The Challenges of Becoming a Subscription Business

Subscriptions are still only a small share of the music market but their time is coming. That time is long over due (I and my former Jupiter colleagues David Card and Aram Sinnreich first started making the case for subscriptions back in 2000) and a slew of big players are getting ready to play ball now that subscription look ready for primetime.  But they will find it far from plain sailing.

Spotify, Deezer, Rhapsody, Muve, Rdio, WiMP etc. have done much get the market moving and although there are still major challenges ahead (e.g. 9.99 not being a mass market price point) a host of new entrants are poised to make their moves.  The much mooted / touted (delete as appropriate) Daisy is one of the more eagerly anticipated ones (see my take here) but focus has recently turned to potential moves from big players like Amazon and Google, while Apple’s arrival in the subscription market is becoming Godot-esque.

All of these companies bring fantastic assets to the subscription market –scale being the most important – but they will all find the subscription transition difficult.  However good their technology assets, however big their marketing spend, however big their customer base, none of these companies have subscriptions running through the DNA of their products nor, most importantly, their customers.  Here are the key challenges each will face:

• Apple: Apple was the music industry’s digital beachhead but now Apple has a problem.  Downloads were a transition strategy with one foot in the digital future and one foot in the analogue past.  Apple has built a paid content customer base founded on ownership, a la carte transactions and downloads.  Meanwhile it tiers its hardware pricing by hard-drive capacity.  In some ways this latter point matters most: in the streaming era consumers download less which means there is less need for higher capacity devices, which in turn means that demand for the higher priced, higher capacity devices tails off.  Apple can use subscriptions to address this issue by creating bundles e.g. iPad Gold, a $200 price premium with device-lifetime access to an iTunes music, video and Apps subscription.   This sort of tactic will be crucial for Apple because the concept of digital content subscriptions is alien to the vast majority of its 400 million iTunes customers.  If anyone can make subscriptions work, it is Apple – and I believe they will – but currently its customer base, hardware pricing and content offerings (iMatch and movie rentals excepted) are simply not the right foundations for building a subscription service on.  A lot needs to change before Apple and its customers are ready for subscriptions.
• Amazon: Amazon’s content-device strategy is the mirror opposite of Apple’s: Amazon is selling devices to help sell content. Amazon needs to be a key player in the music and video business because these low price point items are the bottom rung on the purchase ladder that Amazon hooks new customers in with.  Subscriptions though, are high consideration items.  Amazon is hoping it can nudge customers up to monthly subscriptions in the same way it can nudge customers from a CD to a laptop.  But it isn’t the same transition.  Most Amazon customers have a lot of one-night stands with the retailer rather than a relationship: it is where they go to get stuff, not to immerse themselves in experiences.  Of course Amazon is trying to change that – particularly with video – but it requires a fundamental change in the relationship with its customers.  As with Apple, a device / subscription bundle strategy will deliver best near-term results.
• Google: Google has the most diverse set of assets at its disposal. In YouTube it has the most successful streaming music service on the planet and in Google Play it has, well, not the most successful digital content store on the planet.  Launching a subscription service on YouTube is an obvious option and the sheer scale of YouTube means that even with highly modest conversion rate it can easily become a major player very quickly.  But the fact that YouTube is free is core to why it is so popular, so the vast majority of its users have little interest in paying fees.  Thus Google will have to ‘think different’ to make subscriptions work on YouTube.  But where Google could really make the subscription play work is, well, on Play.  Not Play by itself though but instead as a tightly integrated subscription – device ecosystem with Motorola.  A while ago I wrote that Google ‘needs to do an Apple with Motorola’. It still does, but it should do so in a manner fit for the cloud era by hard bundling a Play subscription service into Motorola handsets. (You should be spotting the theme by now).
• Samsung / HTC / Nokia et al. By this stage any readers from a non-Apple and non-Motorola handset business might be beginning to wonder how on earth their companies are going able to squeeze themselves into the subscription equation.  It is a very good question.  Most mobile handset companies are at a crucial juncture, they now face the same problem as ISPs did in the mid-2000’s: unless something changes mobile handset companies are going to become ‘dumb devices’ just as ISPs ‘became dumb pipes’.  Nokia recognized this earlier than most but got the solution wrong – or at least the implementation – with Ovi and is slowly clawing its way back.  But all of them have a huge task ahead them if they are to avoid becoming helpless observers as other companies build robust digital businesses on the back of their hardware. If they can harness the carrier billing relationship then they have a truly unique asset for building a music subscription market, but that is much, much easier said then done (remember Comes With Music?).

All of these business have the potential to be successful subscription businesses but none of them will find it an easy transition and none of them are guaranteed success.  Not only will they have to transform their products, pricing and customer bases, but they will also have to develop entirely new business practices.  To some degree or another, all of these companies have to make the transition from being retail businesses to being subscription businesses.  Being in the subscription business is all about managing churn.  It doesn’t matter how good a job you do of acquiring customers if you can’t keep hold of them.  These are the skillsets that Rhapsody has been quietly perfecting for years and that Spotify is quickly learning.  A successful subscription business can appear like a duck, slow moving above the water line, but feet moving furiously fast below.

The Churn Killer: Device Subscription Bundles

Any business that is new to subscriptions – whatever they may say to the contrary and whatever talent they might hire in – is going to be learning the ropes.  Which is another reason why hard-bundling subscriptions with hardware makes so much sense for these new entrants. Besides the consumer benefits of turning an ethereal subscription into a tangible product, they allow the providers to plan for 12 to 24 months worth of customer life time value rather than worrying about subscribers churning out after just a month or two.

Even though downloads and CDs will still dominate global music revenues by the end of 2013, it is going to be a big year for subscriptions. Whether the new entrants can help turn that into a big decade remains to be seen.

View From the Top: 10 Streaming CEOs on 2012 and 2013

A special feature for the end of what has a been a big and often controversial year for streaming.  Here are the views of 10 CEO’s of of the top streaming services and of the leading multi-room streaming system, on the following two questions:

1 – What was the most important thing to happen to the streaming market in 2012

2 – What is the most important issue that the streaming market must address in 2013

Daniel Ek, CEO and Founder – Spotify

2012: Growth – both in terms of the number of people who are now paying for music again and the growth in payments back to artists as a result. 2012 was the year when people realised the future growth in the music industry is coming from streaming services.

2013: The abundance of choice. How do you make sense out of 20 million songs?

Axel Dauchez, CEO – Deezer

2012: The streaming market continues to progress at breathtaking speed and we’ve seen some incredibly positive developments in 2012. Most exciting for us, is the fact that targeted online content has developed into something much, much more sophisticated than just algorithm-generated recommendations.  We’re seeing the focus now shift towards personalised music curation. At Deezer we’ve gone a step further, developing really bold new product innovations that are designed to put integration with apps, social media and digital services at the forefront of our new user experience. Our aim is to help music fans discover and share music and promote new artists.  That’s why our local editorial teams work hard to create suggested playlists and recommendations to give music fans a more personal and individual service.

2013: Getting as many people as possible to find out about services such as ours! We’re convinced that the future of digital music will rely on music discovery and re-establishing the emotional connection between music and people. Our mantra is to help people rediscover music, through recommendations by real people all over the world. Our locally-based editorial teams share new music from upcoming local artists, not just in their own countries, but with the other editorial guys around the world – another example of Deezer taking music even further regardless of boundaries. Now our biggest challenge is to get people everywhere to find out how intuitive – and fun! – it is to use Deezer, and we hope to make great strides on this in 2013.

Jon Irwin, CEO – Rhapsody

2012: Looking back, 2012 was the year that streaming became mainstream. We’ve seen a rapid evolution since streaming music was freed from the PC and became a constant companion via smartphones, to this year, when streaming made its way into the living room and into cars—the two places where people listen to the most music. Streaming services are everywhere! This heightened awareness has resulted in more consumers embracing the model and eschewing their old beliefs around the need to own their media; which has given rise to more investment in the sector, innovation around business models and M&A activity. After spending the past 10 years forging the path and taking those proverbial arrows, we are finally seeing the realization of streaming music’s promise.

2013: The most important issue of the mainstreaming of streaming is that artists are paying more attention to how they’re being paid on the various streaming services. Artists are seeing a lot of streams, but are not seeing a lot of cash for them. This makes them justifiably nervous that streaming services are getting popular at the expense of digital sales–and in some cases withholding their music from streaming–a detriment to the growth of these services, just as they become popular. The solution of the problem is twofold. First, we need to do a much better job at education about how artists are compensated and creating transparency around where streaming revenues flow. Streaming services have a responsibility to innovate around artist compensation to get more money into artists’ pockets and help them understand how their music is being consumed. I think there is a lot more that we can—and should—do to ensure that artists are fairly compensated for their music and are extracting maximum value from streaming services.

Steve Purdham, CEO and Founder Investor – We7

2012: Two things, in the UK, the silent landmark in 2012 was the launch of the BBC iPlayer Radio app this has the potential in 2013 to be the catalyst for mainstream adoption of streaming, without the need to know its streaming and secondly the driving momentum of smart phone and tablet adoption reaching what I believe was a tipping point in 2012.

2013: In 2013 the dream would be easier licensing, more flexible pricing plans removing the artificial technical and commercial barriers with  the ability to demonstrate clear ROI’s but in reality for any of the models to work they need the true internet scale that is possible and to achieve that we need to find the means to enable mass market adoption. This is the elusive jewel in the crown that we all should be really seeking to solve.

Ben Drury, CEO and Founder – 7 Digital

2012: Streaming cloud locker services from Google and Amazon

2013: Globalised rights

 

 

Drew Larner, CEO – Rdio

2012: Social media has had a profound impact on the way music is shared, which is something we anticipated when we first built Rdio. 2012 also saw the entry of services into global markets (with our own service expanding to 17 countries). The continued growth of mobile around the world with faster speeds and better phones also contributed to the rise of music streaming in 2012.

2013: Awareness is still a key factor moving into 2013. We’ve seen a big shift in 2012 with more services opening up globally, but we aren’t truly mainstream yet. Innovating on discovery is a key focus as well. With all the songs in the world at your fingertips, creating fun ways to decide what to play next is a challenge. We built Rdio with human powered music discovery at the heart of the experience and we’ll continue to enhance discovery across platforms moving into 2013. Another key issue moving into the new year is the our responsibility to the artist community. We’ve started to address this through the recently launched Artist Program and will continue to work closely with artists to help them create new revenue streams and tap into new opportunities generated by the streaming music model.

Nick Massey, CEO – Rara

2012: The introduction of frictionless music sharing across social networks has led to a massive increase in the adoption of music streaming in 2012.  62.6 million tracks were played 22 billion times across Facebook in the first 12 months of open graph coming to the network.  In the UK UMG reported that 7.5bn tracks had been streamed in 2012 to mid November; a 700% increase on the 1.1bn tracks streamed in 2011.

2013:  Despite the huge rise in popularity of streaming, there’s a lot more work to do before the mass market transitions from music ownership to the access based streaming music services.  Increasing adoption of tablet computing is making it easier for people to consume digital entertainment content while high speed broadband and 4G mobile networks deliver more data to us faster.  However it will be the ways in which streaming services enable simple but engaging access to music through recommendations, sharing and curation which will be key to driving wider consumer uptake in 2013.

Mike Bebel, Head of Music – Nokia

2012: 2012 was a year when many of the mainstream music service providers realized that the typical mobile music consumer is seeking more effortless and delightful entertainment. This is something we had already understood and rolled out to over 20 markets around the globe with Nokia Music, the most satisfying and compelling mobile music experience to date.

2013: In 2013, we expect others will follow our lead and work hard to remove barriers to usage and some have already announced that they also need to solve the consumer issues that we identified long ago. Rest assured that Nokia Music will continue to innovate and deliver the music that people love in the most satisfying and intriguing mobile experiences. We welcome all to discover and enjoy it.

Espen Lauritzen, CEO – WiMP

2012:  The beginning of consolidation in the industry, which I believe we will see more of in the coming year.

2013: The big discussion on sustainability of the business model throughout the value chain.

 

John MacFarlane, Founder and CEO – Sonos 

2012:  In 2012 we’ve seen streaming services go mainstream. With the proliferation of innovative services such as Spotify, RDIO, Pandora, Rhapsody and QQ, we now have access to more music than ever before. At Sonos we’re dedicated to providing music lovers with the simplest way to enjoy all the music on earth in every room and our partnership with such popular music services has ultimately seen our customers consume twice as much music.

2013: 2013 must bring a healthy debate on the value chain of artist to consumer within streaming, and it’s essential that this is resolved to ensure the artist gets paid and the consumer gets a great experience. We are just beginning this dialogue but it absolutely needs to be continued in earnest over the next year.

My take

2012: It was streaming’s big year.  Finally the confluence of ubiquitous connectivity, and smartphones and tablets going mainstream has created the necessary market conditions for streaming to step up to the plate.  It is still very early days and streaming revenues are dwarfed by download and CD revenue, but finally there is the glimmer of a ‘digital plan B’. The artist streaming debate was a useful coming of age for artists, but too much data has too often been misinterpreted, creating a confused marketplace.

2013: 9.99 is not a mass market price point, somehow (bundling, discounts, pricing innovation, partnerships etc) that price must come down to drive wider adoption.  Also the value chain must work out a transparency solution that can work within the restrictions set by commercial relationships.  Artists may never get the full picture, but it is in the interest of all parties that they get as much of it as is possible to help them make informed opinions. Finally, the elephant in the room remains YouTube.  More catalogue than any of the other services, video (of course), great functionality, on every smartphone and tablet, and all for absolutely nothing.  That creates a playing field that is anything but level for the rest.

Rara Sets Sights on the Global Streaming Opportunity

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

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

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

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

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