Why Rhapsody Needs More Than Just Napster To Flourish

Rhapsody yesterday announced the acquisition of long term rival Napster from US retailer Best Buy.  Rhapsody will retire the Napster brand and migrate the customer base over to its own service, with Best Buy gaining a minority stake in Rhapsody. It is a somewhat poignant end to one of digital music’s old guard, going out with a whimper rather than a bang.

The acquisition will give Rhapsody an important boost in scale at a pivotal time, namely as Spotify aggressively grows its US subscription business and simultaneously disrupts the entire market with its introduction of free on-demand music to the US market (a ship which of course MOG and Rdio are also busy jumping on).

When 2+2=2.5

In the near-term the Napster acquisition will put more clear water between Rhapsody’s subscriber count and Spotify’s.  It should also grant Rhapsody membership of the the ‘1 Million Club’, with its 800,000 subscribers swelled by a few hundred thousand from Napster.  The last time Napster reported their numbers in December 2008 they had 700,000 subscribers.   After three years in the Best Buy wilderness and shifts towards bundled download products I estimate there to be no more than 400,000 fully fledged subscribers left, probably more like 300,000.

But Rhapsody will be keenly aware that even keeping hold of just 300,000 subscribers will be no mean feat. They will remember keenly the 2008 acquisition of Yahoo! Music’s 400,000 subscribers and their rapid disappearance into the ether.  Napster will also recall the similar magical disappearing trick of the 350,000 AOL Music Now subscribers they acquired in December 2007 for $43 per subscriber.  In the business of acquiring music subscribers 2+2 too often = 2.5.

Rhapsody’s President Jon Irwin said of the acquisition that “scale is extremely important in this business.”  He is of course entirely correct.  Rights fees leave little in the way of margins.  For sake of full disclosure I’ve been a very long term fan of Rhapsody, right since their earliest days. It was partly our experiences of Rhapsody that led myself and my former colleague David Card to be so bullish about music subscriptions when we were helping build the Jupiter Research digital music forecasts.  But the time has come for Rhapsody not just to change but to drive change.

The digital music market is a different world from that Rhapsody was built for.  Unless Rhapsody wants to be limited to spending the next year or two simply trying to stay one subscriber ahead of Spotify it needs to overhaul its product roadmap.

Rhapsody needs unlimited MP3, now!

I’ve long advocated that if the record labels really want to ensure the extant premium subscription services don’t become extinct that they must empower them with dramatically more powerful licenses: namely unlimited MP3.  Of course it will be a good year or two more of global music revenue decline before the labels hurt enough to really countenance unlimited MP3, but Rhapsody needs it now.

So what can Rhapsody do in the meantime?  Well they’ve already got great discovery and editorial etc. so it is not really the experience they need to fix, rather the entire value proposition.  They need to ask themselves ‘what do we want to mean to consumers in the Spotify age?  What can makes us dramatically and unmistakeably different?’  Unless they can really address this fundamental question Rhapsody will face the very real prospect ending up looking like Spotify’s stuffy old uncle, which would be a criminal insult for the Grand Old Lady of digital music.

Making Freemium Pay: An Artist’s Perspective

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

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

Slicing the Digital Income Pie

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

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

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

What Happens If / When Downloads Go Away?

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

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

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

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

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

Is Freemium No Longer Fit for Purpose?

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

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

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

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

Music Subscriptions: Dead or Alive?

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]
[Posted by Mark Mulligan]

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Real Networks yesterday announced that they intend to spin-off music subscription service Rhapsody as a stand alone business. Rhapsody has long been held up as the best of breed music service, but in the age of Spotify and Comes With Music it and other premium rentals have increasingly struggled to maintain relevancy.  Spotify and Comes With Music each may have

fundamental business issues and are very different offerings, but they both provideunlimited music free at point of consumption.  Once you have that proposition in the marketplace selling 9.99 rented streams looses its shine, however good the discovery and usability may be.

This time two years ago Rhapsody, Napster and Yahoo had about 1.8 million paying subscribers between them.  Since then Yahoo got out of the game (passing its subs onto Rhapsody), Napster got sold and the total count is now around 1.3 million. So just as the music industry is meant to be booming online, its premium tier sheds over a quarter of its value across its heavyweight proponents.

The simple fact is that charging 9.99 or more a month for music that often only sits on your PC is not a mass market value proposition.  It’s great for aficionados but mass market consumers aren’t used to buying music that way.

So is this the end for subscriptions?  No, not at all, in fact they’re doing better than ever, it’s just the old guard that is struggling to keep pace.  A new generation of subscription services are being built that place portability at their core and that often hide some or all of the end-cost to consumers.

Let’s take a quick look at the numbers, here are total paid subscribers by territory (all numbers are approximate):

• Europe: 1.25 million (key players: Spotify,Vodafone, Napster)
• US: 2 million (key players: Rhapsody, Napster)
• ROW: 5 million (key players: Melon)

That gives a global total of about 8.25 million, which is promising though still short of where they need to be.  If subscription services are to help digital music break free of the iPod orbit and go mass market then two things need to happen:

• Premium subscriptions need to be unlimited MP3
• Mass market subscriptions need to have channel partners such as telcos and device companies hide some or all of the cost to consumers i.e. subsidized subscriptions (For the record I think the ‘cost to consumer’ price point for unlimited music should be 3 euros/dollars/pounds  a month.)

The first generation of music subscriptions may have been niche also rans, but the next wave – given the right business models – could be much more important.

Why Napster’s New Pricing Strategy is More than Just Price Cuts

Napster has overhauled its pricing strategy in the US, selling pre-stored value cards in retail stores. It’s being widely reported as ‘Napster slashing prices’ but it’s more than just that.  The key things of note here are:

• It shifts the consumer focus onto downloads: each card has a pre-stored value for MP3 downloads as the headline.  Unlimited streaming is the sub head.
• It targets iPod owners: MP3 downloads and easy synching make iPod owners a core target
• It lowers barrier to entry to subscriptions: by using a Pay As You Go solution Napster makes subscriptions more attainable to more consumers, even if they are sneaking them in through the back door
• It tacitly acknowledges the dire state of premium subscriptions: the focus on MP3s moves the focus away from the subscription business, but the latter is still Napster’s core business.  To really thrive in the imeem and Spotify age they need to be unlimited MP3

This is an innovative move by Napster, and should widen their market appeal, but I can’t help but feel that it is almost embarrassed of its core value proposition (on demand streaming).  Positioning the streaming component as a freebie with MP3 tracks will weaken perceived value.  They’ll need to be careful with their positioning, or risk further weakening their ability to sell their core product, unless of course they can fire the silver bullet of unlimited MP3s.

100% MP3, 100% Late (though hopefully not too late)

Oh the sweet irony – back in the days of the original Napster the major record labels refused to countenance that MP3 was the new format of choice for the digital generation and refused to license content for distribution via MP3.  Now ten years on we have the”MP3 100% Compatible” logo / campaign from seven of the UK’s digital music stores, with full support of the music industry.

 

Don’t get me wrong, I think it’s a solid enough idea (even though it will mean little without Apple on board) but it’s tragically ironic that it’s taken the music industry so long to come around to this way of thinking.

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.