that streaming is changing everything, and more quickly than most people expected. This change is manifesting itself in three big issues:

  1. Deciding what streaming’s main role is
  2. What happens to the middling majority of artists
  3. How to monetize the relationship between artists and fans
  1. Time To Decide Whether Streaming Is Marketing Or Sales

It is clear that most labels are conflicted about streaming. They are waking up to the fact that its promise as a retail channel will take time to realize and even then it may not be a like-for-like replacement for lost album sales. Which is prompting labels to increasingly view streaming as a marketing channel too. But if streaming is both the discovery journey and the consumption destination, then what, as a label, are you trying to actually sell with streaming? Across the bigger labels in particular the digital business teams and the marketing teams need to agree on a common view on what the streaming end game is, else risk accelerating album sales decline without adequately driving streaming revenue growth.

If the question is complex for subscription services for free streaming the picture is much clearer, especially for YouTube. As Simon Wheeler said in his presentation: “YouTube is not driving sales. People are going there to consume music. The end.”  If that isn’t a case for windowing YouTube and free tiers of freemium services then I don’t know what is.

  1. What Case For The Middling Majority?

Wheeler also made a vital observation that the streaming success stories tend to be split between mega hits on the one hand (such as Calvin Harris’ 1 billion Spotify streams and Avicii’s 250 million ‘Wake Me Up’ Spotify streams) and slow burn success stories on the other. He cited the example of the XX’s eponymous album that is still in the Spotify indie top 100 five years after release.

This streaming dualism makes it look like label A&R strategy may have to choose between massive hits or long-term success. And if so, what happens to the rest in the middle? You effectively end up with three key types of streaming artist (see figure):

  • Evergreens
  • Middling Majority
  • Hit Machines

streaming artist segments

Could it be that  streaming will end up being the natural selection process for the challenge of catalogue bloat? There is simply too much music being released at the moment, creating the Tyranny of Choice, where listeners are paralysed by excessive choice. For an artist trying to break through, the background noise can be deafening and also kill any chance of making meaningful cut through. And if you do manage to do so then the endless torrent of new releases pushes you straight back to the margins.

If the streaming natural selection process plays out then unless you have created either an album that people will want to listen to again and again or instead a monster hit, then you will simply drift into oblivion. In the old model you might have sold a couple of tens of thousands of albums and managed to sustain some sort of career. 20,000 album sales would be $180,000 gross revenue but 5 million streams (roughly an equivalence in popularity) would be $50,000 gross revenue. Perhaps streaming’s Dystopian Darwinism will kill off the ability to forge a career built on mediocrity. That may be no bad thing.

  1. Monetizing the Relationship

If streaming is eating into sales then the obvious next step is to drive other spending from streaming music consumers. Hence commerce integrations from the likes of TopSpin, Bandpage and PledgeMusic. Unfortunately it isn’t that straight forward as Pledge’s Benji Rogers pointed out. Rogers rightly found himself turned to at the Future Music Forum as the fan relationship guru and he made a crucially important observation: simply because some one is listening to a song does not mean they are necessarily going to want to buy anything from that artist. Instead streaming services need to think more subtly, looking at how to nurture an artist-fan relationship rather than simply trying to sell someone a t-shirt because they happen to be streaming a track.

Artists and fans are closer than ever but this journey is only getting going. And now that artists are building deeper relationships with their fans while sales revenues decline, they need to get smarter about how to monetize them.  The key question though is whether this can be enough to offset the impact of declining music sales revenue. To help answer that I created a ‘Streaming Ancillary Revenues Model’.

A new MIDiA Research consumer survey shows that 11% of streaming consumers are VERY likely to buy merchandise and tickets from their favourite artists in streaming services. I used this conversion rate against the following artist straw man for a hypothetical Year 1 versus Year 2:

  • 100,000 albums sold decline to 60,000
  • Streams increase from 30 million to 45 million streams
  • Total recorded music revenue (streaming and sales) consequently declines by 17%
  • 11% of fans buy $30 of merch, special editions or tickets each year
  • Ancillary revenues grow to represent 33% of total revenues
  • Revenue decline across all income streams is just 3%

So ancillary revenues can significantly soften the impact revenue decline.

(The additional factor of the longer revenue cycle for albums on streaming services should also push the total revenue up further in the longer-term but is not included in these calculations.)

There are many obvious caveats and assumptions here (not least of which is the varying margins across different revenue streams) but these are broadly the right mix of drivers and levers. You can download the model here: Music Industry Blog Streaming Ancillary Revenues Model 9 14  I invite you to play around with it and test your own theories. If you are an artist you might want to plug some of your actual numbers into Year 1 and your projections into Year 2.

Change Is Difficult But It Is Also A State Of Mind

The streaming picture is changing at an absolutely staggering rate and everyone across the value chain needs to get their heads around all the potential permutations else get left behind.

These are both exciting and daunting times. As the bland management consultancy phrase goes ‘change is difficult’. But it is. However, the way that you view and prepare for change both have as much impact on how it affects you as the change itself. Streaming is changing everything. Those who learn how to reinvent themselves for the realities of this brave new world will be those best placed to survive and perhaps even thrive.

The Problem With Audiences (A Letter To Daniel Ek)

Dear Daniel

I enjoy our occasional Twitter exchanges and last night’s about MIDiA Research’s new music forecasts was no exception. For the record, I believe you deserve great credit for engaging as much as you do on Twitter. But as valuable a platform as Twitter is, it is not the best environment for discussing more complex and nuanced issues so I wanted to take this opportunity to build out from our conversation.

Your comments revolved around MIDiA’s estimate of the global ad supported music audience, which you think is lower than it should be at 202 million. I am really pleased you have picked up on this audience number. Part of what we are trying to do at MIDiA is educate the music industry to think less about Average Revenue Per User (ARPU) and more about how many people are actually engaging with digital music services. The audience-first approach has served the TV industry well and there are many lessons the music industry would do well to heed.

When Active Is In Fact Anything But

The accepted standard for measuring audiences of digital B2C companies is to look at regular users, typically considered as ‘at least one activity during the last 30 days’. If you are a marketer looking to understand the reach of different platforms then this is a perfectly adequate measure. It is similarly useful if you are a company trying to communicate value to advertisers or if you are a start up looking to demonstrate success to potential investors.   However it is the motives of the latter two groups that can lead to problems, especially in the ad supported music space.

For example most people take it as read that Pandora’s c.80 million regular users are monthly users. However Pandora’s imaginative definition for active users is: “…distinct registered users that have requested audio from our servers within the trailing 30 days to the end of the final calendar month of the period.” Which means that for quarterly accounting that can refer to up to a 120 day period, or for monthly accounting up to 60 days. Thus a user that plays just 30 seconds of one song in a two months period would be classified as a ‘monthly’ active user. That might serve Pandora’s purposes well but it is far from a useful measure for objective observers and vested interests such as songwriters and publishers. (Spotify of course defines active users using a straightforward 30 days measure). Another problematic trend is music services that classify active users as those that open the app rather than playing a song.

Why ‘Real’ Regular Usage Is So Important For Understanding YouTube

When we were building the MIDiA forecasts we were particularly concerned about YouTube. Music is crucially important to YouTube but it is not a music service. So, not only is a regular YouTube user not necessarily a music user, an occasional-but-monthly YouTube music user is not necessarily a music consumer in the way an occasional-but-monthly Spotify user is. Somebody who downloads Spotify does so because they want to listen to music, end of. Someone who, for example, watches a ‘Gangnam Style’ video that appears in their Facebook timeline is by no means guaranteed to be an engaged music fan. The highly diverse nature of YouTube’s content means that music can be a very small part of the 6 hours average monthly viewing of a YouTube user. Especially when you consider non-music videos from the likes of PewDiePie and SkyDoesMinecraft each average over 20 minutes. In short, the occasional-but-monthly YouTube user is less likely to be an engaged music fan than an occasional-but-monthly Spotify user.

So we decided to define regular users for YouTube as those who watch 20 or more music videos a month, which translates to about 5 a week and less than a fifth of the average YouTube user’s total monthly YouTube time. We did this because we want to provide the music industry with metrics that have actionable value. YouTube’s total music video audience is probably somewhere in the region of half a billion but less than half are regular users. Apple’s iTunes audience is c850 million only but only 200 million or so are music buyers.  Big numbers look great on Powerpoint slides but they don’t help make good business decisions if they are not truly instructive. 

Not All Active Users Are Created Equal

Of course, the ideal starting point for measuring different audiences is to apply a standard definition, but as we have just seen, this is not always best route to take. Particularly if you are trying to demonstrate where the value in digital music lies for each part of the value chain. For example, a regular download buyer, when defined as those who buy at least monthly, spends around $2 a month. As an artist, if one of those tracks was yours you might get $0.15 from that 1 infrequent regular user, while if that song was streamed 20 times by a infrequent regular Spotify user you might get $0.03, and if it was viewed 20 times by what would have to be a frequent regular YouTube user you would probably get around $0.01. An infrequent regular iTunes customer in this scenario is thus 15 times more valuable to an artist than a frequent regular YouTube user.

Scale Matters If You Do Not Have It

All of this might sound a little esoteric but it does matter, especially to artists, songwriters and smaller indie labels. If you are a big label, or indeed a music service, it is the total revenue that matters as you are effectively guaranteed a meaningful share of it. But if you are an artist, songwriter or small indie, your plays will be just a tiny share of the regular audience’s behaviour making it far harder to make meaningful money out of those users than it is from infrequent download buyers. While its great to see Calvin Harris and Avicii each clock up 1 billion Spotify streams, this feels more like a confirmation of my ‘long tail is dead’ theory rather than signs of a ‘high tide rises all boats’. If you are a big artist or label you have scale and you benefit from the scale of even infrequent audiences. For the rest, an infrequent user audience has little import, particularly as those users also skew towards the big hits. 

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Audiences Really Do Matter

Like I said, I am really glad you’re focusing on the size of digital music audiences – I wish more people would take the same interest. Indeed if you look the chart above – which shows the audience of each type of music service mapped against the revenue – you can see that there is currently a huge imbalance between revenue and audience. This is exactly why I want the industry to focus on audience first and revenue second. In fact if we were to take the looser (bigger) measurement of YouTube’s audience it would make my point even more firmly.

So thank you once again Daniel for helping highlight the importance of audiences and hopefully I’ve gone some way to explaining why MIDiA decided to measure YouTube in the way we did. Though I have to say I am intrigued as to why you showed so much interest in the ad supported audience over all others? I do hope this doesn’t hint at a stronger focus on ad supported to come for Spotify. You have done a fantastic job at kick starting the subscription market and I know it is hard work, but if anyone can make premium subscriptions work at scale it is you. Though I totally get that you also need to highlight how much oxygen YouTube is sucking out of the marketplace – something I think you and I are in violent agreement on.

 

Yours,

 

Mark 

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.