Making Freemium Add Up

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

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

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

Here are some of the key findings of the report:

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

Google Hits Play On Subscriptions

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

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

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

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

A Great v1.0 But….

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

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

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

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

 What’s In A Name?

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

Google is Becoming Microsoft

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

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

Here’s looking forward to version 2.0.

iTunes @ 10

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

The Four Ages of iTunes

The history of iTunes falls into four key chapters:

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

Responding to Streaming

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

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

The Next Chapter

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

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

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

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

Making Twitter’s Music Experience 3 Dimensional

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

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

What Twitter, Facebook and Google+ Could and Should Do

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

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

For example:

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

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

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

Deezer Says It’s Going Global…

…and it means it: the pictures below are of Deezer branded bus stops in rural Mauritius. With Spotify also having announced a bunch of new markets this week, and Apple and Nokia already having an extensive network of global digital stores, 2013 really is the year that digital music should start to see some meaningful ‘rest of world’ traction.

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.

SXSW Presentation

Yesterday I spoke at EMI’s Consumer Insight panel at SXSW.  It was an engaging debate with lots of great questions from the audience. You can read a write up here: http://www.billboard.com/biz/articles/news/1552283/consumer-data-shows-old-ways-still-most-profitable-sxsw-panel-says

Mulligan SXSW Presentation 14 3 13

Putting 2012 Digital Revenues Into Perspective

Note: this post has been updated to reflect some clarifications provided by IFPI.  Thank you to Gabi Lopes IFPI for the guidance.  Changes are noted below.

The IFPI today announced that for the first time ever growth in digital trade music revenues outpaced the decline in physical trade revenue.  (The emphasis on ‘trade’ is important as we’re talking about revenue to the industry rather than consumer spending and so can include income such as advances paid by services in anticipation of sales.)  That caveat aside, this is clearly a key industry milestone that has been a long time coming and is a sign of a digital market that is beginning to reach some degree of maturity. However this is a long way from mission accomplished, here’s why:

• 57% of music revenues still come from physical (see figure). With the exception of the US the few other markets that have surpassed the 50% digital mark (e.g. Sweden, India) are minor music markets in revenue terms.  The simple fact is that the majority of music buyers still buy CDs. And to be clear, I said the majority of ‘music buyers’ still buy CDs, not the majority of ‘people’. So even forgetting for a moment the consumers lost to the music industry through piracy and other means, the majority of its core customers have still not seen reason enough to go 100% digital.  And the interesting additional factor here is that the vast majority of people who are buying digital still buy some music on CD. So even among the vanguard of digital customers, the CD’s embrace is a lingering one.
• CD sales decline will likely accelerate.  Among the top 10 largest music markets in the world CD revenue decline will likely accelerate markedly in the next few years.  In France and the UK leading high street retailers are on their last legs while in Germany and Japan the vast majority (more than 70%) of sales are still physical.  So the challenge for digital is can it grow as quickly as the CD in those markets will decline?

But there is hope.  Streaming services present meaningful opportunity and despite the fact 9.99 is far from a mainstream price point (it is in the entire monthly spend of the top 10% of music buyers) it is a great way to deliver disproportionately high revenue from a small base of consumers.   If that model can be effectively transitioned to the mass market via more telco partnerships like Telia Sonera and Cricket then we may just have a mass-market digital music proposition on our hands.

The Continued Dominance of Apple

But while premium streaming offers future potential, it is expected to total no more than 10% of 2012 digital revenues.   By contrast, Apple is the here and now.

Downloads meanwhile are close to half of all digital revenues with about $3 billion.  (The remaining 40% of digital revenue is a mixed bag, including ring tones, advertising and probably advances.) So with downloads by far the largest single digital revenue source Apple is the here and now – though we have to do some forensic work to find out just how big a role it plays…

The IFPI reports that the total number of paid downloads for 2012 was 4.3 billion units.  (The IFPI have clarified that albums are counted as single units are not counted as total number of tracks). Earlier this month Apple reported reaching the milestone of 25 billion songs sold, with the previous reported number being 16 billion in November 2011. Allowing for January 2013 being a particularly strong month (following all those Christmas iPad and iPhone sales) that gives an annual sales number of about 6.6 billion.  This translates translates to $3.9 billion which is about 70% of all digital revenues.

Which is still 2.3 billion more than the global total reported by the IFPI.   The most likely explanation is that Apple’s February press release headline “iTunes Store Sets New Record with 25 Billion Songs Sold” was misleadingly incorrect – just as I suggested in fact at the end of this blog post – and that the actual numbers instead actually refer to ‘purchased and downloaded’ (i.e. a mix of the two).

Apple remains the biggest and most important game in town.  And even without Apple getting into the streaming game this is still good new for the music industry.   As I posted a few weeks ago, Apple’s growth in iPad and iPhone sales has driven an upsurge in iTunes downloads, which coupled with iTunes’ expansion into multiple new emerging markets will bring even further digital growth.

Finally, for some additional perspective, if you add Apple’s $2.6 billion to the $10.9 billion in CD sales, Apple and the CD combined accounted for 90% of music industry revenue in 2012. So for all the talk of streaming and new service innovation, in 2012 the CD and Apple remained the bedrock of music sales.

Here’s What Daisy Could, and Should, Look Like

Beats’ codenamed Daisy subscription service has been getting a puzzlingly large amount of coverage for a service that isn’t even launched yet. Beats’ Jimmy Iovine has somewhat smartly positioned Daisy as a challenger in what he has portrayed as a dysfunctional market in which the incumbents are flailing around, unable to even understand what the big issues are, let alone try to solve them.  Discovery, transparency, reporting, these are all great issues that do need addressing but they are also the exact issues Spotify et al are all busy trying to fix right now. The fact they haven’t points to the complexity and scale of the problems, and also the limitations of what any one music service can achieve on its own.

But rather than get distracted by the grandstanding and hyperbole (from all sides) it is worth taking a look at the what the next generation of music subscription service could look like, building upon some of the challenges that are faced today. These could be done by any streaming service, but they are also all natural extensions of Daisy’s already unique set of assets and DNA. These features are:

• Artist Led Discovery: one of the big issues with streaming services is that they subjugate the artist brand.  In the single or album model (physical or digital) the fan is seeking out an artist specific experience.  With streaming services the value proposition is all the music in the world so the artist brand and relationship is inherently diluted.  So the next generation of music subscription service will be a confederation of artist sub-sites, combining the benefits of vast catalogue with mainstaining artists’ profile.  Back in the day, MySpace understood the value of unifying disparate artist specific communities with portal-like navigation.  So in the next-generation service you will still be able to use traditional tools like searching by genre, but you will also follow individual artists. This, combined with Spotify-artist app-like experiences would give Daisy a genuinely unique take on streaming discovery and navigation.
• Artist Communities: again taking a lead from MySpace, the natural next step of artist-led discovery is to let users gravitate around their favourite artists.  To follow them, join communities, join discussions, chat with the artist, get virtual-VIP access.  Currently this sort of fan engagement happens one step removed from the music on Facebook and artist pages. Bring it all together and you turn a disjointed discovery-to-engagement-to-consumption/purchase journey into a seamlessly integrated experience, where each of those previously discreet activities becomes an indistinguishable part of a new whole.
• Empower the Artist: and a further logical next step would be to then allow artists to plug directly into this platform and engage with their fans here just like they do on Facebook. This would not mean giving them full exposure to how often their tracks are getting played or how much they’re getting paid (labels deals just don’t permit this) but it would translate into self-serve analytics dashboards and powerful CRM functionality.
• Merchandize and live: and if you’ve got your fans engaging with your music then of course you are going to want the ability to sell them other stuff like vinyl, box sets, merchandize and tickets for gigs. This is where Ian C Rogers’ expertise and the TopSpin hook up will become core assets for Daisy. Expect full eCommerce integration. Also don’t be surprised to see full Songkick integration either.

So what emerges is a picture of a MySpace / Spotify / TopSpin / SongKick / Facebook mashup, as 360 degree music experience platform, joining the dots in a fragmented digital landscape.  If Daisy, or anyone else, pulls this off, we will have a true next generation music subscription service.  One that recognizes that streaming is not a business model, but instead simply a technology means of getting music to people on the devices of their choice. A service that understands streaming is the foundation stone upon which rich, immersive music experiences can be built, but not the product itself.