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.

What Angry Birds Teaches Us About the Future of Media Products

At Midem this weekend I spent some time talking with Peter Vesterbacka, CMO of Rovio, the company behind the phenomenally successful Angry Birds game.  Angry Birds continues to enjoy approximately 1 million downloads a day and as Peter pointed out, that daily download count is more than the majority of music singles ever reach. The conversation got me thinking about why a mobile game can have so much more success than the majority of artists.

Digital Era Products are Tailor Made for Digital Era Devices

To be clear, Angry Birds is not the representative sample of mobile games, to the contrary it is the runaway success story.  And the fact that Rovio hasn’t yet been able to build a new brand franchise to rival Angry Birds emphasizes the uniqueness of the brand.  Nonetheless, Angry Birds illustrates what happens when you build a content product that is tailor made for the digital devices it is intended to be consumed on.  Angry Birds is a content product that does not just utilize the functionality of the smartphones and tablets but depends upon them.  Angry Birds is a 21^st Century content product build for 21^st Century content devices.

Think about when Apple launch a new iPad, they don’t wheel out a senior record label exec with a hot new artist to show off the device, instead they get EA Games to show off a new game that leverages the functionality of the device: graphics accelerator, Retina Display, Accelerometer, Multi Touch etc.  Even the best iTunes LPs do not come close to doing that job, let alone a static audio file, which remains the dominant product that the music industry sells on iTunes and other stores.

Analogue Era Products in Digital Era Clothes

But there is something more fundamental at play rather than simply a technology skills gap between record labels and games publishers, and it isn’t just a record label problem either. The inescapable fact is that record labels, publishers of books, magazines and newspapers and even TV and movie studios are trying to shoehorn analogue era products into digital era technology.  These companies’ products were built for sitting on shelves and for being consumed in single purpose, non-interactive devices.  Games and apps though, are digital era products at home in digital technology while traditional media products are lodgers not yet quite able to keep up the rent payments.

This does not mean that traditional media products cannot have a vibrant future. They can, but they have to truly understand what makes digital era content products work:

• Interactive and Dynamic: digital era content products don’t just leverage the functionality of the devices they are consumed on. They make that functionality core to the content experience itself, to the extent that the content product would not be able to exist without it.
• Visual Experience: digital era content has a visual element at its core. This puts video products at a distinct advantage, but video is an asset that print and music products can leverage too. No coincidence that YouTube is the most successful digital music product in the globe.
• Context and Relevance: digital era content products are increasingly embracing the context of location, social group and time.  They both understand the consumer demand-gaps that these factors combine to create, and they also enrich their experiences by meshing these factors into the products themselves.

None of these three areas are insurmountable hurdles for traditional media companies, but at the same time they are not natural paths for many of their products.  Embracing these objectives often requires an entirely different approach to product development, rethinking what makes the content valuable in the digital age.  For example the audio file in the YouTube video is much less valuable to young teens without the video than with.  The video is as important in that product as the music itself.  Yet the music product development cycle revolves around creating the audio file, not the video.

Embracing digital era product principles also requires an understanding that just because you can does not always mean that you should.  Not all features are appropriate for all types of content.  Not even digital era content products use all the device features available to them e.g. Real Racing relies more on accelerometer functionality while Angry Birds leans towards multi-touch.

Learning lessons from digital era products is a must for all traditional media products.  Most digital versions of traditional media products are digital adaptations, not genuinely new products. Trying to squeeze the round peg of analogue era products into the square hole of digital era devices clearly is not a long-term solution. Until the circle is squared though, digital era products will continue to leave digital adaptions of analogue era products in their slipstream.

The YouTube Dilemma

Back in January 2011 in my Midem address I posited that YouTube was digital music’s  Killer App with about 25% monthly user penetration across all European adults in 2010, up a few percent from 2009.  I also explained that penetration for the under 25s was about double that.  The most important point though wasn’t the scale of adoption, but adoption relative to other digital music activities: the next most popular digital music activity was P-to-P (with about half the adoption rate of YouTube) and paid downloads were fourth with a paltry 11%.  The key takeaway was that YouTube is succeeding with digital music adoption where other services were not, that YouTube had got something right from a user experience perspective that others hadn’t, and that the industry should do a better job of understanding YouTube’s popularity.

19 months on and the latest Nielsen stats reveal it is still the same story.  In some quarters it’s being viewed as a dramatic sea change in the balance of digital power. It isn’t of course, instead it is the successful consolidation of a market leading position by YouTube.   Some of this has happened organically but much is down to sheer hard work by YouTube.

Plan V

Since my 2011 Midem speech, YouTube have upped their game strategically, adding functionality and investing heavily in content channels.  They’ve done so largely because of the V word…Vevo.  Vevo may have its challenges but strategically it was a master stroke by Universal Music: start pull the best music video out of YouTube, put it into an interface that is so deeply integrated into YouTube that it just feels like another YouTube channel to users, and all the while have YouTube deliver the audience. Unsurprisingly YouTube got nervous, particularly when Vevo started ruminating on taking the service out of YouTube entirely and into Facebook.

YouTube is No MySpace

Music matters massively to YouTube: they kick started the online video revolution with short-form video clips, but the momentum firmly shifted to mid-form video providers like Hulu and iPlayer.  If you scraped music video away YouTube was left with skateboarding dogs and ‘Charlie Bit My Finger’.  Hence YouTube’s investment in features like playlist functionality and $200 million in original content channels.  Back when MySpace was beginning to lose ground to Facebook I suggested that MySpace should stop pretending it was a social network anymore and start focusing instead on being a platform for bands and their fans.  They didn’t and they ended up losing out on both counts.  YouTube, to their credit, have recognized what their strengths are and are playing to them.

Why YouTube is Still Music’s Killer Digital App

YouTube is still digital music’s killer app because:

• It’s free. Of course so are Spotify and Pandora et al but YouTube is free and fully on-demand everywhere.  If you want Spotify on your iPhone you have to pay £/$/€9.99 to do so, but you can listen to unlimited on demand YouTube music for free on the iPhone, it’s even integrated into iOS (for now at least).  In fact nearly two thirds of iPhone users use the iOS YouTube app.
• It has all the catalogue in the world, and more. Because of the way YouTube entered music content licensing through the back door in the days before its acquisition by Google by selling stakes to the major labels, YouTube has ended up with effectively being given clearance for much much more content than every other licensed music service.  Granted YouTube have since implemented a largely effective takedown process, but the fact that YouTube’s catalogue is music uploaded by users means it doesn’t have the same restrictions other services do, such as territory restrictions, music not yet being officially available digitally etc.  If there’s a piece of music in the world then the odds are it is on YouTube.  Which cannot yet be said of other music services.
• It just works.  YouTube is available wherever you are in the world (in the main), on whatever device you own, and you don’t have to register or sign up.  It also has effective discovery tools such as user votes, comments and collaborative filtering, and features like playlists.
• You can download to keep too.  Streaming ripping might not be part of the official YouTube featureset, and recent action has been taken to block one such service, but there are dozens of stream ripping apps out there and they are actively used by a meaningful share of regular YouTube users.
• It’s an audio visual experience. And of course, YouTube is so much more than music.  It’s an interactive, social, audio visual experience designed for the digital age.  Whilst most other licensed music services have little or no video.

It would be pretty hard to compete against that combination of features if it had a 9.99 price tag on it, let alone when all of that is available for free, to all consumers in virtually every territory in the globe. Which brings us to the YouTube dilemma.

The YouTube Dilemma

YouTube is simultaneously the most important licensed digital music service on the planet and one of the biggest challenges to all the other licensed music services.  It used to be that YouTube was clearly a discovery mechanism, and indeed it still is, but it is now also firmly a consumption vehicle.  YouTube has become both the journey and the destination rolled into one.

Of course there are plenty of music fans who use YouTube as a complement to buying music or subscribing and as a means of finding and sampling new artists. But plenty more use it instead of those other options, particularly those young Digital Natives who value free, convenience and ubiquity over audio quality.

So the music industry has a difficult balance to maintain, between ensuring the most valuable digital discovery asset it has its disposal remains vibrant, but at the same time ensuring it doesn’t hinder the opportunity for services which generate much higher revenue per user.

YouTube and parent Google can do a lot to help.  They can accelerate their focus on making YouTube’s content unique with further investment in live concerts, exclusive sessions etc.  More importantly they can more deeply integrate with paid music services.  (And if integrating deeply with Apple and Spotify might be a step too far then this should be the development path for Google’s music strategy.)

Meanwhile the music industry can help redress the balance too.  YouTube has defined what the mass market digital consumer expects a music service to look and feel like: namely it needs to have video, work seamlessly on all devices (not just 1 extra device at a time), and have social features.  YouTube has set the blueprint for the next generation music product, the industry now needs to pick up the baton and transform that prototype into a high quality, premium product.

Why It Doesn’t Really Matter Whether Adele Sells More Albums Than Lady Gaga This Year

You may have noticed the unattractive furore surrounding Adele’s contest with Lady Gaga to become the biggest selling artist of the year.  The momentum appears to be with Adele, with her hugely successful ‘21’ album yesterday becoming the first ever album to sell more than 1 million digital copies on iTunes in Europe.

But the simple fact is that albums are no longer the definitive marker of success that they once were.  The shift from the distribution era of the album to the consumption era of the stream and the download have seen a shift from buying to free, and from albums to singles.  The download store allowed music buyers to deconstruct the album into cherry-picked bite size chunk; file sharing enabled people to stop buying albums altogether; and streaming let fans assemble single tracks into their own personal albums (i.e. playlists).

The digital transition makes a case for new measures of success

Income from live, merchandize and other sources have been becoming increasingly important for artists and yet we still measure an artist’s success in terms of how many units of music they sell.  Live revenues are certainly one measure, and of course radio.  But Facebook likes and YouTube views are becoming an increasingly important indicator of success also. And yet, measuring success is not as simple as choosing between one metric or another.  The music industry is in a transition stage, as is consumer consumption of music.  Thus we have a mixture of artists ranging from those that are clearly of the digital age and those that are transition artists, who are entirely contemporary artists but are more at home on a CD than they are YouTube.  I’d put Lady Gaga in the first camp and Adele in the second:  just as measuring Adele solely on her YouTube views would miss the mark, so measuring Lady Gaga on album sales alone would miss the mark.

The chart directly below illustrates the point further.  Here artists are mapped according to their total YouTube views and total Facebook ‘Likes’, with the bubble size representing the total number of albums sold globally.  I have picked a sample of artists that are, or have been, top tier and that represent a range of different artist career models.

A number of trends become apparent:

• A new generation of artist is emerging. Lady Gaga may be the poster girl for the YouTube generation but she also shifts a good number of album units too.    Artists like Cuban American rapper Pitbull are the sharp end of digital age artists. With 1.5 billion YouTube views to his name and tens of millions of singles sold PitBull is a mainstream success story of the highest order, and yet he has sold fewer than 10 million albums.
• Target audience counts. Coldplay and Adele are both top tier contemporary artists, and yet their YouTube views pale compared to Pitbull.  What they have instead are big album sales (50 million for Coldplay, 15 million for Adele).  Why the difference? Because Coldplay and Adele appeal most strongly to people in the their late 20’s and upwards i.e. the people who still buy albums. While Pitbull is much more youth focused.
• The 100 million selling album artist is a dying breed.  Just in case you were wondering why Sir Cliff is in the chart, he achieved the not insignificant feat of selling 100 million albums. He was at his peak during the album’s apogee and although his digital stats are pretty modest, it is hard to see the likes of Pitbull or, perhaps, even Lady Gaga ever matching Cliff’s album sales.  That is not a reflection on those artists but instead on the changing dynamics of the music market.
• The exceptional success stories break the rules.  Lady Gaga and Michael Jackson break the rules.  Lady Gaga is – by contemporary measures at least – a strong album artist as well being in a different league in YouTube and Facebook.  Michael Jackson was firmly an artist of the album apogee era and yet his unique profile has ensured that his success continued into the digital age, and by the rules of the digital age.
• Facebook is the better measure of sustained, organic success.  The problem with YouTube is that it is susceptible to the impact of flashes in the pan.  An artist can have one or two massive YouTube hits and then disappear, or simply be early on in their career.  Facebook ‘Likes’ however are a better measure of longer term, organic popularity.  Take the example of Dev who has close to 300 million YouTube views  - which is nearly as many views as Coldplay.  Yet take a look at Dev’s Facebook ‘Likes’ and you find that she has just 256,00 compared to Coldplay’s 15 million.  YouTube is the key digital popularity measure but needs to be blended with other measures to be truly effective.

Many, rightly, think of YouTube and other free streaming services such as Spotify and Pandora as promotional and discovery vehicles, a digital equivalent for radio.  And yet they are also much more than that: they are increasingly the ends as well as the means.  The chart below shows the number of albums sold per YouTube view.  Cliff Richard’s rate dwarves the rest because his peak was in the album era and his remaining fans aren’t exactly widespread among millennials. But the overall trend is nonetheless compelling: for the true ‘YouTube Generation’ artists, the ratio is dramatically weaker than for album artists.

6 years ago Paul Myers – then CEO of Mp3 download store Wippit – told me that “rock n’ roll was dead”, that the last great album was ‘Thriller’ and that we would never see an album that successful ever again. I was sceptical at the time, but those words are appearing ever more accurate as each year passes.  Looking at the first chart above it is clear that no artist is ever going to come close to selling the amount of albums Michael Jackson did.  But artists will still be successful: we will see artists break the 2 billion YouTube views and we will see artists break the 100 million Facebook ‘Likes’.  As this transition phase continues to play out, artists will evolve how their careers work and the industry will increasingly have to change how it measures their success.  Companies like Music Metric are already starting along this path and the traditional sources of measurement such as Nielsen and the Official Charts Company are also evolving their approaches.  These shifts are crucial, because measuring an artist’s success isn’t just a marketing trick, it is the litmus test with which their fans relate and by which history will remember them.

The Socially Integrated Web and Facebook’s Content Strategy

Click on the video below to view my latest Music Industry Blog podcast.  This episode addresses the Socially Integrated Web, the term I use to describe Facebook’s content strategy.

Topics covered in this episode include:

• Joining users’ digital dots
• The four types of digital content ecosystems
• How Facebook will extend its ecosystem reach
• The universal content dashboard
• What will happen to content companies that integrate with Facebook

Why Digital’s Next Steps Can’t Be Baby Steps

What follows are highlights from my speech at the Westminster Forum on the UK Music Industry 2011 and Beyond

I want to spend the next few minutes building the case that digital music is in a period of transition, a stage that presents us with a unique and ever narrowing window of opportunity to drive truly transformational change within the music industry.  The fact that this panel focuses on both retailing and licensing is emblematic of the convergence, nay collision, of product models and business models.  Collisions that help explain the current turmoil the music industry faces and in which the foundations for future growth lie.

So what exactly has gone wrong?

Firstly, digital retailing is looking increasingly unfit for purpose. It has failed in its key objectives, included in which is a failure to generate a format succession cycle.  With the cases of the cassette and the CD, these formats were firmly in the ascendency by the time their predecessors were in terminal decline, and they then went on to drive periods of unprecedented prosperity.   The same though patently does not apply to the paid download.  However if you swapped out paid downloads for MP3s then the line would be off the chart.  Consumer demand is not the problem.  Current digital retailing formats failing to meet consumer demand is.  And of course Apple’s closed iTunes ecosystem plays a massive role here too.

And if you look at the licensing side of the equation we have problems there too.  Rights owners and artists both feel they don’t get enough from Freemium cloud services, and yet the services themselves feel that they pay too much to those very same parties to be financially sustainable.  With cracks appearing right across the value chain it is looking increasingly like there are too few levers left to pull to fix the model.

Now as concerning as all this may be it doesn’t mean the end of the music industry, nothing like that in fact.  Instead it is simply the end of the beginning: the end of the first chapter in the digital music business.

What we have now are transition products that did a great job of starting us on the path out of the analogue era but their usefulness is drawing to a close.  The paid download is a sustaining innovation.  For those of you not familiar with Clayton Christensen’s ‘Innovator’s Dilemma’ this refers to the principle that companies essentially have two ways to innovate their products.  The first is that they can play the safe game where they tweak features and pricing to defend market share and revenue growth.  These are sustaining innovations.  Or they can take a gamble with disruptive innovations that have huge potential but also massive risk and can even shatter their existing business models.

Unsurprisingly most incumbent companies opt for the safe bet.  But the safe bet is often anything but safe, as it leaves an innovation vacuum which is swiftly filled by the competition, or in the case of music, by the illegal sector.  File sharing was the disruptive and transformational innovation of digital music, not the paid download. Added to this, innovation has been too heavily focused on business models and not enough on user experience. Now the music industry needs to create its own transformational innovation, putting user experience to the fore, before the informal sector does so….again.

So how do we get out of this situation?

Here’s my uber edited solution: two segments and three monetization models.  Forget for a moment the complex multi variant segmentation schemes you’ve painstakingly constructed. Think instead of consumers as those who will pay and those who won’t.  On the free side we have those consumers who are falling out of the habit of buying CDs and either haven’t discovered digital alternatives yet, or if they have they are perfectly happy with free services such as Pandora, Spotify, We7 and of course their killer app: YouTube.  Here also are all those pesky freeloading pirates – they’re not lost customers, but they’re probably not about to start paying 9.99 a month for Spotify Premium either.  And on the other side we have the highly engaged music aficionados.  This used to just be the ‘50 quid bloke‘ but sites like Pledge Music are creating a new generation of younger music fans who will pay good money for recorded music when they establish a direct relationship with artists.

The way to monetize these three groups is threefold: at the bottom of the hierarchy are ad supported free services for the passive majority and the freeloaders, where the contagion of free is legion; at the top there are premium services for the much smaller numbers of engaged aficionados (but they need an entire new generation of music products that are interactive, social and connected, a true successor to the CD – if all they have to chose from is 9.99 a month streaming rentals then this segment will dwindle to the few percentage points of consumers who actually pay those services); and in the middle we have the best balance of scale and ARPU, with subsidized services where third parties such as telcos and car manufacturers pick up some or all of the wholesale cost to make music feel-like-free or close-to-free for end users.  This is the monetization model which will pull in many of those who won’t pay and also those who are in danger of falling out of the habit of paying.

So there you have it: 2 segments + 3 monetization models = the foundation for a prosperous music industry in 2012 and beyond.

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.

Putting the Crowd in the Cloud

[Please note that this post first appeared on the Forrester Consumer Product Strategy blog.  Over the coming month or so I will be migrating all of my activity there.  I will soon be posting new information here for you to amend your feeds and subscriptions. Thanks]

[Posted by Mark Mulligan]

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I have a favour to ask of you: I have the germ of an idea which I am developing for a forthcoming report and I want try it on you.  So please let me know your thoughts.

Apart from the persistent pressure of free, two of the recurring trends that look set to shape the future of digital music are:

1. The Cloud
2. Social

First a few thoughts on the cloud….

The cloud is of course is already with us, but largely as a collection of disparate connected music experiences (e.g. Pandora, Spotify, Comes With Music) rather than as something more all-encompassing.  I’m skeptical of the truly ubiquitous experience happening anytime soon.  Indeed, the practical limitations on ubiquitous connectivity mean that connectivity will in fact fall short of ubiquity for some time (more on that from my colleague Ian Fogg later this year).  But it is clear that over the next few years more of the dots will be joined.  And sometimes the dots will be joined by innovative workarounds, such as Spotify’s ‘offline’ streaming solution.

And a few thoughts on social…

Readers of my Music Product Manifesto will know that I’m a stronger believer in the near term potential of social in music experiences than I am of the cloud.  In order to effectively compete against free music products need to create new, unique music experiences and social interactivity is a key means of achieving this.  If you put a $0.99 iTunes download against a $0.50 Amazon download against a BitTorrent $0.00 download the BitTorrent download will always win.  Future music products need to do more. Formally layering social functionality into the experience is key here, both to add a connected element but also for discovery.  With so much noise online, trusted taste makers (or ‘curators’ as Nettwerk Music’s Tony McBride calls them) are key.  And who do we trust most for recommendations?  People we know and connect with.

My thesis is that these two dynamics not only don’t have to be, dare I say it, disconnected, but that they should be inextricably linked. Their paths should be moulded together.

The likes of Last.FM (Audio Scrobbler) and Apple (Genius) have started to demonstrated the power of ‘Crowd Sourcing’ in the music discovery journey.  Spotify and YouTube and many others are showing the way for cloud based music experiences.

The time has come to be the crowd in the cloud.

Social tools and media are of course already inherently connected and inherently cloud based, whether it be Facebook, Twitter or MySpace.  When woven into the fabric of a digital music offering they bring that experience to life.  In a connected music experience that exists across multiple devices and multiple platforms, social connectivity is more important than ever. Social connectivity turns a bored 10 minutes waiting for a train into a connected a fun engaged interaction with a friend, sharing playlists on MySpace. It transforms looking for something new to listen to on your iPhone into a social discovery journey.

This idea’s still taking shape, so I’d love to hear your thoughts.  I’ll post further on the concept as it evolves.

Why It’s In Everyone’s Interest to Get Music Videos Back on YouTube in the UK

YouTube have announced that they will block access to music videos for UK viewers due to a dispute over licensing terms with UK collection society PRS for Music (formerly known as the MCPS-PRS Alliance).

This is the almost inevitable result of two long-term strategic courses which have ultimately been on collision path:

• On the one hand you have PRS becoming increasingly assertive  of its remit and licensing position, right from the level of policing small business performance licenses. PRS sees a digital world in which numerous start ups build their businesses around music but that publisher and performance rights seem to be much further down the agenda than record label rights.
• On the other hand you have Google still desperately trying to figure out how to make YouTube ‘work’ as a business. More effective innovation in video advertising is needed on the one hand, whilst better relationships with content owners are needed on the other. Ever since Google bought YouTube, numerous content owners have come in for their share of the pie. In many instances unsatisfactory licensing negotiations have seen content owners opting to take legal action against YouTube instead (e.g. Viacom, The English Premier League etc). Others have started playing hard ball by other means (e.g. Warner pulling their music videos). With revenue from advertising needing to grow more strongly, YouTube can only cede so much ground in rights negotiating and also needs to be seen not to be a soft touch. Otherwise all content owners will seek aggressively better terms.

So with both parties set to fiercely fight their corner, a conflict was always a strong possibility. The action does have the air of a PR stunt about it and certainly ensures that dirty laundry is now washed in full public gaze. PRS’s Steve Porter said

This action has been taken without any consultation with PRS for Music and in the middle of negotiations between the two parties

Whilst YouTube’s Patrick Walker said

[PRS was seeking a rise in fees] “many, many factors” higher than the previous agreement.

UK consumers needn’t worry too much. The music videos will be back. Once the grandstanding is over both parties will hit upon a compromise. Music video is too important to YouTube not to reach an agreement, just as YouTube is too important a revenue stream for PRS. Until they do UK music fans have plenty of alternatives, such as Daily Motion and of course file sharing networks. And there’s very strong reason why the labels, PRS and even YouTube don’t want YouTube’s loss to be Bit Torrent’s gain.

EDIT:  One very important additional element I missed off has just been pointed out to me: Google are also arguing that PRS cannot give them an exhaustive list of which artists they represent.  Historically this would have just been because of the many very small artists, often without label deals.  But now, with some major publishers withdrawing their online rights the publisher collection market is becoming highligh fragmented.  This raises the stakes for PRS and may well be an astute negotiating tactic for Google.   If push came to shove PRS would probably sacrifice significantly higher rates in favour quoshing the dispute over catalogue reach.  If they don’t their position as a one stop licensing body will be weakened.

Music as Free: When Discovery Becomes Consumption

Regular readers will know that I’ve dedicated quite a lot of time to the debate over the threat that free music poses to the music business, but that I’m also a strong believer in embracing free as a legitimate business in the right way. It’s a difficult equation to balance and I’m not going to pretend I have answers to every question that the strategy raises: the next five years will see the music business learning those answers for itself.

But there is a simple inescapable fact: if consumers are not offered compelling free alternatives to file sharing, the long term future of the music business is in serious doubt.

A broad range of tactics have been used to address the problems posed by music sharing on peer-to-peer networks, including legal action, technical measures and dialogue with ISPs. These are all important tactics, but the basic behaviour also needs harnessing. If the tap could ever be turned off on peer-to-peer file sharing another technology would evolve to meet the demand. A whole digital generation of youth has grown up expecting music to be free, unlimited in choice of catalogue and essentially disposable.

Those attitudes cannot be turned off. In fact, it could be argued that file sharing is becoming a technological manifestation of new behaviour patterns.

These behaviours need short term and long term attention.

The long term focus is to develop new perceptions of the value of music. Values that will be very different than those of the nineties, perhaps even very different from now, for the right mix of value hasn’t yet been hit upon. The digital youth need to learn a new sense of why music has a value to them that is strong enough for them to opt for legal options over illegal ones.

The short term focus is on providing enough compelling alternatives now, so that as the illegal sector becomes less and less appealing (due to legal action etc.) that there are genuinely interesting legal alternatives that they can jump to. I’ve discussed some of the possible types of services here. One interesting post script to that post is the success of Spotify with a purely streaming solution which is positive news for ISPs looking to push streaming services.  They may thoughhave to accept they’ll need to subsidize rather than charge for such services and even lean on ad revenue. But if you layer in a mobile streaming story into the mix too, then for a telco with fixed and mobile businesses you’ve got a compelling proposition that also drives mobile data usage.

Beyond those services though, a crucial additional layer exists: the social music services. 32 million Europeans are already social music fans and Forrester predicts that the number will grow to 78 million in 2014 (see the press release here with more stats). That is key addressable market. But whereas the social music sites (e.g. YouTube, MySpace, Last.FM, imeem, Pandora etc.) had historically been seen by many in the music business as a good discovery tool, it is becoming increasingly clear that they are also an end in themselves.

The discovery capabilities of social music sites cannot be ignored: they are very positive drivers of music spending and many sites have robust affiliate relationships with digital and physical music retailers. But the discovery is not, and should not be considered to be their Raison d’être. The technology as technological manifestation of new consumer behaviour applies many more times more strongly to social music than file sharing. Social music services, in their various distinct ways, use the Internet to create something new, an immersive experience that did not exist before the Internet.

MySpace music’s success of 40 million streams in the first seven days after launch in the US (17-18 streams per person) show just how much consumption can be tapped, but many services don’t have access to the sort of deal that MySpace has achieved via it’s unique negotiating position to make such large stream counts a viable business model.

The digital future of the music business is a complex and multifaceted one, but social music services will be a crucial component of it. Key to that success though, will be a shift in assumptions and revenue models.