Sopa Highlights Media Industry Strategic Failings

The controversial US copyright and piracy acts Sopa and Pipa (see this Wired piece for a Bluffer’s Guide on what they are) have been thrust centre stage by Wikipedia’s planned protest black-out on Wednesday.  It has taken an entity the size of Wikipedia to bring the debate out of the confines of the digerati and to the mainstream.   For that Wikipedia deserves great credit.

And the debate does need to take place in the mainstream.  The effects of the bills (if passed, upheld in the face of legal challenge and then successfully implemented) will be felt keenly by mainstream consumers.

However I am not going to add to the already vibrant and detailed discussion about the ethical and constitutional implications of the bills, nor the legion flaws and ambiguities in the proposed legislation. Instead I want to put Sopa and Pipa in the context of wider media industry strategy and response to digital change.

Sopa, Pipa and the Media Meltdown

Back in my days at Forrester I helped develop the concept of the media meltdown to describe the process of media industries responding to the impact of digitization.

The media meltdown occurs in three key stages:

  • Stage 1: Audiences take control of their content consumption via new digital technology (think CD ripping, P2P, on demand video streaming, iPads etc).
  • Stage 2: Traditional media industry business models crumble while media companies grapple with denial.  Instead of comprehending that a paradigm shift in consumer behaviour has occurred they think they can turn back the proverbial clock by fighting online piracy and restricting the disruptive threat of legal services.
  • Stage 3: There are two potential conclusions, either the media industries comprehend that user behaviour has changed for ever and that they need to embrace that change with new business models, or they fail.  (For more on the media meltdown check Forrester’s CPS blog and the ever insightful James McQuivey)

Of course as with any analytical framework, this is a generalized world view but it provides a very useful lens through which to view media industry anti-piracy legal activity, lobbying and resultant legislation.  It is immediately apparent that Sopa and Pipa fall within stage 2 of the media meltdown but it would be disingenuous to suggest that the media companies that have lobbied for them – and for other acts such as the French Hadopi act and the British Digital Economy Bill – are in complete denial.  Rather what we have is a distortion of priorities.  These media companies and their industry bodies in particular rightly identify online piracy as a major disruptive threat to their businesses.  However,  instead of recognizing that behaviour shifts have occurred around which new businesses should be built, they reason that turning off the tap on piracy will starve piracy of oxygen, until it withers away.

Digital Piracy Perennially Outwits the Pursuer

As well intended as this thinking is, it is flawed.  Digital piracy (in its many, many guises) is all about innovation and change.  Every time media companies manage to finally catch up with digital piracy – either through enforcement, legislation or technical measures – the pirates have already moved on. Fighting piracy is akin to a game of whack-a-mole, but in this version of the game the moles learn.  Every time one is smacked down another one comes up that is smarter, harder to see and more difficult to reach.

Mainstream Consumers Become  the Effective Targets of Anti-Piracy

The simple and unavoidable fact is that piracy will always move more quickly and more effectively than its pursuers.  Technology improvements can be measured in days, even hours.  Legislation takes years.  This dynamic is one of the key reasons why acts like Sopa and Pipa have such far reaching implications for mainstream consumers: the hard core tech savvy pirates will always find ways of evading the counter measures, the mainstream will not.  Remember how DRM inconvenienced legitimate customers and did nothing to impact pirates?  The parallels here are clear.  Of course there are obvious and important differences between digital content buyers and passive pirates, but there are also similarities.  One of the most important of which is that they are often the same people.  Many paid content buyers also access free illegal content: they blend their content acquisition practices, often using free illegal sources for either discovery or the content they are just not willing to pay for, and then paying for the rest.

Legislation is Fully Necessary But Strategic Priorities Need Rebalancing

To be clear, this is not an apology for piracy, nor is it an argument against legislation – indeed it is crucial that laws evolve quickly enough to keep up with digital change so they can establish the frameworks in which legitimate content business models can prosper and illegal ones cannot.  Instead I am making the case for a rebalancing of strategic priorities and for taking the long view.  Consumer behaviour has changed for ever.  More people are consuming more content across more platforms than ever before, but fewer of them are paying for it.  Making free illegal content harder to get will only weaken consumption and demand unless game-changing legal alternatives simultaneously fill the vacuum.

For example, turning off access to the Pirate Bay and then pointing users  to iTunes will fall far, far short.  Media companies need to get brave, like never before, and quickly so.  They need to start looking at what makes the illegal services so threatening to them and then give legitimate companies licenses to do just the same, legally.  Some media industries get this more than others. For example the TV studios quickly realized the best way of fighting free was with free itself, launching Hulu, ABC.com and iPlayer as genuinely compelling (in fact even more convenient) alternatives to BitTorrent.

Legislators: Compel Media Companies to License to Identikit Legal Alternatives

If the US Congress wants to ensure that Sopa and Pipa are balanced in a way that will help drive digital innovation rather than stifling it in favour of analogue-era protectionism, they should look to baking-in binding innovation commitments from media companies.  To ensure that for every type of illegal service that is wiped out of the US-facing Internet, the opportunity is created for new companies to offer the same type of service legally, with guaranteed licenses from media companies (i.e. without being watered down to irrelevancy with usage restrictions).  Then Sopa and Pipa could become the foundation stones of a period of unprecedented media industry innovation that would finally recast the mould of media business models in the post-meltdown world.  The alternative is media industry failure.  Though they might not realize it, the media industry lobbyists are currently on track for hastening their industries’ demise, not safeguarding their futures.

Competing With Digital Music’s Triple A

Over the last two years the digital music stores-and-services-marketplace has consolidated and – with a few notable exceptions – stagnated. And as the likes of Comes With Music, Spiral Frog and imeem added to the ever growing list of failed but innovative start-ups, the queue of new entrants grew ever smaller.  Successive failures – due in no small part to hefty advances and license fees paid to rights holders – have made investors increasingly sceptical of injecting cash into digital music services that require record label licenses.  On the flip side rights owners have seen more and more services failing to deliver on their promises and thus started – major labels in particular – to demand greater financial guarantees to reduce their exposure to risk.

Meet Digital Music’s Triple A

The net result is a dramatic slowdown in the number of new stores and services coming to market, the direct consequence of which is an ever larger reliance on the Digital Music’s Triple A, namely:

Apple
Android
Amazon

The problem though, is that just as this consolidation is kicking in, so is a slowdown in digital growth, and long before it should be happening.  Digital Music’s Plan A isn’t working.  Apple’s shift of attention from music downloads to Apps, Video and Books is a key contributing factor, but the lack of wider marketplace innovation is equally influential.  But it is the Triple A to whom the music industry is increasingly looking to fix the problem.

SPACE (The Five Letters That Buy You A Chair At Digital Music’s Main Table)

The Triple A’s ‘last men standing’ credentials shouldn’t be under estimated – although they’re not the only big consumer brands left in town (as Spotify and Beyond Oblivion among others will attest).  Yet they are the music industry’s three big safe bets because each of them have the same crucial combination of assets.  They all have SPACE.  That is:

  • Scale: rights owners can’t afford Plan B to be a failure.  That’s why they need big players with big audiences, big reach and big everything else.  The logic goes; the bigger the player, the greater chance of success and the greater chance of pulling in previously elusive mass market audiences.
  • Product: each of Digital Music’s Triple A are in the digital music game with ulterior motives. Apple want to sell devices. Android is all about the operating system and what it can deliver to Google.  Even Amazon’s motive for being a major player is an ulterior one.  They need to remain a major player in music retailing to protect the low-price customer entry point on the purchase consideration ladder. i.e. you start off buying music and end up on PCs and fridges.  Not being a major player in digital music retail would risk a major long term dent on high ticket item sales.
  • Ambition: all three have big ambitions in digital music and appropriate commitments to funding that ambition.  Not all of them (that’s you Android and Amazon) might yet be putting that budget in the places the labels would like them to, but the strategic ambition and commitment is there nonetheless.  These guys are all playing a big, long game.
  • Cash: Even if Android and Amazon may have temporarily baulked at paying licenses for locker services, rights owners know they have big budgets to invest in licenses for other accompanying services – hence no law suits (yet) over the licence-free locker services.  The revenue and balances of The Triple A provide the financial security the labels in particular are so keenly seeking.
  • Ecosystem: An ecosystem is arguably the single most important ingredient of a successful digital music service (ask the c.300 European services which don’t have an Ecosystem play and are left fighting over the 30% of market share Apple leaves them to squabble over).  Apple’s device / service ecosystem is best of breed. Android’s, though based on a different ideology of (semi) openness, is an eager challenger.  Amazon’s is a work in progress; the locker service, music buying customer base and collaborative filtering are all ingredients for Amazon, and the forthcoming tablet may prove to be the secret sauce that completes the recipe.



Drop the P

So if you are not one of the Triple A, what can you do to compete, to get your seat at the main table?  For a start you are going to need at least four of their key attributes, namely Scale (or a clearly demonstrable way of achieving it), Ambition, Cash and Ecosystem (even if this is achieved with 3rd party channel partners).  All of which of course skews the market towards heavily funded major players.  Assuming you can deliver on these attributes, you are still going to need to have the extra ‘X factor’ which will give you the differentiation necessary to steal a march on the three incumbents.

And here’s where there is a big chink of light in the darkness. If you are a pure play music service, not constrained by the needs of your core non-music product(s) then you can throw all of your energies into innovating your core music product experience in a way the Triple A have patently failed to do so yet.  How is it possible that all that Amazon – the longest tenure major player in online music – has so far only launched an MP3 store and a locker service? Similarly, how is it possible that Android haven’t yet launched the world’s most technologically innovative music service?  And how can Apple still not have moved out of their a la carte store beachhead? (Their locker player is not exactly a bold thrust into new territory, however well executed).

Music fans need a new generation of innovative, ground breaking digital music experiences.  The Triple A’s inherent bias of their core non-music products looks set to continue to hinder their ability to deliver.  Here’s hoping that this set of circumstances creates a window of opportunity for (well-funded) disruptive innovations rather than a blueprint for continued stagnation.

Monkeying Around With Mobile Music (Updated)

Today the triumvirate of Universal Music, UK broadcaster Channel 4 and UK mobile operator Orange announced a Pay As You Go (PAYG) mobile music service called Monkey.  The service is aimed squarely at younger consumers, which matches the demographic of PAYG users and Channel 4’s audience.  The underlying principle of the service is that it has a low barrier to entry: it utilizes the voice network rather than data network and is thus available across all handsets and does not require any application download.  Instead consumers simply dial 247 to listen to playlists streamed at 64 kbps.  Most of the more sophisticated behaviour, such as playlist creation, music discovery etc., is expected to happen online, using a cloud based player, where tracks will be streamed at 128 kbps.  Playlists can also be shared using widgets for major social networks and via text.

So what impact is this offering likely to have?  It’s clearly aimed at enticing young consumers away from file sharing and the positioning point is effectively ‘free music when you top up your phone’.  I think there is a risk of worst of both worlds here.  Firstly, I don’t buy into the argument that streaming reduces file sharing penetration.  It may cause file sharers to download less from P2P networks, but it’s unlikely to entice them away from them as they’ll still want music for their MP3 player, to burn onto CD for their friends etc.  Granted, Monkey steps closer to being a replacement in that it has a portability story (of sorts) and it has a sharing story (of sorts).  But it doesn’t provide true portability (what do you do when you’re underground for example) and it only offers partial catalogue.

The killer point though is that it uses voice minutes and the cost of calls is 20p per minute.  So it will cost about 70p to listen to a single and an entire 10 pound top up will give you about 1 album and no time left for talking.  So consumers are paying the same amount as an iTunes single download (even more for an album) but only getting a low quality analogue audio stream.  (And what happens when somebody wants to call them when they’re listening over the voice line?)

*Orange just called me to clarify their press release.  The press release reads:

  • “Monkey customers can access the service on their phones by dialling [sic] 247.”
    and
  • “Calls cost 20p per minute”

However, following my phone call from Orange it transpires that the per minute pricing applies to voice only and not music calls, even though this isn’t actually explained in the release.

Also another interesting detail emerges: the service is actually a limited mobile music service, not an unlimited mobile music subscription, hence the careful use of the term ‘access to music’ in the release.  Customers are only allowed to listen to 600 minutes of music per month on their phone (again not in the release), which translates into 14 albums.  If you take a 30 pounds top up, that then translates into 2 pounds ten per album listen, so if you listen to an album, say 3 times in a month, that’s 6.30 an album.  Which isn’t far off the cost of a standard album, but of course you don’t get to keep it after you’ve finished listening . The ‘3 listens’ cost drops to 4.20 for a 20 pound top up, 2.10 if you just take a 10 pound top up.  So still far from free, even though they’re being told it’s ‘free’ music,  which in turn reinforces conceptions that music is a free commodity (thus further undermining perceived values of music).

The additional fact that Universal will make some releases available here before anywhere else is a brave move and underlines the major’s persistently adventurous product innovation.  It will certainly be a key asset for demonstrating consumer value, but it will need careful positioning alongside premium products.  How, for example, would a high-end 15 pounds a month subscriber to Virgin’s unlimited MP3 subscription service (also in conjunction with UMG) feel if they realized they were getting new releases after the lower end Monkey customers were?

The other interesting sub text here is the underwhelming success of Comes With Music (Universal and Orange are both key UK partners for Nokia).   Is this picking up where CWM has failed to do so?  As I’ve stated here many times before, I am a firm believer in the CWM model and I believe it is the best tool that the music industry currently has for fighting piracy.  It is a genuinely compelling alternative to file sharing as it has a viable portability and ownership story.  Unfortunately it’s been hindered by channel issues, marketing problems and limited consumer awareness and understanding.

When I asked how Monkey would be positioned alongside CWM, UMG’s Rob Wells said Monkey was aimed more at younger, lower end consumers and Orange’s Pippa Dunn said that Monkey was for PAYG customers whilst CWM was for subscription customers.  Orange’s positioning is clean and elegant, but it’s a shame that CWM is effectively being marginalized as a high-end proposition.  That is not its sweet spot. Indeed the strong CWM association with the 5800 illustrates Nokia’s understanding that CWM is best positioned at younger, lower spending consumers and that it does not stand up as well when held up against higher end digital music offerings.  Also, from a broader music industry perspective CWM needs to be reaching younger consumers.  I hope Monkey doesn’t distract from that.

Spotify, Scratching Beneath the Surface of the Numbers

The Financial Times today report that Spotify has 250,000 UK Internet Users have downloaded the streaming music application, and 800,000 worldwide. Not bad for an application which has only recently just stopped being invite-only. I’ve posted before on why Spotify has been so successful, now we have some numbers to measure that success by. First of all let’s assume that 98.5%+ of those 800,000 are free, ad supported customers, so I’ll treat the reported numbers as being largely synonymous with free. I invite Spotify to challenge that assumption, but I think it’s a relatively safe bet.

  • 250,000 is more than 4 times higher than the premium subscribers Napster has managed to accumulate in the in the UK after years of trying. That’s significant because the free Spotify service effectively offers just what Napster’s 9.99 tier does but with much weaker editorial and programming. This is proof positive of why being free has been at the core of Spotify’s success to date. All the ease of use, deep catalogue, smart streaming technology and clever use of pyramid-selling peer promotion would have come to naught if it had just been for the 9.99 tier. And this is why Spotify have to realistically build their business for being an ad supported business not a premium subscription business.
  • 250,000 may be bigger than Napster, but Napster was never anything more than a niche player in the UK. As a share of the total UK paid digital buyer market Spofity is less than 5%, as a share of the total UK digital music audience, less than 2%. So 250,000 is a great first step, but it’s not at ‘taking over the world’ proportions yet.
  • 250,000 means that the UK accounts for nearly a third of the total 800,000, with each of the other 5 markets accounting for an average of 110,000. As much as the Brits do really like Spotify, I’d expect France and Spain to be really strong markets too, especially Spain. Both are big free-music markets. In fact as a label exec I’d be a little concerned that Spotify was doing so well in the UK (the strongest European premium digital music market) and hoping it doesn’t cannibalize iTunes sales.
  • Let’s generously assume that only 95% of the 800,000 are free: compared to those users being 9.99 paid subscribers, that’s a shortfall of just under 100 million euros annual subscription revenue that needs to be made up in advertising. I admit the comparison is a bit disingenuous given the explicit tactic of deploying a free tier to promote the service. But Spotify must be careful not to expect to convert the majority of those to paid subscriptions. They’ve cast their net among free music fans and they’ve reeled in a nice catch of freeloaders who love their music but predominately won’t pay to stream it. Charging for must-have added functionality, such as mobile, might be an avenue, but Last.FM, Pandora, imeem etc have all set the standard of mobile support being free. So charging for mobile would arguably be as damaging to their growth potential as if they’d only launched with a premium offering.
  • Finally the numbers must be caveated with the fact they only refer to downloads, not active usage.

So a solid start for Spotify, but the real test is building a vibrant business around free music and kicking it towards the mainstream. If anyone can do that right now, it’s Spotify. But they need to strike whilst the iron is hot before they start getting bogged down with the every day tedium the rest of the digital music market has e.g. directly competitive services, disgruntled customers, differentiating from file sharing, competing with Apple etc.

UPDATE: Spotify have just announced that they passed the 1 million users mark.

Spotify: Why It’s Been So Successful and What it Needs to do Next

I first spoke to the guys at Spotify a good few months ago and I have to confess to thinking at the time that they were just another digital music start-up. In fact, it was worse than that, I thought they were potentially another doomed digital music start-up if they didn’t revise their strategy.

On the face of it Spotify doesn’t actually have that much to offer. The discovery, programming and community features are next to non-existent in comparison to the feature rich functionality that the current next-wave of digital music services such as imeem, Pandora, Last.FM and Comes With Music are offering. Added to that the core of the business model seemed to be a 9.99 monthly subscription for non-portable streaming music rentals (with an ad supported layer that appeared to be a customer acquisition tool). In short, it was the increasingly defunct premium subscription model that Napster, Yahoo and Rhapsody have all failed to push out of a niche. To give a sense of the degree of failure, the share of European Internet users that paid for music subscriptions in 2008 was approximately 0.1 percent.

And yet despite all of that, Spotify is proving to be a roaring success, rapidly become the darling of the digerati (it certainly seems to have replaced Blip.FM as the service of choice for European Twitterers). Why? There are three key factors behind Spotify’s success:

  1. The actual lack of sophisticated functionality has actually proven to be an asset: the simplicity of the proposition has made it equally popular among tweens as it has pensioners.
  2. Spotify used smart viral marketing tactics, launching in an invite-only mode, but giving each user a large number of invites. This created apparent (though not actual) scarcity which drove demand, making those invites hot-tickets and giving whoever had them kudos. It was essentially a pyramid selling scheme, but it worked, and some.
  3. The single most important factor though is the fact the ad-supported tier offers completely free access to very comprehensive catalogue.

In short, Spotify gives you most of the music you could want for free without hassles or complications. My Forrester colleague James McQuivey has developed a methodology called the Convenience Quotient that measures products and services based upon the benefits to consumers and the barriers to adoption. Spotify would get a strong CQ score because it makes it easy to get strong benefits.

So what next for Spotify?

Spotify, by accident or intent, now has the potential to become a mass market free music offering. They need to build up their audience sufficiently to attract big advertisers to generate enough revenue to enable them to ditch any business plan reliance on the premium tiers. Founder and CEO Daniel Ek is talking up strong new features for premium subscribers, some sort of mobile play and even downloads. I hope they don’t spend too much time focusing on the premium offering. They’ll struggle to get anything as near as compelling user experience as Rhapsody which even with market leading UI failed to break out of niche.  I’d also steer clear of ad supported downloads. That would require messy DRM implementation which will muddy the service’s current simplicity.

Mobile though could be a hugely important move. Pandora’s iPhone app has demonstrated how well implemented mobile can turn a PC-centric service into a truly portable one. If you have a compelling portable streaming element, the need for downloads becomes much less important.

So interesting times ahead for Spotify. They succeeded so far by smart adherence to the KISS principle: Keep It Simple Stupid.   If they stick those ideals they stand every chance of stepping up to the next level.

spotify

MTV Put Their Well Learnt Lessons into Practice

Compare and contrast:

Viacom and YouTube: $1 billion copyright infringement suit pending

MTV and MySpace: innovative solution to serve ads on MTV videos

 

The quote from MTV’s president of global digital media Mika Salmi says it all

“MySpace has always respected copyright and is more progressive about copyright in our mind. The way we’re pushing this out with Auditude and MySpace is different than with YouTube or our past associations there.”

So a) MTV learnt their lessons with YouTube and b) MySpace know how to leverage their audience to secure good ad and content deals.  I wouldn’t be surprised if MySpace had double negotiated their position with MTV and ensured that they get a share of ad revenue on top of securing the content.  Remember, they negotiated such a good deal with Google that the search giant blamed disappointing financial results on the terms of the deal.

Have audience, will travel…

Beatles About to Go Digital?

Looks like the Beatles are finally going to go digital, but not via iTunes, rather in Rock Band the video game: http://www.edge-online.com/news/beatles-rock-band-announce-coming

If Apple Corp are taking this first step, don’t be surprised to see downloads in the not too distant future, though I’ll wager they won’t be with the other Apple first…

Datz Music Lounge: What it Means for Apple

Datz Music Lounge hit the newswires today.  There’s plenty of skepticism about it but I’d advise not to get too hung up on the caveats (i.e. that it only has a couple of the majors, won’t include many new releases and requires a 100 quid up front payment).  This is as big a deal as Nokia’s Comes With Music and MySpace Music.  Why?  Because it changes the rules of engagement for digital music subscriptions.  This is the first unlimited DRM-free music subscription service.  Sure, it requires a hefty up front fee but they need to protect against misuse.  Also, more new release catalogue will get on there over time.  The major labels are, understandably, approaching this with some caution and are trying to do their best to minimize cannibalization of CD sales and Napster and Rhapsody.  

 

There’s a decent argument that both those battles are lost.  OK, CDs will be with us for a while yet, but Napster and Rhapsody simply don’t have a future in their current guises alongside CWM and Datz.  They need to change their game plans, and quick.

 

And, of course, the rumour mill has it that Apple are edging towards a launching a subscription service of some kind.  What does this mean for them? Given their current relationships with the record labels it’s pretty safe to assume that they didn’t have any inside information from the labels on the Datz licensing terms or business model.  So they may well find themselves in the far form ideal position of being in advanced stages of developing a service which will not stand up against Datz on paper.  But don’t get too worried for Apple, their far superior marketing skills (and budgets), coupled with their market leading product development and the ace of hardware integration will see them good.  

All in all, though, Datz just turned the page on the next chapter of music subscriptions.  A chapter that could be so significant as to make the market up to this stage look like little more than a preface.