The Three Things Streaming Needs To Fix Next

I spent a couple of days last week in Barcelona for the annual Future Music Forum, which is developing into an important date on the music conference circuit.   Later this week I will post some of the highlights of my opening address but first I am going to spend some time developing some of the white hot issues surrounding streaming that were raised at the conference.

In a really strong field, two speakers in particular stood out: Beggars head of strategy Simon Wheeler and PledgeMusic founder Benji Rogers.   Their presentations and the conference as a whole were infused with a sense that streaming is changing everything, and more quickly than most people expected. This change is manifesting itself in three big issues:

  1. Deciding what streaming’s main role is
  2. What happens to the middling majority of artists
  3. How to monetize the relationship between artists and fans
  1. Time To Decide Whether Streaming Is Marketing Or Sales

It is clear that most labels are conflicted about streaming. They are waking up to the fact that its promise as a retail channel will take time to realize and even then it may not be a like-for-like replacement for lost album sales. Which is prompting labels to increasingly view streaming as a marketing channel too. But if streaming is both the discovery journey and the consumption destination, then what, as a label, are you trying to actually sell with streaming? Across the bigger labels in particular the digital business teams and the marketing teams need to agree on a common view on what the streaming end game is, else risk accelerating album sales decline without adequately driving streaming revenue growth.

If the question is complex for subscription services for free streaming the picture is much clearer, especially for YouTube. As Simon Wheeler said in his presentation: “YouTube is not driving sales. People are going there to consume music. The end.”  If that isn’t a case for windowing YouTube and free tiers of freemium services then I don’t know what is.

  1. What Case For The Middling Majority?

Wheeler also made a vital observation that the streaming success stories tend to be split between mega hits on the one hand (such as Calvin Harris’ 1 billion Spotify streams and Avicii’s 250 million ‘Wake Me Up’ Spotify streams) and slow burn success stories on the other. He cited the example of the XX’s eponymous album that is still in the Spotify indie top 100 five years after release.

This streaming dualism makes it look like label A&R strategy may have to choose between massive hits or long-term success. And if so, what happens to the rest in the middle? You effectively end up with three key types of streaming artist (see figure):

  • Evergreens
  • Middling Majority
  • Hit Machines

streaming artist segments

Could it be that  streaming will end up being the natural selection process for the challenge of catalogue bloat? There is simply too much music being released at the moment, creating the Tyranny of Choice, where listeners are paralysed by excessive choice. For an artist trying to break through, the background noise can be deafening and also kill any chance of making meaningful cut through. And if you do manage to do so then the endless torrent of new releases pushes you straight back to the margins.

If the streaming natural selection process plays out then unless you have created either an album that people will want to listen to again and again or instead a monster hit, then you will simply drift into oblivion. In the old model you might have sold a couple of tens of thousands of albums and managed to sustain some sort of career. 20,000 album sales would be $180,000 gross revenue but 5 million streams (roughly an equivalence in popularity) would be $50,000 gross revenue. Perhaps streaming’s Dystopian Darwinism will kill off the ability to forge a career built on mediocrity. That may be no bad thing.

  1. Monetizing the Relationship

If streaming is eating into sales then the obvious next step is to drive other spending from streaming music consumers. Hence commerce integrations from the likes of TopSpin, Bandpage and PledgeMusic. Unfortunately it isn’t that straight forward as Pledge’s Benji Rogers pointed out. Rogers rightly found himself turned to at the Future Music Forum as the fan relationship guru and he made a crucially important observation: simply because some one is listening to a song does not mean they are necessarily going to want to buy anything from that artist. Instead streaming services need to think more subtly, looking at how to nurture an artist-fan relationship rather than simply trying to sell someone a t-shirt because they happen to be streaming a track.

Artists and fans are closer than ever but this journey is only getting going. And now that artists are building deeper relationships with their fans while sales revenues decline, they need to get smarter about how to monetize them.  The key question though is whether this can be enough to offset the impact of declining music sales revenue. To help answer that I created a ‘Streaming Ancillary Revenues Model’.

A new MIDiA Research consumer survey shows that 11% of streaming consumers are VERY likely to buy merchandise and tickets from their favourite artists in streaming services. I used this conversion rate against the following artist straw man for a hypothetical Year 1 versus Year 2:

  • 100,000 albums sold decline to 60,000
  • Streams increase from 30 million to 45 million streams
  • Total recorded music revenue (streaming and sales) consequently declines by 17%
  • 11% of fans buy $30 of merch, special editions or tickets each year
  • Ancillary revenues grow to represent 33% of total revenues
  • Revenue decline across all income streams is just 3%

So ancillary revenues can significantly soften the impact revenue decline.

(The additional factor of the longer revenue cycle for albums on streaming services should also push the total revenue up further in the longer-term but is not included in these calculations.)

There are many obvious caveats and assumptions here (not least of which is the varying margins across different revenue streams) but these are broadly the right mix of drivers and levers. You can download the model here: Music Industry Blog Streaming Ancillary Revenues Model 9 14  I invite you to play around with it and test your own theories. If you are an artist you might want to plug some of your actual numbers into Year 1 and your projections into Year 2.

Change Is Difficult But It Is Also A State Of Mind

The streaming picture is changing at an absolutely staggering rate and everyone across the value chain needs to get their heads around all the potential permutations else get left behind.

These are both exciting and daunting times. As the bland management consultancy phrase goes ‘change is difficult’. But it is. However, the way that you view and prepare for change both have as much impact on how it affects you as the change itself. Streaming is changing everything. Those who learn how to reinvent themselves for the realities of this brave new world will be those best placed to survive and perhaps even thrive.

The Problem With Audiences (A Letter To Daniel Ek)

Dear Daniel

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

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

When Active Is In Fact Anything But

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

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

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

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

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

Not All Active Users Are Created Equal

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

Scale Matters If You Do Not Have It

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

us audience

Audiences Really Do Matter

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

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

 

Yours,

 

Mark 

Why Digital Music Services Always Steal Each Other’s Customers

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

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

customer transition

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

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

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

What Future For The Album In The On-Demand Age?

Recently BBC Radio 1’s head of music George Ergatoudis stirred up something of a storm with his claim that “albums are edging closer to extinction”. Nonetheless there is a growing body of evidence that the album does indeed seem to be losing its relevance in today’s track and playlist led world. And the implications stretch much further than the confines of the recorded music business. (Hint: live music industry, you need to be watching your back too.)

The Advent Of Grazing

When Napster emerged 15 years ago it kick started an irreversible transformation in music consumption. The music business had spent the previous three decades turning the singles dominated market of the 1950’s into the albums led market of the 1990’s, but with Napster consumers suddenly did not have to take the whole album package anymore. The labels had their own fair share of blame. When the vinyl LP had been the dominant format albums typically had 8 tracks, but with the CD labels felt compelled to fill every one of its 74 minutes’ capacity, resulting in a preponderance of filler tracks over killer tracks. Couple this with album price hyperinflation and you had the perfect recipe for consumer revolt. Little wonder that music fans cherry picked tracks, skipping the filler for the killer. Grazing replaced immersion.

Ironically the issue became even more pronounced with the advent of the iTunes Music Store. Whereas with file sharing many users downloaded entire albums – and as bandwidth and storage improved, entire discographies – listening still skewed towards the stand out tracks. Indeed the hoarding mentality of these digital immigrants was one borne out of being children of the age of scarcity, with a ‘fill up quick while you still can’ mentality. With iTunes, price was a limiting factor and so people focused on acquiring single tracks rather than albums. Labels and artists had been scared iTunes would cannibalise album sales, they were right.

Digital Natives Set A New Pace

In the subsequent decade new digital behavior patterns have become more clearly defined, particularly among the digital natives. Playlists and individual tracks have become the dominant consumption paradigm. Even music piracy has moved away from the album to smaller numbers of tracks, with free music downloader mobile apps and YouTube rippers now more widespread than P2P. This is the piracy behavior of the digital natives who have no need to hoard vast music collections because they know they can always find the music they want on YouTube or Soundcloud if they want it.

playlists versus albums

The behavior shift is clearly evidenced in revenue numbers. Since 2008 alone US album sales (CD and digital) have declined by 22% (IFPI), while digital track sales outpace digital album sales by a factor of 10 to 1. The top 10 selling albums in the US shifted 56.4 million units in 2000.  In 2013 the number was 14.7 million (Nielsen SoundScan). Even more stark is the contrast between playlists and albums on streaming service. Spotify has 1.5 billion playlists but just 1.4 million albums (see figure). While the comparison is not exactly apples-to-apples (album count is a catalogue count and playlist count is a hybrid catalogue / consumption count) it is nonetheless a useful illustration of the disparity of scale. (In fact the 1.4 million album assumption is probably high due to a) duplicates b) singles and EPs c) compilations.)

Even the much heralded success of Ed Sheeran’s album ‘X’ does not exactly paint a robust argument for the album. ‘X’ set the record for first week global plays of an album on Spotify with 23.8 million streams. But that represents just 0.27% of weekly Spotify listening (based on Spotify’s reported 40 million active users, 110 minutes daily listening and an average song length of 3.5 minutes).

The Album As A Mainstream Consumption Paradigm Was A Historical Anomaly

This is the consumer behavior backdrop for the demise of the album.  Creatively the album still represents the zenith of an artist’s creativity and many albums are still most often best appreciated as a creative whole. Core fans and music aficionados will still listen to albums but the majority of consumers will not. The album as the mainstream consumption paradigm was a historical anomaly of the 70’s, 80’s and 90’s. In the 50’s and the 60’s the single was the way the majority interacted with music, and now in the early 21st century it is once again. There has always been space for vast diversity of artists along the niche to mainstream spectrum but as a consumption format the album is closer to the Steve Reich end than it is the Katy Perry end.

Artists And Labels Need To Catch Up With Consumer Behaviour

The majority of artists will still make albums and labels will indulge them because their organizations and business models are built around the format. But therein lies the problem: the more that consumer behavior evolves, the more distant the gap between artists’ recorded output and their fans’ demand becomes.

There is more music released now than ever before and most likely more music listened to than ever before. But the amount of music listeners in the world’s top 10 music markets – which account for 91% of revenue – has not increased at anything like the same rate. People are spending less time with individual artists and albums. In the on-demand age with effectively limitless supply they flit from here to there, consuming more individual artists in a single playlist than an average music fan would have bought albums by in an entire year in the CD era. Fewer fans develop deep relationships with individual artists. Right now this translates into fewer album sales. In 10 years’ time it will manifest as a collapse in arena and stadium sized heritage live acts. In fact we are already witnessing the impact, after all what are festivals and DJ sets if not the playlist translated into a live experience?

As painful as it may be for many to accept, the tide has already turned against the album. The challenge to which artists and labels must now rise is to reinvent creativity in ways that meet the realities of the on-demand world.* If they do not, artists will eventually find the chasm between their wants and their audiences’ needs quite simply too wide to traverse.

*For those interested I wrote a couple of reports on this very topic a few years ago:

The Music Format Bill of Rights: A Manifesto For The Next Generation Of Music Products

Agile Music: Music Formats and Artist Creativity In The Age of Mass Customisation

Google’s Acquisition Of Songza And ‘Fixing Discovery’

Google yesterday confirmed the much rumoured purchase of curated music service Songza for somewhere between $15 and $39 million. While it is not a vast investment for a company with the recent $3.2 billion acquisition of Nest as a benchmark, it is nonetheless a significant one for a company that already has a couple of streaming music services of its own. It is not a Beats sized deal but then if Google had wanted one of those it would have bought Spotify. So just why did Google splash the cash on Songza?

Access to all the music in thee world can be overwhelming, with so much choice that there is effectively no choice at all. This is the Tyranny of Choice. For all the efforts and intent of music services to ‘fix’ discovery no one has yet nailed it. Listen Services like Nokia Mix Radio, O2 Tracks and Pandora present one solution: effectively removing the burden of excessive choice by delivering a curated stream of music that requires little or no effort from the user. But this approach does not translate well to All You Can Eat (AYCE) services like Spotify and Googles’ Play Music All Access. These services are built on the foundations of giving access to everything, the exact opposite of what Listen Services are about. Which is why AYCE services are doubling down on enhancing their internal curation and recommendation capabilities. Spotify moved first with its acquisition of the EchoNest, Rdio followed by acquiring TastemakerX and now this move from Google. Beats Music took a different route entirely, building its service on the foundations of programming rather than superimposing it.

Google should be able to extract great value from Songza but as with all of these technologies it is just part of the solution. Human programming, as resource intensive as it might be, remains a pivotally important part of the equation, and though all the AYCE services have teams of curators, only Beats so far has done it at large scale.

First, Show People How To Find What They Have Already Found

And still the discovery problem is not fixed. Progress has been made in the last few years, but in many respects it is a case running before learning to walk. Recommendations, discovery and programming are just one part of the music consumption journey i.e. discovering new music. Arguably the most important aspect of the journey is the one that is most neglected: navigating the music people have already discovered. As counter intuitive as it may sound, people first of all need to be shown how to find what they have already found…their pre-existing music collections but also the music they have listened to in a service. Creating playlists and tags of songs is an often burdensome task that requires no small amount of discipline. Which means that newly discovered gems can all too quickly disappear back into bottomless pit of 30 million songs, rendering a discovery journey wasted.

Smart of use of data can provide the foundations for the solution, ensuring that people’s streaming ‘collections’ are dynamically created and programmed. But data alone is not enough. What is needed is an entire new paradigm in music navigation. For all the faults of CDs they were visual reference points. A consumer might not remember the name of an artist or an album but would know roughly where the CD was on a shelf or what colour the cover was. (I remember as a DJ often identifying a record I was about to play only by the colour of the label on the centre of the vinyl).

Digital music lacks such visual reference points. iTunes transformed our music collections into featureless spreadsheets, with playlists emerging as simply another means of sorting the data. New visually rich interfaces in music services help enhance the user experience but most often simply try to shoe horn in the old album art approach into a digital context. This new navigation paradigm must start with a blank sheet and think in terms of multimedia, interactive, dynamic experiences. It will need to leverage rich visuals, touch, dynamic context aware programming, sound, voice control and Shazam, to create an immersive whole that gives the consumer clear, immediate results in a way that engages multiple senses. Only once we have fixed this first step of the music consumption journey can we really start thinking about ‘fixing discovery’.

YouTube, Record Labels And The Retailer Hegemony

YouTube (i.e. Google) has put itself in the midst of a music industry conflict that may yet turn into a much needed process of soul searching for the labels as they weigh up whether YouTube’s contribution to their business is net positive or net negative.  The controversy surrounds the imminent-ish launch of YouTube’s premium subscription service and the refusal of some independent labels to sign the terms Google is offering them.  Whereas normally this would just result in a service launching without a full complement of catalogue, in this instance YouTube is also the world’s second largest discovery platform after radio.  YouTube execs have been quoted as stating that labels that do not sign their terms will have their videos blocked or removed.  Exactly from where (i.e. the main YouTube service, or the premium offering) remains a matter of conjecture with both sides of the debate more than happy to allow the ambiguity cloud the debate.    But the fundamental issue is clear either way: YouTube has become phenomenally powerful but delivers comparatively little back in terms of direct revenue and is now happy to flex its muscle to find out who is really boss.

The Retailer Hegemony 

Google’s stance here fits into a broader phase in the evolution of digital content, with the big tech companies (Amazon, Apple, Google) testing how far they can push their content partners in order to consolidate and augment their already robust positions.  It fits into the same trend as Amazon making life difficult for book publishers Hachette and movie studio Warner Bros.  The big tech companies are becoming the three key powerhouses of digital content and each is fighting to own the customer.  Media companies are becoming collateral damage as the new generation of retailer behemoths carve out new territory

The record labels, indies included, have to take much of the blame here.  They let YouTube get too big, and on its terms.  The big labels had been determined not to let anyone ‘do an MTV again’ and yet they let YouTube do exactly the same thing, getting rich and powerful off the back of their promotional videos.  But this time YouTube’s resultant power is far more pervasive.

youtube subs impact

Stealing The Oxygen From The Streaming Market

Labels are beholden to YouTube as a promotional channel.  They have turned a blind eye to whether its ‘unique’ licensing status might be stealing the oxygen out of the streaming market for all those services which have to pay far more for their licenses.  The underlying question the labels must ask themselves is whether YouTube’s inarguably valuable promotional value outweighs the value it simultaneously extracts from music sales revenue.  Indeed 25% of consumers state that they have no need to pay for a music subscription service because they get all the music they need for free from YouTube (see figure).  This rises to 33% among 18 to 24 year olds and to 34% among all Brazilians.

Reversing Into Subscriptions Is No Easy Task

Of course the aspiration here is that YouTube is finally going to start driving premium spending, but reversing into a subscription business from being a free only service is far from straightforward.  It is far easier to make things cheaper than it is to raise prices, let alone start charging for something that was previously free.  Add to the mix that free music is not exactly a scarce commodity and you see just how challenging YouTube will find entering this market.  Indeed, just 7% of consumers are interested in paying a monthly fee to access YouTube music videos with extras and without ads.  The rate falls to just 2% in the UK.

The counter argument is that only a miniscule share of YouTube’s one billion regular users are needed to have a huge impact.  But if the price the music industry pays to get there is to kill off the competition then it will have helped create an entity with such pervasive reach that it will truly be beholden unto it.  If the music industry has hopes of retaining some semblance of power in this relationship, it must act now.

 

 

Apple, Beats and Streaming’s Mutual Fear Factor

Although the Apple-Beats deal is about far more than just streaming music, it is nonetheless an important part of the puzzle.  Apple has been going slow with streaming, introducing cloud experiences (iCloud, iTunes Match, iTunes Radio, Video rentals) slowly so as not to alienate its less tech-adventurous mainstream user base.  That strategy remains valid and will continue, but it has failed to protect the defection of its core, high value, early adopters.  This is why Apple has to get serious about streaming fast: it is scared of losing its best customers.  It is also why all other streaming companies, whatever they may admit publically, are getting ready to run scared.  This is streaming music’s mutual fear factor:

  • Velvet handcuffs: Music downloads are monetized CRM for Apple, a means of enhancing the device experience.  Purchased tracks and an iTunes managed library act as velvet handcuffs for Apple device owners.  But for those consumers that use a streaming subscription app, the playlists and music collection can exist on any device.  Suddenly the handcuffs slip off.  This is why Apple has to get streaming right in short order.  It simply cannot afford to lose swathes of its most valuable device customers at the next handset replacement cycle.
  • Chinks in the iTunes armour: Until the launch of the App Store, 3rd party music services had no way of breaking into the iTunes ecosystem and were, in the main, doomed to the role of also rans.  The App Store was the chink in the otherwise impregnable iTunes armour that allowed those 3rd parties to not just launch punitive raids but to set up camp in Apple’s heartlands. It was the price Apple had to pay to enter the next phase of its business, but now it is ready to shore up its defences once more.
  • Eating from Apple’s table: The vast majority of streaming music subscribers were already digital download buyers first, and of those the majority were either current or past iTunes Store customers when they became subscribers.  On a global scale, subscriptions have first and foremost been about transitioning existing spending rather than creating new digital customers. The picture is very different in Nordics, the Netherlands and South Korea but those markets contribute far less to global scale than the markets (US, UK, Australia etc.) where this trend dominates.  Apple has provided the core addressable market for streaming services for the last five years.  Now those companies worry over where will they be able to get new subscribers if Apple start taking subscriptions seriously.
  • Apple will not have to play fair: Although Apple knows it is under the watchful eye of various regulatory authorities following the eBook price fixing episode, there is still plenty it can do to make life hard for 3rd party streaming services.  Just take a look at what Amazon is reportedly getting away with in its book pricing dispute with Hachette: delaying shipments of the publisher’s books to customers, removing buy buttons from pre-ordered books, even pointing Amazon customers to competitive titles when searching for Hachette books.  Fair play or foul, the power of the retailer is huge.  Whether Apple simply ensures Spotify et al don’t appear in search results, or that they are never quite able to integrate seamlessly with iOS anymore for no specific reason that anyone can quite put their finger on….But even without resorting to such behavior, simply by deeply integrating an Apple (or Beats) branded subscription service natively into its devices and ecosystem, Apple will have the upper hand and 3rd parties will find it a whole lot harder to fish in Apple’s waters.

None of this is necessarily bad for the market either.  In fact it could be just what the subscriptions business needs.  To finally focus on green field opportunity beyond the confines of the Apple elite.  Nor should Apple even limit its subscription focus to streaming or to music.  The rise of the Content Connectors points to Apple, Amazon and Google pursuing digital content strategies in the round, that do not get bogged down with super serving any individual content type at the expense of the rest.  Apple’s best mid-term subscription play may yet simply prove to be a monthly allowance of iTunes credit across all content types, bundled into the cost of the device.  Put that on top of iCloud, iTunes Radio, Beats Music and suddenly you have a very compelling multi-content offering.  Something far out of the reaches of the current product roadmaps of any of the stand alone music services.

Can Apple afford to loss lead with music subscriptions to pursue such a strategy?  Well, remember Apple’s entire digital music business has been built on loss leading.  Whatever the final outcome, the mutual fear factor balance looks set to tip in Apple’s favour for a while.

What 10 Million Spotify Subscribers Actually Means

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

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

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

free steraming growth

What Acquiring Beats Could Do For Apple (And Everyone Else)

Stories emerged last night that Apple is in talks to buy Beats, citing well-placed sources. If true – and if it actually goes through – the acquisition has countless potential impacts of seismic proportions, particularly if the deal includes nascent subscription service Beats Music. Apple has always been in the business of selling music for the business of selling hardware, and the potential acquisition must be considered in those terms. With download sales declining and subscriptions gaining traction, Apple has been locked in a process of soul searching, trying to work out what it can do to remain relevant in the digital music business in order to remain relevant in the device business. Beats is a ‘if you can’t beat them, buy them’ solution.

download slow down

There are a number of key considerations and potential impacts:

  • Digital music Plan A has run its course: Despite dynamic growth in Northern European markets, digital music growth nearly shuddered to a halt in 2013, slowing from 11% year-on-year growth in 2012 to just 2% last year, and that is unlikely to be much higher than 4% in 2014. The reason is quite simple: streaming subscriptions are, outside of Northern Europe, predominately converting the most valuable download buyers – who are most often iTunes buyers – into subscribers. Aficionados who bought a few digital albums a month are instead spending 9.99 a month. So instead of bringing up the average spend of music buyers it is bringing down the spending of many – I’ll be publishing some data on this in the coming weeks. Digital music needs a Plan B to reinvigorate growth
  • Apple is paradoxically holding back digital growth: Apple almost singlehandedly created the global digital music in the 2000’s but it is now actually holding back growth in the 2000’s. Streaming has taken off most quickly where Apple never got a foothold (see figure). Where Apple is firmly established streaming is a transition story, of download revenue shifting to streaming. Where it is not, streaming is green field growth. An interesting side effect of this is that because English speaking Apple has prospered most in English speaking markets, it is in these countries – US, UK, Canada, Australia, all of which are top ten music markets – where digital growth is now slowest. Apple has inadvertently passed the digital baton to the non-English language world.
  • Apple’s go-slow streaming strategy is too slow: All this translates into weakening digital relevance for Apple, which infers weakening hardware relevance. Apple has been here before, back in the heyday of Last.FM when Apple was still predominately a computer business, it tried to steal the social music revolution’s clothes with the launch of the now-defunct Ping and the just-about-still-around Genius. Yet Apple came out of that era stronger than ever. Now though, portable devices are the beating heart of Apple’s business, and with the relentless onslaught of Android it cannot afford its next music move to be another Ping. However Apple has had to go slow with streaming. Its user base is more mainstream than ever – as the growing popularity of Now compilations in its store attests – so it has to introduce new features in a way that does not overwhelm its less tech-adventurous customers. iCloud and iTunes Radio are great transition technologies to help introduce streaming to Apple users at a steady pace and to demonstrate clear relevance in the iTunes context. Unfortunately this long-term strategy for its mainstream users has done little to halt the defection of its more sophisticated and, crucially, most valuable, customers. Beats Music could be the defensive strategic option for them.
  • Subscriptions don’t have to be AYCE 9.99: 9.99 AYCE services have done a great job of monetizing the super fans, but with less than 5% penetration in major music markets, there is a clear need for something else for the more mainstream fan in top 10 music markets. Cheap priced subscriptions and telco hard bundles are both solutions to this problem. Apple should not feel compelled to jump on the 9.99 bandwagon. Digital content stores are breaking down the genre walls – as Google’s Play demonstrates so well. Apple gets much more revenue from other content genres – see this figure – so a multi-content genre subscription would be a much cleaner fit for Apple. As would a subscription that gave users a certain amount of credit to use on any iTunes products, sort of a virtual iTunes Gift Card subscription. Pricing would be blissfully simple – e.g. $10, $20, $30 etc. – and would help protect Apple from revenue cannibalization until it makes the full switch to access from ownership. $10 could include ad-free iTunes Radio, $20 and upwards could include unlimited music streaming.
  • Apple could make hard bundling work, and some: If Apple does get Beats Music, it would have an unprecedented opportunity to make bundled subscriptions work. Hardware has always been key to making digital content work, whether that be the Kindle, Xbox, Playstation, iPhone or the new generation of Content Connectors like Chromecast. Subscriptions are working now because Apple opened up a chink in its vertically integrated ecosystem armour by allowing streaming services to exist on its devices. In fact mobile access is responsible for the majority of the 9.99 model’s growth. Retailing an iPhone / Beats headphones subscription bundle would communicate clear value to users, and with the cost largely hidden in the premium price point associated with the bundle, could help consumers get over the hump of committing to monthly spending.
  • Beats would redefine Apple as a CE company: The implications on Apple’s device portfolio are intriguing tool. The simplicity of Apple’s limited product range has always been key to its success. Being able to retail a single phone when competing with the excessively vast portfolios of incumbent smartphone companies was a major differentiation point. Since those first iPhone days though Apple has multiplied its number of product SKUs. Incorporating a range of headphones would take that to another level. Whether Apple has the ability to seamlessly transform from a computer company with a small range of portable computing devices, to a fully-fledged CE company remains an intriguing open question.

There is no doubt that if Apple does buy Beats and Beats Music, that the impact on the competition will be dramatic. Spotify will be rightly worrying about the impact on its impending IPO – though expect words to the effect that this is simply a resounding validation of the model. But the competition should be welcomed. To date most digital music services have been strategically lazy, focusing their efforts on trying to sell new products to already existing digital customers, the majority of whom, in the big markets at least, are Apple customers. Now digital music companies will have to start thinking much more creatively about how they can compete around, rather than with Apple. About how they can create revenue in new consumer segments, not simply trying to extract more revenue from the preexisting ones. Some companies are doing this already but they are in the distinct minority – this should be a good time for them. If Apple does buy Beats, it will bring some much needed momentum to market that was beginning to suffer from hubris.

Why 2014 Will Be the Year of Taking Digital Content into the Home

2014 is shaping up to be the year that the chasm that separates consumers digital content experiences and their home entertainment is bridged.  Amazon, Apple and Google have all embarked on a quest for the lower end of the market with Amazon Fire TV, Apple TV and Chromecast respectively.  Meanwhile a host of interesting new specialized music entrants are making waves, including Pure’s Jongo and forthcoming devices such as Fon’s Gramafon and Voxtok.  And then of course there’s the granddaddy of them all Sonos, that continues to go from strength to strength with an ever more diverse product range and list of integrated music services.

Regular readers will know that I have long held that the living room (along with the car) is one of the two final frontiers for digital music.  The great irony of digital music’s brief history to date is that it has transformed music from a highly social one-to-many experience across speakers into a highly insular and personal one delivered through ear buds on phones, MP3 players, tablets and PCs.  It is no coincidence that streaming music services desperately attempt to artificially recreate the missing social element with the blunt tool of pushing play data into people’s social streams.  To be clear this is not to take away from the personal consumption renaissance, but instead to illustrate that music is disappearing out of the living room and other home listening environments.  When the CD player disappears out of the home – and it is doing so at an accelerating rate – for many households music amplified music playback disappears too.  This is why digital music needs bringing into the living room, the den, the kitchen, right across the home.  It is a concept I first introduced in 2009 at Forrester, and revisited for Billboard early last year and again here later in 2013.

We Are Entering the Fourth Stage of Digital Content

Getting digital content into and throughout the home is the next stage of the evolution of web-based content.  The first stage was getting it there (Napster), the second was getting it onto consumers’ portable devices (iTunes), the third was providing frictionless access (YouTube, Spotify, Netflix) and now the fourth is getting it into the home.  This fourth stage is in many ways the most challenging.  All of the technology that underpinned the first three stages was computing related technology (PCs, MP3 players, smartphones, tablets).  All of those device types are a) highly personal and b) have evolved as computing enclaves within our homes.  Besides the niche of households that have smart TVs or web connected radios, the majority of the devices that the majority of households spend the majority of their prime media consumption time with (i.e. radios and TVs) remain separate and disconnected from the computing centric devices.  The fact that the computing devices are heralding a new paradigm of consumer behavior – media multitasking – only highlights the separation of the two device sets.  Indeed the vast majority of multitasking time is asynchronous (e.g. checking Facebook or email while watching TV) rather than being an extension of the primary media consumption behavior.

Efforts are Focused on the TV

Chromecast et al are all designed to bridge that divide, to turn our key non-computing home device – the TV – into a quasi computing device, so that we can bring our digital content experiences into the home entertainment fold.  This, as Amazon, Apple and Google all know, is where the battle for the digital entertainment wallet will be waged.  The downside for the music industry is that the TV device focus will naturally skew the dialogue to video content, which is why Sonos and the growing body of specialized music home devices are so important.  If the industry relies too heavily upon TV centric devices to lead the home charge, it will be left fighting for scraps rather than being centre stage.

Context is Everything

However labels, music services and hardware companies (including Amazon, Apple and Google) already need to start thinking beyond just getting digital music into the home.  They need to think about what extra relevance and context home music experiences should deliver.  The likelihood is that the rich UIs of PC, tablet and smartphone apps will have to recede, in the near term at least, to allow simple, elegant device experiences.  In effect they will need to almost get out of the way of the consumer and the music.  In some respects this echoes the ‘zero UI’ approach of app-of-the-moment Secret.  Which in turn means that curation and programming will become the key differentiation points.  Not in the sense of ‘here are three artists we think you’ll like based on your prior listening’ but real programming of the type that has helped radio remain the single most widespread music consumption platform throughout the digital onslaught.

2014 will be the year that the divide between the computing devices and the traditional entertainment devices in the home will start to be bridged.  But that is simply the enabler not the end game.  It is once the divide has been bridged that the real fun begins.