Mobile Music, Beyond the AppMobile Music, Beyond the App

Yesterday I delivered a keynote at the Music 4.5 Mobile music conference.  My presentation was entitled ‘Mobile Music: Apps, Ecosystems and the Cloud’ and here are some of the highlights.

I’ve been a music industry analyst for more years than I care to remember and I recall my first mobile music experience being on a Wap 1.0 handset with a monochrome screen and no graphics.  Mobile music has obviously come on a long way since then but it remains hindered by the recurring error of trying to do too much too soon.  Mobile seems to be perennially burdened with developers’ aspirations being one step ahead of what contemporary mobile technology can deliver. Witness the continually delayed arrival of ‘NFC payments are about to go mainstream’ as a case in point.  Mobile music’s poster child Shazam, was itself far too early to market.  I remember being demoed the tech by the founder a decade ago.  It took the advent, many years later, of the iPhone and the iTunes App Store to enable Shazam to become the runaway success it currently is.  Most start ups aren’t lucky enough to manage to wait for the pieces to fall in place.

Mobile music is undoubtedly going through an unprecedented period of buoyancy, perhaps even prosperity, driven by two key dynamics: the rise of smartphones and the app boom.  46% of UK consumers have a smartphone (see figure 1) which at first glance presents a great addressable audience.  But as my former colleague Ian Fogg observed, as smartphones go mainstream we end up with the quasi-paradoxical situation of smartphones with dumb users.  (By way of illustration one panellist referred to a customer request supporting for his HTC iPhone). Most new smartphone users don’t even use a fraction of the functionality on their devices and this creates big problems for music strategy.  Because mobile music apps are inherently the domain of the tech savvy, not the tech-daunted majority.

It is easy to think that the future of mobile is apps.  But as a cautionary tale consider that UK ring tone revenues plummeted by 32% in 2011.  Once ring tones looked like the future of mobile music.  Things change, and quickly so.

Apps are just one step in the evolution of mobile

Mobile Music has had more than its fair share of false dawns, largely because of wrongly set expectations.  The App revolution appears to have finally kicked mobile music into market maturity, though in actual fact it is just one more step on the journey.

One of the key reasons apps have been such a runaway success (Apple just announced its 25th billion App download) is because they play to the unique characteristics and strengths of mobile as a channel.  They deliver fun and convenient experiences that are typically also social, location sensitive and instantaneous.  All integral parts of the mobile phone’s DNA.

All of which is great of course, but there is a risk that the current infatuation with Apps is a focus on form over function.  Apps may have driven a paradigm shift in mobile behaviour but they are in the end just software.  They are a natural part of the evolution of the mobile platform and experience. They play just the same role as software does for the PC.  But of course we don’t excited about having McAfee and Excel icons on our desktop (see figure 2).  The reason why it feels so different for Apps is because of the channel strategy, namely App stores.  There’s just one place to go and get every type of software you could want, all of course with the same billing details and some guarantee of quality of experience.  A far cry from the PC experience of searching the web for the right software, reading reviews and creating a new user profile on yet another online store, hoping that the retailer is safe and secure.

The history of mobile music to date can be broken down into three key stages (see figure 3):

  • Stores
  • Apps
  • Access

A lot of consumer got burned in that first stage of mobile music stores, finding themselves subjected to poor quality experiences that paled in comparison even to the supremely average contemporary online stores.  The main mistake made was to expect too much from the rudimentary technology that was available: handset memory and screens were both too small and connectivity was far too slow and patchy.  WAP 1.0 and GPRS simply weren’t music delivery technologies.  The first stage of mobile music development failed because mobile tried to be a ‘mini-me’ PC music and was doomed to never stand up to the test.

The wave of the current App boom has lots of force left in it yet.  But when it finally does subside, the marketplace is going to be left realizing that Apps are the tool not the endgame.  The next stage of mobile music will be putting into practice what the app revolution has taught us about what mobile should be, what role it should play and where it should sit.

Value chain conflicts

Perhaps one of the most challenging aspects of launching a mobile music service is the conflict across the value chain.  In highly simplistic terms there are three key constituencies in the consumer mobile value chain: the handset makers, the carriers and the retailers.  Of course sometimes one entity can play two or even all three roles.  Each wants to own as much of the customer  relationship as they possibly can.  Throw music in the mix and suddenly each of those stakeholders is busy trying to leap frog the other (see figure 4).  This of course is what Nokia found themselves up against when trying to take Comes With Music to market: the carriers simply saw Nokia trying to circumvent their own heavily funded digital music services and yet Nokia was still asking them to subsidize those very same handsets…

The mobile music service value chain has become a complex place to navigate, with not only competition but also a diversity of business models each with their own unique twist on carving up the revenue pie (see figure five).

Value Chain Conflict Translates into Consumer Confusion

But value chain conflict doesn’t just impact business, it hits consumers as well, with an increasingly confusing mish mash of music brands on any given phone. And then of course there is the added complexity of ecosystems and operating systems.  Consumers are inadvertently being forced into make bets on their long term mobile future.  Once a consumer has opted into an app store ecosystem, paid to download apps over a 2 year contract, uploaded their music to a locker, saved their playlists etc it becomes very hard to move.  Not so much velvet handcuffs as clapped in iron chains.  Add to that the complexity of handset operators developing their own app and music service ecosystems within each of the OS siloes (see figure 6) and an increasingly complex picture emerges.  All of which skews the field to music services which are not tied to any single operating system fiefdom.  Perhaps the biggest winner out of all of this mobile music fragmentation will be Facebook?  Currently quietly collecting the world’s most comprehensive set of music service user data, come the end of the year Facebook will be uniquely well positioned to act as cross-service, cross-OS conduit.  Spotify might be making a play for being the operating system for music (I say the API for music, though that’s probably semantics) but Facebook could become operating system for music *services*.

The Future’s Bright, Probably

There is no doubt that mobile brings a huge amount to the digital music equation, making music discovery, acquisition and consumption more immediate and fun than it has ever been.  With the help of the likes of TopSpin and Mobile Roadie it has become the ideal conduit for deepening direct to fan relationships.  And though mobile will play a key part in cloud focused music services it is the app developer community which has transformed mobile most. While paid mobile music services remain mired in internecine value chain conflict, Apps have transformed mobile as a music channel from an awkward, underperforming curiosity into something vibrant and truly differentiated.

Tablets add important context.  They turn the conversation from mobile music strategy to connected device music strategy.  (They  also do a better job at most music experiences than phones).  In fact talking about mobile as a separate channel is no longer that instructive, rather we should think about mobile as one consumer touch point in an integrated channel and platform strategy.

But, once again, it is crucial to consider that Apps are the enabler, not the objective.  Remember, ringtones were the future once too.  The challenge for developers is to navigate through the wild west gold rush, and establish long term learnings from the App boom experience.  Think of the App economy as one big market research project (that’s certainly how Apple views it).  When the wave subsides the mobile music landscape will have changed forever.  Artists, labels, managers, developers, carriers, handset makers all need to work together to ensure that that future is as positive a force for the music industry as the early signs suggest it could be. The depressing alternative is that we look back in 5 years at the App era as another ringtone bubble.

Spotify’s Marathon

The news that Spotify’s mobile app is now available for the Android platform, coupled with an anticipated Autumn US launch, are both part of the music service’s inexorable rise and media interest.  Spotify undoubtedly has momentum and potential in abundance.  But, even without considering the issue of cash burn, it is also important to keep a sense of scale. Spotify has done a great job of acquiring a sizeable audience after a short period of time, but needs many users more before it can be considered on a par with some more established services that get a lot less attention (these days at any rate).

In the chart below I have mapped the number of users of Spotify and a number of other key free music services, each from launch.  What is clear is that Spotify has made a solid start is growing at a stronger rate than Pandora was at the same stage.  If Spotify ever reaches Pandora’s scale and business model viability, it will rightly be considered a success.

But it is also clear that other services like Last.FM and imeem grew more quickly.  And just to put the absolute scale of Spotify into perspective, the Pandora iPhone app alone is mapping almost exactly in line with Spotify’s entire user base. (No coincidence of course that Spotify see the iPhone app as a crucially important ticket to further success).

Monthly users of key free music services mapped by months from launch

So what can we conclude from these numbers?

  • Extrapolating Spotify’s early user growth suggests that if it is sustained it could reach the 20-30 million user range within 2 years
  • A US launch will significantly accelerate audience growth (all of the other services mapped here have US reach.  imeem and Pandora have reached their scale in the US alone)
  • Spotify will need to accelerate its revenue model maturation if it is going to be able to sustain this projected level of growth.

The last point is key. All of the other services in the chart have had to deal with the challenge of audience cost sustainability:

  • imeem has had well publicized financial difficulties with WMG writing off millions of debt
  • Last.FM recently closed its free service to countries it couldn’t operate in profitably
  • Pandora closed its non-US operations when it couldn’t strike deals with rights owners that would enable it to operate profitably in international markets.  Pandora has long focused on building financially sustainable audiences, a strategy echoed by We7 in the UK.

Spotify has run a fast first lap, but it is a very, very long race.

Why Spotify Needs an iPhone App to Get to Market

Spotify’s much anticipated iPhone app has been submitted to Apple for approval and certainly looks the part…in fact it almost looks too much the part.  This level of integration into the iPhone music playback experience may well be deemed by Apple to be too competitive to the core iPhone functionality. There is precedent, the Podcaster app was rejected, reportedly because it was too similar to iTunes functionality (it since developed a scaled back RSS Reader iPhone app).  The Spotify app certainly seems to mimic core iPhone music playback functionality (e.g. utilizing standard iPhone / iPod Touch playback controls) and would therefore be likely to compete with iPhone iTunes music playback.

A cynic might argue that Spotify are already concerned that Apple won’t approve and are doing their best to raise the profile to build consumer demand by posting the preview video on YouTube and putting it in the hands of key tech journalists.  Will it work?  Not necessarily.  Spotify is currently little more than a minor irritation to Apple, most pertinently because it’s not in Apple’s core market (the US) but also because it’s largely been a complement to iTunes.  This app could make it a competitor, but only if Apple will let it.  Apple’s App Store is an unregulated monopoly.  It’s easy to forget that, but as developers become more adventurous more and more apps will fall at the approval hurdle (as Nine Inch Nails recently discovered).

But leaving the approval conjecture aside, the Spotify iPhone app is potentially a really important development.  It provides on demand streaming music on the go, but crucially with off-line playlists, which means that you can listen to ‘streaming’ music without being connected.  This really blurs the lines between what is a download and what is a stream.  This doesn’t mean the distinctions will become irrelevant, but they’ll certainly become less key as these sorts of consumer experiences proliferate, which I posit is an inevitability, regardless of whether Spotify’s iPhone app passes muster.

Spotify really need to make their premium business to work. They’ve got a clearly market leading consumer value proposition, but they have yet to develop a vibrant business model.  Advertising revenue is important, but alone simply isn’t going to cut it.  Not seeing ads is clearly not reason enough alone to convince sizeable enough chunks of Spotify’s millions of users to pay 9.99 a month.  Equally Spotify know full well that they can’t ‘slice and dice’ their way to premium subscriptions: if they take away from their free offering they’ll soon lose lots of users, and therefore weaken their ability to generate ad revenue.  Mobile is the most logical way to drive near to mid term premium revenue.  So even if this iteration doesn’t make it, Spotify will make sure that one does.  They quite simply can’t afford not to.

Unlimited Mobile Music Gains Momentum in Singapore

This weekend saw the launch in Singapore of SingTel’s unlimited music download service Amped in partnership with Universal Music.  The service is available with a SingTel data plan, so is very much a data revenue driver for the operator.

Although a relatively small market, Singapore is fast becoming the global capital of unlimited mobile music subscription services.  Nokia’s Comes With Music and Sony Ericsson’s Play Now plus are both already live in the market and enjoying some success: Nokia reported more than three million CWM track downloads in less than two months, making it the best performing global CWM music.  The early momentum in Singapore illustrates that each market has its own digital sweet spot, its own unique digital music consumer footprint.  In the case of Singapore, unlimited mobile music downloads looks like it is the slipper that fits.

Spotify and Spiral Frog: Spot(ify) the Difference

Spotify reached another milestone at the weekend, clocking up a million users in the UK. As I’ve mentioned in previous posts Spotify’s success lies in doing what it does simply and well, not by doing anything particularly revolutionary (advanced caching technology arguably aside). But it is imperative that Spotify doesn’t go the way of Spiral Frog. Remember Spiral Frog built up a million strong user base also. Granted, Spotify’s consumer proposition is superior, but whilst both user experiences are products of their respective times, their business models are less distinct. In short they both depend upon advertising income to be larger than license fee and technology costs. As Spiral Frog proved, having a million users is no guarantee of achieving that equation.

Spotify is probably in a much stronger position now than Spiral Frog ever was, but to paraphrase the Conservative leader David Cameron’s comment to then Prime Minister Tony Blair “it was the future once too”. Spiral Frog may look like a fundamentally flawed business model now, but the bottom line is that if it had struck a better cost to revenue ratio it would have fared much better. With a more vibrant balance sheet it’s reasonable to assume that the DRM-download model would have ultimately been shunned for streaming as user bandwidth augmented. When it comes down to brass tacks, Spiral Frog and Spotify aren’t as different as you might think.

Which all underscores how crucial it is that Spotify both successfully develops a premium (probably mobile) business and builds its ad business in a softening online ad market. Both are easier said than done. Consumers have proven for years that they’re just not willing to pay for content in meaningful numbers. Also the likes of imeem, Last.FM and Pandora have all set the standard for mobile streaming music apps to be free, not paid. With the softening ad market Spotify will not only need to think carefully about how aggressively it grows its user base but may also need to reassess some of its business relationships. Many content providers are finding themselves unable to afford their audiences growing because ad revenue is not growing as quickly as the increased license fee costs are every time their audiences listen to more music or watch more video. Which basically means many online content providers are finding themselves in the paradoxical situation of not being able to afford to have their audiences to grow. (I just wrote a report on this topic which Forrester clients can find here).

All this said, Spotify are in a better position than many to be able to navigate these troubled waters than many. They’re the right service in the right place at the right time. They’re a high profile success story that the labels will not want to fail. But it’s equally important that the rest of the market succeeds also. Just in the same way it’s as equally important that imeem’s streaming business model is as sustainable as MySpace Music’s. An uneven playing field will simply tilt the balance in favour of the bigger players. The one-size-fits-all shiny disc days are gone. The future should be all about choice, but that may yet require a little ‘behind the scenes give and take’.

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.

The Ever Changing Face of Ovi: Why It Means So Much to Nokia

I spent the first half of this week in Barcelona at Nokia World.  I was fortunate enough to spend  time with many senior Nokia executives in small group sessions with my Forrester colleagues and also one-on-one sessions.  There were a lot of big announcements, not least of which was the superb looking N97.  But I’m going to focus on Nokia’s content and services strategy. If you’re interested in hearing more about Nokia’s other announcements you should read these posts by my colleagues Thomas Husson and Ian Fogg. 

 

Regular readers will know that I’m not a mobile specialist and indeed until a few years ago I didn’t spend that much time following Nokia.  The reason this changed is explicitly because of Nokia’s major shift in strategic direction, in their bid to become a major content and services player, under the Ovi banner.

 

I’m encouraged to see that the Ovi concept has undergone significant evolution since its announcement last year.  At the time of announcement Ovi looked in danger of becoming a poor man’s MSN, AOL or Yahoo. The 20th century portal model of being ‘all things to all people’ is losing relevance in today’s social media dominated world.  It made sense when people needed guiding through the Internet and when choice was limited. Now Internet users are savvier and spend time with specialist content destinations and the 21st century portals (TM David Card) such as MySpace and YouTube. 

 

So it’s good to see that Nokia have shifted emphasis and are focusing on developing strong individual content and services brands such as Nokia Maps and Comes With Music.  These brands need the space to develop their own identity and brand values.  Ultimately Ovi’s character should be shaped as the sum of these parts rather than imposing its identity onto each of them, and this looks like where Nokia is heading.

 

But there is a fundamental tension in Nokia’s Ovi, and indeed, broader device strategy.  The focus of devices such as the N97 is to make the mobile Internet simply the wider Internet on a mobile phone.  This openness is admirable and the correct move (many mobile operators mistakenly still believe that they can control much of the mobile Internet experience in their semi-walled garden portals).  But at the same time Nokia wants to establish content and services relationships with its customers that put it in direct competition with established Internet brands such as Google, Hotmail and iTunes.  Thus, the more that Nokia pushes towards an open-Internet model, the more it implicitly encourages its customers to translate their PC Internet brand relationships to mobile.  In short, Nokia aids its competition.

 

This situation is further complicated by the fact that Ovi is perceived by much of the mobile operator marketplace as being a disruptive force.  Nokia’s bid to establish direct-to-consumer relationships is effectively disintermediative (is that even a word?) to operators who are all actively pursuing their own content and services strategies.  However much Nokia likes to consider itself inclusive of operators they’ll need to put more meat into the game for operators if they’re going to get them on board.  And they need them on board, otherwise they’re not only competing against those Internet brands but also against the crucial element of the mobile channel, who’ll inevitably strike partnerships with those same Internet brands.  Nokia needs its allies.

 

So Nokia certainly has major challenges ahead of it.  But its bold ambitions could yet be met.  Comes With Music should prove to be a tactical Proof of Concept of the broader Ovi strategy.  Nokia were smart enough to understand that they couldn’t challenge Apple by just rolling out a Nokia equivalent of iTunes.  Instead they developed a compelling alternative that offered something very distinct, targeted at very distinct target groups. 

 

For Ovi to succeed, Nokia will need to replicate the CWM approach in other content areas.  Success, Comes With Innovation.

Music Mistakes, Myths and Misconceptions. Part 3: Subsidized

One again, continuing my bid to provide more fuel for the ‘music should be free’ fire this is the third in my short series of ‘Music Myths, Misconceptions and Mistakes’ posts, tackling one big ‘free’ issue at a time.  Today’s topic is Subsidized* (the previous two posts can be found here: Part 1: File Sharing  Part 2: Ad Supported). 

 

*i.e. a service where all or most of the cost to the consumer is paid for by the content provider e.g. Nokia’s Comes With Music (CWM),  Sony Ericsson’s Play Now plus (PNp) and TDC’s Play

 

Subsidized: 10 Mistakes, Myths and Misconceptions

 

1.      Misconception: subsidized offerings will not further erode consumer perceptions of music as a paid commodity. Whatever the restrictions on marketing (see #2) consumers are smart enough to perceive CWM as being free music: they pay nothing for the music and the device costs the same as without the music.

2.      Mistake: not calling CWM ‘Free’ or ‘Unlimited’.  ASA concerns for the latter, and label imperatives for the former, mean that CWM cannot be marketed to its strengths.  The effect described in #1 will happen regardless of whether the messaging is overt.  Weakening the message will only weaken consumer adoption.

3.      Myth: Subsidized offerings are a necessary but ultimately short-term tool for driving digital music adoption . A whole digital generation has grown up with no concept of paying for music online.  Those habits are engrained.  Free, subsidized services, and ad supported, will become permanent features of the digital music landscape.

4.      Mistake: Managing consumer life cycles. Make no mistake, lots of mistakes will be made (!) as the industry learns how to manage these services.  One of the biggest challenges is correctly segmenting users into those who will never pay, and those who can be migrated up the food chain.

5.      Mistake: Positioning. Services like CWM and PNp can’t be allowed to be too successful – they need to be focused on core target consumers (e.g. young file sharers) and not be widely adopted by strong music buyers, else their spend will be cannibalized.

6.      Myth:  CWM and PNp will revolutionize the digital music market in the next 5 years. These services are vastly important (arguably the biggest thing to happen to the music industry in years) but their core impact will be longer term.  Near term growth will be slowed by geographic roll-out, consumer awareness / education, handset replacement cycles, value-chain tensions.

7.      Misconception: Subsidized offerings will not cannibalize premium digital spending.  As long as targeting is kept tight, negative impact on spending on operator OTA services and online stores should be minimal, but it will decrease a little, though overall revenues will increase due to licensing income. 

8.      Misconception: Consumers will not ‘max-out’ these services. TDC’s Play service has had phenomenally high usage rates (see my post here for details).  When people get unlimited access to free music, they use it!

9.      Mistake: Not having licensed to fully subsidized offerings sooner.  CWM etc. are the best tools the music industry has to fight file sharing with.  They should have licensed to them sooner.

10.  Mistake: If licensing terms don’t enable Nokia etc.to make money.  If fully subsidized service business models are not financially viable (which doesn’t necessarily mean profitable BTW) their current proponents will eventually move onto something else, leaving what will be a gaping hole in digital music provision, which will quickly be filled by illegal free alternatives again.