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.

Making Streaming Work (Fixing Playlists and Churn)

UPDATED 28/3/13 (see sections labelled ‘UPDATED’

During my SXSW panel I presented a slide that showed the distribution of paid, active free, and inactive users of the two big streaming services Spotify and Deezer based upon the latest data for both services.  What the numbers show is that inactive users is a big problem for streaming services, which in actual fact means that churn is a bid problem for streaming services.  (Something I discussed last week).

Paul Resnikoff at Digital Music News and Stuart Dredge at MusicAlly have since written pieces about the data and something of a debate is emerging.  But the important point is not whether Deezer has more inactive users than Spotify, but that streaming services as a whole have a problem with churn.

To illustrate the fact that this is not a Deezer problem I have created a new chart (below) that uses the latest available official numbers for all three types of users from both services.  The most recent total user numbers for Spotify are Facebook app users and are therefore not official stats.  The most recent official Spotify data for all three metrics is from year-end 2011 – when these numbers were filed in a company report – and for Deezer this means early 2013 when the numbers were quoted in the press.

UPDATED: Note that Spotify only ever mentions its total registered user number in company reports while Deezer have quoted theirs more frequently. So the Deezer numbers below are a more accurate representation of the current scenario whereas Spotify’s user base dynamics have changed markedly since end-2011.  (Whether that translates into more or fewer inactive users we’ll have to wait and see.)

Retention is a Freemium Issue not a Spotify or Deezer Issue

What is clear is that both services have essentially the same distribution of users, with the vast majority of both services’ installed bases being inactive users.  If you spread Spotify’s 2011 numbers over the course of the year, from the end of 2010 base numbers, this translates into Spotify acquiring 1.9 million new users every month but only keeping hold of 200,000 of them.

Again, this is not a Spotify problem, it is a fundamental issue with the freemium music model: many more people decide its not for them than continue using the service.  Over time this effect will soften, as people become more familiar with the idea of on-demand streaming.  But it will always be a key part of the mix for both free and paid users.

UPDATED: It is also not even just a music service issue.  As I discussed in a previous blog post about Facebook, social networks like Google+ and Twitter also have a big issue with inactive users, as this chart illustrates. In fact only a quarter of Google+ users are active, as are less than half of Twitter users.  As Daniel Ek correctly identified on Twitter, this is a problem that affects all businesses that have a free tier that requires registration.

Currently Deezer and Spotify are in growth stage and are more focused on acquisition than retention, but sooner or later they’re going to have to recalibrate their metrics if they want to move towards sustainable financial models.  It can be done, as Rhapsody shows us, but it is not an easy task, and it also doesn’t leave a lot of spare cash in the kitty for aggressive growth.

Any established subscription business – such as a cable or satellite TV provider – will tell you that managing churn is the overriding strategic objective.  Any subscription service – especially a nice-to-have like music – is going to be vulnerable to churn.  But this does not mean that the music subscription business is fundamentally flawed, rather that the industry needs to start thinking in terms of a much more fluid movement of users than was ever the case for downloads.  In the download model Apple locked in its customers with devices.  Streaming services have no such asset – at least not yet.

Playlists Belong to Users not Services

With time, clear blue water will emerge between the value proposition of streaming services, and this should be considered not just as a loyalty driver, but also as reason for people to swap and change subscription services just as people swap and change cars.  And for that to happen streaming services need to stop thinking about users’ playlists and libraries as the property of the streaming service to be used as velvet handcuffs and instead as the transferable property of the user, and by extension, the communal property of the marketplace.

Locking music consumers into devices sort of made sense for companies like Apple that were largely using music to sell hardware.  But for companies like Deezer and Spotify that are just in the business of selling music – or at least access to it  – there is no such justification.  The subscription market is only just getting going and there is far too much green-field opportunity for services to get bogged down in internecine conflict.  As MusicAlly’s Dredge correctly identifies, opening up Playlists could prove to be crucial to the long term validity of streaming and subscriptions (and Tomahawk is a great first step). But to really work, streaming services need to stop thinking about Playlists as their property and instead as the property of their users.  That’s when services like Tomahawk could come into their own and it is when mainstream music fans will view streaming services with less scepticism.   In the words of ShareMyPlaylists: Long Live The Playlist!

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.

Rara Sets Sights on the Global Streaming Opportunity

Today UK-headquartered streaming service Rara issued a slew of announcements (squeezed in just ahead of Apple’ iPad mini launch) including expanding from 20 to 27 markets, increasing their catalogue to 18 million tracks, iOS and Windows apps and a deal with Lenovo.  Rara have been in the market for some time now but have largely slipped under the radar.  Now though they appear to be ready for taking a shot at the big time.

There is of course no shortage of streaming music services (Spotify, Deezer, Rhapsody, Wimp, Simfy, Sony Music Unlimited etc etc) but there is also a massive amount of opportunity.  Streaming will become increasingly pervasive as the music world continues its steady switch from the distribution age of selling-units-of-stuff to the consumption era of access-trumping-ownership.  In fact streaming will become so ubiquitous that it will become anachronistic to talk of ‘streaming services’.  Streaming is merely the technology that enables on-demand, consumption based music experiences.   So when the leading on-demand services only number their total users in the low tens of millions and paying users in single digit millions, while Apple touts 450 million credit card iTunes accounts, the scale of the untapped opportunity is abundantly clear.

The challenge is how to sell streaming to the masses.  Personalized radio is one approach: Pandora have made a lot of progress, with more than 150 million registered users and 7Digital just announced a $10 million finance raise to (among other things) pursue their own personalized radio play.  Rara’s strategic ambition though, is to take on-demand streaming to the masses.  Rara has built its user experience and market strategy around targeting the mass market consumer, opting for moods and a visual navigation approach over the traditional list-based navigation.  But an inherent difficulty with selling premium subscriptions to the mass market (Rara do not have a free tier) is that those very consumers are the ones who are going to find renting streaming music an unfamiliar concept.

Rara have built a service designed to demystify streaming. The partnership with Lenovo (Rara will be pre-installed on laptops and tablets) will help.  But a new stealth competitor will be present on those devices, in the shape of Microsoft’s subsidized xBox Music on all Windows 8 devices.  When you consider the challenge of persuading a new laptop owner to pay for a music service when the device comes with a free music service embedded in the OS you realize just how disruptive Microsoft’s new music play is.  As I have said before, I’ll be very interested to see what the European Commission make of xBox Music’ Windows 8 bundle, considering that years ago they compelled Microsoft to unbundle Windows Media Player from Windows for being anti-competitive.

The xBox challenge is of course a hurdle all music service will have to navigate, but Rara will be hoping that being pre-installed on the devices of one of the world’s biggest PC manufacturers will give them an advantage over the rest.

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.

The Music Format Bill of Rights

Today I have published the latest Music Industry Blog report:  ‘The Music Format Bill Of Rights: A Manifesto for the Next Generation of Music Products’.  The report is currently available free of charge to Music Industry Blog subscribers.  To subscribe to this blog and to receive a copy of the report simply add your email address to the ‘EMAIL SUBSCRIPTION’ box to left.

Here are a few highlights of the report:

Synopsis

The music industry is in dire need of a genuine successor to the CD, and the download is not it. The current debates over access versus ownership and of streaming services hurting download sales ring true because a stream is a decent like-for-like replacement for a download.  The premium product needs to be much more than a mere download.  It needs dramatically reinventing for the digital age, built around four fundamental and inalienable principles of being Dynamic, Interactive, Social and Curated (D.I.S.C.).  This is nothing less than an entire new music format that will enable the next generation of music products.  Products that will be radically different from their predecessors and that will crucially be artist-specific, not store or service specific.  Rights owners will have to overcome some major licensing and commercial issues, but the stakes are high enough to warrant the effort.  At risk is the entire future of premium music products.

D.I.S.C.: The Music Format Bill Of Rights

The opportunity for the next generation of music format is of the highest order but to fulfil that potential , lessons from the current digital music market must be learned and acted upon to ensure mistakes are not repeated.  The next generation of music format needs to be dictated by the objective of meeting consumer needs, not rights owner business affairs teams’ T&Cs.  It must be defined by consumer experiences not by business models.  This next generation of music format will in fact both increase rights owner revenue (at an unprecedented rate in the digital arena) and will fuel profitable businesses.  But to do so effectively, ‘the cart’ of commercial terms, rights complexities and stakeholder concerns must follow the ‘horse’ of user experience, not lead it. This coming wave of music format must also be grounded in a number of fundamental and inalienable principles.  And so, with no further ado, welcome to the Music Format Bill of Rights (see figure):

• Dynamic. In the physical era music formats had to be static, it was an inherent characteristic of the model.  But in the digital age in which consumers are perpetually online across a plethora of connected devices there is no such excuse for music format stasis.  The next generation of music format must leverage connectivity to the full, to ensure that relevant new content is dynamically pushed to the consumer, to make the product a living, breathing entity rather than the music experience dead-end that the download currently represents.
• Interactive. Similarly the uni-directional nature of physical music formats and radio was an unavoidable by-product of the broadcast and physical retail paradigms.  Consumers consumed. In the digital age they participate too.  Not only that, they make content experiences richer because of that participation, whether that be by helping drive recommendations and discovery or by creating cool mash-ups. Music products must place interactivity at their core, empowering the user to fully customize their experience.  We are in the age of Media Mass Customization, the lean-back paradigm of the analogue era has been superseded by the lean-forward mode of the digital age.  If music formats don’t embrace this basic principle they will find that no one embraces them.
• Social. Music has always been social, from the Neolithic campfire to the mixtape.  In the digital context music becomes massively social.  Spotify and Facebook’s partnering builds on the important foundations laid by the likes of Last.FM and MySpace.  Music services are learning to integrate social functionality, music products must have it in their core DNA.
• Curated. One of the costs of the digital age is clutter and confusion: there is so much choice that there is effectively no choice at all.  Consumers need guiding through the bewildering array of content, services and features.  High quality, convenient, curated and context aware experiences will be the secret sauce of the next generation of music formats. These quasi-ethereal elements provide the unique value that will differentiate paid from free, premium from ad supported, legal from illegal.  Digital piracy means that all content is available somewhere for free.  That fight is lost, we are inarguably in the post-content scarcity age.  But a music product that creates a uniquely programmed sequence of content, in a uniquely constructed framework of events and contexts will create a uniquely valuable experience that cannot be replicated simply by putting together the free pieces from illegal sources.  The sum will be much greater than its parts.

Table of Contents for the full 20 page report:

Setting The Scene

• Digital’s Failure To Drive a Format Replacement Cycle

Analysis

• Setting the Scene
• (Apparently) The Revolution Will Not Be Digitized
• The Music Consumption Landscape is Dangerously Out of Balance
• Tapping the Ownership Opportunity
• The Music Format Bill Of Rights
• Applying the Laws of Ecosystems to Music Formats
• Building the Future of Premium Music Products
• D.I.S.C. Products Will Be the Top Tier of Mainstream Music Products
• The Importance of a Multi-Channel Retail Strategy
• Learning Lessons from the Past and Present
• We Are In the Per-Person Age, Not the Per-Device Age

Next Steps

Conclusion

The Awkward, Unanswered Questions That Led to Coldplay’s Spotify Embargo

Coldplay have opted to not have their latest album Mylo Xyloto made available on streaming services…all of them, though of course Spotify is the core motive for this move.  It is yet another thrust of the wedge which is inserting itself between the streaming service and artists.

The download / streaming revenue disparity

Coldplay – with apparently begrudging support of their label EMI-  have made a business decision that they would prefer to have a smaller number of people listening to Mylo Xyloto to ensure that a larger number of them are buying it.  The problem with Spotify is that it generates so little income per activity to artists compared to downloads, but this is not just a Spotify issue.  In my earlier post showing PledgeMusic’s Benji Rogers’ digital income I showed how the average pay out per activity for streaming services (premium ones included) is over 300 times smaller than the average pay out per activity on iTunes.   Now to be clear, we are not comparing apples with apples here (no pun intended).  An activity on iTunes is a one-off paid download, whilst an activity on a streaming service is one stream and that play could occur multiple times for the same song.  Yet it still leaves a rather large number of plays required before you start catching up with an iTunes pay out.

The three possible reasons why artists get so little from streaming services

So what is broken with the model?  Streaming services already feel that they pay out too much to rights owners: services typically pay out in the region of 80% of their income to rights holders. So increasing their royalty payments would likely put many services out of business, unless of course they hiked their prices. But 9.99 a month is a hard enough sell as it is, let alone anything higher.

So where is the money going? Here are three possible scenarios:

• The long tail is getting mined, and some.  One possibility is that users of streaming services are spending their time listening to such a vast diversity of catalogue that any one artist only gets a minimal amount of plays and thus only small pay outs.  However, with discovery features so weak on most services, the opposite is more likely to be true for the majority of users.  Indeed 24/7’s CEO Frank Taubert once stated that a third of 24/7’s catalogue had never been downloaded, not even once. (24/7 remember is the service that powers the remarkably successful TDC Play unlimited music service in Denmark).
• Messy metadata is to blame. Streaming service metadata is a complex beast.  With so many different sets of fields from different rights holders having to be blended into one massive dataset by each service, and each time in a slightly different way.  There is always going to be room for error.  This may be causing some proportion – possibly a significant share – of plays not getting reported.  When Benji Rogers decided to test how well Spotify paid out, he left his albums on permanent stream for a month.  Yet his digital income reports for that month not only fell well short of that number of plays, some of the catalogue was listed as not having even been played once.  Given the complexity of rights reporting it is unrealistic not to expect at least some loss of  data quality along the path of point-of-listening: in-service reporting; in-service data cleansing; data warehousing; distributing data to rights holders; rights holder data analysis; rights holder accounting; rights holder pay outs to artists.
• Rights holders aren’t distributing all royalties appropriately. The conspiracy theory is that the big bad labels are collecting swathes of digital income from streaming services and then secretly squirreling away the majority of it for themselves.  Though this is less likely than it may seem, there are a number of label practices which can cumulatively contribute to creating the effect.  All artist/label contracts have stipulations about recouping costs – some of which are skewed against artists – and most have different stipulations about digital pay outs.  So there are contractual and accounting reasons why some artists will not see all the income they expect.  The notoriously Byzantine accounting practices of major labels are another potential related factor.  The Achilles Heel of major label public relations, questionable accounting practices have resulted in many an artist horror story.   The possibility of sums of unpaid royalties, stuck in escrow somewhere until forgotten about is every artist’s nightmare.

The likelihood is that all three scenarios play a role.  I don’t believe that any party, Spotify or the labels included, have intentionally embarked on strategies to cheat artists out of money.  But there is a distinct possibility that not all involved parties are exactly incentivized to plug the holes in their processes to thus bring the increased accuracy and effectiveness which could result in larger artist pay outs.

Digital commercial practices complicate matters further

The waters are further muddied by major labels becoming stake holders in some digital services, raising the prospect of portions of income from those services being joint venture income and therefore not subject to reimbursement to artists.  Add to that the issue of the large advances services have to pay labels in anticipation of actual revenues, how much of that is paid to artists, and when, and especially if the service doesn’t ever generate the income guaranteed by its advance.

All these are valid issues that would benefit markedly from an open dialogue across the value chain.  Spotify is left looking like the pantomime villain but is likely no more than a cog in a machine that nobody seems to really want to fix other than the artists.

But fixed it must be.  Spotify and YouTube massively outpace most other digital music services in adoption and usage, yet they deliver a tiny fraction of the income.  Artists cannot afford for these services to behave like radio (i.e. the tool to drive sales) when they are also becoming the end product for many music fans.

The case is clear for a transparent and robust dialogue between labels, artists and services.

Coldplay have the benefit of being big enough to dictate terms.  Most other artists don’t have that benefit.  Greater transparency, effectiveness and accuracy in revenue reporting and distribution will help drive not only artist trust, but, via increased income, greater support too.  The alternative is that piracy gets another free shot at goal, which is what Coldplay have already likely delivered, driving many Spotify users back to Torrents to find Mylo Xyloto for themselves.