Google Hits Play On Subscriptions

As expected Google just announced their music subscription service: Google Play Music All Access.  To cut a not-so-long story even shorter, it’s another $9.99 streaming subscription service.  To be fair it looks like a solid offering with clean, mobile optimized flat design aesthetics and some nice features, including:

• ‘radio without rules’: fully editable auto-programmed radio based on tracks your listening to
• blended algorithmic and curated programming
• 30 days free trial
• seamless integration with the cloud locker service

The locker service integration is a great move and transforms a relatively isolated product concept into a natural extension of the music experience.  Of course locker services are a transition product aimed at helping consumers migrate from the ownership mindset to remote access, so the life cycle of the product is inherently limited.

The ‘uniquely Google’ recommendations and discovery are designed to ‘know exactly what you want’.  The proof of the pudding will be in the eating, but there is a risk of creating an ever shrinking filter bubble where the range of recommendations narrows the more the service learns about you.

A Great v1.0 But….

Make no mistake, it looks like a great version 1.0, streets ahead of where its peers were at 1.0.  But is it enough?  There are many things that Google could have done to stand out, including innovative pricing, Google+ and YouTube integration, a Motorola device bundle etc.  But of course Google never needed to push the envelope on this one.

The streaming market is only just getting going with 20 million global paying subscribers in 2012 paling compared to Apple’s half a billion iTunes accounts.  Streaming and subscription accounted for just 20% of global digital revenues in 2012 and only 8% of US digital revenues.  So Google’s view, correctly, is that this is a market waiting to happen, so focus on refining the model rather than reinventing the wheel.  That’s exactly what Apple did in 2003 when it launched the iTunes Music Store.  The market was pretty crowded with download stores back then, but how many people remember any of them now?

But that’s not to say though that Google is going to do for streaming what Apple did for downloads.  In fact it faces a number of key challenges:

• Don’t pay won’t pay? Google’s consumer base is predominately built around ad-funded free access and associate Google with free. Even though it will not be offering a free tier, Google still face the freemium challenge of convincing swathes of free users that they should pay for something.  By contrast Apple has the largest single addressable audience of paid content consumers in the globe.
• Paid subscriptions don’t drive ad revenue: for all of Google’s desire to diversify its business and revenue streams, advertising pays the bills. Whereas initiatives like Android, Google+ and YouTube all help drive advertising, premium subscriptions do not. And given that premium subscriptions are a low margin business, the profit rate Google earns from subscription services will be less than it gets from ad supported consumers, even if total ARPU is higher.  So there seems little reason for All Access to become a strategic priority for Google.
• $9.99 is not a mass market price point: Google’s biggest asset for the labels is its unrivalled scale and reach, the potential to take digital music to the mainstream. But 9.99 is not a mainstream proposition, it is in fact what the top 10% of music buyers spend in the UK.  Spotify et al have done a great job of engaging the higher spending music aficionados, but there is a finite pool of them, especially in the increasingly crowded US market.  Unless Google plans on stealing everyone else’s subscribers it is going to find mid term growth potential limited (though expect some near term surge from pent-up demand among Google aficionados).
• Balkanized organizational siloes: on paper Google has the most fantastic combination of music service assets (Play, YouTube, Google+, Motorola, Android etc.).  Tie all of those assets together into a 360 degree music service and you have a world beater on your hands.  But Google can’t. It can’t because these business units operate so autonomously and because each one has business conflicts and commercial constraints that prevent them from being fully unified.  For example, ‘doing an Apple’ with Motorola and turning it into a closed Google Play ecosystem would alienate Android partners.  While YouTube’s music licenses are wholly different and distinct from Google Play licenses. 

 What’s In A Name?

Let’s assume that Google has got an ambitious roadmap for All Access that will include innovation on price, product and channel, perhaps even rolling version 2.0 within 6 to 9 months.  Even then, all of the above still apply, and it is the organizational challenge that clips Google’s wings the most.  Even the elongated name hints at the organizational quagmire: Google Play Music All Access. Doesn’t roll off the tongue in the way Spotify, Deezer, Rhapsody or Rdio do does it?  ‘All Access’ is the service, ‘Music’ is the division and ‘Play’ is the strategic overlay and of course ‘Google’ is the company.  Just to get to where it has, All Access has had to coalesce numerous internal Google fiefdoms.

Google is Becoming Microsoft

Google is beginning to look for music what Microsoft did 10 years ago.  Up to and beyond the launch of the iTunes Store everyone expected Microsoft to be the dominant player.  It held most of the cards in the deck, including the industry standard media player and DRM system.  Then along came Apple with the aces.  Try as Microsoft might to compete, it simply couldn’t get over itself.  It couldn’t pull together the disparate business units that needed to cooperate and it was scared of harming other revenue streams and relationships. Microsoft feared that if it pushed too hard with its own service it would alienate the business partners that relied on WDRM for their music services.  All this begat strategic paralysis.  Much the same is happening to Google.  Fear of alienating Android partners precludes them from doing-an-Apple with Motorola (which I suggested they should do).  Also, pulling together YouTube, Google+ and Android into the All Access mix appears to be a step too far.

Google is at a similar stage of its corporate evolution as Microsoft was ten years ago.  It is a big company that is still learning how to actually be a big company.  Before Google can fulfill its vast digital music potential it needs to learn how to get the best out of its organizational structure first.

Here’s looking forward to version 2.0.

iTunes @ 10

On Sunday 28^th April Apple’s iTunes Store will celebrate its 10^th 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 9^th 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 3^rd 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

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.

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.

Why Twitter #music Should Only Be Considered a Small First Step

So finally Twitter leveraged its We Are Hunted acquisition and today launched the much expected, if not necessarily much anticipated, Twitter #music.  I say ‘not necessarily much anticipated’ not so much because Twitter isn’t a big deal in the digital music ecosystem (it is) but more because few expected Twitter to do anything particularly groundbreaking here.

Making Twitter’s Music Experience 3 Dimensional

Twitter #music is a neat integration of Twitter music content, such as artists’ Twitter accounts and tweets, integrated with iTunes previews streams and (for Rdio and Spotify users) full audio playback.  All of which undoubtedly brings genuine additional value and turns the Twitter music experience from something pretty superficial and two dimensional into a three dimensional music experience.  But in doing so (some nice UI and discovery algorithms aside) Twitter is essentially just doing a Facebook.  It is leveraging its audience’s behavior as a navigational front end for existing music services.

This is of course a good thing, pulling together the disparate social, graphic and audio elements of the digital music landscape into a cohesive whole.  But it is also so much less than what Twitter, Facebook and Google+ could and should do.

What Twitter, Facebook and Google+ Could and Should Do

Between them Twitter, Facebook and Google+ have a cumulative 2 billion registered users and 1.5 billion cumulative active users.  In short, just about every online and mobile music fan.  These three social powerhouses between them also provide homes to the majority of artists online. This sort of power, influence and reach is staggering. And yet so far all that the three have seen fit to do is plug into other music services.

Now that might be the most sensible core plank of their respective digital music strategies, but there is also so much more that they could do that would complement, and add to the core digital music services currently in market.

For example:

• Google+ could create a standard ‘plug and play’ portfolio of creative tools such as remix, karaoke and live jamming apps that artists and fans could plug into hangouts and profiles
• Twitter could allow fans to follow the journey of a song from its original tweet right through to how it got to them
• Facebook could create a virtual jukebox app that would use Gracenote database look-ups to create service-agnostic playlist and digital collection data from users streamed music that would auto-port to any other music service via Facebook

These are all of course tactics, not strategies, but collectively they add up to something much bigger.  The strategy of the social powerhouses has to be: bring new, unique value that genuinely moves the needle.  Simply creating another suite of discovery tools is not enough. Twitter #music adds audio to the visual music discovery journey and in doing do runs the risk of making much of the discovery journey the destination.  Which is great from a user perspective, but much less so for artists and labels unless some robust additional commercial models are added.  The harsh reality is that if you give a social user too much value in the social context, the opportunity for converting engagement into transaction is reduced.

The digital music market needs social’s big three to start ramping up their respective music games. Twitter #music is a cute first step, but not the end game.

The Challenges of Becoming a Subscription Business

Subscriptions are still only a small share of the music market but their time is coming. That time is long over due (I and my former Jupiter colleagues David Card and Aram Sinnreich first started making the case for subscriptions back in 2000) and a slew of big players are getting ready to play ball now that subscription look ready for primetime.  But they will find it far from plain sailing.

Spotify, Deezer, Rhapsody, Muve, Rdio, WiMP etc. have done much get the market moving and although there are still major challenges ahead (e.g. 9.99 not being a mass market price point) a host of new entrants are poised to make their moves.  The much mooted / touted (delete as appropriate) Daisy is one of the more eagerly anticipated ones (see my take here) but focus has recently turned to potential moves from big players like Amazon and Google, while Apple’s arrival in the subscription market is becoming Godot-esque.

All of these companies bring fantastic assets to the subscription market –scale being the most important – but they will all find the subscription transition difficult.  However good their technology assets, however big their marketing spend, however big their customer base, none of these companies have subscriptions running through the DNA of their products nor, most importantly, their customers.  Here are the key challenges each will face:

• Apple: Apple was the music industry’s digital beachhead but now Apple has a problem.  Downloads were a transition strategy with one foot in the digital future and one foot in the analogue past.  Apple has built a paid content customer base founded on ownership, a la carte transactions and downloads.  Meanwhile it tiers its hardware pricing by hard-drive capacity.  In some ways this latter point matters most: in the streaming era consumers download less which means there is less need for higher capacity devices, which in turn means that demand for the higher priced, higher capacity devices tails off.  Apple can use subscriptions to address this issue by creating bundles e.g. iPad Gold, a $200 price premium with device-lifetime access to an iTunes music, video and Apps subscription.   This sort of tactic will be crucial for Apple because the concept of digital content subscriptions is alien to the vast majority of its 400 million iTunes customers.  If anyone can make subscriptions work, it is Apple – and I believe they will – but currently its customer base, hardware pricing and content offerings (iMatch and movie rentals excepted) are simply not the right foundations for building a subscription service on.  A lot needs to change before Apple and its customers are ready for subscriptions.
• Amazon: Amazon’s content-device strategy is the mirror opposite of Apple’s: Amazon is selling devices to help sell content. Amazon needs to be a key player in the music and video business because these low price point items are the bottom rung on the purchase ladder that Amazon hooks new customers in with.  Subscriptions though, are high consideration items.  Amazon is hoping it can nudge customers up to monthly subscriptions in the same way it can nudge customers from a CD to a laptop.  But it isn’t the same transition.  Most Amazon customers have a lot of one-night stands with the retailer rather than a relationship: it is where they go to get stuff, not to immerse themselves in experiences.  Of course Amazon is trying to change that – particularly with video – but it requires a fundamental change in the relationship with its customers.  As with Apple, a device / subscription bundle strategy will deliver best near-term results.
• Google: Google has the most diverse set of assets at its disposal. In YouTube it has the most successful streaming music service on the planet and in Google Play it has, well, not the most successful digital content store on the planet.  Launching a subscription service on YouTube is an obvious option and the sheer scale of YouTube means that even with highly modest conversion rate it can easily become a major player very quickly.  But the fact that YouTube is free is core to why it is so popular, so the vast majority of its users have little interest in paying fees.  Thus Google will have to ‘think different’ to make subscriptions work on YouTube.  But where Google could really make the subscription play work is, well, on Play.  Not Play by itself though but instead as a tightly integrated subscription – device ecosystem with Motorola.  A while ago I wrote that Google ‘needs to do an Apple with Motorola’. It still does, but it should do so in a manner fit for the cloud era by hard bundling a Play subscription service into Motorola handsets. (You should be spotting the theme by now).
• Samsung / HTC / Nokia et al. By this stage any readers from a non-Apple and non-Motorola handset business might be beginning to wonder how on earth their companies are going able to squeeze themselves into the subscription equation.  It is a very good question.  Most mobile handset companies are at a crucial juncture, they now face the same problem as ISPs did in the mid-2000’s: unless something changes mobile handset companies are going to become ‘dumb devices’ just as ISPs ‘became dumb pipes’.  Nokia recognized this earlier than most but got the solution wrong – or at least the implementation – with Ovi and is slowly clawing its way back.  But all of them have a huge task ahead them if they are to avoid becoming helpless observers as other companies build robust digital businesses on the back of their hardware. If they can harness the carrier billing relationship then they have a truly unique asset for building a music subscription market, but that is much, much easier said then done (remember Comes With Music?).

All of these business have the potential to be successful subscription businesses but none of them will find it an easy transition and none of them are guaranteed success.  Not only will they have to transform their products, pricing and customer bases, but they will also have to develop entirely new business practices.  To some degree or another, all of these companies have to make the transition from being retail businesses to being subscription businesses.  Being in the subscription business is all about managing churn.  It doesn’t matter how good a job you do of acquiring customers if you can’t keep hold of them.  These are the skillsets that Rhapsody has been quietly perfecting for years and that Spotify is quickly learning.  A successful subscription business can appear like a duck, slow moving above the water line, but feet moving furiously fast below.

The Churn Killer: Device Subscription Bundles

Any business that is new to subscriptions – whatever they may say to the contrary and whatever talent they might hire in – is going to be learning the ropes.  Which is another reason why hard-bundling subscriptions with hardware makes so much sense for these new entrants. Besides the consumer benefits of turning an ethereal subscription into a tangible product, they allow the providers to plan for 12 to 24 months worth of customer life time value rather than worrying about subscribers churning out after just a month or two.

Even though downloads and CDs will still dominate global music revenues by the end of 2013, it is going to be a big year for subscriptions. Whether the new entrants can help turn that into a big decade remains to be seen.

View From the Top: 10 Streaming CEOs on 2012 and 2013

A special feature for the end of what has a been a big and often controversial year for streaming.  Here are the views of 10 CEO’s of of the top streaming services and of the leading multi-room streaming system, on the following two questions:

1 – What was the most important thing to happen to the streaming market in 2012

2 – What is the most important issue that the streaming market must address in 2013

Daniel Ek, CEO and Founder – Spotify

2012: Growth – both in terms of the number of people who are now paying for music again and the growth in payments back to artists as a result. 2012 was the year when people realised the future growth in the music industry is coming from streaming services.

2013: The abundance of choice. How do you make sense out of 20 million songs?

Axel Dauchez, CEO – Deezer

2012: The streaming market continues to progress at breathtaking speed and we’ve seen some incredibly positive developments in 2012. Most exciting for us, is the fact that targeted online content has developed into something much, much more sophisticated than just algorithm-generated recommendations.  We’re seeing the focus now shift towards personalised music curation. At Deezer we’ve gone a step further, developing really bold new product innovations that are designed to put integration with apps, social media and digital services at the forefront of our new user experience. Our aim is to help music fans discover and share music and promote new artists.  That’s why our local editorial teams work hard to create suggested playlists and recommendations to give music fans a more personal and individual service.

2013: Getting as many people as possible to find out about services such as ours! We’re convinced that the future of digital music will rely on music discovery and re-establishing the emotional connection between music and people. Our mantra is to help people rediscover music, through recommendations by real people all over the world. Our locally-based editorial teams share new music from upcoming local artists, not just in their own countries, but with the other editorial guys around the world – another example of Deezer taking music even further regardless of boundaries. Now our biggest challenge is to get people everywhere to find out how intuitive – and fun! – it is to use Deezer, and we hope to make great strides on this in 2013.

Jon Irwin, CEO – Rhapsody

2012: Looking back, 2012 was the year that streaming became mainstream. We’ve seen a rapid evolution since streaming music was freed from the PC and became a constant companion via smartphones, to this year, when streaming made its way into the living room and into cars—the two places where people listen to the most music. Streaming services are everywhere! This heightened awareness has resulted in more consumers embracing the model and eschewing their old beliefs around the need to own their media; which has given rise to more investment in the sector, innovation around business models and M&A activity. After spending the past 10 years forging the path and taking those proverbial arrows, we are finally seeing the realization of streaming music’s promise.

2013: The most important issue of the mainstreaming of streaming is that artists are paying more attention to how they’re being paid on the various streaming services. Artists are seeing a lot of streams, but are not seeing a lot of cash for them. This makes them justifiably nervous that streaming services are getting popular at the expense of digital sales–and in some cases withholding their music from streaming–a detriment to the growth of these services, just as they become popular. The solution of the problem is twofold. First, we need to do a much better job at education about how artists are compensated and creating transparency around where streaming revenues flow. Streaming services have a responsibility to innovate around artist compensation to get more money into artists’ pockets and help them understand how their music is being consumed. I think there is a lot more that we can—and should—do to ensure that artists are fairly compensated for their music and are extracting maximum value from streaming services.

Steve Purdham, CEO and Founder Investor – We7

2012: Two things, in the UK, the silent landmark in 2012 was the launch of the BBC iPlayer Radio app this has the potential in 2013 to be the catalyst for mainstream adoption of streaming, without the need to know its streaming and secondly the driving momentum of smart phone and tablet adoption reaching what I believe was a tipping point in 2012.

2013: In 2013 the dream would be easier licensing, more flexible pricing plans removing the artificial technical and commercial barriers with  the ability to demonstrate clear ROI’s but in reality for any of the models to work they need the true internet scale that is possible and to achieve that we need to find the means to enable mass market adoption. This is the elusive jewel in the crown that we all should be really seeking to solve.

Ben Drury, CEO and Founder – 7 Digital

2012: Streaming cloud locker services from Google and Amazon

2013: Globalised rights

 

 

Drew Larner, CEO – Rdio

2012: Social media has had a profound impact on the way music is shared, which is something we anticipated when we first built Rdio. 2012 also saw the entry of services into global markets (with our own service expanding to 17 countries). The continued growth of mobile around the world with faster speeds and better phones also contributed to the rise of music streaming in 2012.

2013: Awareness is still a key factor moving into 2013. We’ve seen a big shift in 2012 with more services opening up globally, but we aren’t truly mainstream yet. Innovating on discovery is a key focus as well. With all the songs in the world at your fingertips, creating fun ways to decide what to play next is a challenge. We built Rdio with human powered music discovery at the heart of the experience and we’ll continue to enhance discovery across platforms moving into 2013. Another key issue moving into the new year is the our responsibility to the artist community. We’ve started to address this through the recently launched Artist Program and will continue to work closely with artists to help them create new revenue streams and tap into new opportunities generated by the streaming music model.

Nick Massey, CEO – Rara

2012: The introduction of frictionless music sharing across social networks has led to a massive increase in the adoption of music streaming in 2012.  62.6 million tracks were played 22 billion times across Facebook in the first 12 months of open graph coming to the network.  In the UK UMG reported that 7.5bn tracks had been streamed in 2012 to mid November; a 700% increase on the 1.1bn tracks streamed in 2011.

2013:  Despite the huge rise in popularity of streaming, there’s a lot more work to do before the mass market transitions from music ownership to the access based streaming music services.  Increasing adoption of tablet computing is making it easier for people to consume digital entertainment content while high speed broadband and 4G mobile networks deliver more data to us faster.  However it will be the ways in which streaming services enable simple but engaging access to music through recommendations, sharing and curation which will be key to driving wider consumer uptake in 2013.

Mike Bebel, Head of Music – Nokia

2012: 2012 was a year when many of the mainstream music service providers realized that the typical mobile music consumer is seeking more effortless and delightful entertainment. This is something we had already understood and rolled out to over 20 markets around the globe with Nokia Music, the most satisfying and compelling mobile music experience to date.

2013: In 2013, we expect others will follow our lead and work hard to remove barriers to usage and some have already announced that they also need to solve the consumer issues that we identified long ago. Rest assured that Nokia Music will continue to innovate and deliver the music that people love in the most satisfying and intriguing mobile experiences. We welcome all to discover and enjoy it.

Espen Lauritzen, CEO – WiMP

2012:  The beginning of consolidation in the industry, which I believe we will see more of in the coming year.

2013: The big discussion on sustainability of the business model throughout the value chain.

 

John MacFarlane, Founder and CEO – Sonos 

2012:  In 2012 we’ve seen streaming services go mainstream. With the proliferation of innovative services such as Spotify, RDIO, Pandora, Rhapsody and QQ, we now have access to more music than ever before. At Sonos we’re dedicated to providing music lovers with the simplest way to enjoy all the music on earth in every room and our partnership with such popular music services has ultimately seen our customers consume twice as much music.

2013: 2013 must bring a healthy debate on the value chain of artist to consumer within streaming, and it’s essential that this is resolved to ensure the artist gets paid and the consumer gets a great experience. We are just beginning this dialogue but it absolutely needs to be continued in earnest over the next year.

My take

2012: It was streaming’s big year.  Finally the confluence of ubiquitous connectivity, and smartphones and tablets going mainstream has created the necessary market conditions for streaming to step up to the plate.  It is still very early days and streaming revenues are dwarfed by download and CD revenue, but finally there is the glimmer of a ‘digital plan B’. The artist streaming debate was a useful coming of age for artists, but too much data has too often been misinterpreted, creating a confused marketplace.

2013: 9.99 is not a mass market price point, somehow (bundling, discounts, pricing innovation, partnerships etc) that price must come down to drive wider adoption.  Also the value chain must work out a transparency solution that can work within the restrictions set by commercial relationships.  Artists may never get the full picture, but it is in the interest of all parties that they get as much of it as is possible to help them make informed opinions. Finally, the elephant in the room remains YouTube.  More catalogue than any of the other services, video (of course), great functionality, on every smartphone and tablet, and all for absolutely nothing.  That creates a playing field that is anything but level for the rest.

Spotify’s Bold New Transition from Streaming Music Service to Music Platform

Spotify today gave an update on the year to date and announced a host of new features.

5 Million Paying Subscribers

As expected Spotify has managed to hit the 5 million paying subscriber mark which is a fantastic achievement, as is the 1 million US paying subs also announced.  That translates to 1 million new paying subscribers in just 3 months.  Back in May I predicted that Spotify would hit 8 million paying subscriber in May 2013.  It looks like that prediction is going to be in the right ball park.  Spotify’s official active user count is now 20 million, which interestingly is much closer to the Facebook reported 24 million – those numbers have been very far apart for the last 9 months or so.  Which indicates that Spotify’s marketing funnel has got bigger as its profile in the US has grown.  i.e. more people are trying out the free service. (See the graphic at the bottom of the page for a summary of Spotify’s numbers).

Spotify also announced it has paid out $500 million to rights owners, which is impressive, but to keep a sense of perspective is about 2% of all digital music service money paid to record labels globally since 2009 when Spotify burst onto the scene.

A Bold New User Experience

But of more interest, to me at least, was a slew of new features that collectively transform the Spotify experience.  Spotify has made a bold UI transformation from a list-based approach to a rich visual experience with modules of music content (which visually looks like a cross between Rdio and Pinterest).  These include music, artwork, bio information, reviews from Pitchfork, Songkick gig information, recommendations based on your behaviour.  In doing this, Spotify has made a subtle but powerful transition from streaming music player to immersive music platform.

Spotify Thinks the Discovery Question Does Need Answering

Spotify also announced, as TechCrunch had correctly predicted, a new social discovery tool called Follow, whereby users can follow people’s whose music tastes they want to keep up with. People can follow friends or music influencers such as artists, music bloggers, music journos etc. pretty much in the way they would on Twitter, but here they get sent playlists of music to listen to instantly rather than 140 characters of static text.

Spotify are trying to answer the big discovery question which has so far gone largely unanswered, despite plenty of well-intentioned efforts to come up with a solution.   Discovery has been the centre of some pretty heated debate of late – as this and this post show – but whether or not it gets fixed in the wider music industry it is a huge issue for streaming music services.  What is the point of having all the music in the world at your fingertips if a search bar is all you have to find your way around.

Good music discovery happens in two main ways:

1. Someone who’s reputation we trust (DJ, cool friend, family) makes a recommendation
2. We serendipitously fall upon a piece of music that we love

Why Discovery Matters So Much to Streaming Services

Unlimited music services face the paradox of their being so much choice that there is in effect no choice at all.  People need a way to navigate through immensity of the music world. Spotify’s Follow function is a way of addressing this issue. It’s a smart way to do it, because good music discovery isn’t ‘we’ve seen you like this song, so we think you’ll like these three songs too’.  It’s much subtler than that.  Following people who have great music taste can be exactly that sort of subtle discovery.  But this isn’t a new idea.  Beyond Oblivion had built their entire service around the concept of following influencers (and they had a pretty cool atom-like visual navigation to let you get from influencer to influencer too).  Of course Beyond never got to market, but Spotify have picked up the idea and run with it. Rdio also have the feature.  In fact if I were Rdio I’d be feeling a little as if some of my clothes had been stolen.

Spotify’s Follow feature gets really interesting in an artist context.  If an artist posts a music playlist to his followers it gets delivered straight into their music collections.  A great way to launch a new album direct to your fans.  Though it does raise some interesting questions about whether this will increase or decrease album sales?  Does getting your favourite artists’ latest album delivered straight into your Spotify player sate your appetite straight away or simply whet it?

Spotify’s Follow feature is not the answer to the discovery question, but it is certainly one important step in the right direction.  In fact there won’t be a single answer to discovery, because we all like to discover music in different ways.  Some of us want to dive in and have an immersive experience, others want something music less. Some of us want both, but at different times.  And Spotify recognize that by offering multiple other new ways of recommending music, ranging from recommendations based upon user behaviour, collaborative thinking and context such as the age of the user.

Spotify is Now A Music Platform

This set of new features is the most important change in Spotify’s user experience, period.  It transforms Spotify from an excel spread-sheet streaming app into an immersive, multimedia, context rich music experience platform and app ecosystem.  Back in November 2011 I suggested that with the launch of its API platform that Spotify was taking the first step towards making music the API, and towards transforming Spotify into a music platform.  Now just over one year on we can see the fruits of that labour.

Much of what Spotify has done isn’t unique, but they have executed it in a manner akin to Apple in its digital music prime.  Execution is everything.  Spotify has just set the digital music experience standard for other music services to aspire to.

Streaming Music Apps – Three’s Not A Crowd

You wait months for a streaming music app announcement and then three come along on the same day….buses come to mind.

Deezer App Studio

Deezer have just announced the launch of a Spotify-like app platform ‘App Studio’ for third party developers and will soon also launch an ‘App Centre’ for users to discover apps. It is a welcome development from Deezer and as I have said for some time, streaming services can play an invaluable role of providing the infrastructure and music content on which third parties can then develop innovative and differentiated user experiences.  Streaming itself is not a product, it is a delivery mechanism.  Streaming apps turn the streaming user proposition into a rich set of products and features.  Of course Spotify set the agenda here and Deezer’s announcement is almost a year to the day later than Spotify’s app announcement (read my take here on Spotify’s bid to turn music into the API).  This isn’t the first time that Deezer have followed Spotify’s lead and they need to be careful they do not develop a reputation for shadowing Spotify’s strategy.

PLAY GUETTA

Meanwhile on Spotify’s app platform comes the launch of David Guetta’s ‘PLAY GUETTA’ app. Back when Spotify launched artist apps back in June I said that they were a great start on the rod to relevance for streaming music services and music discovery but that there was a long distance to go (which was a polite way of saying that the first wave of apps weren’t very good).  The David Guetta app is a different kettle of fish altogether.  Whereas the first wave of apps had an air of unfulfilled promised ‘PLAY GUETTA’ is a rich, immersive and – crucially – massively social app.  As a testament to the importance of Spotify’s app ecosystem, ‘PLAY GUETTA’ is built using the Soundrop SDK, itself a Spotify app.  ‘PLAY GUETTA’ demonstrates three crucial elements of value that streaming apps can deliver:

• Coalesce fan communities of likeminded fans: leveraging some of the core Soundrop functionality Guetta fans can help shape what music is played and recommended, even at a country level (see graphic).
• Create immersive experiences: apps allow streaming services to focus on the business of acquiring customers while third party developers can develop cutting edge user experiences.
• Open up the long tail: for an artist like Guetta who has an extensive back catalogue, artist apps create a fantastic opportunity for connecting fans with older material.  For the consumer, because they have unlimited music access, listening to older albums is a pure added value rather than added cost, but for the artist and the label it is extra revenue.

‘PLAY GUETTA’ shows the potential of what streaming music apps can achieve.

 

Rdio iOS and Android Apps

The third and final streaming app announcement of the day was the launch of refreshed iOS and Android clients for Rdio.   Though obviously a different type of app announcement than the previous two, Rdio deserves credit for forging their own way in the streaming space, focusing on building a differentiated user experience.  Rdio do also have their own API, but they have worked hard to create a user experience that is rich and immersive out of the box.

It is perhaps a little overblown to claim that the future of streaming music depends upon apps, but be in no doubt, apps will play a major role.  Expect this space to hot up in 2012.

For Those About to Download….

This week Apple and Colombia announced the arrival of another big digital holdout to the iTunes Store: AC/DC.  Having grown up listening to AC/DC and playing Angus Young riffs such as the seminal ‘Whole Lotta Rosie’ in my high school heavy metal band, my level of interest in this announcement is perhaps a little biased.  But there are a couple of important factors here:

• The digital hold outs are being won over by downloads. When Apple first launched the iTunes Music Store there were plenty of high profile holdouts, the most significant of which being the Beatles.  Over the subsequent years most of those holdouts have come on board.  iTunes is no longer the scary unknown quantity it once was.  iTunes is now the establishment. Its FUD Factor (Fear Uncertainty and Doubt) has largely diminished.
• But streaming is still a step too far. By contrast streaming services such as Spotify are at a much earlier stage of their evolution and their FUD Factor is high.  Thus Spotify has a sizeable body of holdouts, including AC/DC. The same fear of the unknown that once afflicted iTunes now tars Spotify, Deezer, Rdio et al.  The paid download might feel like the embodiment of security and safeness now, but back in the early noughties it struck terror into the hearts of many music industry executives who, rightly as it transpired, feared that it would result in consumers hacking away at albums to skip to the singles.  Streaming will ultimately hone its model and win over the doubters but it will be a slow and steady process.  After all it took a decade for AC/DC to be won over by iTunes.

The Importance of Not Getting too Hung Up on Yesterday’s Stars

Back when the Beatles were finally licensed to the iTunes Store I went on record as saying it wasn’t actually a big deal for the digital music market.  I found myself the subject of torrents of abuse from Beatles fans (for entertainment’s sake you can see the comments here). The point I was making was that the Beatles, as important as they are both creatively and commercially, are part of the past.  They are not what matters to the generation of young music fans that the music industry really needs to win over with (paid) digital services.  The Digital Natives who currently just aren’t spending money on music.  The Beatles were a big coup but they mattered much more to Steve Job’s generation than to tweens and teenagers.  For sake of impartiality I have to apply the same rule to AC/DC, who matter much more to my generation than to the Digital Natives.  AC/DC finally being won over to the iTunes Store is important progress, but much more important will be more digital services which get young music fans on the music spending ladder.  BBM Music is a rare and under-appreciated foray into this market.

Defusing the Demographic Timebomb

A Demographic Timebomb is ticking: unless the Digital Natives start spending meaningful amounts of money on music soon (either directly or indirectly) the gaping hole they will leave in music spending as they get older (and thus have more music to spend) will make the current decline in music revenues look like a mere blip.  In fact this is a warning I first made 7 years ago, and we are already feeling the first effects, but there is still time to address the issue.

A lot is made of the importance of iTunes in tapping the young, pre-credit card market, by dint of teenagers using their parents’ iTunes accounts to buy music. It is certainly an important factor but the scale is far below where it needs to be to have a meaningful impact on the pre-credit card youth and it is unfair to expect Apple to bear all of that burden. Although it is worth considering that as the iPod transitions towards being a youth product that Apple may yet be the key link in the youth chain.

So welcome to the digital age AC/DC, and congratulations to Apple for getting them on board the digital bandwagon, but I hope your arrival does not distract from the even more important task of winning over the Digital Natives.

Deezer, Spotify and the Streaming Gold Rush

The music streaming world is one full of contrasts and inconsistencies.  At one end We7 and MOG sell for peanuts;  in the middle Rhapsody, Sony, Rdio, Wimp, Rara and others continue to steadily build a market; and at the other end Deezer and Spotify are sucking in investment with the force of a black hole. Spotify’s investment is well documented, but this week Deezer confirmed their seat on the fast train with a $100m investment from Access Industries, which also just happen to own Warner Music.

Leaving aside for a moment the intriguing fact that the two streaming global super powers are European, Deezer has managed to slip beneath the radar of the often US-skewed digital music world view by pointedly deciding to ignore the US market (for now).  Like a canny general who decides to march around a heavily fortified stronghold and thus effectively leave it stranded behind enemy lines, so Deezer expects the streaming war to waged on different shores.  They are both right and wrong.

The US is Saturated and Yet Potential Remains Untapped

There is no doubt that the US paid streaming market is overly catered for at present, and that Deezer would struggle to get any foothold.  Also there is clearly a much bigger scale opportunity in the remainder of the globe.  However, and somewhat paradoxically, the US market should also have much much more space, plenty enough for Deezer, Spotify and the rest to flourish in.  The problem is that the $9.99 streaming monthly subscription is not a mass market value proposition and it is not about to suddenly become one. We have had the product in market for over a decade, if it was going to hit hockey stick growth we’d have seen it by now.

To be clear, this is not to say streaming music is not a mainstream proposition, but that the $9.99 streaming subscription is not.  And that is a problem, because it is clear that for the economics of streaming to add up (for artists, services and labels alike) scale is key.  Pandora’s Tim Westergren has made the case for lower statutory streaming rates to drive scale, it is probably time to start a parallel dialogue for on-demand streaming.

But lower wholesale rates alone won’t fix the problem.  The market still desperately needs more mobile carriers, ISPs and device companies to start hiding in their core products some or all of the cost of subscriptions to consumers.  Cricket Wireless, Telia Sonera, France Telecom and of course TDC have all made solid starts but more, much more, is needed.

Price Is the Biggest Barrier to Streaming Going Mainstream

If streaming is to go mainstream the price point (for streaming with full mobile device support) has got to get towards $5, through a combination of bundling and rate discounting. Until then Spotify’s and Deezer’s gold rush millions will achieve little more than saturate the high end aficionados that the $9.99 price point appeals to.  Currently both companies look remarkably similar in terms of user metrics (see figure) but while they pursue somewhat distinct geographic priorities they will continue to find those few per cent of aficionados in each market.  Things will get really interesting when they reach $9.99’s adoption glass ceiling.

Apple: the Elephant in the Room

And of course there is an elephant in the room: Apple.  Apple have played their hand cautiously to date, conscious of their hugely influential role in the digital market and indeed in the music industry more broadly.  If they get their streaming play wrong (and there will be an Apple streaming play eventually) the results could be catastrophic for the music industry.  Apple’s 400 million credit card linked iTunes accounts dwarves Spotify and Deezer so it is understandable that the they each want to make hay while they can.  But the streaming pricing problem still needs fixing, and soon.

Why Losing Free Customers is a Good Thing for Spotify’s Business Model

In my Future Music Forum keynote last week I discussed some Spotify metrics which were picked up by Paid Content and have stirred up a bit of a debate.  Here is a little more context to those numbers.

The headline statistic is that in 2011 Spotify had to acquire approximately 1.8 million users per month to retain just 400,000 a month (i.e. ‘losing’ 1.4 million a month), resulting in a total monthly churn rate of approximately 20%.  These estimates are based upon the following reported numbers:

• Spotify’s end of year accounts for 2011 reported a total of 32.8 million registered users.
• In December 2011 Spotify reported 10 million active users on its developer blog.
• In March 2011 Spotify reported 1 million paying subscribers, representing 15% of active users, which put the active user count at 6.7 million.
• In September 2010 Spotify held a press event to announce 10 million registered users.

The headline numbers give a ‘gap’ of 22.8 million between registered users and active users at the end of 2011.  Using all of the reported numbers and applying flat rate growth assumptions for intervening months we can calculate the total number of active and registered user gains throughout calendar year 2011 (see figure 1).  All of which gives approximately 1.8 million new registered users per month but only 400,000 active users per month.

Figure 1

Now of course there will be monthly and seasonal variations in those numbers so the exact count will be different for each calendar month.  Also many of those 1.4 million new monthly inactive users (i.e. the gap between new registered and new active) may well become active later in the year.  But the headline trend remains that Spotify has to gain a lot more users than it holds onto (or at least did in 2011 – though I would expect similar metrics to apply in 2012).

Losing Low-Value Free Users Actually Helps Spotify’s Business Model

None of this is necessarily a reflection of a flawed business model for Spotify.  In fact, in my view, it reflects positively.  Let me explain.  Spotify’s business is all about selling premium subscriptions.  That’s where the money is for Spotify, labels, publishers and artists alike. The free tier of its business is simply a marketing funnel.  Ultimately it doesn’t actually matter that much how many of those free users stay on board as free users, what matters is how many convert to paid.  In fact, it benefits Spotify if those users who have no intention of paying churn out early on from the free service as it means less cost to Spotify’s bottom line.  As challenging a path towards profitability as Spotify may find itself on, it would be a dramatically more difficult road if all of those 32.8 million users were active.  So Spotify’s business model and margins actually benefit from the majority of those new free users churning out of the service early, allowing Spotify to focus on migrating the remaining engaged free users to paid.

Figure 2

Free Churn Does However Raise Questions About the Wider Streaming Market

All in all Spotify has brought a huge amount of value to the digital music market and has achieved many credit-worthy milestones (see figure 2).  But as much sense as the free-user-leakage makes sense to Spotify’s business model, it does raise challenging questions about the streaming model more broadly.

For so many users (two thirds of Spotify’s 2011 total) to effectively say “no to free” indicates that streaming audio, even when free, does not resonate strongly enough with mass market music fans.  There are multiple potential reasons that Spotify free users churn out, such as: usage caps, advertising, being PC only, not being able to burn to CD, even just being a stream rather than a download.  Many of those can be fixed with a 9.99 subscription, but the simple fact is that most consumers do not spend that kind of money on music.  9.99 is actually the average monthly spend of the top 20% of music buyers. So it is a price point for the aficionados not the mainstream, which means that most consumers will never get a proper taste of the ‘complete’ streaming audio experience.  Which is why I continue to argue strongly that subsidized subscriptions and cheaper price points are the crucial routes to the mainstream music fan that need pursuing with haste.

Spotify, Rhapsody, Deezer, rDio etc are all doing a great job of trying to take premium subscriptions to the masses, but until they can work out a way to get cost-to-consumer price points down, the addressable audience remains a subset of that top 20% of music buyers.

The Elephant in the Room

And all of their cases are challenged further by an uneven playing field.  While all those music services have to charge for mobile access and have some gaps in their catalogues, YouTube provides unlimited access, on all mobile devices, with the world’s largest music catalogue, with video, for absolutely no cost at all to the consumer.  As far as streaming goes, there is one rule for YouTube, and another for the rest.  Until that anomaly is fixed, the rest will be swimming against the tide.