Why It’s Time For A Streaming Pricing Reset

There is a growing realization that that streaming revenue is not growing quickly enough to offset the impact of declining download sales. It is an eerily familiar echo of the recurring narrative of the noughties that download sales were not growing quickly enough to offset the impact of declining CD sales. The situation is very different now in that the industry licenses the disruptive force. Back in the noughties the combined impact of changing consumer behavior patterns, growing piracy adoption and the loss of content scarcity were factors the industry had little control over. Yet this present shift is more fundamental and will have much bigger long term impact. This is the shift to the consumption era. Streaming happens to be the tool of the moment for harnessing that shift but with current pricing strategy the industry’s toolset is woefully unable to fully harness the massive potential that exists.

Zero to 9.99 Is Too Big A Leap

The single biggest issue is the binary nature of streaming pricing: 9.99 or free. (Sure there are desktop versions for less but the desktop is yesterday’s consumption platform and is no longer a useful differentiator for price.) The leap from zero to 9.99 is simply too big. Even a 30 day trial still leaves the consumer with the same zero to 9.99 leap at the end.

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Streaming pricing strategy is simply not aligned with consumer music spending (see figure):

  • Super fan aficionados tend to spend between $10 and $30 a month but many are now shifting down to $9.99 a month
  • Mainstream music fans spend less frequently and at best average less than $10 a month, most typically just a few $. $9.99 is just too much for them as is regular spending, so they end up streaming for free
  • Passive fans used to spend occasionally now typically spend nothing and are core users of free streaming, YouTube especially

So streaming is bringing down the spending of the super fans and missing the spending of the mainstream fans.

Most music fans (i.e. not the super fan aficionados who by definition most of the people reading this blog are) engage with music in a very event driven manner. They have their favourite artists and they engage with them when they are in cycle with a new single, album, tour etc. That used to mean buying an album or some tracks, and it still means buying concert tickets. But these days for the digitally engaged mainstream fans it most often does not include buying anything. Instead they stream for free from YouTube, Soundcloud, Pandora.

Just to make things worse, the super fan aficionados are now spending less because of streaming. 23% of them used to buy more than an album a month, now they spend 9.99 a month and that spending is spread across a far greater quantity of music, meaning a smaller pie is being divided into even smaller slices.

Three Ways To Fix Streaming Pricing

It wasn’t meant to be this way. A high tide was meant to rise all boats. Mass market music fans were meant to increase their spending to 9.99. The aspiration is reasonable enough, these same consumers have been persuaded to pay for mobile phone subscriptions over the last decade, and many have adopted Netflix and Amazon Prime too. But it will take some time to get them there and they need a helping hand in the meantime.

There are a number of tactics that will set up streaming to capitalize on the mainstream music fan opportunity:

  1. More price tier differentiation: this means cheaper tiers ($2, $3, $5) to capture spending across a broad a range of consumers as possible
  2. Reduce the main $9.99 price point to $7.99: to capture the upper band of mainstream fans, while adding a $12.99 tier for super fan aficionados who want extras like high quality audio, bios, photos, exclusives etc.
  3. Introduce PAYG / Top Ups: the mobile phone business needed PAYG to take phone subscriptions to the mainstream – they were an unfamiliar concept consumers needed to experience to understand the value of. The same applies to music. But also it gives tentative consumers the benefit of the long term relationship without the commitment

Universal’s Lucian Grainge stated at the WSJD conference this week that revenue from subscription services is simply not enough to stem the decline of downloads and CDs. As things stand he is absolutely right. But fill the chasm between free and paid with a diverse range of pricing options and that will change. Virtually every consumer market, whether it is phones, supermarkets or cars has a segmented pricing strategy, now it is time for streaming to benefit from the same approach. The alternative is leaving most of the potential spend on the table.

What the Numbers Tell Us About Streaming in 2014

By the end of 2014 streaming revenues will account for $3.3 billion, up 37% from 2013. However headline market value numbers only ever tell part of the story. Just as important are the numbers on the ground that give us some sense of where the money is flowing and of the sustainability of the business models. During the last two weeks we have been fortunate to have four different sets of data that go a long way to filling in those gaps:

Each is interesting enough in isolation but it is the way that they interact and interdepend that gets really interesting:

  • Sustainability: A lot is rightly made of whether the subscription business model is sustainable. Spotify has showed us that, at least in a local subsidiary, an operational profit can be turned. However that profit rate was just 2.5%, does not account for previously acquired losses and also does not account for the broader company’s cost base where many of Spotify’s other costs lie. 2.5% is a wafer thin margin that leaves little margin for error and would be wiped out in an instant with the sort of the advertising Spotify has been using in the US. Meanwhile Soundcloud have demonstrated that it is also entirely possible to post a heavy loss even without rights costs. Soundcloud is going to need every ounce of its investor money and new revenue streams when it adds a 73.2% rights cost to its bottom line (though Soundcloud is doing all it can to ensure it doesn’t have to play by those rules and instead hopes to operate under YouTube’s far more preferable rates).
  • Transition: Nielsen’s US numbers should finally remove any lingering doubt about whether streaming is eating directly into download revenue. As MIDiA Research revealed last month, 23% of streamers used to buy more than an album a month but no longer do so. Streaming is converting the most valuable downloaders into subscribers and in doing so is reducing their monthly spending from $20 or $30 to $9.99. The combined effect of the perpetual decline of the CD and now of the download make it hard for streaming to turn the total market around. That won’t happen globally until 2018, though in many individual markets streaming driven growth is already here. Spotify pointed to bundles with the Times of London newspaper and mobile carrier Vodafone as key sources of growth in the UK. This sort of deal points to how subscriptions can break out of the early adopter beachhead and drive incremental ‘found’ revenue.
  • The Ubiquity of Free: YouTube, Pandora, Soundcloud and Spofity free are among the largest contributors to streaming’s scale. Some business models are more proven than others – Pandora looks better placed than ever to be a central part of the long term future of radio. YouTube’s role remains controversial though. Its proudly announced $1bn payout milestone is less impressive when one considers Content ID was launched in 2007 and that this is all rights holders, not just music. So let’s say 60% was to music rights holders, over the course of seven years that averages out at $0.07 per year for each of YouTube’s current one billion monthly users. That’s a pretty small return for the globe’s biggest music service.

We are clearly still some distance away from a definitive set of evidence that can tell us exactly what streaming’s impact will be. But in many ways it is wrong to wait for that. There will never be a truly definitive argument. Instead the world will continue to change in ways that will better fit the streaming market. It is a case of streaming and the industry meeting half way. This is exactly what happened with downloads. Early fears that downloads would accelerate the demise of the CD and instigate the decline of the album were both confirmed but the music industry learned how to build a new set of businesses around these new digital realities. The same process will take place with streaming.

We are already seeing some remarkable resilience and appetite for change from artists, from DIY success stories like Zoe Keating, through veteran rockers like Iggy Pop, right up to corporate megastars like Ed Sheeran. These are as diverse a collection of artists as you could wish for but they are united in an understanding that the music industry is changing, again, and that simply bemoaning the decline in sales revenue will not achieve anything. Of course it sucks that sales revenue is falling and of course its infinitesimally easier for me to write these words than to live them. But that sort willingness to evolve to the realities of today’s rapidly changing market will set up an artist with the best chance of surviving the cull. The old adage rings truer than ever: adapt or die.

Note To Struggling Bands And Singers: Sorry But Most Of Your Fans Don’t Care

The plight of artists and songwriters grappling with download dollars transforming into streaming cents is well documented and a series of long term, sustainable solutions are needed (I wrote about some here). The debate occurs alongside an assumption that there is widespread concern for the creators’ and their livelihood. Unfortunately the general sympathy that is apparent within the echo chamber of the online press and social media does not translate to the broader population

In a recent MIDiA Research survey we asked consumers the following question:

“Some singers and bands are concerned that streaming music services like YouTube, Spotify and Deezer pay too little money back to them compared to selling music. Using a scale of 1 to 5 where 1 equals ‘do not agree at all’ and 5 equals ‘agree entirely’ indicate how much you agree with this statement: This issue concerns me enough to reconsider my music buying habits.’

Just 15% of respondents said they agreed and only four per cent strongly agree. And this is against a backdrop of 60% of consumers stating that they consider music to be worth paying for.  So willingness to pay is not the overriding issue here.

ARTIST FAN AMBIVELANCE

Things don’t look quite so bad when you start diving into specific segments. For example among Music Aficionados – those who spend and listen above average – the rate is 30% and among subscribers it is 34%. But even those rates are remarkably low when you consider that these are some of the very most engaged music fans and that more than 80% of them think music is worth paying for.

So what is going on? Artists and fans are closer than ever before and artists are undoubtedly finding the transition to consumption models a difficult process. To some degree there has always been some fan ambivalence. Mainstream consumers tend to think of artists as megastars who drive around in sports cars and sip champagne for breakfast. So getting the mass market to feel sympathy is not an easy sell. Even though the music world has changed from its 80’s and 90’s excess, many consumers just haven’t paid enough attention to the plight of artists to join the dots. Others conveniently turn a blind eye and use their old-world stereotypes to justify piracy to themselves.

Artists and fans have an unprecedented array of tools and services to connect them and to help build genuine engagement. But outside of their core followings, artists should not expect their wider fan bases to have any particularly strong feelings about their struggles. Even less should they expect those fans to do anything about it: 54% of consumers specifically would not change their buying behaviour.

Streaming is ramping up fast, that much is clear, but even among those consumers just 24% care enough about the plight of artists to consider changing their behaviour. As bitter a pill as it may be to swallow, artists have to accept the fact that beyond their super fans, most consumers (and three quarters of streamers) simply don’t care whether streaming is making it harder for them to build and maintain a career.

Digital Ascendency: The Future Music Forum Keynote

I recently keynoted the annual Future Music Forum in Barcelona.  These are some highlights of the keynote.  If you would like the full slide deck please email me at mark AT midia research DOT COM.

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Streaming is turning years of music business accepted wisdom on its head but did not arrive unannounced, it is just one chapter in the evolution of digital music. Each of the four phases of digital music have been shaped by technologies that solved problems. Now we are entering the fourth phase, bringing meaning to the 30 million tracks Spotify et al gave us access to. This might look like a simple honing of the model but it is every bit as important as the previous three stages. 30 million tracks is a meaningless quantity of music. It would take three lifetimes to listen to every track once. There is so much choice that there is effectively no choice at all. This is the Tyranny of Choice.

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But the for all the evolution, today’s digital music marketplace is an unbalanced one. We have more than 500 music services across the globe but too many of them are chasing after the same customers with weakly differentiated offerings. This wouldn’t matter so much is if the competition was focused on where the consumer scale is, but this is anything but the case. The majority of paid music services are targeting the engaged, high spending Music Aficionados who represent just 17% of all consumers.

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The consequences of the imbalance in digital music strategy are also easy to see in total revenues. The last decade has been one of persistent decline in recorded music revenue and by 2018 the most likely scenario is one of stabilization rather than growth. This is because of a) the CD and b) the download.

No one has taken the demise of the CD seriously enough. It still accounts for more than half of global revenue and more than three quarters of revenue in two of the world’s biggest music markets. Yet far too many CD buyers are being left to simply stop buying entirely because they see no natural entry point into the digital services market. No one appears to be putting up a serious fight for them. Meanwhile the streaming services that have been chasing those same aficionados that Apple engaged are now busy turning that download spending into streaming spending, which ends up being, at best, revenue transition rather than growth. Consequently CDs and downloads will end up declining at almost the same rate over the next five years.

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Nonetheless the imbalance remains. Part of the reason we got into this state of affairs is the music industry’s obsession with revenue metrics: chart positions, market share and ARPU. Compare and contrast with the TV industry’s focus on audiences. It is time for the music industry to start thinking in audience terms too.

When we do so we see a very different picture. Here we have the US digital music market plotted by revenue and by audience size. Subscriptions pack a big revenue punch but reach only a tiny segment of the market while YouTube has vast reach but delivers remarkably little in terms of direct revenue. Meanwhile downloads, for all their doomed future, are still by far the best combination of scale and revenue.

The issue of free services stealing the oxygen from paid ones is a perennial one and is effectively a digital rerun of the never-to-be-resolved radio driving or reducing music sales debate. But it has far more impact in digital. With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination. When they don’t lead to sales can they really be called discovery anymore?

Free is of course the language of the web. The contagion of free is legion. And free is where the audience growth is. This is the circle the music industry must square.

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For 15+ years the music industry has been running to catch up, never quite able to get ahead of the game, an unavoidable feature of the process of digital disruption.   But although the consumer behaviour shift is inevitable the future direction of the music business is not and it will be shaped most by three key factors:

  1. The continued evolution of consumer behaviour
  2. Technology company strategy
  3. Income distribution

Consumer behaviour. The most important consumer behaviour trends are not the steady transition of the Aficionados or even the Forgotten Fans but of the next generation of music consumers, the Digital Natives. Free and mobile are the two defining elements of their music behaviour. Of course younger people always have less disposable income, but there is a very real chance that we are beginning to see demographic trends locking in as cohort trends that will stay with these consumers as they age. For a generation weaned on free, the more free you give them, the more they will crave it. Whatever course is plotted, success will depend upon deeply understanding the needs of Digital Natives and not simply trying to shoe horn them into the products we have now that are built for the older transition generation.

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Technology companies: Apple, Amazon and Google each in their own ways dominate digital music. But most importantly they all want very different things from it. For each of them music is a means to an end. All are willing to some degree to loss lead on music to achieve ulterior business objectives. All of which is great for labels and publishers as they get their royalties, advances and equity stakes. But for the pure play start up it means competing on an uneven footing with giant companies who don’t even need music to generate a revenue return for them.

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Revenue distribution: Artists and songwriters found their voices in recent years. Partly because of the rise in social media but also because so many are now paying much more attention to the business side of their careers. The fact they are watching download dollars being replaced by streaming cents only intensifies matters, as does the fact that the top 1% of creators get a disproportionately large share of revenue. It has always been thus but the signs are that the disparity is becoming even more pronounced in the streaming age, with the effects felt all the more keenly because unless you have vast scale streaming can too easily look like chicken feed to an artist compared to download income.

But artist and songwriter discontent alone is not going to change the world. Their voices are just not powerful enough, nor do most fans care enough. Also labels and publishers remain the most viable route to market for most artists. Matters aren’t helped by the fact that artists who demand an audit of their accounts to work out where their streaming revenue has gone swiftly accept their label’s hefty silence payment and the accompanying NDA. Artist discontent while not decisive in impact is beginning to apply important pressure to the supply end of the music business.

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So those are the three big challenges, now here are three sets of solutions. And I should warn you in advance that I am going to use the P word. Yes, ‘Product’.

I get why product sounds like an ugly word. It’s a term you use for baked beans, for fridges for phones. Not a cultural creation like music right? True enough, when we’re talking about the song itself, or the performance of it, product is irrelevant. But as soon as we’re talking about trying to make money out of it as a CD, download, stream or however, then we’re firmly in the territory of product. It is both naïve and archaic to think otherwise. When artists got megabucks advances and never had to worry about the sustainability of their careers and everything revolved around the simplicity of CD sales you could perhaps be forgiven for turning a blind eye. But now there is no excuse.

So with that little diatribe out of the way, on to the first solution.

Music product: The harsh reality is that music as a product has hardly evolved in the digital realm. A lot has been done around retailer and business model innovation, but the underlying product is the same static audio file that we found in the CD. Meanwhile the devices we are spending every growing shares of our media consumption have high definition touch screens, graphics accelerators, accelerometers…audio hardly scratches the surface of what tablets and smartphones do.

Music is always going to be about the song, but it is also about the artist and their story. That’s what a quarter of consumers think, and 45% of aficionados and a third of digital natives. Video, lyrics, photos, reviews, interviews, acoustic sets, art, these are all ways in which the artist can tell their story and they all need to be part of the product. Most of this stuff is already created by labels, artists and managers but it is labelled marketing. Putting this together into a curated, context aware whole is what will constitute a 21st century music product.

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Fans: Artists and fans are closer than ever but this journey is only getting going and artists need to get smarter about how to monetize their fan bases. Artists need to find their popcorn. What do I mean by this? Well when the cinema industry started out it was a loss making business. To try to fix this cinemas started by experimenting with the product, putting on double bills but that wasn’t enough. Then came innovation in the format by adding sound. Then the experience itself by co-opting the new technology of air conditioning from the meat packing industry. Still no profit. Finally cinemas found the solution: popcorn. With a 97% operating margin, popcorn along with soda and sweets quickly became how cinemas become profitable entities. Artists need to find their popcorn. To find out what other value they can deliver their fans to subsidize releasing music. It’s what newspapers are doing with wine clubs and travel clubs, and in some instances even with Spotify bundles!

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Labels: Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Kobalt and Essential and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.

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And finally, the grand unifying concept to pull all this together: experience. Experience is the product. The internet did away with content scarcity. Now the challenge that must be met is to create scarce, sought after experiences that give people reasons to spend money on the artists and music they love.

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. 

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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 

What Beats Music Needs to Do to Be a Success

Next week Beats Music will finally launch, after arguably the most hyped music service launch in the history of digital music.  CEO Ian Rogers published a blog post over the weekend that dives into some of the thinking behind the service and some of its functionality.  Early signs are that it is a well designed and programmed service, but that alone will not be enough to make it a success.

Rogers cheekily labelled competitor services as ‘servers’ rather than services and there is no doubt that Beats Music has put addressing the Tyranny of Choice right at the heart of its strategic mission.  Beats Music has invested heavily in a host of cool features and top quality editorial and deserves great credit for doing so, but it still won’t be enough.  Beats Music is another 9.99 subscription service and 9.99 is still not, nor ever will be, a mass market consumer price point….at least not until years of inflation have taken effect. Just 5% of consumers currently pay for subscriptions in the US and the UK and the lion’s share of that is down to Spotify.

It is a massive – i.e. currently impossible – challenge for Beats or any of its soon-to-be competitor AYCE subscription services to get the headline pricing down – that is instead the domain of a new breed of innovative services such as MusicQubed, Bloom.fm and Psonar. But where Beats does have the ability to at least make their offering feel cheaper is with bundling.  On this front a lot has been made of Beats’ partnership with AT&T.  Though it is great to have such a high profile partner pushing subscriptions into the US it feels like a missed opportunity.

AT&T is a Missed Opportunity

Instead of being a long term bundle, the AT&T deal is in fact a promotional partnership, with three months free before reverting to a full priced $15 p/m deal.  As we recommended in our Telco Bundling White Paper last year, the best practice is to transition to a subsidized bundle with the end user paying either nothing or a discounted rate (much preferable to labels).  While a three month free trial is a fantastic way to deliver value and get users hooked, the leap from zero to $15 p/m is just too big.

Granted the deal is an innovative ‘Family Plan’ but I am not convinced consumers will see the value.  Core to the value proposition is being able to access the service across 5 people and 10 devices, which compared to other subscription services is strongly differentiated.  But multi-device value is actually the value of the label licenses not consumer value.  Apple and Samsung customers do not pay a premium for every additional device they want to play music downloads they purchased from the iTunes and Play Stores.  iTunes accounts are already inherently family plans in many households with no price premium.   As I have been saying for years: we are in the per-person age, not the per device age.  Consumers should not pay a premium for multiple device support. Labels need to accept the realities of the modern day multi device consumer and not try to slice the proverbial baloney.

Artists and Songwriters Will Feel the Family Plan Pinch

Also the Family Plan also raises the tricky issue of whether the fact that this would translate into $3 per head per month effectively means three times less rights pay out per track.  Big labels and publishers won’t feel the pinch so much as they’ll still be getting their 10%/20%/30% shares of revenue.  In fact they’ll be 50% better off as it will be a share of $15 not $10.  But artists and songwriters only have small catalogues of music so they’ll feel the impact of track play revenue being a share of $3 not $9.99.  And given that a family is likely to have diverse tastes, especially between parents and kids, artists are unlikely to get plays across all of the family members, where of course a label with a diverse portfolio of artists will.

It’s the Headphones, Stupid

But enough of the hurdles, I did promise with this blog entry’s title a solution. Despite all of the hype I do genuinely believe Beats Music could be a game changer if it is willing to properly leverage all of the assets at its disposal.  Beats has a hugely valuable brand and route to market in its core headphone business.  And although Beats is now facing fierce competition, it remains the stand out youth headphone brand, for now.   As great a partner as AT&T may be, they’ll still most likely only reach the same high value, data plan power user, music aficionado that all the other subscription services have been super serving.  And as such Beats Music will get far less bang for its buck than it should.

Instead Beats Music should focus on hard bundling into Beats headphones with a 3 month free trial followed by a subsidized $5 12 month commitment subscription. It really is that simple. ..well the commercials aren’t but the proposition is.

Among Beats’ headphone customer base are hundreds of thousands of young, brand conscious music consumers that value high quality music experiences and are not yet subscription converts.  If Beats fully embraces its new family member and puts it at the heart of its core product range then Beats Music might just reach a whole swathe of new consumers that the incumbent subscription services have not yet managed to.  If instead it treats Beats Music as an awkward digital appendage then it will wither on the vine.  Here’s hoping Beats opts for the former.

Decoding the Digital Music Consumer: New Report

Today MIDiA Consulting published a report: Decoding the Digital Music Consumer. The report deep dives into the music activity of UK consumers leveraging data from a brand new MIDiA consumer survey.

The music industry is in a peculiar spot: digital is where all the momentum is and yet it remains but a small part of the equation. Across the globe digital accounted for just 25% of recorded music revenues outside of the UK and US in 2012 but even in the UK, one of the most digital markets, traditional consumption modes still dominate (see figure one).

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These are some of the key findings from the report:

  • Radio and CD still outshine all digital music activities other than online music video
  • 10 years after the launch of the iTunes Store, music download buyer penetration is just 14%, though album purchasing is now just as widespread as single track buying
  • Music video is the only digital music activity that has gone mainstream so far
  • Streaming adoption is still relatively niche and paid subscriptions stand at just 4% penetration
  • Pricing, commitment issues and trepidation all act as barriers to consumer adoption of subscription services
  • The CD still reigns even for digital consumers, with 55% of digital music buyers and 45% of music subscribers buying CDs at least monthly
  • Non-Network Piracy is replacing P2P as the music sharing choice of Digital Natives, with Digital Immigrants still clinging to P2P
  • A quarter of music subscribers are also pirates
  • There is a music subscriber gender divide: 63% of subscribers are 
male
  • Subscription service churn is going to become a major component of the digital market: 46% of the entire subscriber audience have either churned or plan to churn

survey2

Churn from subscription services will become an increasingly important part of the digital music landscape (see figure two).   Looking at the entire base of consumers that have either previously been subscribers, currently are subscribers or plan to become one, 44% have either already churned or plan to do so. Just 32% are current subscribers that intend to remain so.  This base of churned music subscribers poses a key challenge for the digital marketplace: these consumers have tasted unlimited on-demand music without ads, on their phones, but are now going cold turkey. The question is where they will get their next fix? If it is not from subscribing to another service then the illegal sector beckons. This is the challenge that the music industry must meet over the next couple of years. It must ensure that these consumers either reengage with full fat music services or instead are nudged towards lower price point alternatives.

The report is available free of charge to MIDiA clients and subscribers to Music Industry Blog.  If you are not a subscriber to the blog but would like to subscribe please add your email address to the email subscription field on the right hand side of the blog home page.  If you would like to learn more about how MIDiA can help you with your digital music strategy please email info AT midiaconsulting DOT COM or visit our website here www.midiaconsulting.com  You can also find all previous free reports for download here: http://musicindustryblog.wordpress.com/free-reports/

 

New Report: Building the New Business Case for Bundled Music Services

Today MIDiA Consulting is proud to announce the release of a white paper commissioned by Universal Music entitled “Building the New Business Case for Bundled Music Services”.  The report, written by myself and MIDiA Consulting co-founder Keith Jopling, provides an unprecedented analysis of telco music services, taking a critical look at what has and had not worked to date and a series of models and recommendations for the future.  We interviewed a host of telco music executives to get a deep understanding of what telcos need out of music services to make them a success and combined this insight with data from consumer surveys and music service trials as well as case studies and best practices.  We think it is pretty much the definitive piece of work on the topic (!) and we invite you to download it here: Building the New Business Case for Bundled Music Services – FULL REPORT.  You can also download an executive summary version of the report here: Building the New Business Case for Bundled Music Services – EXECUTIVE SUMMARY.

Here are some of the key findings of the report.

The consumer shift from downloads to streaming is the most important digital music market trend since the advent of the iTunes Music Store.  Before streaming services telcos struggled to find a way in which they could compete in a market dominated by Apple, restricted to selling DRM locked downloads that of course would not play on Apple devices.  Subscription services changed all of that, with the leading streaming services all pursuing robust telco partnership strategies as well as a number of download subscription services.  There are now nearly 50 telco music service partnerships live in six regions across the globe.  With 40% of streaming consumers now paying to stream, generating $1.2 billion in trade revenue in 2012 the opportunity is clear.

Music Bundles Across the Globe

However it is clear that many of the hurdles that telcos faced in the last decade continue to pose challenges.  These include music not being a priority for many telcos, internal business casing getting in the way of building compelling services and the wrong success metrics being used.

The new success stories of telco music services are those that make music a strategic priority.  This is not some sop to the record labels, but a reflection of what it takes to make music strategy a success. If a telco just adds music to a long list of Value Added Services (VAS) it will wither on the vine.  But if a telco puts a music service front and centre and positions around it then success is far more likely.  Success stories that have followed this approach include Telia Sonera’s hard bundle with Spotify in Sweden and Cricket Wireless’ Muve Music in the US.

Streaming by the Numbers

The Role of Promotional Offers

For all the obvious synergies of telco music bundles there is a real danger that hard bundles that make music subscriptions free or feel like free to the end user run the risk of devaluing the proposition.  Yet it is also clear that consumers need to be able to ‘suck it and see’ before subscribing so promotional free trials and limited period bundles present a strong balance of value to the consumer, cost effectiveness to the telco and protecting the integral value of music for artists and labels.  The market data for free trial is compelling: half of one month trialists convert to a paid subscription at the end of the promotional offer period.

Customer Satisfaction, the New Music Service Opportunity

An entirely new aspect to music bundling that we dive into in the report is the role of music subscriptions in driving customer satisfaction across a telco’s wider business.  Even the most edgy, cleverly positioned challenger telco is ultimately a provider of important products but not usually a consumer passion point.  Music though has that brand passion secret sauce and partnering with the right music service can enhance the telco’s own brand and customer sentiment.  Smart integration of music into the customer journey and integration with customer satisfaction measurement tools, particularly Net Promoter Score (NPS) can enable telcos to create a customer satisfaction halo effect.  With music converting satisfied music subscription customers into highly vocal net promoters with satisfaction benefits felt across the full range of a telco’s services.

Bundled music services did not get off to the best of starts, but now their time has come, giving telcos the opportunity to assume centre stage in the digital music marketplace.

For more information on the research please feel free to email us at info AT midiaconsulting DOT COM.

About MIDiA Consulting

Midia ConsultingMIDiA Consulting is a boutique, media industry focused consultancy that delivers practical, results-driven outcomes.  MIDiA stands for Media Insights & Decisions in Action. Our mission is to help media and technology companies develop purposeful strategies quickly through market understanding, clarity of vision, and workable innovation.

We help media and technology companies make sense of the changes that digital market forces are bringing about. And we help them make profits from digital content.

http://www.midiaconsulting.com

info@midiaconsulting.com

It’s Windowing Jim, But Not As We Know It

Back in 2009 I wrote a report for Forrester Research entitled ‘Music Release Windows: The Product Innovation That The Music Industry Can’t Do Without’ (you can read the summary blog post here, and the ‘money’ graphic is here).  In the report I proposed that the music industry should adopt three release windows based around a ‘Preview’ window for premium customers, a ‘Mainstream Pay’ window for CDs and downloads and a ‘Free to Air’ window for ad supported streaming.  With all of the brouhaha surrounding the Atoms for Peace withdrawal from Spotify, release windows, and the role of streaming services more widely, are very much back centre stage.  But whereas I strongly believe in the case for release windows, I believe that, as per my 2009 report, that paid subscriptions should be in the first window, not the last.  It is free-to-consumer, ad supported streaming that needs to be pushed to the back of the queue and it is high time that the windowing and streaming debate in general makes a clear distinction between the two very different propositions.

Subscription Service Hold Outs Actually Hit the Best Fans Hardest

Music fans that pay 9.99 for a Rhapsody, Spotify, Deezer or Rdio subscription are among the globe’s most valuable music consumers.  These music fans need treating as such, almost regardless of the business models that may surround their consumption points of choice.  It is not their fault that the music industry and tech sector contrived to construct business models that have propagated doubt and division among many of the industry’s key stakeholders.   This is not to dismiss the absolutely crucial issues of sustainability and equitability, but instead to raise the issue of who is paying most the price of windowing?  The services or the fans?  There isn’t a clear-cut answer, and the decision dynamics are analogous to those of applying economic sanctions on a nation state.

Delay Releases to Free Platforms, Not Paid Ones

But if we for the moment view the issue through the lens of the music fan, then it becomes abundantly clear that if a high value music fan deserves to be treated like a VIP then something analogous to the opposite is true for those consumers that choose not to pay for music.  This is the case for why the ad supported tiers of music subscription services, along with Pandora, the radio and YouTube should all be put into the last release window.  This is already how the movie industry behaves.  Now clearly this proposal is not without controversy.  The music industry’s entire discovery mechanisms revolve around putting the best content on free-to-air platforms first under the remit of promotion. But this proposal does not have to be the death knell for that approach, as long as the potential of digital platforms are properly harnessed:

  • Think of subscription services as ecosystems not silos: There used to be a physical journey between the radio and the music store.  Now in subscription services discovery and consumption are symbiotically joined. This means that the radio promotion approach can be played out in subscription services and in doing so reach the most valuable customers based on their music preferences. Thus when the radio window hits weeks later it will be targeting a largely distinct group of consumers for whom it will still be the first time they have heard the music.  And for those that are subscribers and radio listeners, the few weeks delay may prod them into reengaging with the album they first heard on their subscription service.
  • Window albums not singles: Singles are invaluable tools for promoting albums and tours.  There is less need to apply windows to singles, or rather to the lead singles from the album.  To protect the value of the premium release window though, it is important that only one single hits the free to air channels before the album hits the first window. Else the impression is given of too much content being too widely available elsewhere.
  • Combat scarcity with new products: Of course the biggest challenge to windowing is the lack of scarcity i.e. what’s the point in turning off the tap if its available elsewhere?  There are two answers to this 1) by ensuring content is available first only on the premium platforms, the availability of content on free platforms is markedly reduced (radio and YouTube account for the VAST MAJORITY of music listening, P2P is in decline) 2) more has to be added to the premium music products to make the windowed content act as a complement to a rich, curated product experience not available elsewhere.  Two examples of how to do this are artist subscriptions and D.I.S.C. products.

Holding Back from Paid Subscription Tiers Can Be a Missed Opportunity

It is still too early in the emergence of widespread streaming adoption to draw definitive conclusions about the impact of windowing but there is a growing body of useful evidence.  Spotify’s Will Page this week released a report that brings some invaluable evidence and analysis (you can read the report here). Although Will is obviously on Spotify’s pay roll and Spotify clearly have an agenda to push, Will is a diligently objective economist with an impressive track record at the UK’s PRS for Music, and his work should not be dismissed on the grounds of assumed bias.  In the report Will pulls data from Spotify for streams, GfK for sales and Musicmetric to compare the performance of albums across all three channels for windowed and non-windowed albums.  The broad conclusions on the sample of albums tracked is that non-windowed albums did not appear to lose sales  but that windowed albums had much higher piracy rates.  Significant caution is required when interpreting this type of analysis, principally because it is impossible to definitively identify causal relationships e.g. the marketing strategy of one artist might tend towards piracy activity than another, as might the geographical location of the artist and the global distribution strategy.  But even with these caveats, the report presents some solid directional data. The market needs much more data like this and I will be adding to the data pool later this summer with a white paper that I’ve been working on for some months now.

Windowing Doesn’t Solve the Streaming Debate, But It’s Not Meant Too

Windowing does not address most of the broader issues that currently surround streaming.  It can however be an important part of the equation if, and only if, it is done on the basis of distinguishing between free-to-air streaming and paid streaming.  Though not quite as distinct as an iTunes download is from a Torrent download, the parallel is nonetheless provides useful context.  This is not to discredit the huge value of radio, YouTube and Vevo in driving music discovery, nor the equally strong value of freemium service free tiers in acquiring customers.  This is not a proposal to remove content from free-to-air channels, but instead one to simply not put everything there straight away. As the music discovery journey and consumption destination become ever more entwined, it is time to think long and hard about just how much leg needs to be shown to make a fan fall in love with an artist’s music.

Making an Impact: Assessing Streaming’s Role in the Digital Music Market

The streaming audio market is beginning to take the perturbingly familiar shape of the download market, with one big player stealing all of the momentum and scale.  And the debate about what streaming brings to the broader digital music market continues to divide the industry across ever deepening fault lines.

But leaving aside for a moment the much visited discussions about artist payments and financial viability of the freemium model, what impact is streaming having on the overall digital market?  To help answer that question I’ve compiled IFPI reported data for multiple international territories, including total market size and growth, digital market size and growth, physical share, download share and streaming share and mapped the relationships between them (see figure).

The results show that the streaming impact picture is a complex one with many permutations.  There isn’t a definitive trend that affects all markets in a consistent manner, however a few interesting trends do emerge:

  • Streaming tends to get a foothold quicker in territories where the physical market is already in marked decline.  Once it gets established the physical market decline accelerates.  It is not possible yet to definitively conclude whether this is cause or effect.
  • Strong streaming markets tend to experience significantly stronger digital growth rates than strong download markets.
  • Strong physical markets are more likely to have downloads dominate their digital markets.
  • Strong download markets tend to be more static.
  • Unsurprisingly the Nordic markets (Spotify’s back yard) are the strongest streaming markets, France remains a mainly download digital market despite Deezer’s efforts, as does the UK.

So the impact of streaming is a nuanced story.  Over two years streaming certainly seems to have brought dynamic digital growth rates to a number of markets, and has accompanied, or driven, an accelerated CD decline.

The fact that downloads are stronger in CD markets is testament to the similarity of these ownership based models.  But perhaps the strong similarity is one of the reasons that downloads aren’t growing the digital market as strongly as streaming is in other markets? Of course downloading has already had years to get established and so there is an argument that it has already contributed its dynamic growth phase to digital.  This is probably true, but it shouldn’t be that way.  With the exception of the US, no major music market has yet passed the 50% digital mark, and across all markets, the majority of music buyers still buy CDs.  Which means that digital is still a long way from being in a position in which it could plausibly be called ‘mature’.

So digital growth does need to be happening at the rates we see in strong streaming markets, and not in strong download markets.  And if streaming is the only tool with which those rates can be achieved then the questions around commercial sustainability (for the services and across the entire music industry value chain) become all the more pressing.