Spiral Frog R(edd)IP?

IMPORTANT DISCLAIMER: I’ll state up front that I have no privileged information on the current financial situation at Spiral Frog and I’m only going to focus here on the strategic positioning of the music service. This strategic analysis stands, whatever the outcome of Spiral Frog’s current management situation.

There have been press reports concerning Spiral Frog’s difficulties for some time now and it seems that things are finally coming to a head (see this story for more details).


If Spiral Frog is to close its doors, it’ll be a shame but at the same time not a huge surprise: Spiral Frog would be paying the price for first mover advantage. The history of technology is a path littered with the corpses of companies that had good ideas too soon. Most often it is the early followers who are the successes, learning from the mistakes of the pioneers. Apple is the shining example in the digital music space. Apple was far from the first to sell music digitally. Instead Apple watched the likes of OD2 and MP3.com make their respective mistakes and acted, still quickly enough to be in pole position just as the race was really getting started.

Spiral Frog here has played the role of OD2. They had the right idea, but were too early and didn’t execute successfully. It was in August 2006 that Spiral Frog burst onto the scene with a high profile announcement regarding a licensing deal with Universal Music, and I had high hopes for it and Qtrax. (This was incidentally the first high-profile manifestation of the rebirth of UMG as the preeminent digital innovator major).

Spiral Frog, and indeed Qtrax, had the vision to see that the music industry would soon need a digital Plan B. That paid download sales were not going to get anywhere close to keeping pace with the rate of decline of CD sales. They also knew that young file sharers were never going to suddenly switch in their tens of millions to becoming iTunes buyers. So ad supported, free music seemed like a perfect fit. And it is. Unfortunately Spiral Frog asked the right questions but didn’t provide quite the right answers.

Ultimately Spiral Frog’s hop was weighed down with DRM temporary downloads that didn’t work with iPods, difficulties in getting all content owners on board, and license fees that challenged profitability. That’s not to say Spiral Frog didn’t have their successes (they registered 1 million unique visitors in early 2008) and equally it’s possible that there is life in the old frog yet. But any future success will depend upon significant revisions to their business model.

Ad supported is going to be a corner stone of digital music, but the next wave of services that are leveraging this business model are doing so by creating business models that are more financially viable and don’t try to create a watered down version of the iTunes experience, which in itself is a costly thing to do from a licensing perspective. So look to the likes of Last.FM, imeem, Spotify and We7 as the early followers who will reap the benefits of Spiral Frog’s hard learned lessons. In fact We7 have really put those lessons into practice, moving from an ad supported download model to a predominately streaming model, in the process acquiring half a million users in the UK. The added irony for Spiral Frog is that the growth of the mobile Internet is enabling those PC streaming services to get portability without needing downloads.

Spiral Frog played a crucial role in driving the ad supported music sector forward, unfortunately it was too much too soon.

Apple iTunes Music Store (Finally) Goes DRM-free: First Take

So finally Apple gets DRM-free across all of its music catalogue on the iTunes Music Store (80% now, 100% end of Q1). It’s late, not too late but non-the-less late. As Apple accounts for the vast majority of the paid download market we can talk effectively talk about the impact this will have on the broader digital music market rather than just on iTunes sales.

Don’t expect it to kick start the digital music market (which is worryingly sluggish). This is just a basic enabler the market needs for long term viability. It is, however, crucial for future differentiation of the next wave of digital music services. Subsidized and ad supported services such as Qtrax and Nokia’s Comes With Music give consumers music for free but with DRM restrictions. DRM will become the key tool for differentiating premium from subsidized. The more you pay, the less DRM you have.

So it’s a case of DRM is dead, long live DRM.

But why did we have to wait so long for this announcement? European digital music execs told Forrester in late 2006 that they were ready for dropping DRM and, in April EMI went DRM free on iTunes and elsewhere. Most readers will have noticed that much of Apple’s competition has been acquiring increasingly comprehensive MP3 catalogue from the majors whilst Apple has not. Some of the majors trying to ‘level the playing field’ is undoubtedly a factor here, but it’s evident that Apple remains the biggest game in town with or without DRM-free. So all this strategy achieved was penalizing the majority of digital music buyers and the key force in one of the few dynamic parts of the industry the labels have left.

DRM-free should be a non-story by now. It’s not even much of an issue for the majority of digital music consumers. Principally because they don’t come up against it. Apple has dominant market share in devices and downloads. So the majority of digital music buyers don’t have DRM interoperability issues. And anyone who wants to burn more than 5 CDs knows how to. But at some time Apple may lose market share, perhaps to music enabled phones. When it does, consumers will start encountering interoperability issues. So it’s actually in the interests of the labels to weaken Apple’s lock in sooner rather than later in order to aid any such transition.

Finally, from an Apple perspective, dropping DRM starts a process of bringing iTMS up to date. Whilst the iPod and iPhone have undergone key transformation, the iTMS has essentially remained unchanged save for Genius. Whilst MP3, social music and mobile music happened around it iTMS clung stubbornly to it’s 2003 blueprint. Nokia’s Comes With Music is arguably the first major challenger to the iPod / iTunes dominance, because it a) is an integrated device / service proposition buy b) because it tries to do something radically different i.e. unlimited permanent downloads. Apple know they need to respond. DRM-free across all catalogue is a first step towards putting clear blue water between them, but they need to do a lot more yet. Ideally the next steps will be in the social-music direction, building upon the start made with Genius.

2008: The Year of Free

This time last year I predicted that 2008 would be ‘The Year of Free’. (Targeted legal free that is, not the ‘let’s give it all away and hope for the best’ flavour of free I’ve been posting about here recently.) Though all music can’t ‘just be free’, free services are a crucial element of blended digital music strategies. As the year draws to a close we can see just how fundamentally the digital music market changed in 2008. (See the list of developments at the bottom of this post).

2008 was the year in which the music industry accepted the fact that the only way to fight free is with free. That the only way to engage young digital consumers that have grown up with file sharing is to offer them something genuinely comparable in experience and price (i.e. free). Back in 2005 I wrote in a Jupiter report that if the industry didn’t start offering these young consumers free music they would become a demographic time bomb for future music revenues. Now finally we’re seeing these strategies starting to happen.

Today’s announcement from TeliaSonera illustrates just how far digital music strategies have come since I wrote that report, but also how there is still much distance to go. TeliaSonera’s Telia Musik service will offer unlimited free music to all of its mobile and PC broadband customers across 6 markets for 3 months. Telia can expect robust take-up and to bring many new consumers into the digital music fold. But as soon as they start trying to charge for the service they can expect the vast majority of these new customer to go.

To paraphrase, Free is not just for Christmas, Free is for life. You can’t just use it as a loss leading customer acquisition tool. That both falls short of its potential but is also damaging. Free services are invaluable when targeted at specific target groups who are unlikely to spend anything. Target it at all consumers and it weakens overall perceptions of the value of music as a paid commodity.

Free should be a crucial element of multi-tiered digital music strategies, based upon sophisticated segmentation of the consumer marketplace, working on the underlying assumption that one size does not fit all. But equally sophisticated consumer life-cycle management is equally important to ensure valuable customers are migrated to premium offerings.

Here’s my Top Ten of the ‘the Year of Free’ (i.e. services that launched or had a key event in 2008 ) Let me know who you think I’ve missed but should have included.

2008: The Year of Free Top 10

  1. Comes With Music (UK launch)
  2. TDC Play (Danish launch)
  3. MySpace Music (US launch)
  4. Pandora (2 million iPhone downloads)
  5. Last.FM (downloads launch)
  6. Spotify (ad supported tier)
  7. We7 (Repositioning & relaunch)
  8. Telia Musik (Nordic & Baltics launch)
  9. Blip.FM (surge in adoption mid 08 )
  10. Qtrax (US label deals signed)