Why Digital Music Services Always Steal Each Other’s Customers

The next five years will be one of the music industry’s most dramatic periods of change. The last ten years might have been disruptive but the change that is coming will be even more transformative. By 2019 70% of all digital revenue globally will be from on-demand services, representing 40% of total music revenues. It will be a shift from the old world and the ‘old new world’ to a brave new one. The CD and the download will decline at almost the same rates: physical revenue will be 43% smaller while downloads will be 40% smaller. In some ways the CD has less to worry about than the download. The CD has the protection of a vast installed base of players across the globe and growing niches such as deluxe box sets. The download though depends massively upon Apple’s devices, and the tide over at Cupertino is turning.

One of the concerns of the shift to streaming has been revenue cannibalization. It is no new phenomenon. The paid digital music market has still not truly broken out to the mainstream. While the likes of YouTube and Pandora clearly have mass market reach, music download stores and subscription services do not. Each at their respective times have appealed to the same higher spending and tech savvy end of the music buyer spectrum.

customer transition

In the 1990’s and early 2000’s Amazon’s online CD store was the home of the globe’s most tech savvy music aficionados. Then Apple came along and poached its iTunes customers directly from Amazon because those same CD buyers were also buying iPods. Then Spotify came along and started poaching Apple’s most valuable customers via Apple’s App Store – the chink in the armour of Apple’s otherwise closed ecosystem.

Now Apple and Amazon are both setting out on their own cloud strategy journeys and each will be hoping to win back a chunk of their lost customers. Apple’s recent elevation of Beats Music to one of the family of ‘Apps Made By Apple’ gives the first hint of what the company can do to ‘encourage’ its users away from other streaming services.

The next three years or so will be a fiercely contested battle for the hearts and minds of the digital music aficionado that will illustrate the strengths and weaknesses of the technology ecosystems of Apple, Amazon and Google. Yet while they all fight to win or win back customers, the attention once again remains firmly on the top end of the market. For as long as music services focus their efforts on the most valuable music customers, the mainstream will continue to be catered by low ARPU ad supported services. And for as long as that happens the evolution of digital music will continue to be one of the latest generation of services stealing the customers of the last.

YouTube, Record Labels And The Retailer Hegemony

YouTube (i.e. Google) has put itself in the midst of a music industry conflict that may yet turn into a much needed process of soul searching for the labels as they weigh up whether YouTube’s contribution to their business is net positive or net negative.  The controversy surrounds the imminent-ish launch of YouTube’s premium subscription service and the refusal of some independent labels to sign the terms Google is offering them.  Whereas normally this would just result in a service launching without a full complement of catalogue, in this instance YouTube is also the world’s second largest discovery platform after radio.  YouTube execs have been quoted as stating that labels that do not sign their terms will have their videos blocked or removed.  Exactly from where (i.e. the main YouTube service, or the premium offering) remains a matter of conjecture with both sides of the debate more than happy to allow the ambiguity cloud the debate.    But the fundamental issue is clear either way: YouTube has become phenomenally powerful but delivers comparatively little back in terms of direct revenue and is now happy to flex its muscle to find out who is really boss.

The Retailer Hegemony 

Google’s stance here fits into a broader phase in the evolution of digital content, with the big tech companies (Amazon, Apple, Google) testing how far they can push their content partners in order to consolidate and augment their already robust positions.  It fits into the same trend as Amazon making life difficult for book publishers Hachette and movie studio Warner Bros.  The big tech companies are becoming the three key powerhouses of digital content and each is fighting to own the customer.  Media companies are becoming collateral damage as the new generation of retailer behemoths carve out new territory

The record labels, indies included, have to take much of the blame here.  They let YouTube get too big, and on its terms.  The big labels had been determined not to let anyone ‘do an MTV again’ and yet they let YouTube do exactly the same thing, getting rich and powerful off the back of their promotional videos.  But this time YouTube’s resultant power is far more pervasive.

youtube subs impact

Stealing The Oxygen From The Streaming Market

Labels are beholden to YouTube as a promotional channel.  They have turned a blind eye to whether its ‘unique’ licensing status might be stealing the oxygen out of the streaming market for all those services which have to pay far more for their licenses.  The underlying question the labels must ask themselves is whether YouTube’s inarguably valuable promotional value outweighs the value it simultaneously extracts from music sales revenue.  Indeed 25% of consumers state that they have no need to pay for a music subscription service because they get all the music they need for free from YouTube (see figure).  This rises to 33% among 18 to 24 year olds and to 34% among all Brazilians.

Reversing Into Subscriptions Is No Easy Task

Of course the aspiration here is that YouTube is finally going to start driving premium spending, but reversing into a subscription business from being a free only service is far from straightforward.  It is far easier to make things cheaper than it is to raise prices, let alone start charging for something that was previously free.  Add to the mix that free music is not exactly a scarce commodity and you see just how challenging YouTube will find entering this market.  Indeed, just 7% of consumers are interested in paying a monthly fee to access YouTube music videos with extras and without ads.  The rate falls to just 2% in the UK.

The counter argument is that only a miniscule share of YouTube’s one billion regular users are needed to have a huge impact.  But if the price the music industry pays to get there is to kill off the competition then it will have helped create an entity with such pervasive reach that it will truly be beholden unto it.  If the music industry has hopes of retaining some semblance of power in this relationship, it must act now.

 

 

Why Full Albums Need to Go from YouTube Right Away

YouTube has long been the digital music anomaly: hugely successful, almost free of criticism but with a pitifully small pay-per-stream rate (below half that of Spotify, who does get criticism, and some).  YouTube is now on the verge of launching a subscription product and this will hopefully go some way of addressing the fact it has made the marketing journey the consumption destination.  But the music industry should keep its aspirations in check, not just about the potential impact of the service, but also – and perhaps most importantly – because of YouTube’s intent.

Google is a rights frenemy.  Rights frenemies strike a careful balance between maintaining good relations with rights holders on one side of their business but testing the limits on the other side. They pursue a do first, ask forgiveness later strategy.  Thus all the while Google is launching two music subscription services (Google Play Music All Access and the forthcoming YouTube offering) it is also lobbying for copyright reform and posting a link to chillingeffects.org for every successful copyright takedown.  In other words Google talks the talk but only reluctantly so and it does the absolute minimum of walking the walk.

Nowhere is this approach more apparent in YouTube and the presence of user uploaded ‘full albums’.   A coherent argument can be made that 383 million views of Miley Cyrus’s ‘Wrecking Ball’ Vevo video delivered clear benefits to the artist and her team (both though direct Vevo advertising and the vast exposure).  Full length albums ripped into YouTube by users have no such benefit.  In fact labels in the main do what they can to remove them using YouTube’s takedown process.  If Google was a rights ally rather than a rights frenemy it wouldn’t solely wait to be told to take stuff down, at least for the really obvious and high profile stuff, but it doesn’t.

yt1

Take a look at these top search results for Adele, U2, the Red Hot Chili Peppers and the Beatles (see figure 1).  The full album results are high lighted in red, many of which have hundreds of thousands of views each, in the case of Adele’s ‘21’ it is more than 1 million, and some have been live for more than a year.  In the case of the Beatles all of the top results are full albums.  I doubt that the Beatles spent the best part of a decade not licensing to iTunes in order to suddenly throw it all straight up on YouTube.

yt3

There are also endless ripped live DVDs and recorded TV broadcasts of live concerts (see figure 2). It’s pretty hard to see why somebody would want to buy a live DVD of a U2 show when they can get the entire show in 1080p HD on YouTube.  And of course because it is a continual 2 hours and 22 minutes of video the viewing experience will be virtually ad free, save for a 30 second pre-roll and the odd pop up which can easily be clicked off.  The only winner here in business terms is YouTube.

Not all the blame can be laid at Google’s feet though: these examples were found immediately, with no effort, so it is inconceivable that someone somewhere in each of the respective labels doesn’t also know about this.  Thus someone has taken the decision in some of these instances to take the benefit of the ‘exposure’ in return for cannibalizing sales of the exact same music the exposure is supposed to drive sales of.  It is this conflicted view of YouTube (i.e. ‘we couldn’t sell as much music without it even though we lose sales because of it) that needs to be fixed.  Google can hardly be blamed for having a schizophrenic approach to the music industry if the industry does exactly the same back.

But relationship issues notwithstanding, full albums need to disappear from YouTube right now. They need to do so if for no other reason than to level the playing field for those music services that pay back at higher rates to rights owners and that actually try to get consumers to pay for music.  Labels and Google, bang your respective heads together!

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

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

Subscription Service Hold Outs Actually Hit the Best Fans Hardest

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

Delay Releases to Free Platforms, Not Paid Ones

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

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

Holding Back from Paid Subscription Tiers Can Be a Missed Opportunity

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

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

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

Streaming’s Dirty Dozen

Atoms for Peace’s Thom Yorke and Nigel Goodrich’s much publicized decision to withdraw their music from Spotify added to a small but growing band of streaming hold-outs. Rather than add to the surplus of Atoms commentary, instead here are a dozen of the most pressing issues surrounding streaming.  They are presented in no particular order and are a mix of both positive and negative trends and implications:

  1. Technology has made access models ready for prime time. Downloads (both paid and P2P) made perfect sense in the days of dial-up, slower broadband and GPRS.  But now ubiquitous high-speed connectivity and cached streaming mean consumers don’t need to get as hung up about downloading to own anymore.  Access models are ready for primetime and Apple would be in, driving the market if it wasn’t so terrified about trashing its ability to 32 and 64 GB iPhones and iPads (when everything’s in the cloud who needs local storage capacity?).  Of course being ready for primetime doesn’t mean the world will change tomorrow.  There is always a long ‘flash-to-bang’ for new technology to manifest itself as consumer behavior.  But the inescapable fact is that downloads will eventually become a digital anachronism, an evolutionary dead end.  Though again, not tomorrow, because they remain the perfect route for new converts to digital to switch from the CD and because it remains Apple’s core mode, and Apple is the beating heart of the digital music market.  But the shift will come.  Consumer behavior is moving on and if business models don’t catch up then the illegal sector will fill the vacuum.
  2. Everything has happened before and will happen again. 10 years ago when Apple launched the iTunes Music Store artists were up in arms just as they are now, terrified that it would kill the CD and that it would result in consumers dissecting albums.  To some degree both those came to pass but you will be hard pressed to find an artist now who does not consider iTunes to be one of, often ‘the’, key source of recorded music income.  As the cliché management phrase goes ‘change is difficult’, but it is.  No one ever really knows how things will pan out and if you have a degree of stability the last thing you want is to jeopardize that.  Taking risks is fine when its someone else’s money and company, but not when it is your livelihood. So it is utterly understandable why there is so much fear among artists and songwriters, but there has to be a belief that the market will find an equilibrium.  If the streaming model is unsustainable for any part of the music industry food-chain it will ultimately have to rebalance. Services can’t exist without labels, labels can’t exist without artists, artists can’t exist without songwriters. The concern is whether some artists, services and labels could end up as collateral damage in the process.
  3. Transition not cannibalization.  Streaming will replace downloads, that much is incontrovertibly true.  It won’t happen immediately, but it will happen.  To consider the process as ‘cannibalization’ however misses the bigger picture of an inevitable transition in behavior.  You could argue that the car cannibalized the steam train, but the answer would not have been to ban the production of cars.  The consumer behavior shift is happening, business models will catch up.
  4. Scale might not benefit artists as well as labels and publishers. The holy grail of streaming is ‘scale’.  When it is reached all will be well, so the argument goes.  Clearly the amount of income will be dramatically better with 100 million paying subscribers but scale may be slower to benefit artists and songwriters.  This is because a label and a publisher both have a big pool of catalogue, so a 50% increase across hundreds of thousands of works is going to be measured in millions of dollars while for an artist with a couple of albums it will be measured in hundreds of dollars.
  5. Fuzzy data: Artists have become empowered with their ability to shed light on streaming by publishing their payouts.  But there are so many variables (what sort of deal they are on, whether they are a songwriter, whether they are recouped etc) that even averaging the data out is problematic. There are other problems too.  Many of the artists who pay most attention to the economics of music are later on in their careers, sometime in the sunset of their careers so their overall popularity is on the wane.  But a factor that impacts all artists is the delay between consumption and reporting, i.e. finding out how much they get paid. With labels the delay is typically quarterly, but with collection societies it is often a year.  So much of the data artists are looking at is a year out of date, representative of where the market was 12 months ago but not now.  And with the streaming market changing so quickly, this has big implications.
  6. Windowing might work some of the time.  There is a steady flow of high profile albums that have been held back from streaming services but there is no definitive evidence on how streaming impacts album sales. Coldplay and Adele both held back and had hugely successful album sales. Yet the three artists with the biggest first week album sales in 2013 (Justin Timberlake, Jay-Z and Daft Punk) were all available on streaming services the week of release.  There is a very strong case for holding back new releases from free streaming services (why should free customers get new releases the same time as paying customers?) but the case for paid streaming is less robust.
  7. The journey is becoming the destination too.  Nowhere more so than YouTube. The difference with YouTube is that everyone now accepts it as a crucial marketing vehicle.  The problem though is that for so many people YouTube is not just the discovery journey but also the destination itself, what’s more YouTube is the globe’s most popular digital music destination.  So instead of driving sales it replaces them for many users.  This is particularly true among younger music fans.  So even if YouTube was paying out the same amount as subscription services (which it isn’t) artists have a much, much bigger cannibalization risk in YouTube than they do in Spotify et al.  This is the core of the streaming challenge – the distinction between what constitutes promotion and consumption is blurring to the point of irrelevance.  Right now many of the positioning and commercial mechanics of free streaming services and tiers is that of promotion, even though they are also consumption.
  8. Pricing and product must evolve. Streaming pricing and product sets must evolve.  9.99 is not a mass market price point, however good value it may represent.  In fact it is the entire monthly spend of the top 10% of music buyers.  Much more needs to be done around testing pricing elasticity, else subscriptions will never break out of their aficionado niche.  There are a few interesting experiments, such as MusicQubed and Bloom.fm which focus on curating small amounts of content at low price points.  But much more needs to be done on this front, the leap from free to 9.99 is too big. There must also be innovation in the product experience, and Deezer’s, Spotify’s and Soundcloud’s developer platforms all look like great environments for such innovation to occur, but they’re not enough on their own.  Product and pricing need to be used strategically to target services at discreet consumer segments. The 2000’s taught us that one size does not fit all for digital music, the same applies to subscriptions.  One key way the mainstream services can start segmenting their offerings is by providing artist channel subscriptions were a user pays $/£/€1 per month per artist.
  9. Income comparisons are not binary.  A comparison of the amount of money earned (across all rights holders) from a paid stream (c.$0.01) versus that of a paid download (c.$0.70) is always going to look catastrophic.  But these rates are points on a much larger scale, with the download at one end and terrestrial radio at the other.  In the US terrestrial radio does not pay anything to record labels and in Europe rates are far, far smaller than streaming services.  The assumption has always been that radio is so important a discovery channel that paltry rates are tolerable.  But if music sales are diminishing then radio has the same ‘journey as destination’ problem as YouTube.  The challenge for artists and songwriters is to work out where the sweet spot on the scale is for them. Where is right balance between discovery and income generation?
  10. Rethinking the life-time value of a song.  In the past the commercial value of most songs peaked during the course of a few months, tailed off steadily for another few months and then nearly flat-lined thereafter.  For big artists and big hits the tail off would be longer and the flat-line would be replaced with a steady after life.  Streaming changes that in three ways: i) fewer song purchase transactions occur, meaning less money up-front, ii) money is generated direct from listening long after the original release iii) streaming services drive strong consumption of catalogue.  So artists will see a shift from immediate big income to long-term steady income. The question of whether one will equal the other will become clear in the next 2 to 3 years.  See my consumption analysis for a view of where it may get to.
  11. The listener net widens. While it is clear that an album being listened to a dozen times on Spotify is much less valuable to an artist than if it had been bought on iTunes, that comparison assumes it is a case of one or the other.  But what is becoming increasingly clear is that more artists are getting listened to by more people.  The absence of the price barrier means people are eagerly trying out new artists.  And in many cases the listener would never have bought the album anyway.  What’s more, after having streamed it a few times, they may even realise they just don’t like it that much.  In the analogue era that would have just been a disinterested listen to a single on the radio, with streaming it is direct revenue. The artist is thus getting money from a consumer that does not even like them enough to proactively spend money on them.  It may be small revenue, but it is ‘found revenue’ that would not have existed anywhere else.
  12. Things will get much worse unless more change happens.  Digital music revenue is not growing quickly enough, in fact growth is slowing.  Global digital revenues grew more slowly in both absolute and percentage terms in 2012 than they did in 2011. Globally digital is still only 38% of music sales and in Japan, which may become the world’s largest music market this year, 80% of sales are physical and digital has been in decline since 2009.  It is wrong to assume that the market will naturally ‘go digital’.  At the current trajectory it will not.  Experimentation with new models and products is crucial.  We are back in the ‘throw it all at the wall and see what sticks’ phase we were in during 2007-9.  This time though artists and songwriters are part of this, both because they have found their voice and because DIY/Direct-to-Fan services are part of the mix.  The next five years will be the most important phase of change the music business has ever gone through.  The last 10 years has given us a solid foundation of options but it has also created a hornet’s nest of inequities, mistrust, misgivings, threats and disruption.  Labels, publishers, songwriters, artists, music services, tech companies must all learn how to create a sustainable music ecosystem that benefits all parties.  A naïve aspiration?  Perhaps, but the current ‘what’s in it for me?’ ethos will only result in unnecessarily dismembering an industry that is perhaps finally ready to start on the path to recovery.

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

Angry_Birds_promo_artAt 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 21st Century content product build for 21st 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