The Digital Music Year That Was: 2011 in Review and 2012 Predictions

Following the disappointment of 2010, 2011 was always going to need to pack more punch.  In some ways it did, and other ways it continued to underwhelm. On balance though the stage is set for an exciting 2012.

There were certainly lots of twists and turns in 2011, including: disquiet among the artist community regarding digital pay-outs, the passing of Steve Jobs, Nokia’s return to digital music,  EMI’s API play, and of course Universal Music’s acquisition of EMI.  Here are some of the 2011 developments that have most far reaching implications:

  • The year of the ecosystems. With the launch of Facebook’s content dashboard, Android Music, the Amazon Fire (a name not designed to win over eco-warriors),  Apple’s iTunes Match and Spotify’s developer platform there was a surge in the number of competing ecosystem plays in the digital music arena.  Despite the risk of consumer confusion, some of these are exciting foundations for a new generation of music experiences.
  • Cash for cache.  The ownership versus access debate raged fully in 2011, spurred by the rise of streaming services.  Although we are in an unprecedented period of transition, ownership and access will coexist for many years yet, and tactics such as charging users for cached-streams blur the lines between streams and downloads, and in turn between rental and ownership. (The analogy becomes less like renting a movie and more like renting a flat.)
  • Subscriptions finally hit momentum.  Though the likes of rdio and MOG haven’t yet generated big user numbers Spotify certainly has, and Rhapsody’s acquisition of Napster saw the two grandaddys of the space consolidate.  Spotify hit 2.5 million paying users, Rhapsody 800,000 and Sony Music Unlimited 800,000.
  • New services started coming to market.  After a year or so of relative inactivity in the digital music service space, 2011 saw the arrival of a raft of new players including Blackberry’s BBM Music, Android Music, Muve Music , and Rara.  The momentum looks set to continue in 2012 with further new entrants such as Beyond Oblivion and psonar.
  • Total revenues still shrank.  By the end of 2011 the European and North American music markets will have shrunk by 7.8% to $13.5bn, with digital growing by 8% to reach $5 billion.  The mirror image growth rates illustrate the persistent problem of CD sales tanking too quickly to allow digital to pick up the slack.  Things will get a little better in 2012, with the total market contracting by just 4% and digital growing by 7% to hit $5.4 billion, and 41% of total revenues.

Now let’s take a look at what 2011 was like for three of digital music’s key players (Facebook, Spotify and Pandora) and what 2012 holds for them:

Facebook
2011.  Arguably the biggest winner in digital music in 2011, Facebook played a strategic masterstroke with the launch of its Digital Content Dashboard at the f8 conference.  Subtly brilliant, Facebook’s music strategy is underestimated at the observer’s peril.  Without investing a cent in music licenses, Facebook has put itself at the heart of access-based digital music experiences.   It even persuaded Spotify – the current darling of the music industry – to give it control of the login credentials of Spotify’s entire user base. Facebook’s Socially Integrated Web Strategy places Facebook at the heart of our digital lives.  And it’s not just Facebook that is benefiting: Spotify attributed much of its 500,00 new paying subs gained in October and November to the Facebook partnership.

2012. Facebook is quietly collecting unprecedentedly deep user data from the world’s leading streaming music services.  By mid-2012 Facebook should be in a position to take this to the record labels (along with artist profile page data) in the form of a series of product propositions.  Expect whatever is agreed upon to blend artist level content with music service content to create a 360 user experience.  But crucially one that does not require Facebook to pay a penny to the labels.

VERDICT: The sleeping giant of digital music finally stepped up to the plate in 2011 and will spend 2012 consolidating its new role as one of the (perhaps even *the*) most important conduit(s) in digital music history.

Spotify.
2011.
 It would be puerile not to give Spotify credit for a fantastic year.  Doubts about the economics of the service and long term viability remain, but nonetheless 2011 was a great year for the Swedish streaming service.  It finally got its long-fought-for US launch and also became Facebook’s VIP music service partner. Spotify started the year with 840,000 paying subscribers and hit 2.5 million in November.  It should finish the year with around 200,000 more.  Its total active user base is now at 10 million. But perhaps the most significant development was Spotify’s Developer platform announcement,paving the way for the creation of a music experience ecosystem.  Spotify took an invaluable step towards making Music the API.

2012: Expect Spotify’s growth trajectory to remain strong in 2012.  It should break the 3 million pay subscribers mark in February and should finish the year with close to 5 million.  And it will need those numbers because the funnel of free users will grow even more dramatically, spurred by the Facebook integration.  But again it will be the developer platform that will be of greatest and most disruptive significance.  By the end of 2012 Spotify will have a catalogue of music apps that will only be rivalled by Apple’s App Store.  But even Apple won’t be able to come close to the number of Apps with unlimited music at their core.  More and more start ups will find themselves opting to develop within Spotify rather than getting bogged down with record label license negotiations.  Some will find the platform a natural extension of their strategy (e.g. Share My Playlists) but others will feel competitive threat (e.g. Turntable FM).  If Spotify can harness its current buzz and momentum to create the irresistible force of critical mass within the developer community, it will create a virtuous circle of momentum with Apps driving user uptake and vice versa.  And with such a great catalogue of Apps, who would bet against Spotify opening an App Store in 2012?

VERDICT: Not yet the coming of age year, but 2011 was nonetheless a pivotal year paving the way for potentially making 2012 the year in which Spotify lays the foundations for long term sustainability.

Pandora
2011.
 Though 2011 wasn’t quite the coming of age year for Spotify it most certainly was for Pandora.  In June Pandora’s IPO saw 1st day trading trends reminiscent of the dot.com boom years.    By July it had added more than 20 million registered users since the start of the year to hit 100 million in total and an active user base of 36 million, representing 3.6% of entire US radio listening hours.  But Pandora also felt the downs of being a publically listed company, with flippant traders demonstrating their fear that Spotify’s US launch would hurt Pandora.

2012: And those investors do have something of a point:  whatever founder Tim Westergren may say, Spotify will hurt Pandora.  A portion of Pandora’s users used Pandora because it was the best available (legal) free music service.  Those users will jump ship to Spotify.  This will mean that Pandora’s total registered user number will not get too much bigger than 100 million in 2012 and the active number will likely decline by mid-year.  After that though, expect things to pick up for Pandora and active user numbers to grow again.  The long term outlook is very strong.  Pandora is the future of radio.  It, and services like it, will get an increasingly large share of radio listening hours with every month that passes in 2012, and with it a bigger share of radio ad revenues.  Pandora will be better off without the Spotify-converts, leaving it with its core user base of true radio fans. Spotify’s new radio play will obviously be a concern for Pandora  but this is Pandora’s core competency, and only a side show for Spotify.  Expect Pandora to up their game.

VERDICT: Since launching in November 2005 Pandora have fought a long, dogged battle to establish themselves as part of the music establishment, and 2011 was finally the year they achieved that.  There will be choppy waters in 2012 but Pandora will come out of it stronger than it went in.

Dear Lucian Grainge…

Dear Lucian Grainge and co,

Congratulations on your successful bid for EMI.  You are about to find yourself in charge of an unprecedentedly large share of the world’s music market.  Not so long ago, to have even imagined that regulators would countenance such a situation would have been fantasy.  But the world has changed, and I’m sure you’ll be glad that Prime Minister Monti will be too preoccupied with cleaning up Silvio Berlusconi’s mess to block another EMI acquisition (though time will soon tell whether Joaquín Almunia will be any more understanding, or indeed if he intends to carry on Neellie Kroes’s crusading).

For argument’s sake, let’s assume that the acquisition clears all regulatory hurdles and challenges.  You now control more than a third of the recorded music market.  And although some suggest that market share doesn’t matter anymore, I just don’t buy it.  In fact I think market share matters more than ever and I think you do to.  Of course, in pure business terms market share on its own means nothing.  Revenue pays the bills, not market share.  And yet, in the digital arena, market share takes on a whole new meaning. Because you and your label peers still exercise an effective monopoly of supply of content to digital services, whoever holds the largest market share holds the greatest degree of market control and can thus shape the market.

But you already know this because Universal was already the world’s largest label before the EMI acquisition and Universal exercised that dominant position to full effect.  I have to say, I think Universal has done so in a way which, on balance, has encouraged marketplace innovation.  Being the first to license to edgy services such as Spiral Frog, Comes With Music and – in principle at least – the stillborn Virgin Media unlimited MP3 service, saw Universal shoulder the risk of disruptive models.  You may have charged a premium in these situations for being the first major willing to take that risk, but you knew that your unique position as the world’s largest record label would – in most cases – led to the other majors coming on board.  (A fact that your licensee partners were banking on and were willing to pay that premium for.)

Now, as head of an even bigger ‘world’s biggest record label’ I’d love to watch you oversee a stepping-up of this approach.  And I’m not even too bothered about you charging a premium for being the first to license.  (Between you and I, that’s because I’m waiting for market dynamics to balance things out, for your bold licensing strategy to pull the rest of the marketplace with you, and to such an extent that all of the majors will be fighting to be the first to license to the next disruptive service.  So that nobody will be able to charge a premium for being first anymore.   I guess when it comes down to it, I’m hoping your exercising of seller-control will paradoxically create a buyers’ market.  But I can keep a secret if you can).

And while we’re talking, what I’d like to see less of, is using the justification of ‘risk mitigation’ as a means of stifling the market.  Yes, all majors demand big fat advances from digital services, and yes, it does a great job of separating the wheat from the chaff, of ensuring the market is driven by serious companies with serious scale.  But, as much as the prospect of the digital market evenly split between the Triple A of Apple, Amazon and Android may be more palatable to you than one in which Apple controls 75%+, you don’t really want that any more than I do. As pesky and unpredictable as those small disruptive start-ups can be, they are the ones which ultimately drive the quantum leaps in digital music progression.  If young start-ups have to commit the majority of their investment to label advances, that means that they will have so much less to spend on technology development and marketing.  Which of course means that you end up with safely secured digital income but no great new services driving the market forward.   Have you stopped to wonder why there has been a slowdown in licensed digital music services?  VCs are getting tired of financing non-starters.

Why am I firing this broadside at you when all of your major label peers are just as guilty?  Because now as head of the world’s biggest ever ‘world’s biggest record label’ I think it is only right that you start using your power to drive change across the entire market.  Your company has done so well in the digital arena by being bold, ambitious and, most importantly of all, by being innovative.  I’ve long held Universal up as the innovation standard for traditional media companies of all shapes and kinds.  But there comes a point at which that innovation must focus on providing the necessary conditions for driving innovation in the marketplace.

In short, I am asking you to continue to be a catalyst for innovation across the digital music marketplace, but also to resist succumbing to the conservatism and caution that your unprecedented market share will undoubtedly tempt you with.

Be bold, be brave, take risks (big risks) and most importantly of all, use your new power responsibly, don’t give the sceptics ammunition.  The digital music market needs Universal Music to continue to drive innovation not stagnation.

Good luck!

Kind regards

Mark Mulligan

Facebook Fallout

As if to prove that Facebook’s F8 announcements were truly seismic we are still feeling the aftershocks now.  Interestingly though it is Spotify who is feeling most of the effect of Facebook’s moves towards becoming a 21st Century Portal.

When Spotify was positioned centre stage at F8 (literally in the case of Daniel Ek)  it wasn’t immediately apparent whether this was just Spotify as the first among equals of the dozen+ digital music services included at launch.  Now the dust is settling it is becoming apparent (to misquote Orwell) that

All digital music services are equal, but some digital music services are more equal than others.

Facebook, Guardian or Gatekeeper?

There are many quite logical strategic and financial reasons why Spotify’s bond with Facebook is so close (shared investors, scale, momentum of brands, closeness of Zuckerberg and Ek etc etc).  But in my opinion it is more interesting to look at what the long term effect of the fallout may be:

  • Facebook: Gatekeeper of the ‘Socially-Enabled Web’. Over recent years Facebook has slowly been flicking the switch on its strategy of integrating itself into the wider Internet, first with ‘Likes’ across external web sites and now with features such as the Timeline, and a play for the Universal Log In (see below for more).  What Facebook is doing is placing a social (i.e. Facebook) layer across more and more of our external web experiences and also bringing more of our external web experiences into Facebook.  This is what I term Facebook’s Socially-Enabled Web strategy. As leading content destinations such as Spotify, Vevo and Netflix jump on board they have their eyes firmly set on the 800 million potential customers and turn a blind eye to the longer term implications their collective activity is facilitating.
  • Facebook’s Digital Music Gentleman’s Club: Spotify’s tighter integration raises questions about Facebook’s role as a curator of out digital content experiences. Rdio and Mog for example appear to be given less prominence than Spotify within Facebook. Rdio users have complained that Spotify’s ‘featured music service’ status overrides some Rdio functionality within Facebook.  Facebook creating a social layer for content experiences is one thing, but choosing who gets in and who does not is an another thing entirely.
  • A Nail In The Coffin for Ownership? Universal Music’s UK Director of Digital Paul Smernicki said he saw the F8 announcements as a ‘coming of age’ for streaming services and a shift to access rather than ownership. The emergence of the consumption paradigm has been something I’ve long expounded, but it is interesting to hear it come from the world’s largest record label.  (And from a record label that typically doesn’t just let executive comment ‘slip out’.)  The addition I’d add to the argument is that we are in a transition phase where additional, complementary blended access / ownership models will be crucial to mass market revenue migration.
  • Facebook Boosts Spotify Usage, Though From What Base? New usage metrics (from a third party measurement company) suggest that active Facebook integrated usage of Spotify rose from 3.25 million to 4.5 million following the F8 announcements.   Spotify report their ‘active’ users at c. 6.5 million, which means that if these 3rd party numbers are broadly accurate that only 50% of Spotify’s ‘active’ users in a normal non-F8 month are active Facbook integrated users.  It also means that Spotify’s 2 million paying subs represent 61% of this user base.  There are some important caveats: the measurement company suggests their data should be considered as directional rather than absolute. Additionally ‘active Facebook integrated’ users is not the same as ‘active Facebook users’ but it is a decent proxy for the most engaged Spotify users. Which raises questions about just how many more potential new premium customers are left to convert. Which in turn helps explain why Spotify is widening out the funnel with a ‘6 months free Facebook streaming’ offer.
  • Facebook and the Universal Log-In.  Perhaps the most contentious issue of all has been Spotify’s insistence on all Spotify users using their Facebook log in details to access the music service.  Which of course means that if you are not on Facebook you cannot use Spotify.  Faceboook’s 21st Century Portal ambitions don’t stop with adding that social layer to content.  The Socially-Enabled Web strategy requires Facebook to become the lock and key for our digital lives.  The concept of the Universal Log In concept is far from new. Many have tried and failed.  Facebook’s scale gives it a great chance of success, and if implemented well (i.e. gradually and on an opt-in not force-in basis) it will deliver great convenience and benefit for consumers.  What Spotify are guilty of is rushing it through in a heavy handed manner.  But doing so was probably part of the price of the centre stage positioning Spotify got given.  Note that Rdio and Mog have no such requirements.  Interestingly some premium Spotify users indicate that it is possible to get around the requirement by opting out of the timeline functionality within Facebook.  It will be interesting to see whether this is a bug in need of a fix or indeed a benefit for paying users.

Expect more  fallout from the Facebook announcement, but don’t expect Spotify and Facebook to fall out

It is likely that the fallout will continue over the coming days and weeks and that Spotify and Facebook will both consider making changes (Daniel Ek even reached out to the Twitterverse to ask directly for their feedback and stated he would make changes if need be).  Indeed one survey suggested 20% of Swedes could leave Spotify in light of the changes.  But when the changes do come, don’t expect them to be a change in strategy, instead simply a slowing of the timeline (no pun intended).

The harsh reality is that Facebook’s Socially-Enabled Web strategy is simply too important to be put of course by a few disgruntled streaming music fans.

BBM Music: First Take

Today Blackberry announced their anticipated BBM Music service, which it transpires is powered by white label cloud music stalwart Omnifone (who also power the likes of Sony and Vodafone).

In short the service offers:

  • 50 tracks per month for a £/$ 5.99 fee
  • Is available to Blackberry Messenger (BBM) users
  • Users’ tracks are available for their BBM friends to listen to (so the more friends with the service the more music you have access to)
  • It is launching in Beta in the UK, US and Canada today and will eventually roll out to 18 countries

Blackberry have done something with BBM Music that many other services haven’t: they have targeted a specific defined consumer segment. Which in turn is something that the majors, Universal in particular, are increasingly looking for in music services they license to.

Blackberry has weathered a lot of tough marketplace scrutiny over recent years with many questioning how RIM will deal with the iPhone threat.  Those concerns are valid ones but primarily relate to the email-focused business users and misses the massive importance of the youth segment to Blackberry adoption.  Blackberry’s youth appeal largely stems from BBM presenting a cost-free alternative to texting for text hungry youths.  Blackberry’s ability to successfully simultaneously target these two almost diametrically opposed segments with the same device portfolio has been little short of masterful.   This was well illustrated to me when a friend recently told me about when his teenage daughter saw him checking email on his Blackberry she asked him “what do you need a Blackberry for Dad?  Aren’t you too old for one?”!

So by targeting their youth centric installed base of 45 million BBM users with a cheap, inherently viral and social music service plays to one of Blackberry’s key strengths.  Of course direct comparisons with Rhapsody, MOG, rdio, iTunes, Spotify etc are unlikely to be unfavourable, but that’s simply not what BBM Music is about.  We’ve reached the stage of maturity in digital music where we shouldn’t be talking anymore about ‘an iTunes killer’ or a ‘Spotify killer’.  Instead the music industry needs targeted segmented offerings that grow the market by engaging with un-penetrated consumer segments.  In that context, BBM Music should be a valuable addition to a digital music marketplace that is in real need of new differentiated services.

Finally….the timing of the announcement, off the back of BBM’s new found infamy as the communication method of choice for London’s rioters is unfortunate but does open up some interesting potential marketing slogans, such as ‘download while you loot’ and ‘so cheap it’s a steal’….
And if you missed it, don’t forget to submit an email subscription to this blog to get a freecopy of my latest report: ‘Agile Music: Music Formats and Artist Creativity in the Age of Music Mass Customization’.  See here for more details.

Spotify and Virgin Media Take The Third Way

UK cable broadband and TV provider Virgin Media and Spotify today announced the partnership deal they’ve been working on for some time.  The deal will ensure that Spotify is delivered across the web, mobile and TV to Virgin customers.

On the surface this might not seem like such a big deal, but don’t be fooled, it is potentially huge…just so long as it is executed upon properly….

A Marriage of Supreme Convenience

This is a marriage of supreme convenience: Virgin Media and Spotify really need each other right now.  Virgin Media has been pushing hard at delivering a truly differentiated music service for some time now.  Just over two years ago they announced the holy grail of digital music: an unlimited MP3 subscription service in partnership with Universal Music (you can see my post about the announcement here).  Unfortunately this was too big a step taken too soon for the rest of the majors, and Virgin and Universal were forced to back down. (For the record, the arrival of unlimited MP3 is a matter of ‘when’, not ‘if’, whatever some label execs might think.)

So now Virgin have turned to Spotify for plan B, and Spotify need Virgin just as much as they need Spotify.  Spotify’s struggle to make the economics of free add up are well documented and their struggle towards profitability has raised some difficult questions about the Freemium model.  Having  Virgin deliver paying customers to Spotify’s door will be a major boost for the Swedish streaming service.

Digital Music’s Third Way

For years now I have been advocating a Third Way for monetizing digital music and Spotify and Virgin look like they’re about to take this very route.

Right now digital music has two options: Paid (iTunes, Rhapsody etc) and Free (YouTube, Pandora etc).  Paid generates high average spend but only appeals to a minority of customers.  Free appeals to the mass market but doesn’t generate enough income for rights owners nor enough profit for services.

Like it or loathe it, the Internet has made most people expect music to be free, whether that be from YouTube or BitTorrent etc.  Free is of course the only way to truly fight free, but if free doesn’t pay the solution is to make music ‘feel like free’ by getting a third party to subsidize some or all of the cost.  This is the Third Way of Digital Music (see graphic).

Go Big Or Go Home

Spotify have already experimented with this approach with mobile operator 3 and ISP Telia Sonera.  This is potentially Spotify’s most important deal yet. But for this deal to realize its potential, Spotify and Virgin will have to hit upon heavily subsidized prices, ideally with the cost to consumer hidden entirely in some bundles.  Simply offering a couple of £ discount won’t fly.

Spotify and Virgin Media have the opportunity here to set the gold standard for subsidized subscription models.  Here’s hoping they seize that opportunity with both hands and kick start digital music’s most viable route to the mass market.

Monkeying Around With Mobile Music (Updated)

Today the triumvirate of Universal Music, UK broadcaster Channel 4 and UK mobile operator Orange announced a Pay As You Go (PAYG) mobile music service called Monkey.  The service is aimed squarely at younger consumers, which matches the demographic of PAYG users and Channel 4’s audience.  The underlying principle of the service is that it has a low barrier to entry: it utilizes the voice network rather than data network and is thus available across all handsets and does not require any application download.  Instead consumers simply dial 247 to listen to playlists streamed at 64 kbps.  Most of the more sophisticated behaviour, such as playlist creation, music discovery etc., is expected to happen online, using a cloud based player, where tracks will be streamed at 128 kbps.  Playlists can also be shared using widgets for major social networks and via text.

So what impact is this offering likely to have?  It’s clearly aimed at enticing young consumers away from file sharing and the positioning point is effectively ‘free music when you top up your phone’.  I think there is a risk of worst of both worlds here.  Firstly, I don’t buy into the argument that streaming reduces file sharing penetration.  It may cause file sharers to download less from P2P networks, but it’s unlikely to entice them away from them as they’ll still want music for their MP3 player, to burn onto CD for their friends etc.  Granted, Monkey steps closer to being a replacement in that it has a portability story (of sorts) and it has a sharing story (of sorts).  But it doesn’t provide true portability (what do you do when you’re underground for example) and it only offers partial catalogue.

The killer point though is that it uses voice minutes and the cost of calls is 20p per minute.  So it will cost about 70p to listen to a single and an entire 10 pound top up will give you about 1 album and no time left for talking.  So consumers are paying the same amount as an iTunes single download (even more for an album) but only getting a low quality analogue audio stream.  (And what happens when somebody wants to call them when they’re listening over the voice line?)

*Orange just called me to clarify their press release.  The press release reads:

  • “Monkey customers can access the service on their phones by dialling [sic] 247.”
    and
  • “Calls cost 20p per minute”

However, following my phone call from Orange it transpires that the per minute pricing applies to voice only and not music calls, even though this isn’t actually explained in the release.

Also another interesting detail emerges: the service is actually a limited mobile music service, not an unlimited mobile music subscription, hence the careful use of the term ‘access to music’ in the release.  Customers are only allowed to listen to 600 minutes of music per month on their phone (again not in the release), which translates into 14 albums.  If you take a 30 pounds top up, that then translates into 2 pounds ten per album listen, so if you listen to an album, say 3 times in a month, that’s 6.30 an album.  Which isn’t far off the cost of a standard album, but of course you don’t get to keep it after you’ve finished listening . The ‘3 listens’ cost drops to 4.20 for a 20 pound top up, 2.10 if you just take a 10 pound top up.  So still far from free, even though they’re being told it’s ‘free’ music,  which in turn reinforces conceptions that music is a free commodity (thus further undermining perceived values of music).

The additional fact that Universal will make some releases available here before anywhere else is a brave move and underlines the major’s persistently adventurous product innovation.  It will certainly be a key asset for demonstrating consumer value, but it will need careful positioning alongside premium products.  How, for example, would a high-end 15 pounds a month subscriber to Virgin’s unlimited MP3 subscription service (also in conjunction with UMG) feel if they realized they were getting new releases after the lower end Monkey customers were?

The other interesting sub text here is the underwhelming success of Comes With Music (Universal and Orange are both key UK partners for Nokia).   Is this picking up where CWM has failed to do so?  As I’ve stated here many times before, I am a firm believer in the CWM model and I believe it is the best tool that the music industry currently has for fighting piracy.  It is a genuinely compelling alternative to file sharing as it has a viable portability and ownership story.  Unfortunately it’s been hindered by channel issues, marketing problems and limited consumer awareness and understanding.

When I asked how Monkey would be positioned alongside CWM, UMG’s Rob Wells said Monkey was aimed more at younger, lower end consumers and Orange’s Pippa Dunn said that Monkey was for PAYG customers whilst CWM was for subscription customers.  Orange’s positioning is clean and elegant, but it’s a shame that CWM is effectively being marginalized as a high-end proposition.  That is not its sweet spot. Indeed the strong CWM association with the 5800 illustrates Nokia’s understanding that CWM is best positioned at younger, lower spending consumers and that it does not stand up as well when held up against higher end digital music offerings.  Also, from a broader music industry perspective CWM needs to be reaching younger consumers.  I hope Monkey doesn’t distract from that.

Virgin and Universal Announce Unlimited MP3 Subscription: First Take

Today Universal Music and UK ISP Virgin Media announced the launch of an unlimited MP3 subscription service.  Yes, you read correctly, ‘unlimited MP3’.  And, perhaps even more significantly this goes hand in hand with Virgin committing to a graduated response (i.e. Three Strikes and You’re Out) policy for music file sharers.    Universal and Virgin have come to the negotiating table with their highest stakes and in doing so each has got their respective Holy Grail.    And don’t underestimate how high those stakes are for each party – basically Universal and Virgin have each delivered as much as they have to offer and conceded as much as they can give: they’ve both played their Aces.  Once again Universal put themselves in the position of digital trailblazers, leaving the other majors to follow in their slipstream.

Also, there’s no coincidence about the timing of the announcement i.e. the day before the final Digital Britain report is published.  The graduated response approach runs counter to the more modest ‘technical solutions’ that the then Culture Minister Andy Burnham suggested the Digital Britain report will propose.  He even went as far as to say that the graduated response approach wasn’t workable.

But he also told the music industry and the ISP’s to fix their own problems rather than wait for the ‘heavy hand of legislation’.  Given that this is exactly what has happened, it will be interesting to see how the government responds.  Its also worth noting that the release is at pains to stress that disconnections will be temporary and that Virgin will not use its own traffic management technology to enforce the action.  Thus the ISP’s arguments that their traffic management technology isn’t well suited to dealing with individual accounts remain in play.

The service itself will come in two tiers: a premium tier which is the unlimited MP3 offering, in return for a 1 year broadband bundle subscription commitment, and a second lower tier that has limited MP3s.  Unlimited streaming is available on both also.  The 12 month MP3 model is what I’ve been advocating should happen with music subscriptions for some time now, and leaves Napster’s UK offering looking even more in need of fundamental revision.

The pricing of course will be key.  UK consumers have historically shown little appetite for premium subscription services: HMV and Virgin Megastores both tried and failed – though HMV is back for a second stab, Napster has failed to break out of a small niche, Wippit closed shop and Yahoo and Rhapsody didn’t ever bother to launch here.  Of course, none of those were as compelling an offering as this, and this is smartly targeted at households not individuals.  But pricing will be key.  Price it too highly and you’ll miss the disengaged music households this and just switch over already high spending ones.  Price it too low and CD sales will be cannibalized.

It will also be interesting to see whether this announcement means that the UK’s other major label backed unlimited MP3 offering Datz will be breathed new life.

Whatever the political fall out of this announcement, there is no doubting that this is a massive step forward and shows that where there’s a will there’s a way.  If the other majors come on board Virgin Media will have a market leading digital music service that will bring real value to their subscribers.  At the same time the labels will get a major ISP implementing a twist on their preferred anti-piracy measures without needing the government to do it for them.

Unlimited Mobile Music Gains Momentum in Singapore

This weekend saw the launch in Singapore of SingTel’s unlimited music download service Amped in partnership with Universal Music.  The service is available with a SingTel data plan, so is very much a data revenue driver for the operator.

Although a relatively small market, Singapore is fast becoming the global capital of unlimited mobile music subscription services.  Nokia’s Comes With Music and Sony Ericsson’s Play Now plus are both already live in the market and enjoying some success: Nokia reported more than three million CWM track downloads in less than two months, making it the best performing global CWM music.  The early momentum in Singapore illustrates that each market has its own digital sweet spot, its own unique digital music consumer footprint.  In the case of Singapore, unlimited mobile music downloads looks like it is the slipper that fits.

Spiral Frog R(edd)IP?

IMPORTANT DISCLAIMER: I’ll state up front that I have no privileged information on the current financial situation at Spiral Frog and I’m only going to focus here on the strategic positioning of the music service. This strategic analysis stands, whatever the outcome of Spiral Frog’s current management situation.

There have been press reports concerning Spiral Frog’s difficulties for some time now and it seems that things are finally coming to a head (see this story for more details).


If Spiral Frog is to close its doors, it’ll be a shame but at the same time not a huge surprise: Spiral Frog would be paying the price for first mover advantage. The history of technology is a path littered with the corpses of companies that had good ideas too soon. Most often it is the early followers who are the successes, learning from the mistakes of the pioneers. Apple is the shining example in the digital music space. Apple was far from the first to sell music digitally. Instead Apple watched the likes of OD2 and MP3.com make their respective mistakes and acted, still quickly enough to be in pole position just as the race was really getting started.

Spiral Frog here has played the role of OD2. They had the right idea, but were too early and didn’t execute successfully. It was in August 2006 that Spiral Frog burst onto the scene with a high profile announcement regarding a licensing deal with Universal Music, and I had high hopes for it and Qtrax. (This was incidentally the first high-profile manifestation of the rebirth of UMG as the preeminent digital innovator major).

Spiral Frog, and indeed Qtrax, had the vision to see that the music industry would soon need a digital Plan B. That paid download sales were not going to get anywhere close to keeping pace with the rate of decline of CD sales. They also knew that young file sharers were never going to suddenly switch in their tens of millions to becoming iTunes buyers. So ad supported, free music seemed like a perfect fit. And it is. Unfortunately Spiral Frog asked the right questions but didn’t provide quite the right answers.

Ultimately Spiral Frog’s hop was weighed down with DRM temporary downloads that didn’t work with iPods, difficulties in getting all content owners on board, and license fees that challenged profitability. That’s not to say Spiral Frog didn’t have their successes (they registered 1 million unique visitors in early 2008) and equally it’s possible that there is life in the old frog yet. But any future success will depend upon significant revisions to their business model.

Ad supported is going to be a corner stone of digital music, but the next wave of services that are leveraging this business model are doing so by creating business models that are more financially viable and don’t try to create a watered down version of the iTunes experience, which in itself is a costly thing to do from a licensing perspective. So look to the likes of Last.FM, imeem, Spotify and We7 as the early followers who will reap the benefits of Spiral Frog’s hard learned lessons. In fact We7 have really put those lessons into practice, moving from an ad supported download model to a predominately streaming model, in the process acquiring half a million users in the UK. The added irony for Spiral Frog is that the growth of the mobile Internet is enabling those PC streaming services to get portability without needing downloads.

Spiral Frog played a crucial role in driving the ad supported music sector forward, unfortunately it was too much too soon.

What the ISPs and the Record Labels Need to Do Next

The UK music industry and ISPs have been working towards the goals of the government-brokered Memorandum of Understanding since last summer but we’ve yet to see concrete results, in particular with regards to new music offerings. All stakeholders recognize the crucial importance of having a big fat carrot to accompany the stick. Yet we still seem to be some distance from the ISPs being empowered with truly compelling music services they can offer to their subscribers as a genuine alternative to file sharing.

On the surface of things this week’s reported tie up with Sky and Omnifone for a music subscription services seemed like a positive step forward. However, the lightest of scratches beneath the surface reveal it to actually be a microcosm of broader problems. Omnifone’s press announcement pointedly doesn’t even mention Sky as a partner for their new ISP white label offering. Although many press reports imply Sky have signed up, the only actual substance is that Sky are considering using Omnifone to power some of the technology on its offering.

The nuanced specifics here are important. Last year Sky and Universal Music proudly announced a music JV. Details were scarce in the extreme but the strategic ambition was bold. Sky has since then not been able to add any of the other 3 majors onto the JV roster. Part of this may well relate to the other majors getting increasingly narked about UMG’s highly proactive (even aggressive) digital strategy. But more broadly it talks to the fact that there is a lot of distance between what Sky wants to be able to offer its customers and what the labels feel they can provide for the financial terms Sky are willing to consider. This follows on the heels of Virgin Media dropping pursuit of PlayLouder’s MSP offering due to label concerns and also 7Digital so far failing to get any ISP to take up their white label offering.

The root of the problem is that the ISPs want to offer consumers more content and flexibility for less money (and pay the labels less) than the labels are willing to countenance.

But most UK ISPs have good reason for having high demands, as do many other continental European ISPs. They’ve been burnt once, launching poorly featured, weakly differentiated services near the turn of the century. Their inadequacies (and the subsequent failures) weren’t the fault of the ISPs per se, rather they were products of their time, restricted to the terms that the major record labels were willing to countenance back then. (e.g. 99 cents downloads that could only be played on your computer)

Apple changed the rules of the game and the failings of the ISP services were only accentuated.

The ISPs know now that if they get back in the game they have to be differentiated and be able to compete with Apple. But they also know that most of their file sharing subscribers are unlikely to be able or willing to pay much either. So the ISPs want compelling (ideally MP3) services that cost little or nothing to consumers. The labels business models can’t support that model without the ISPs picking up a lot of the cost, which they can’t afford to do due to falling broadband ARPU.

So we’re in a stalemate that nobody really expected to be in. (Indeed back in the summer of last year BMR CEO Feargal Sharkey said he expected to have something to announce “within a matter of weeks”). The labels thought the ISPs would lap up what they had to offer, and the ISPs thought they’d get more. The record labels are not about to change the fundamentals of how they value their IP, but there are some viable mid term compromises that can get us out of this malaise:

  • A series of Joint Ventures: MySpace have created a blue print for using this approach to get favourable licensing terms to deliver free music that wouldn’t have been financially viable otherwise. And the labels get lots of potential upside and to extend their role in the value chain. JVs would bind the ISPs and labels closer together, create common purpose and engender greater strategic flexibility.
  • Focus on free, not MP3: the success of Spotify has shown that MP3 isn’t everything. Free music streaming with good catalogue and easy to use UI is actually a winning formula. The business case for hiding the cost of a streaming service in the access subscription is a lot stronger than for MP3 downloads
  • Leverage all elements of the multiplay: ISPs typically have multiple products (TV, mobile etc.). Fully leverage these. Creating a compelling music offering means going beyond a balkanized online vs mobile vs TV strategy. Fully integrate and actually drive other business areas in the process e.g. extending a streaming music offering to mobile via an on-handset app will drive mobile data usage

Time is of the essence: every day that goes by, file sharing grows in popularity and becomes more entrenched. So agreeing on intermediate solutions with a view to a longer term roadmap is far favourable to stalling until the perfect solution can be agreed upon.