Streaming, Change, And The Right State Of Mind

Disruptive technology and the change it brings can be overwhelming, particularly when it threatens to change forever all that we have known. Streaming clearly fits this bill. But the impact of change is as much in the eye of the beholder as the disruption itself. While it would be bland and disingenuous to say that change is merely a state of mind, a positive outlook that is focused on the opportunities can make the world of difference.

To illustrate the point, here are three examples from the last century of how vested interests have viewed revolutionary new media technology.

1-ebwhiteThis first quote is from the American author and essayist EB White writing in 1933 on the impact of radio. Here new technology is eloquently portrayed with an almost magical profundity.

2-sarnoffThis quote is from David Sarnoff, the Belorussian-American radio and TV pioneer who oversaw the birth of RCA and NBC. Here he is in 1939 talking about the advent of a TV broadcast network against the backdrop of the globe teetering on the brink of world war.

And then fast forward 70 odd years to the emergence of streaming music, and we get this….3-yorkeSomething certainly appears to have happened to the eloquence of observation over the decades. While I’m perhaps being a little unfair to our esteemed Mr Yorke his quote illustrates the stark contrast in how one can view impending change.

There is an inevitability about the shift in consumer behaviour of which streaming is merely a manifestation. We are moving from the distribution era when everything was about linearly programmed channels and selling units of stuff to the consumption era when consumers value access over ownership. Resisting fundamental shifts in consumer behaviour is a futile task. It’s what happened when the labels fought Napster tooth and nail and it took the best part of a decade for the music industry to recover from that mistake.

None of this is to say that the shift to streaming is going to be easy, but it is going to happen anyway. Artists, labels, managers, publishers all need to decide whether to work with streaming now, and have some control over the process, or wait until they have no choice at all.

The Problem With Audiences (A Letter To Daniel Ek)

Dear Daniel

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

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

When Active Is In Fact Anything But

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

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

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

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

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

Not All Active Users Are Created Equal

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

Scale Matters If You Do Not Have It

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

us audience

Audiences Really Do Matter

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

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

 

Yours,

 

Mark 

Why Digital Music Services Always Steal Each Other’s Customers

The next five years will be one of the music industry’s most dramatic periods of change. The last ten years might have been disruptive but the change that is coming will be even more transformative. By 2019 70% of all digital revenue globally will be from on-demand services, representing 40% of total music revenues. It will be a shift from the old world and the ‘old new world’ to a brave new one. The CD and the download will decline at almost the same rates: physical revenue will be 43% smaller while downloads will be 40% smaller. In some ways the CD has less to worry about than the download. The CD has the protection of a vast installed base of players across the globe and growing niches such as deluxe box sets. The download though depends massively upon Apple’s devices, and the tide over at Cupertino is turning.

One of the concerns of the shift to streaming has been revenue cannibalization. It is no new phenomenon. The paid digital music market has still not truly broken out to the mainstream. While the likes of YouTube and Pandora clearly have mass market reach, music download stores and subscription services do not. Each at their respective times have appealed to the same higher spending and tech savvy end of the music buyer spectrum.

customer transition

In the 1990’s and early 2000’s Amazon’s online CD store was the home of the globe’s most tech savvy music aficionados. Then Apple came along and poached its iTunes customers directly from Amazon because those same CD buyers were also buying iPods. Then Spotify came along and started poaching Apple’s most valuable customers via Apple’s App Store – the chink in the armour of Apple’s otherwise closed ecosystem.

Now Apple and Amazon are both setting out on their own cloud strategy journeys and each will be hoping to win back a chunk of their lost customers. Apple’s recent elevation of Beats Music to one of the family of ‘Apps Made By Apple’ gives the first hint of what the company can do to ‘encourage’ its users away from other streaming services.

The next three years or so will be a fiercely contested battle for the hearts and minds of the digital music aficionado that will illustrate the strengths and weaknesses of the technology ecosystems of Apple, Amazon and Google. Yet while they all fight to win or win back customers, the attention once again remains firmly on the top end of the market. For as long as music services focus their efforts on the most valuable music customers, the mainstream will continue to be catered by low ARPU ad supported services. And for as long as that happens the evolution of digital music will continue to be one of the latest generation of services stealing the customers of the last.

What 10 Million Spotify Subscribers Actually Means

Spotify today announced that it had hit its much anticipated milestone of 10 million premium subscribers.  Make no mistake this is a highly significant achievement for Spotify itself and for the broader digital marketplace.  But it is a long way from mission accomplished. Here’s why:

  • Paid growth is flat: When a new technology enters into the marketplace it goes through a few stages of growth. Initial uptake is driven by the early adopters.  If it succeeds with them it breaks through to the early followers where growth really accelerates through to mainstream before slowing as the market saturates, creating the well know s-curve – see this graphic for how this process works.  Not all technologies follow this pattern though, some never break out of that early adopter niche.  Right now Spotify’s paid subscriber count looks firmly locked in that early adopter segment.  If growth rates sustain at this level it will be late 2016 before we see the 20 million mark hit.
  • Free however is booming: Spotify’s free user count though is showing dynamic growth.  In fact it is following the right trajectory for a technology breaking through.  What’s more the growth is uncannily similar to that of Pandora during the same stage of its growth (see figure below).  In fact by its 66th month Pandora had 39 million active users, while Spotify now has 40 million, also after 66 months.  If Spotify’s free and paid user bases continue to grow at their current rates the currently impressive 3-to-1 free-to-paid ratio will widen markedly.  Free is where the action is.  Just ask potential Twitter suitor Soundcloud with its 250 million active users or YouTube with its 1 billion active users.
  • Paid users still biased to the aficionado: Key to the paid growth problem is that 9.99 subscriptions are the domain of the super fan, the engaged, high spending music aficionado.  And this is very much a music subscription phenomenon rather than an issue with digital subscriptions more broadly. While 60% of music subscribers are male and 48% of them are aged 25-34, 54% of video subscribers (Netflix, Amazon Prime) are female and just 35% are aged 25-34.
  • Churn is likely slowing growth: Being an early stage growth company is great fun but when your business starts to mature attention switches to the much more mundane task of managing churn i.e. making sure the rate at which people stop paying for your product is slower than the rate at which they join.  It sounds deceptively easy but it is in fact a vastly complex discipline and Spotify will be focussing an ever larger share of its resources on it.
  • Twitter’s depressed stock price may slow an IPO: An IPO remains Spotify’s most likely exit and hitting the 10 million mark with an impressive free-to-paid ratio was always going to be a prerequisite for that process.  However as I wrote last year, the performance of Twitter’s stock price will play a key role.  As illogical as it may seem, many investors will look at Twitter’s stock performance as an indicator of how Spotify may fare.  Right now Twitter’s stock is bombing.  Spotify will probably want to wait for that to hit a positive trajectory before moving ahead with an IPO, should that be its planned course of action.  Though I’m sure Spotify will be keen to point to the much better long term story of Pandora’s stock as a reference point.

So, 10 million premium subscribers is a fantastic milestone for Spotify and for the digital music marketplace, but it raises as many questions about the 9.99 model as it answers.

free steraming growth

What the Consumer Adoption Curve Tells Us About Where Pandora is Heading

meltdown1The following post is an excerpt from my forthcoming book: Meltdown (which you can read more about here).  You can also read another excerpt from the book here.

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With any new technology there is a long flash-to-bang, a gap between its arrival and its transformative impact on consumer behaviour. For all that technologists may recognize the immediate paradigm-shifting potential of a new technology, consumers typically take years to understand and employ the benefits of it. This is because consumers adopt technology in phases, with distinct consumer groups adopting at different stages:

  • Early Adopters: These first consumers are the most adventurous and technology savvy. Early Adopters are typically younger though not necessarily young, often male, and always wanting to be at the forefront of technology.  These consumers will willingly tolerate bugs and glitches as part of the price to pay for being ahead of the curve.  Though incredibly important, the Early Adopters are only a small share of the total population, typically in the 5% to 10% range, and as a consequence any product that appeals solely to this group will remain confined to niche reach.
  • Early Followers: The Early Followers are in many ways the sternest test of whether a product or service is every going to break through to the mainstream.  These consumers are technology enthusiasts but less willing to endure bugs and glitches, instead they want technology that is exciting and new but that is also ready for prime time.  They typically take their lead from the influential voices of Early Adopters, waiting for their affirmation of a technology before adopting it themselves. Slightly more populous than Early Adopters, strong adoption by these consumers will push a product towards 20% to 25% adoption, up to, and perhaps even through, the Critical Mass Threshold.  This is the point at which a technology will either push through to the mass market or instead remain tied to the domain of the technology enthusiasts.  To date most digital music products have failed to break out of the Critical Mass Threshold, YouTube and Pandora are notable exceptions.
  • Mainstream: Should a technology have truly mainstream appeal, in terms of functionality, ease of use and pricing, then the Early Followers will help drive it to the Mainstream. This is the summit of the ambition of most technologies.  This is currently where YouTube and smartphones are.  The penetration rate is typically up to about 60-65% of the total population.
  • Late Adoptions: A few technologies will push even further to the Late Adopters and thus onto market saturation.  In pure percentage of population penetration terms this peaks at around 80%.  Current technologies in this bracket are mobile phones, email and Facebook.

As a technology goes through these stages the line of adoption almost always adheres to an S-Curve, with a long slow initial burn and then a sharp acceleration of growth before finally slowing down again and then finally flattening out.

Pandora and the consumer adoption curve

This framework is useful for both understanding the historical context of music technology but also to help gauge where current technologies are heading.  When we look at the long term historical trend for Pandora’s active users we see a strong correlation with the model (see figure).  To be clear we are not talking about the total penetration rates of the entire population, but instead in the context of Pandora the model illustrates its growth within the confines of its addressable audience.

A lot of talk was made of the impact of Apple’s iTunes Radio on Pandora’s active user count, and a small dip is clearly discernable.  However when it is considered within the context of the historical growth curve we can see that Pandora’s user growth had already matured.  Though it is worth noting that listening hours among those users actually grew in October 2013 even though users dipped.

As things stand, it appears that Pandora has reached a growth ceiling.  This does not mean that it cannot accelerate beyond this but the trend indicates that something significant will need to change to make that happen.  In a longer term perspective Pandora can absolutely push further into the mainstream populous, but that growth is likely to be slower, driven by more fundamental organic trends such as overall consumer usage of digital media and the broader transition of radio consumption to digital platforms.

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.

Making Freemium Add Up

Today at MIDiA Consulting we have released a new report on the digital content sector entitled ‘Making Freemium Add Up’.

The report combines an unprecedented appraisal of key freemium service metrics with market analysis and recommendations to create a definitive assessment of the freemium marketplace.  In the report we analyse an intentionally diverse selection of consumer web services, looking at the distribution and scale of their user bases and the relationship of these with their business models.  Services tracked range from music services like Slacker, through utility services like Skype to social services like Google+.  It also includes long term data trend analysis of Spotify, Deezer and Pandora.

The report is available for free to all subscribers to Music Industry Blog (to subscribe just add your email address in the Email Subscription box to the right of this post.  If you are already a subscriber but have not yet received a copy of the report by email please email mark AT midiaconsulting DOT COM).

Here are some of the key findings of the report:

  • Inactive users: inactive user rates range from 13% to 77%.  Social services have the highest rates (77% for Instagram and 66% for Twitter).  Inactive users are a key characteristic of all registration based services with free-to-consumer tiers, but the registered-to-active rate is below average for all freemium services However freemium inactive users are also often highly interested customers who simply need hooking up with the right pricing and product. In short, freemium inactive user bases are priceless qualified marketing lead databases.  The challenge is to separate the wheat from the chaff, to differentiate between disinterested freeloaders and potentially valuable paying customers.
  • Paid users: paid user rates range from less than 1% to 90%.  But both ends of the scale are outliers.  At the low end Soundcloud’s premium tiers are aimed at the smaller audience of creators that are just a small subset of its 180 million active users. While at the other end Valve’s gaming platform steam is more digital retail store than pure freemium destination.   The risk for all freemium services is ensuring the free tier isn’t too good, unless free users are your key revenue source (cf Hulu and Pandora). Spotify and Deezer appear to have hit a conversion sweet spot, a solid balance between compelling free tiers and better enough paid tiers.
  • Scarcity counts: a music service user risks little by churning because he can still easily get all the same music elsewhere if he cancels his Spotify subscription.  But if you stop playing Angry Birds you’ll find few other places where you can hurl bad tempered feathered missiles at egg-stealing green pigs.  Similarly churning out of a social network carries a high ‘churn risk’ for consumers as they will weaken their ability to connect with extended social circles online
  • The free-to-paid divide needs narrowing: the gap from free to paid is high, a significant leap of faith is required from the user.  Whereas the gap from zero to $0.99 for Angry Birds free to paid is a modest step, from zero to $9.99 for Spotify or Deezer portable is a much more sizeable hurdle.  Thus converting to paid for music subscription services is a more sizeable achievement than for low priced gaming apps. More needs to be done to bridge the divide.  This can be achieved in through bundles and innovative pricing. Though this must be set against the risk of cannibalizing full price tiers.

making freemium add up

iTunes @ 10

On Sunday 28th April Apple’s iTunes Store will celebrate its 10th birthday.  It is arguably the single most important milestone in the digital music market to date.  In these days of cloud and streaming dominated industry discourse it easy to forget just how important Apple has been in the history of digital music and how equally important it remains today.  In 2012, iTunes generated approximately $3 billion in trade revenues for the recorded music industry, equivalent to around  55% of all digital trade income and close to a fifth of all global recorded music trade revenue.  By comparison Spotify was closer to 10% of digital trade revenues and 4% of all global trade revenue.  Spotify is clearly at a much earlier stage of growth and represents the future, but iTunes is far, far from being a historical footnote.

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

  • Baby Steps: On January 9th 2001 Apple launched its iTunes music management software, and later that year in November came the first ever iPod.  Back then there was no iTunes Store and Apple made it very clear how they expected their customers to acquire digital music with their ad campaign slogan: ‘Rip Mix Burn’.  Revolutionary as it was though, the iPod got off to a modest start: despite multiple product updates, by the end of 2002 Apple had still only shifted 600,000 iPods. iTunes wasn’t changing the world, not yet.
  • Changing the Tune: In April 2003 Apple launched the iTunes Music Store in the US, and then in 2004 in the UK, Germany, France and Canada, as well as an EU Store.  There were plenty of download stores already of course – Apple is always an early follower not a first mover – but they were crippled by restrictive DRM, cumbersome technology and lack of interoperability.  Most stores didn’t even allow buyers to transfer to MP3 players or burn to CD. And if you were lucky enough to be allowed to transfer to an MP3 player, your device probably didn’t even support the store’s DRM it probably also relied on incompatible 3rd party music management software.  Apple changed all of that in an instant, delivering an end-to-end integrated experience.  Steve Jobs, through a combination of sheer force of personality and a commitment to spend big on marketing (really big) managed to persuade the big labels to support unlimited iPods, CD burning and multiple PCs.  Digital music hadn’t so much been stuck in the starting blocks as having its feet nailed to them.  Jobs set digital music free.  By July 2004 the iTunes Music Store had hit 100 million downloads, but more significantly by the end of 2005 Apple had sold 42.2 million iPods. iTunes was now selling iPods, and fast.
  • Beyond Music: When Apple was in the business of selling monochrome screen iPods, music was the killer app and iTunes was the marketing tool. But that changed on June 29 2007 with the launch of the iPhone.  Apple soon needed more than music to market its multimedia, touch screen, accelerometer enabled devices. Movies were proving difficult to license and TV shows faced free competition from Hulu, iPlayer, ABC.com et al. The solution of course was the App Store.  The App Store took just 3 months to hit 100 million downloads – it had taken the iTunes Music Store 15 months to hit the same milestone.  Apple remained, and remains, firmly committed to music but its attention is inherently diluted by all of the other content types that iPhones and iPads cater for.  When Apple launches a new device it is EA Games you see demonstrating a new game to showcase the device’s capabilities, not a new music track.  (And of course the word ‘music’ got dropped from the iTunes Store name long ago.)
  • The Platform Challenge: The App Store turned the iTunes Store into a platform, albeit it a highly controlled one.  This created an unprecedented window of opportunity for competing digital music services, suddenly they could break into the previously impenetrable iTunes ecosystem.  Pandora was an early mover and within a year of launching its iPhone app had acquired 6 million iPhone users, 60% of its then 10 million active users.  Shazam was another beneficiary, with the iPhone app finally giving Shazam relevancy and context it had long lacked.  And now of course we have Spotify, Deezer, Rhapsody, Rdio et al all hugely dependent on the iPhone, using it as the central reason subscribers pay 9.99.

Responding to Streaming

Strong iPhone and iPad Sales Have Reinvigorated iTunes Music Sales

Many commentators suggest Apple is being left behind in the streaming era.  It echoes comments that Apple was getting left behind by the social age, and its responses then (Ping! and Genius) are not the most compelling of evidence for Apple jumping on the latest digital music bandwagon.  Apple will of course have to eventually move towards a more consumption and access based model but it will wait, as it always does, until streaming and is ready for primetime.  (A radio service is a logical interim step). Spotify’s 6 million paying subscribers are impressive but pale compared to Apple’s 450 million credit card linked iTunes account.  And besides, iTunes is enjoying its most successful period ever (see figure).  For all the need of interactive multimedia products to market iPhones and iPads, music remains one of the key use cases and the iTunes Store has seen an unprecedented surge in music downloads as millions of new music fans enter the iTunes ecosystem as iPad and iPhone buyers.

Apple Still Underpins the Growth of the Digital Music Market

Interestingly Apple’s music download growth appears to be strongly outpacing the overall digital music market (see figure).  According to the IFPI total global digital trade revenue grew by 8% in 2012 but Apple’s iTunes downloads grew by about 50% during the same period, culminating in 25 billion cumulative downloads in Q4 2012.  Multiple factors are at play: iTunes has rolled out to new territories and a portion of the downloads will also be free.  Nonetheless, iTunes remains the beating heart of digital music.

The Next Chapter

Apple’s next big digital music move will have major strategic ramifications that will go far beyond the iTunes Store.  Currently Apple’s device pricing model is driven by storage capacity.  And of course in a streaming age consumers will store less and less content on their devices, so the ability to charge a premium for extra storage capacity will diminish.  This is a key reason why Apple has to go slow with the cloud.  Music however also presents an opportunity to safeguard price premiums.  Apple has shied away from subscriptions (Steve Jobs famously baited then-Rhapsody owner Rob Glaser that subscriptions were mere rentals) but device-bundled-subscriptions are now an opportunity that Apple simply has to take seriously.  Instead of charging a monthly fee for subscriptions Apple could create ‘iTunes-Unlimited’ editions’ of iPads and iPhones that would include ‘device lifetime’ access to either unlimited music streams or a monthly allowance of iTunes credits (for use on all forms of iTunes content).  The latter probably sits most comfortably with Apple as it presents the opportunity for tiers of access (e.g. $5 of monthly iTunes credit, $10 of monthly credit etc.) and so would enable Apple to support multiple product price tiers.

Whatever Apple decides to do with iTunes in the next 10 years, it will remain a key player and do not bet against it still being the preeminent force a decade from now.

Making an Impact: Assessing Streaming’s Role in the Digital Music Market

The streaming audio market is beginning to take the perturbingly familiar shape of the download market, with one big player stealing all of the momentum and scale.  And the debate about what streaming brings to the broader digital music market continues to divide the industry across ever deepening fault lines.

But leaving aside for a moment the much visited discussions about artist payments and financial viability of the freemium model, what impact is streaming having on the overall digital market?  To help answer that question I’ve compiled IFPI reported data for multiple international territories, including total market size and growth, digital market size and growth, physical share, download share and streaming share and mapped the relationships between them (see figure).

The results show that the streaming impact picture is a complex one with many permutations.  There isn’t a definitive trend that affects all markets in a consistent manner, however a few interesting trends do emerge:

  • Streaming tends to get a foothold quicker in territories where the physical market is already in marked decline.  Once it gets established the physical market decline accelerates.  It is not possible yet to definitively conclude whether this is cause or effect.
  • Strong streaming markets tend to experience significantly stronger digital growth rates than strong download markets.
  • Strong physical markets are more likely to have downloads dominate their digital markets.
  • Strong download markets tend to be more static.
  • Unsurprisingly the Nordic markets (Spotify’s back yard) are the strongest streaming markets, France remains a mainly download digital market despite Deezer’s efforts, as does the UK.

So the impact of streaming is a nuanced story.  Over two years streaming certainly seems to have brought dynamic digital growth rates to a number of markets, and has accompanied, or driven, an accelerated CD decline.

The fact that downloads are stronger in CD markets is testament to the similarity of these ownership based models.  But perhaps the strong similarity is one of the reasons that downloads aren’t growing the digital market as strongly as streaming is in other markets? Of course downloading has already had years to get established and so there is an argument that it has already contributed its dynamic growth phase to digital.  This is probably true, but it shouldn’t be that way.  With the exception of the US, no major music market has yet passed the 50% digital mark, and across all markets, the majority of music buyers still buy CDs.  Which means that digital is still a long way from being in a position in which it could plausibly be called ‘mature’.

So digital growth does need to be happening at the rates we see in strong streaming markets, and not in strong download markets.  And if streaming is the only tool with which those rates can be achieved then the questions around commercial sustainability (for the services and across the entire music industry value chain) become all the more pressing.