MusicQubed Puts the Rise of Listen Services Into Numbers

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

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

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

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

Will Listen Services Define the Next Phase of Digital Music?

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

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

4th phase

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

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

How Streaming Will Impact Music Sales

With 2013 now behind us we are beginning to see the first full year sales numbers come if for 2013 and the long anticipated ability to assess the impact of streaming on the market.  Until the IFPI annual revenue numbers come out we are mainly constrained to volume data which only paints half of the picture.  This is especially true for streaming given the massive difference in revenue per stream for free versus paid, YouTube versus Spotify etc.  But even within these constraints we have enough to start establishing a view, one that indicates the headline story may be more about transition than it is growth.

Nielsen’s numbers for the US show that digital track sales were down 5.7% and that digital albums were down 0.1% while albums as a whole were down 8.4%. In the UK the BPI reported that digital track sales were down 4.2% though digital albums were up 6.8%.  Nielsen also reported a 103% rise in audio streams.  Let’s assume that a significant portion of those increased streams will be coming from free users and that the impact on streaming revenue growth will therefore be around the 65% mark. That would translate into total US music market revenue growth of just under 1%, though if free usage is a bigger part of the picture then growth could be negative.

It is important to understand the appropriate context for the shift to streaming: it is fundamentally a transition of spending.  Just as the download was a transition from the CD so streaming subscriptions are a transition from the download.  This is because the majority of subscribers were already digital music buyers before becoming subscribers and the majority of those were iTunes customers.  50% of subscribers buy album downloads every month and 26% buy CDs every month (see figure).  On the one hand this can be interpreted as the fantastic capacity of streaming to drive discovery and music purchasing.  There is some truth in this, but it is an inherently temporary state of affairs.  If streaming services do their job well enough there should be little or no reason for a subscriber to additionally buy music.  They do so because consumers transition behaviour gradually not suddenly.  The fact that a third of download buyers still buy CDs illustrates the point.

subscriptions download overlap

In this respect streaming services are strongly competitive with music sales in a way that streaming radio services are not. However what is crucially different from the CD transition is that while downloads drove a decrease in ARPU with consumers cherry picking single tracks from albums, subscriptions drive ARPU upwards. So there is more of an opportunity for subscriptions to drive longer term revenue growth than downloads.  The two key questions that arise are:

  1. What download market will be left once/if subscriptions have reached scale?
  2. What will the net impact on digital music spending be?

1 – Impact on downloads: The answer to the first question is probably the most straight forward.  Looking at markets like Sweden and Denmark we have strong evidence that streaming subscriptions grew at the direct expense of downloads, but in doing so they transformed the total music markets.  In the US, where the download sector is much more entrenched, streaming has resulted in a worst of both worlds, with streaming eating into downloads but not having enough headway to transform the market Sweden style.  The outlook for downloads in big markets such as the US, UK, France and Germany will be one of subscriptions absorbing the spending of the most valuable download customers.  Downloads as a global sector though will remain strong because they are the natural transition technology from download and will thus have strong long term opportunity in emerging digital markets of scale such as Turkey, Brazil and Mexico.  Downloads will also remain the best tool for monetizing mid tier digital music consumers who like to buy a few singles and the occasional album but do not spend 9.99 a month on music.

2 – Net impact on music spending: This one is a tougher call to make.  If subscriptions only reach scale by converting the most engaged music consumers then there is a risk of reducing ARPU among some of them, changing their spending patterns from buying a few albums a month to spending the equivalent of just one.  This effect will be felt more strongly as the dual-consumption behavior of subscribing and buying naturally fades.  The net positive opportunity lies in converting large swathes of the ‘upper middle’ tier of music buyers with more competitive pricing and also with bundles. Though this will likely come at the expense of further erosion of downloads.

As the RIAA rightly highlighted, even in the US streaming is becoming a really important part of the music market, and there is no doubt that access based models of shapes and sizes are the future.  The next few years though will see some growing pains as we transition away from the old guard in some of the world’s biggest music markets.

Music Industry Predictions and Aspirations for 2014

2013 was a year of digital music milestones: 15 years since the arrival of Napster, 10 years since the launch of the iTunes Store and 5 years since the birth of Spotify.  Which begs the question, what will we looking back at in 5 years as the success stories of the ‘class of 2013’?   There have been some interesting arrivals with promise, such as WholeWorldBand, Soundwave, O2 Tracks, Bloom.fm, Google Play Music All Access (ahem)…. As is the nature of start ups many of the dozens that started in 2013 simply won’t go the distance.  Indeed many of Spotify’s ‘class of ‘08’ have fallen by the wayside: MXP4, MusiqueMax, Beyond Oblivion, Songbird etc.   If the ‘class of ‘13’ want to emulate collective success then it is the ‘class of ‘07’ they should look at: a bumper crop of success stories that included Songkick, Topspin, Deezer, Songza and Soundcloud (though Spiral Frog and Comes With Music were notable flops).

So what can the ‘class of ‘13’ and the rest of the music industry expect in 2014?  Well here are a few of my predictions and aspirations:

  • Label services will grow and grow (prediction): following the lead of the likes of Cooking Vinyl and Kobalt every label and his dog appears to be getting in on the act.  Which is no bad thing.  The choice used to be binary: DIY or label.  Now labels are borrowing some of the clothes of DIY and in turn transforming the artist relationship from one of employee to client.  Expect many established frontline artists coming to the end of their label deals in 2014 being persuaded to opt for a label services deal with their label rather than jumping ship.
  • Downloads will be flat globally (prediction): the download is still the dominant digital product globally but in the markets where streaming has got a strong foothold it is eating into downloads.  A key reason is that the majority of paid subscribers are also download buyers and their behavior is transitioning.  But in most of the big markets, and in most of the non-Northern European markets, downloads are the mainstay of digital and will grow further in 2014, cancelling out declines in the US and elsewhere.
  • Latin America and Africa will both grow in importance (prediction): these are two regions with hugely diverse national economies but both also contain a number of markets that are ripe for digital lift off, particularly in Latin America.  However the standard solutions for the western markets will only have limited success.  Expect innovative newcomers to do well here.
  • The streaming debate will NOT resolve (prediction): expect strong continued growth in streaming.  Spotify should hit 10 million paying subscribers soon – the free mobile offering may even push it to 100 million users.  Deezer should clock up another milestone soon too.  And Beats Music could get really serious scale if it does indeed bundle with headphone sales.  But the nature of the debate means the bigger streaming gets the more artists will perceive they are being short changed, because individual artists will feel the impact of scale more slowly than the market.  Expect things to really hot up if Spotify goes public, does well and the majors do not distribute meaningful portions of their earnings to artists.
  • Spotify, Deezer and Beats Music have a good year (aspiration): to be clear, this isn’t me breaking with years of tradition and suddenly jettisoning impartiality and objectivity.  Instead the reason for the inclusion is that the future of investment in digital music will be shaped by how well this streaming trio fare.  Between them they accounted for 70% of the music invested in music services between 2011 and 2013.  These big bets may not be leaving a lot of oxygen for other start ups, but if they do not succeed expect digital music service funding to get a whole lot more difficult than it is now.
  • Subscription pricing innovation accelerates (aspiration): regular readers will know that I have long advocated experimentation with pricing so that portable subscriptions can break out of the 9.99 niche.  In addition to more being done with cheaply priced subscriptions we need to see the introduction of Pay As You Go subscription pricing in 2014.  Pre-paid is what the mobile industry needed to kick start mobile subscriptions, now is the time for the music industry to follow suit.
  • More innovation around multimedia music products (aspiration): one of the most exciting things about Beyonce’s album last week was the fact it put video at its heart.  Since I wrote the Music Product Manifesto in 2009 depressingly little has happened with music product strategy.  Of course not every artist can afford to make an album’s worth of flashy videos, but hey, they don’t need to all be flashy.   Here’s hoping that a few more labels follow Sony’s lead and start really pushing the envelope for what music products should look like in the digital era.  Here’s a clue: it is not a static audio file.

P.S. If you’re wondering why I am so harsh on Google Play Music All Access it is because they can and should do so much better.  The market needs innovation from Google, not a ‘me too’ strategy.  Come on Google, up your game in 2014.

Spotify Now Free on Mobile: First Take

Spotify today made a number of important announcements, including a host of new territories and Spotify Free on smartphones and tablets.

Having a free mobile music experience is an important strategic move.  When Spotify first licensed its service in 2008 there were clear boundaries between what constituted mobile and PC music experiences.  So drawing a clear boundary between the two platforms made sense at the time.  But now the walls have come down and consumers expect to be able to take their digital experiences with them on the go.  So in order to persuade a free streaming user to upgrade to mobile they really need to be given a taste of what the mobile experience is.  You might say that having free mobile streaming is table stakes for the game.

Spotify have come up with a solution that includes a host of features for free on mobile devices.  Features that include allowing people to listen to music by any artist on shuffle (i.e. not a Pandora-like station of artists that sound like the artist, but just the actual artist) as well as radio and playlists.  It is a compelling solution, perhaps a little too compelling.  Spotify’s end game with free streaming is to create a marketing funnel for acquiring potential customers to its paid service. The only real difference between paid and free is no offline playback, having to listen on shuffle and ads.  It might be that this is just too good a free experience for many consumers.  But then again with YouTube available for free on all smartphones and tablets the playing field was not exactly level.  So at least now Spotify can compete on even terms with YouTube.

Stimulating Growth

Spotify has had to strike a new set of deals for this offering and they won’t have come cheap.  The ad supported tier at the best of times was a loss leader for Spotify, that will now accentuate.  But it has had to bet bigger on free in order to stimulate growth.  Currently music subscription penetration across the UK and the US sits at just 6% and shows no sign of accelerating off into the sunset.    Spotify accounts for the lion’s share of those consumers but is not yet in a position to announce 10 million paying subscribers.  Back in May 2012 I noted that the growth rates Spotify was experiencing then suggested Spotify would be on track for 8 million paying subscribers by May 2013.  Spotify has probably passed that milestone already and it will be hoping the combination of mobile enabled Spotify Free and the slew of new territories announced today will nudge the subscriber number over the 10 million mark.

Betting Big

Spotify, along with Deezer and Beats Music, is betting big in a high-risk game that has implications for the entire music market. Between them these three companies accounted for 70% of total money invested in digital music services between 2011 and 2013.  (In total these three have raised $743 million in finance and investment to date).  Not only are they sucking much of the oxygen out of the investment arena they are also leaving many investors waiting to see whether these heavily leveraged companies can deliver on their supercharged promises.  If they do not then expect a major contraction in digital music investment.

Listen Services Raise Their Game While Access Services Raise More Capital

Regular readers will recall my classification of the digital music market into Access services and Listen services, located at opposite ends of the Complexity Axis. Late last week two of those Listen services upped their respective games, with MusicQubed launching a new service with Vodafone New Zealand and Nokia Mix Radio introducing a host of new features.

Both services are focused squarely on delivering elegantly simple music experiences for as little effort as possible from the listener.  All you can eat Access services have done a great job of engaging the higher end aficionado and will continue to be the most appropriate business model and value proposition for the more engaged, higher spending music fan.  They do little for the lower spending mass market consumer however, which is where Listen services come in.

Interestingly MusicQubed and Nokia’s announcements came in the exact same week that news began to surface of Spotify securing an extra $250 million in finance, taking Spotify’s total investment tally to over half a billion.  In fact Deezer and Spotify alone account for approximately two thirds of all of the investment in digital music services in the last three years, amassing $0.6 billion between them from 2011 to 2013 alone.  Both companies have reported impressive subscriber counts and have made subscriptions work at scale in a way that the stalwart incumbents Rhapsody and Napster never did.  But building the Access business is clearly one that requires a large and steady influx of working capital.  The industry has got to hope that the investment to date helps build the foundations of long term sustainability and not simply supercharge a few services for a quick sale without an eye fixed firmly on the long game.

Concerns aside, it is great to see more investment pouring into the space, even if it is too concentrated at the moment. It is even more encouraging though to see more companies recognising the need to engage the less hip, but much larger installed base of mass market fans who are currently getting left behind by the digital music bandwagon.  It is to be hoped that these are the foundational signs of a more mature digital marketplace that can take the digital transition onto the next stage.

Why the Music Industry Should be Watching Twitter’s Stock Price

This is the chart that the music industry needs to be paying close attention to over the coming weeks and months (it’s Twitter’s stock price).  How well Twitter fares will be a bellwether for digital consumer service investments. Two of the music industry’s biggest bets (outside of the big tech trio of Apple, Amazon and Google) are Spotify and Deezer.  Both of whom are performing strongly (Deezer just hit 5 million paying subscribers and Spotify could be edging towards 10 – see my prediction from last year).  But both have also taken very significant amounts of investment resulting in valuations that markedly narrow the pool of potential buyers.  For Spotify in particular a flotation looks like the best route of realizing a strong return for its investors, particularly the later stage ones.

Facebook’s flotation rattled a lot of the investment community.  Although it eventually recovered and is now trading solidly, it sowed fear and uncertainty about the ability of digital consumer companies to translate business plan valuations into actual market trading value.  Those of a certain age recalled painful memories of the dotcom bubble bursting and the near instantaneous disappearance of billions of dollars worth of dotcom company valuations.

If Twitter’s stock price falters over the next 6 weeks or so then it will make an IPO all the more challenging to sell to the market.  But if Twitter does well, some of those lingering doubts and concerns will be assuaged, paving the way – in a best case scenario – for a new dawn of digital consumer company IPOs.

The stock market is a fickle beast and though underpinned by some of the most sophisticated financial modeling on the planet, is easily swayed by investor sentiment, which in turn is driven by that equally ineffable of qualities: momentum.  If Spotify can report 10 million paying subscribers some time over the coming months it will have a clear momentum story to tell.  If Twitter’s stock price holds up into the start of 2014 Spotify will be able to translate its momentum into market sentiment and build towards an IPO.

There is of course no guarantee Spotify, or Deezer, will IPO, but the option looks like a strong commercial and strategic fit given the direction of travel of the digital music market and the companies’ current valuations. If one or both companies successfully IPO or successfully exit via a trade sale or some other route then the music industry will be able to breathe a huge sigh relief and brace itself for a resurgence in digital music investment.

Right now digital music is not a great investment proposition for professional investors, especially VCs.  They see sizeable chunks of their investment disappearing straight onto the bottom line of record labels in the form of advances and guaranteed payments; a congested market that still remains predominately niche in reach; and the CD still lingering as the world’s largest music sales revenue source.  But get a couple of high profile exits under the belt and the music industry will appear a far more compelling investment proposition, with investors more willing to tolerate the costs of doing business in music.  First though, Twitter needs to deliver the goods. Keep watching that chart!

How Downloads Will Determine the Future of Streaming

There is no doubt that streaming subscriptions will play a major role in the future of digital music, but their impact is going to be far from immediate. There also needs to be great caution applied to interpreting the encouraging early signs of the advanced streaming markets and the potential impact on total music sales.

Norway and Sweden both experienced an upturn in music sales in the first half of 2013 thanks largely to the impact of streaming subscriptions, while most of the rest of the global music market continued in its struggle to return to growth after more than a decade of decline.  The easy conclusion to draw is that when streaming subscriptions take hold across the globe, music revenue grow.  While there is some truth in the argument, it is too simplistic.

streaming 1

An analysis of the leading streaming markets (Sweden, Norway, France, Netherlands) and the leading download markets (US, UK, Germany, Japan) – see figure one – reveals that streaming took hold in markets where downloads had not.  The markets where downloads represented the lowest share of total music sales in 2010 (before streaming really kicked off) are those that in 2013 had the rates of streaming as a share of digital music revenue.  In markets where downloads were making the biggest contribution to total music income (not just digital) streaming did not get much of a look in in 2013.  In the US and UK streaming subscriptions were in market long before Spotify and Deezer, but most digital music consumers opted for downloads and have been unwilling to switch allegiances since.  It will happen over time, but right now downloads have a firm grip and that is largely because of Apple.

streaming 2

When we look at the same countries plotted by streaming share against Apple device penetration we see an even more pronounced trend – see figure two.  Here the relationship is clear: streaming has taken hold where Apple has not.  In short, there was no established mainstream digital music service and streaming subscriptions filled the void.  But of greatest significance is the impact on total music revenue.  These strong streaming markets contribute just 10% to global digital revenue, even though France and the Netherlands are two of the world’s top 10 music markets.  Meanwhile the UK and US alone count for 54%.  If you factor in Japan and Germany too you have 71% of all digital music income, and within these four countries (the four biggest music markets) streaming accounted for just 10% of digital revenue.

On the other side of the equation, streaming has brought unparalleled growth in its core markets: across Sweden, Norway and the Netherlands digital revenue grew by an average of 213% between 2010 and 2013, compared to an average of just 40% across the big four markets (though Japan’s declining digital sector pulls that average down).  And of course the Swedish and Norwegian music markets both grew in 2012 and 2013 while the rest did not.

While there is not a clear cut ‘answer’ to streaming’s likely long term impact we can however draw a few important conclusions:

  • Streaming will grow more slowly in markets where Apple and the download market are strong (which helps explain why growth of Spotify et al appears to have slowed in markets like the US and UK).
  • Streaming can make a digital market grow more quickly than downloads can (though it does so normally at the direct expense of downloads – download sales shrank in both Sweden and Norway in 2012 and 2013)
  • ‘Home turf’ counts.  Most of the big streaming markets have their own local heroes (Sweden – Spotify, Norway – WiMP, France – Deezer) – all of whom also benefited from hard bundles and marketing support from their incumbent telcos. Meanwhile Apple of course prospers on its home turf and that of the English speaking UK.
  • Consumer behavior and technology are all edging towards a more access based world and it is inevitable that the download will become less important.  So although these brakes on streaming adoption exist in many markets, they will slow rather than halt the transition. Streaming will near 50% of global digital revenues by 2018.

Streaming remains bedeviled by countless issues – not least artist payments – but what is clear is that it has the ability to transform the shape of the digital music market.  And while that change may be slower to come than the Swedish and Norwegian experiences might suggest, come it will.

 

 

New Report: Building the New Business Case for Bundled Music Services

Today MIDiA Consulting is proud to announce the release of a white paper commissioned by Universal Music entitled “Building the New Business Case for Bundled Music Services”.  The report, written by myself and MIDiA Consulting co-founder Keith Jopling, provides an unprecedented analysis of telco music services, taking a critical look at what has and had not worked to date and a series of models and recommendations for the future.  We interviewed a host of telco music executives to get a deep understanding of what telcos need out of music services to make them a success and combined this insight with data from consumer surveys and music service trials as well as case studies and best practices.  We think it is pretty much the definitive piece of work on the topic (!) and we invite you to download it here: Building the New Business Case for Bundled Music Services – FULL REPORT.  You can also download an executive summary version of the report here: Building the New Business Case for Bundled Music Services – EXECUTIVE SUMMARY.

Here are some of the key findings of the report.

The consumer shift from downloads to streaming is the most important digital music market trend since the advent of the iTunes Music Store.  Before streaming services telcos struggled to find a way in which they could compete in a market dominated by Apple, restricted to selling DRM locked downloads that of course would not play on Apple devices.  Subscription services changed all of that, with the leading streaming services all pursuing robust telco partnership strategies as well as a number of download subscription services.  There are now nearly 50 telco music service partnerships live in six regions across the globe.  With 40% of streaming consumers now paying to stream, generating $1.2 billion in trade revenue in 2012 the opportunity is clear.

Music Bundles Across the Globe

However it is clear that many of the hurdles that telcos faced in the last decade continue to pose challenges.  These include music not being a priority for many telcos, internal business casing getting in the way of building compelling services and the wrong success metrics being used.

The new success stories of telco music services are those that make music a strategic priority.  This is not some sop to the record labels, but a reflection of what it takes to make music strategy a success. If a telco just adds music to a long list of Value Added Services (VAS) it will wither on the vine.  But if a telco puts a music service front and centre and positions around it then success is far more likely.  Success stories that have followed this approach include Telia Sonera’s hard bundle with Spotify in Sweden and Cricket Wireless’ Muve Music in the US.

Streaming by the Numbers

The Role of Promotional Offers

For all the obvious synergies of telco music bundles there is a real danger that hard bundles that make music subscriptions free or feel like free to the end user run the risk of devaluing the proposition.  Yet it is also clear that consumers need to be able to ‘suck it and see’ before subscribing so promotional free trials and limited period bundles present a strong balance of value to the consumer, cost effectiveness to the telco and protecting the integral value of music for artists and labels.  The market data for free trial is compelling: half of one month trialists convert to a paid subscription at the end of the promotional offer period.

Customer Satisfaction, the New Music Service Opportunity

An entirely new aspect to music bundling that we dive into in the report is the role of music subscriptions in driving customer satisfaction across a telco’s wider business.  Even the most edgy, cleverly positioned challenger telco is ultimately a provider of important products but not usually a consumer passion point.  Music though has that brand passion secret sauce and partnering with the right music service can enhance the telco’s own brand and customer sentiment.  Smart integration of music into the customer journey and integration with customer satisfaction measurement tools, particularly Net Promoter Score (NPS) can enable telcos to create a customer satisfaction halo effect.  With music converting satisfied music subscription customers into highly vocal net promoters with satisfaction benefits felt across the full range of a telco’s services.

Bundled music services did not get off to the best of starts, but now their time has come, giving telcos the opportunity to assume centre stage in the digital music marketplace.

For more information on the research please feel free to email us at info AT midiaconsulting DOT COM.

About MIDiA Consulting

Midia ConsultingMIDiA Consulting is a boutique, media industry focused consultancy that delivers practical, results-driven outcomes.  MIDiA stands for Media Insights & Decisions in Action. Our mission is to help media and technology companies develop purposeful strategies quickly through market understanding, clarity of vision, and workable innovation.

We help media and technology companies make sense of the changes that digital market forces are bringing about. And we help them make profits from digital content.

http://www.midiaconsulting.com

info@midiaconsulting.com

The Complexity Coefficient: ‘Listen Services’ and the Tyranny of Choice

Despite commendable progress the digital music market is still way behind where it should be.  It is an easy mistake to view the global music market through the Anglo-American lens but if you strip out the UK and US from the statistics the result is that three quarters of global ‘rest of world’ music sales are physical.  Thus ten years since the launch of the iTunes Store digital is still only a quarter of non-US and UK revenues.  The role of Apple is, as ever, key: Apple knew how to make an elegantly simple user experience that just worked.  Thus where Apple was strongest (US and UK) digital music sales prospered.  But most consumers do not have Apple devices so the music industry needs more music services to be as elegantly simple as iTunes if it is going to push the needle on that 25%.  The problem is that most of the services on which industry hopes are being pinned are anything but.

Innovating for the Elite?

Streaming subscription services are undoubtedly at the leading edge of music technology sophistication and recent innovations from Spotify in particular are setting the bar high for immersive digital music experiences.  But paradoxically this is part of the problem.  At the end of 2012 subscription and ad supported services accounted for just one fifth of global digital music revenues.  Though that number will grow markedly in 2013 – and already over indexes in the digital sophisticate Nordic and Dutch markets – it will not overtake downloads anytime soon.  There are of course many factors, including the key issue of pricing – 9.99 is not a mass market price point, but there is a more fundamental one: streaming subscription services are just too sophisticated for mainstream users.

The reality is that mainstream music consumers are not heavily engaged with music and like programmed, curated music experiences.  For all the music industry turmoil of the last decade radio listening has remained relatively steady, even growing in many markets, and it also remains the number one music discovery source – still far ahead of YouTube.  Radio’s enduring popularity stems from its simplicity.  A common product strategy error is the assumption that more features = better quality product.  But more often than not, less = more.  The extra discovery features in subscription services are fantastic tools for the niche audience of engaged music aficionados that use these services but they also make them less accessible for mainstream users.  This is what I term the Complexity Coefficient. 

The Complexity Coefficient is a simple way of understanding a complex problem and can be calculated as follows:

Feature Benefits – Feature Sophistication = Complexity Coefficient

In short, the more sophisticated the features of a service, the less the benefits will be felt by the user.  When this is applied to less sophisticated users a multiplier needs to be applied: a heavily featured sophisticated music service will already have barriers to use for an aficionado but will be entirely inaccessible for a mainstream user.  The Complexity Coefficient manifests itself in another way also: the more complex a service, the longer the music journey is.  For music aficionados that can be a good thing, but for radio-centric mainstream users it is a barrier rather than a benefit.

The COmplexity Coeffecient

The Tyranny of Choice

When we apply this thinking to the digital music landscape something really interesting emerges (see graphic).  The on demand subscriptions that monetize access – ‘Access Services’ – sit at the top right, highly sophisticated, but therefore also complex, with the longest music journey.  These services provide access to a vast, vast catalogue of music.  A catalogue that is growing rapidly every single day.  Last week 7Digital’s Ben Drury reported that his company now has 27 million tracks in its catalogue and is growing at a rate of 100,000 a week.

Choice is fantastic but too much begets choice paralysis.  There becomes so much choice that there is effectively no choice at all.  This is the Tyranny of Choice. 27 million tracks is an unwieldy vastness of music that would take 205 years to listen to.  What matters about music catalogue is the music that truly matters not the total size.  Of those 27 million perhaps 3 to 6 million are ‘core’ catalogue.  Of those how many really matter to any given listener? Perhaps 10,000 at the most?  Even that would be 2 months of listening for someone who listens 10 hours a week and doesn’t listen to the same song more than once.

With the growth in catalogue each ‘Access Service’ must get 100,000 tracks worth of being better at its discovery job just to stay as good as it was last week.  And despite the vast progress that is being made, few would argue that there is a long way to go yet before we can come close to arguing that the discovery problem has been fixed.  So the odds are against a worsening status quo not an improving one.

The ‘Listen’ Services

But at the opposite end of the Complexity Coefficient scale a very different picture emerges. Here we have services like Pandora, MusicQubed’s O2 Tracks and Nokia’s Mix Radio delivering highly programmed, lean-back music experiences for the mainstream users, where the music journey is shortest.  Whereas Access services give the user access to all the music in the world, Listen service take the user straight to the music that matters.  One leads the user up the garden path, the other just opens the front door.

But there is an overriding monetization issue at the lower end of the Complexity Coefficient: most of these services predominately generate revenue via advertising.  The majority of Nokia Mix Radio’s and Pandora’s users are on free tiers.  O2 Tracks is the exception, with users paying for all tiers of access (other than a free trial).

In many ways the Access services are taking a TV broadcaster approach to discovery: they are trying to encourage users to discover as much new content as possible, to send the user on a rich journey of serendipitous discovery.  The Listen services however are focused squarely on delivering a smaller selection of music the user is most likely to like, and keeping firmly within those parameters. To an aficionado the Listen service approach may feel restrictive and limited, but to a mainstream music consumer it fits their exact needs.  But what is clear is that music services at the lower end of the Complexity Coefficient scale are going to be crucial for pushing digital music towards the mainstream.  Welcome to the age of the ‘Listen’ service?

It’s Windowing Jim, But Not As We Know It

Back in 2009 I wrote a report for Forrester Research entitled ‘Music Release Windows: The Product Innovation That The Music Industry Can’t Do Without’ (you can read the summary blog post here, and the ‘money’ graphic is here).  In the report I proposed that the music industry should adopt three release windows based around a ‘Preview’ window for premium customers, a ‘Mainstream Pay’ window for CDs and downloads and a ‘Free to Air’ window for ad supported streaming.  With all of the brouhaha surrounding the Atoms for Peace withdrawal from Spotify, release windows, and the role of streaming services more widely, are very much back centre stage.  But whereas I strongly believe in the case for release windows, I believe that, as per my 2009 report, that paid subscriptions should be in the first window, not the last.  It is free-to-consumer, ad supported streaming that needs to be pushed to the back of the queue and it is high time that the windowing and streaming debate in general makes a clear distinction between the two very different propositions.

Subscription Service Hold Outs Actually Hit the Best Fans Hardest

Music fans that pay 9.99 for a Rhapsody, Spotify, Deezer or Rdio subscription are among the globe’s most valuable music consumers.  These music fans need treating as such, almost regardless of the business models that may surround their consumption points of choice.  It is not their fault that the music industry and tech sector contrived to construct business models that have propagated doubt and division among many of the industry’s key stakeholders.   This is not to dismiss the absolutely crucial issues of sustainability and equitability, but instead to raise the issue of who is paying most the price of windowing?  The services or the fans?  There isn’t a clear-cut answer, and the decision dynamics are analogous to those of applying economic sanctions on a nation state.

Delay Releases to Free Platforms, Not Paid Ones

But if we for the moment view the issue through the lens of the music fan, then it becomes abundantly clear that if a high value music fan deserves to be treated like a VIP then something analogous to the opposite is true for those consumers that choose not to pay for music.  This is the case for why the ad supported tiers of music subscription services, along with Pandora, the radio and YouTube should all be put into the last release window.  This is already how the movie industry behaves.  Now clearly this proposal is not without controversy.  The music industry’s entire discovery mechanisms revolve around putting the best content on free-to-air platforms first under the remit of promotion. But this proposal does not have to be the death knell for that approach, as long as the potential of digital platforms are properly harnessed:

  • Think of subscription services as ecosystems not silos: There used to be a physical journey between the radio and the music store.  Now in subscription services discovery and consumption are symbiotically joined. This means that the radio promotion approach can be played out in subscription services and in doing so reach the most valuable customers based on their music preferences. Thus when the radio window hits weeks later it will be targeting a largely distinct group of consumers for whom it will still be the first time they have heard the music.  And for those that are subscribers and radio listeners, the few weeks delay may prod them into reengaging with the album they first heard on their subscription service.
  • Window albums not singles: Singles are invaluable tools for promoting albums and tours.  There is less need to apply windows to singles, or rather to the lead singles from the album.  To protect the value of the premium release window though, it is important that only one single hits the free to air channels before the album hits the first window. Else the impression is given of too much content being too widely available elsewhere.
  • Combat scarcity with new products: Of course the biggest challenge to windowing is the lack of scarcity i.e. what’s the point in turning off the tap if its available elsewhere?  There are two answers to this 1) by ensuring content is available first only on the premium platforms, the availability of content on free platforms is markedly reduced (radio and YouTube account for the VAST MAJORITY of music listening, P2P is in decline) 2) more has to be added to the premium music products to make the windowed content act as a complement to a rich, curated product experience not available elsewhere.  Two examples of how to do this are artist subscriptions and D.I.S.C. products.

Holding Back from Paid Subscription Tiers Can Be a Missed Opportunity

It is still too early in the emergence of widespread streaming adoption to draw definitive conclusions about the impact of windowing but there is a growing body of useful evidence.  Spotify’s Will Page this week released a report that brings some invaluable evidence and analysis (you can read the report here). Although Will is obviously on Spotify’s pay roll and Spotify clearly have an agenda to push, Will is a diligently objective economist with an impressive track record at the UK’s PRS for Music, and his work should not be dismissed on the grounds of assumed bias.  In the report Will pulls data from Spotify for streams, GfK for sales and Musicmetric to compare the performance of albums across all three channels for windowed and non-windowed albums.  The broad conclusions on the sample of albums tracked is that non-windowed albums did not appear to lose sales  but that windowed albums had much higher piracy rates.  Significant caution is required when interpreting this type of analysis, principally because it is impossible to definitively identify causal relationships e.g. the marketing strategy of one artist might tend towards piracy activity than another, as might the geographical location of the artist and the global distribution strategy.  But even with these caveats, the report presents some solid directional data. The market needs much more data like this and I will be adding to the data pool later this summer with a white paper that I’ve been working on for some months now.

Windowing Doesn’t Solve the Streaming Debate, But It’s Not Meant Too

Windowing does not address most of the broader issues that currently surround streaming.  It can however be an important part of the equation if, and only if, it is done on the basis of distinguishing between free-to-air streaming and paid streaming.  Though not quite as distinct as an iTunes download is from a Torrent download, the parallel is nonetheless provides useful context.  This is not to discredit the huge value of radio, YouTube and Vevo in driving music discovery, nor the equally strong value of freemium service free tiers in acquiring customers.  This is not a proposal to remove content from free-to-air channels, but instead one to simply not put everything there straight away. As the music discovery journey and consumption destination become ever more entwined, it is time to think long and hard about just how much leg needs to be shown to make a fan fall in love with an artist’s music.