Streaming’s First Steps into 2014

2013 was a big year for streaming, with the IFPI reporting total trade revenues of $1.1 billion and a total of 28 million subscribers globally.  2014 will be a crucial year and today Rhapsody revealed its contribution to the growing global picture.

As of April 2014 there are 1.7 million global subscribers to Napster and Rhapsody, up from a little over 1 million in April 2013.  Those numbers were boosted in part by the transition of Sonora customers in Latin America from Rhapsody’s October deal with Telefonica in which the Spanish telco reported would amount to the transition of ‘hundreds of thousands of existing customers’. 

Digital Colonialism

Latin America is undergoing something of a digital gold rush with European and US companies seeking to ‘colonize’ the digital market like modern day conquistadors.  It is a real pity that more is not being done by indigenous services. ‘Digital colonialism’ aside, Rhapsody’s Lat Am focus is part of a wider recognition of the importance of emerging markets to the longer term viability of the digital market.  How these markets adopt digital will play an increasingly influential role in shaping global strategy.  In some markets the download will have a long term transition technology role, acting as the digital stepping stone between the CD and access based models.  In others, there will be a technology leapfrog effect with consumers going straight to access based models, in a similar way that many consumers in emerging markets skipped the PC web entirely and went straight to the mobile web.

Super Cheap Flat Rate Access

What is clear though, is that the available spending power of emerging market consumers is far lower than in US, Europe and especially than in the prosperous Nordics.  So the 9.99 model simply doesn’t apply.  Labels are already heavily discounting wholesale rates for emerging markets but the likelihood is that the majority of customers will be monetized with hard bundles, with the consumer paying nothing.  This is a different model from telco bundles in western markets where telcos invest heavily as strategic marketing efforts (and typically lose money).  Instead, emerging market bundles will be long term offers, a permanent feature of mobile packages.  Telcos pay far less to labels but get much bigger scale.  The risk of heavily devaluing music is moot, as in the territories this model works in, music already has zero value to consumers as a monetary proposition.

Scale Does Not Impact Everyone in the Same Way

Back over in the western world, where the vast majority of streaming revenues currently are  (c. 90% to be precise), some of the initial sheen is beginning to fade.  Beggars Group have long been positive exponents of the streaming model and have rightly earned plaudits for paying artists 50/50 net receipt deals. However last night Beggars’ head of strategy Simon Wheeler intimated that those rates may not be sustainable.  The main reason is that streaming is such a key part of digital revenues now that the 50/50 share damages under-pressure margins.  But it is also because of the operational costs of streaming for a label (vast quantities of data to account – ‘billions of lines of data’, bandwidth costs etc.).  This highlights an issue I have been talking about for a while, namely that the great bright hope of scale (i.e. ‘when we reach scale, streaming will make commercial sense to everyone’) does not apply equally across the digital music value chain.  If you are a big label or publisher with a big catalogue of repertoire you will measure the impact of a million new subscribers in terms of millions of new dollars each month.  Scale benefits you well.  But if you are a single artist with just a few albums you will measure the impact of that same 1 million new subscribers in terms of hundreds of dollars a month.  Beggars Group sits somewhere in the middle of that scale-impact continuum.

The counter balancing of good news story / bad news story is nothing new to streaming, and it will continue to characterize the evolution of the market in 2014.  The shift from distribution models to consumption models is arguably the most dramatic transition the recorded music industry has ever been through, and consequently the change will have seismic repercussions.  Streaming revenue will come of age in 2014, but as it does so expect more speed bumps along the way.

MusicQubed Puts the Rise of Listen Services Into Numbers

Back in October I wrote about the emergence of a new wave of music services: ‘Listen Services’. Namely music services that sit at the opposite end of the sophistication spectrum to ‘Access Services’ like Spotify and Deezer.  While the on-demand Access Services are focused on immersive discovery experiences for the engaged music aficionado, Listen Services are aimed at the mainstream music fan that does not have the time nor appetite for searching out what to play from a catalogue of 30 million tracks.  Listen Services, and their addressable audience, are a key priority for the music industry as it is becoming increasingly clear that Access Services, while fantastic at monetizing the top tier of fans, are not the right fit for the mainstream. To date the main focus for this segment has been ad supported personalized radio from the likes of Pandora and Slacker.  New entrants have started trying to drive digital spending from these consumers with cheap subscriptions, players like MusicQubed, Bloom.fm, Blinkbox Music and Nokia Mix Radio (interestingly there is a distinctly European company bias in this sector). MusicQubed has released some figures to illustrate how this emerging segment is developing.

To celebrate the first anniversary of its launch into market, MusicQubed last week released a combination of performance metrics for its services and some related statistics:

  • 85% of UK radio play comes from the top 120 tracks
  • The Forgotten Fan (above average listening but below average spend) accounts for 30% of consumers
  • Daily listening time of MusicQubed users = 30 minutes
  • 30% of all active users are subscribers
  • 1.5 million consumers have used MusicQubed services to date
  • O2 Tracks (O2’s UK music service powered by MusicQubed) has 60% female users and an average lifetime value of £33, while 20% buy at least one download a month after having discovered it in the service

While MusicQubed is a long way yet from challenging Spotify in terms of total users and paying subscribers, the numbers do hint at a validation of this too easily neglected consumer segment. Of course everything starts small and it is worth remembering that a year after launch (i.e. by end August 2009) Spotify only had in the region of 100,000 paying subscribers.

Will Listen Services Define the Next Phase of Digital Music?

The history of digital music has evolved in roughly 5 year chapters, each defined by a key service and the problem it solved:

  • Phase 1: Napster gave consumers frictionless access to all the music in the world
  • Phase 2: iTunes made the paid download make sense
  • Phase 3: Spotify fixed buffering and gave frictionless (legal) access to all the music in the world (well most of it anyway)
  • Phase 4: Beats, Blinkbox, Bloom.FM, MusicQubed are all candidates for defining the next phase. Spotify gave access to 25 million songs and now these services are each doing at least one of a) trying to make sense of that 25 million via curation and b) making music subscriptions affordable for the mainstream

4th phase

Once we have another 12 months or so of market activity we should be in a position to make a more definitive conclusion on which service, or services, will emerge as the defining reference point for the next era of digital music.

Listen Services, affordable subscriptions and curation-centred services are only just getting going, but they will be key to long term sustainability.  As subscriptions eat into the spending of the most valuable download buyers, it is clear that a ‘digital plan B’ is required.  This new generation of services are part of that plan.

IFPI and RIAA 2013 Music Sales Figures: First Take

The IFPI and RIAA today released their annual music sales numbers.  Though there are positive signs, overall they make for troubling reading 

  • Total sales were down 3.9%.  Based on 2012 numbers the trend suggested that 2013 revenues should have registered a 2% growth, so that is a -6% swing in momentum.
  • Digital grew by 4.3% which was not enough to offset the impact of declining CD sales, which has been the story every year since 2000 except last.
  • Download sales declined by 1%. Continued competition from apps and other entertainment, coupled with subscriptions poaching the most valuable download buyers is finally taking its toll.
  • Subscriptions up by 51%: An impressively strong year for subscriptions but not enough to make the digital increase bigger than the physical decline on a global basis nor in key markets, including the US.

Global numbers of course can be misleading and there is a richly diverse mix of country level stories underneath them, ranging from streaming driven prosperity in the Nordics, through market stagnation in the US to crisis in Japan – where revenues collapsed by 16.8%.  The Nordic renaissance helped push Europe into growth but data from the RIAA, show that total US music revenues were down a fraction – 0.3%.  US download sales were down by 0.9% while subscriptions were up an impressive 57% to $628 million.

On the one hand this shows that Spotify has managed to kick the US subscription market into gear following half a decade or so of stagnation.  But on the other it shows that subscriptions take revenue from the most valuable download buyers.  This backs up the trend I previously noted, that streaming takes hold best in markets where downloads never really got started.  Thus markets like the US with robust download sectors will feel growth slowdown as high spending downloaders transition to streaming, while in markets like Sweden where there was no meaningful download sector to speak of, subscriptions can drive green field digital revenue growth.

The Download Is Not Dead Yet

Though subscriptions now account for 27% of digital revenue, the value trend obscures the consumer behavior trend.  For Spotify’s c.9.5 million paying subscribers (or 6 million last officially reported) Apple’s installed base of iTunes music buyers stands at c.200 million (see figure).  The IFPI report that there are now 28 million subscription customers globally.  In the US and UK this translates into 4 or 5% of consumers. Subscriptions do a fantastic job of monetizing the uber fans, just like deluxe vinyl boxsets and fan funding sites like Pledge do so also.  But they are inherently niche in reach.  This is why downloads remain the music industry’s most important digital tool.  Downloads are the most natural consumer entry point into digital music, and if anyone else had been able to come close to matching Apple’s peerless ability to seamlessly integrate downloads into the device experience, then the sector would be much bigger than it is now.

service bubbles

Do not confuse this with being a luddite view that streaming and subscriptions are not the future, they are, but there is a long, long journey to that destination that we are only just starting upon for most consumers.   And before that there is a far more important issue, namely how to get the remaining CD buyers to go digital.

Sleepwalking Into a Post-CD Collapse

Last year the IFPI numbers showed a modest globally recovery but despite the widespread optimism that surrounded those numbers I remained cautious and wrote that it was “a long way from mission accomplished.”  My overriding concern then was the same as it is now, namely that the music industry does not have a CD buyer migration strategy and it desperately needs one.  So much so that unless it develops one it will end up sleepwalking into a CD collapse.   In fact I predicted exactly what has happened:

“CD sales decline will likely accelerate.  Among the top 10 largest music markets in the world CD revenue decline will likely accelerate markedly in the next few years.  In France and the UK leading high street retailers are on their last legs while in Germany and Japan the vast majority (more than 70%) of sales are still physical.  So the challenge for digital is can it grow as quickly as the CD in those markets will decline?

The IFPI have stressed the fact that Japan’s dramatic 15% decline was the root cause of the global downturn.  While this is largely true – without Japan included global revenues still declined 0.1% – Japan’s problems are simply the global industry’s problems squared.  In 2012 a staggering 80% of Japanese music sales were physical but despite the digital market actually declining 4 successive years total revenues increased 4%.  As the world’s second biggest market, when Japan sneezes the global industry catches a cold.   But expect Japan to continue to drag down global revenues and also keep an eye on Germany.  Germany saw a modest 1.2% increase in revenues in 2013 but only 22.6% of sales were digital.  The most likely scenario is that Germany will follow the Japanese trend and go into a CD-driven dive in 2014 and / or 2015.

In conclusion, there is still cause for optimism from these numbers.  Subscriptions are going from strength to strength, at least in revenue terms, and the download sector remains robust in buyer number terms.  But unless the CD problem is fixed, the best both those digital revenue streams can hope to do is consolidate the market around a small rump of digital buyers.

Media Companies: Your Nightmare Piracy Scenario has Arrived, And Its Called Popcorn Time

Two years ago I said that the nightmare piracy scenario for the media industries would be when the pirates gave up trying to fight enforcement and turned their attentions to build great user experiences.  Now with the arrival of Popcorn Time that scenario has come to pass.  However bad piracy might have been for media companies, it is just about to get a whole lot worse.  This is the new era of Experience-First Piracy.

Popcorn Time is an open source interface that sits on the top of pirated video content on torrents.  Instead of downloading the video Popcorn Time streams them to the end user, with titles selected from a neat Netflix-like interface.  In fact one might argue a ‘Netflix clone’ interface (see figure) but with new releases that Netflix does not even have.  On top of all this Popcorn Time is open source, with installer and project files all hosted on developer collaboration site GitHub, and with the app built on a series of APIs.  With multiple development forks already this is an entirely new beast in the piracy arena.  Forget whack-a-mole, this is potentially a drug-resistant, mutating contagion.

popcorn time

In fact Popcorn Time looks exactly like what I envisaged two years ago:

“What if a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging?  If you thought the paid content market was struggling now imagine how it would fare in the face of that sort of competition.”

Piracy for the Mainstream Consumer 

Until now, piracy was largely the domain of youngish tech savvy males (69% male, 50% under 35). Popcorn Time and the inevitable coming wave of new Experience-First piracy apps will give piracy truly mainstream appeal.  It looks and feels just like the real thing, only for free and with even better content.  What’s not to like?  Worse still – for media companies, not consumers – these sites might – even have a legal defense as they do not actually host any of the files.  The emphasis there is on the ‘might’ as it is an argument that ultimately the Pirate Bay was not able to defend in court.

Three Ways to Hit Back at Experience-First Piracy

So what can media companies do to respond to Experience-First Piracy? Legal action will be the first port of call but ultimately it is a pain killer, not a cure.  The problem itself needs addressing with three key strategic focuses:

  • Windowing: Netflix can only dream of having the content Popcorn Time has, just as early licensed music services could only dream of having the catalogue Napster had in 1999/2000.  The movie studios need to learn that lesson fast, and treat Netflix and Amazon Prime etc. as tier 1 release window partners.  As soon as a release is ready for its first post-theatre window it should go straight onto the paid video services.  BlueRay and DVD are fading yesteryear technology, the media industries’ most engaged and valuable audiences are online and using online services.  It is time to treat them as first class customers, not second class ones.
  • User Experience: Before Experience-First Piracy, the retort to media companies was that all they needed to do in order to stay ahead of piracy was to create more compelling alternatives.  Now the ante has been well and truly upped.  There will never ever be the user experience gulf again.  That time has gone.  This means licensed services have to be continually pushing the user experience envelope, using their capital to hire the very best designers and developers.  Which means that content companies need to saddle them with as little up front rights acquisition debt as possible, freeing them up to spend big on development and design.
  • Pricing: The harsh reality of the internet economy is that when something is widely available for free you have to make your paid-for product even cheaper than it was intended to be.  For Netflix and Spotify et al, that means getting below $5 a month.  Ironically this happens at just the time that Amazon increases its pricing for Prime and Netflix is considering increasing its pricing in order to cover higher rights costs.  Media companies have a crucial decision to make: do they want to get more revenue per user out of a user base that will quickly lose share to Experience-First Piracy, or instead do they want to take a near-term revenue hit in order to shore up their digital service partners’ longer term future?

The fact that piracy has spent so long locked in a user experience quagmire is testament to the media industries’ counter measures: pirate sites were just too busy figuring out how to evade enforcement to focus on user experience.  But now that era has come to a shuddering halt.  It is difficult to over state the dramatic effect Experience-First Piracy will have on the paid content landscape unless media companies do everything within their powers to help the nascent licensed services respond in kind.  The smart companies realized long ago that content is not the product, experience is.  Unfortunately the pirate’s just figured this out too.

Got Milk?

milkPoor Samsung launched their latest punt at digital music success just as Spotify was stealing all the media oxygen with its acquisition of the Echo Nest.  Samsung’s latest venture, curiously called ‘Milk Music’, is another attempt from the smartphone giant to carve out some mindshare and consumer traction in the digital music space.  Like all but one smartphone manufacturer – you know, that one from Cupertino – Samsung does not have the best of track records when it comes to digital music, having recently culled its previous Hub service.  Milk is a Pandora-like mobile radio app and while it certainly suffers from ‘me-too syndrome’ it is not actually a terrible strategic fit.

With 200 stations and a catalogue of 13 million tracks, Milk Music has some muscle but it is hard not to see it as a thinly veiled attempt to ‘do an iTunes Radio’.  However there is not necessarily that much wrong in doing exactly that.  iTunes Radio is a very neat service that is well geared towards the mainstream, less engaged music fan.  That is exactly Samsung’s addressable audience.  Samsung has been at the vanguard of the mainstreaming of smartphone adoption, so much so that many of its devices are smartphones with dumb users.  Milk Music is however limited to the Galaxy range of handsets, which will to some degree filter its audience towards Samsung’s more engaged users.

No smartphone manufacturer has been able to make music work like Apple has.  In fact no smartphone manufacturer has been able to make content and services as a whole work like Apple has.  Apple’s ecosystem is a fascist state compared to Android’s federated democracy, but at least the trains ran on time in Mussolini’s Italy.  That absolute control of the user experience enables Apple to deliver on the single most important part of digital music product strategy: the service-to-device journey.  It just happens, and seamlessly so.  So many other phone companies have failed to understand the importance of this ineffable magic.

Samsung might be able to get it right with Milk Music, but because they are part of the federated states of Android, they will also have to tolerate a bunch of pre-installed incursions from fellow Android states, not least Google’s Play Store.  Apple meanwhile ensures there is just one place for music on its devices.

Samsung desperately wants to make music work and to its credit continues to throw money at trying to fix the problem.  Free radio might just be the best first step.  Especially considering that just 1% of Android consumers state they intend to start paying for a music subscription service and that a quarter of them say they have no need to pay for music because they get so much for free.  Milk Music might be feeding that free music habit, but it could also be the foundation for something bigger and better.  In the meantime, if you can’t beat them…

Why Spotify’s Acquisition of the Echo Nest is a Test Case for the Age of the API

Spotify’s acquisition of music data and recommendation company the Echo Nest is a clear statement from a pre-IPO Spotify to the market that it takes the challenge of the Tyranny of Choice seriously.  In doing so it has established ideological fault lines between it and rival Beats Music. While Beats has put its faith in human curation Spotify has bet big on algorithms. It’s men against machines.  But the most important implication is neither this nor even the fact that Spotify now powers the discovery tools of many of its competitors, but instead the shockwaves that Spotify could send throughout the entire tech start up ecosystem if its screws up how it deals with the Echo Nest’s API.  This is the first major text case for the Age of the API.

Over the last half decade open APIs have become a central component of the technology space with countless start ups opening up their code and data for other start ups to riff off.  It has been a win-win for start ups on both sides of the equation: the givers more quickly permeate throughout their target marketplaces while the takers get to short cut to functionality that might be otherwise unobtainable.  Consequently we now have countless companies that are built upon a patchwork of interconnected APIs and a richer seam of products and services.

This is the exact strategy the Echo Nest pursued, aggressively pushing their API out into the digital music market place with very liberal usage terms and putting themselves at the heart of the Music Hackday movement.  (Few Hackday entrants worth their salt will be found without the Echo Nets API coursing through their virtual veins.)  Only Soundcloud can lay claim to having been more successful in the music API game.

But now that the Echo Nest is deeply embedded in the digital music marketplace what happens if it turns off or dials back its API? Currently it is making all the right noises, that its API will remain both “free and open”.  But there is a big difference between the aspirations of a newly acquired company and the actual behavior of the buyer 12 months or so down the line.  Indeed, a highly plausible scenario is that Spotify will eventually wind down the Echo Nest as a distinct entity, bringing all of its functionality behind the walls.  After all, if you break down what motivated Spotify’s acquisition, other than the prime motive of sending the right message to the street, the core assets are not the data itself – Spotify has plenty enough of that – but instead the expertise and the technology.  Data is worthless if you cannot interpret it properly.  Why let competitors benefit from that?

So right now the technology sector as a whole should be paying close attention to what Spotify does with the Echo Nest’s API.  If it does indeed eventually turn off the tap then it will rightly make investors and start ups alike question the strategic integrity of building businesses on the foundations of third party APIs.  Spotify needs to get this one right because the implications are far bigger than Spotify’s IPO, or indeed even the broader digital music market.  Instead this is the future of the entire technology start up marketplace.

 

The Death of the Long Tail

Long Tail CoverToday MIDiA Consulting is proud to announce the publication of an important new report: The Death of the Long Tail: The Superstar Music Economy.  The report is available free of charge to Music Industry Blog subscribers.  (If you are not yet a subscriber to this blog simply enter your email address in the box on the right hand column of the home page.)

The 21st century decline in recorded music revenues continues to send shockwaves throughout the music industry and although there are encouraging signs of digital-driven growth, the impact on artists is less straightforward.  Total global artist income from recorded music in 2013 was $2.8 billion, down from $3.8 billion in 2000 but up slightly on 2012.  Meanwhile artists’ share of total income grew from 14% in 2000 to 17% in 2013.  But the story is far from uniform across the artist community.

The Superstar Artist Economy

The music industry is a Superstar economy, that is to say a very small share of the total artists and works account for a disproportionately large share of all revenues.  This is not a Pareto’s Law type 80/20 distribution but something much more dramatic: the top 1% account for 77% of all artist recorded music income (see figure).

fig4

The concept of the long tail seemed like a useful way of understanding how consumers interact with content in digital contexts, and for a while looked like the roadmap for an exciting era of digital content.  Intuitively the democratization of access to music – both on the supply and demand sides – coupled with vastness of digital music catalogues should have translated into a dilution of the Superstar economy effect.  Instead the marketplace has shown us that humans are just as much wandering sheep in need of herding online as they are offline.

In fact digital music services have actually intensified the Superstar concentration, not lessened it (see figure).  The top 1% account for 75% of CD revenues but 79% of subscription revenue.  This counter intuitive trend is driven by two key factors: a) smaller amount of ‘front end’ display for digital services – especially on mobile devices – and b) by consumers being overwhelmed by a Tyranny of Choice in which excessive choice actual hinders discovery.

fig5

Ultimately it is the relatively niche group of engaged music aficionados that have most interest in discovering as diverse a range of music as possible.  Most mainstream consumers want leading by the hand to the very top slither of music catalogue.  This is why radio has held its own for so long and why curated and programmed music services are so important for engaging the masses with digital.

Music has always been a Superstar economy and there will always be winners and losers in music sales, with the big winners winning really big.  Over time the improved discovery and programming in digital music services should push the needle for the remainder artist tier but a) it will not happen over night and b) it will still have a finite amount of impact.

The Catalogue Size Arms Race

Matters are worsened by the music services’ catalogue arms race which has become entirely detrimental to consumers’ digital music experiences.  Action needs taking urgently to make sense of 25 million songs, not just through discovery and editorial, but also by taking the brave decision to keep certain types of content, such as sound-alikes, outside of music services’ main functionality.

Until labels, distributors and artists come to together to fix the issue of digital catalogue pollution – sound alikes and karaoke especially – the Tyranny of Choice will reign supreme, hiding 99% of artists under a pervasive shroud of obscurity and giving the Superstars another free lap of the track.

How The iPad May Help Soften The Decline Of The Download

In this previous post I outlined how the rise in mobile app spending is directly cannibalising iTunes music spending.  That decline was only a few percentage points in 2013 because of a confluence of factors, not least the fact that the US download market (Apple’s biggest) only fell by 3% in 2013 while the UK (another key Apple market) grew by 3% and growth also came in other major music markets and a bunch of emerging markets with scale. Throughout the course of 2014 downloads however will probably decline more sharply due to both app competition and also to the fact many of the highest spending download buyers are now subscription service customers.  But there is a slither of light for the download market….the iPad.

Apple’s customer base has changed a lot over the years.  Once being an Apple customer meant being at the bleeding edge of innovation in consumer technology.  Now it is a much more mainstream user base that in turn compels Apple to innovate at a pace appropriate for their more timid tastes.  The evolution of the iPad customer base followed a similar path: once the device of the true Apple aficionado the iPad quickly developed a distinctly populist appeal, especially the iPad Mini.

The iPad Is An iTunes Beachhead Among Android Users

But what is most interesting about iPad owners from a music industry perspective is that so many of them are Android phone users, 32% of them to be precise (see figure).  The iPad is acting as an iTunes beachhead among Android phone users.  It is a less surprising trend than might at first appear because Tablets and smartphones have highly distinct purchase consideration cycles and retail chain dynamics.  A smartphone is most often intimately tied to a mobile carrier relationship and the sales process will have as much to do with what device a carrier is pushing as it will with consumer preference.  A tablet though is, most often, not tied to a carrier and the purchase consideration cycle is instead much more about aspiration and desirability.  Other tablets might beat the iPad in terms of price and specs, but the iPad is the aspirational tablet.

ipad users

The iPad Mini Effect

The trend is even more pronounced among iPad Mini owners: 48% of them are Android smartphone users, highlighting the success of this SKU to reach new consumer segments.  Meanwhile a whopping 68% of iPad Intenders – i.e. consumers that plan to buy an iPad – are Android smartphone users.  Although this figure has to be discounted to account for aspiration rather than likely intent, the directional trend is clear: Android smartphone users are a major share of iPad owners and iPad Intenders.  With all the perpetual talk of who will win the smartphone wars the iPad’s ability to grow Apple’s customer footprint almost goes unnoticed.  The fact 57% of iPad Mini customers are female indicates just how good a job the device does of reaching beyond the male dominated early adopter niche.

Because an iPad customer is also inherently an iTunes user significant opportunity exists for content providers.  For all Google Play’s valiant efforts – and extensive marketing spend – no one else manages to get people to buy music downloads the way Apple does.  More Android customers becoming iTunes users via the iPad presents the opportunity to grow the installed base of music download buyers.  And there are encouraging indicators: only 26% of iPad customers do not buy music, compared to 49% of all consumers and 47% of overall Android smartphone users.

iPad Owners Want Apps Too

But before we get too carried away with how a new wave of iPad owners are going to save the music download sector we also need to consider why consumers are buying these devices and what use cases they best serve. The fact they have a tablet indicates they are at the more sophisticated end of the Android phone user base so they probably already use their Android phone for listening to music on.  An iPad is a device purpose built for web surfing, video viewing and mobile app usage.  So it is to be expected that the lion’s share of content spending from these new iTunes converts will be on apps.  Music spending will however be a part of the mix and thus we can expect the influx of new-to-Apple iPad owners driving new music download spending that while it may not be enough to counteract the bigger decline it will help slow it.

How The Role of Genres Has Changed In Music Culture

The Echo Nest’s Paul Lamere has been doing some interesting work around age and gender music preferences which got me thinking about a bit more about how the relevance of genres has changed.  A school of thought that is gaining traction is that genres matter much less than they did and that they are no longer so useful for categorising music (just look at the rise of mood based discovery from the likes of Songza and Beats Music).  But as much as mood and activity are highly useful ways of programming music, genre does in fact matter just as much as it ever did, only in a different way.

Up until 20 years or so ago, music was the defining cultural reference point.  Throughout prior decades it had been possible to identify people’s music affinity by the clothes they wore and the style of their hair.  From the leather jackets and Brylcreemed hair of rockers in the 1950’s, through the mohicans and safety pins of punks in the 1970’s, to the baggy trousers and hooded tops of ravers in the 1980’s, musical identity was worn as much as it was played.  The definition of a casual music fan was more engaged than today, with a casual fan typically every week buying a seven inch single and tuning into the charts show on the radio.  Because music was the core cultural reference point the average ‘music IQ’ was high.

Now though, music competes with a fierce array of alternative cultural identifiers such as branded clothing, extreme sports, networked gaming etc.  And of course media consumption time and wallet share are also competed for more intensely than ever before.  The result is that the average mass market music fan is less engaged than in the analogue era and the overall average ‘music IQ’ has dropped.

This manifests itself in a greater number of mainstream consumers coalescing in the middle ground of popular music.  Consequently pop music has become more amorphous, with all genres of music having strong footholds in the pop end of the spectrum.  But this does not mean that genres have stopped mattering.  In fact what has changed is that they have different relevance according to the sophistication of the consumer.  What we have is in fact a genre ladder (see figure).

genre ladder

At the top of the genre ladder we have the mainstream music fan, who will think about genres in very broad terms such as rock, dance and urban, but will often have little strong preference between one or another.  These are the sorts of consumers who when asked what type of music they like will most often say ‘I like a bit of everything’.  What they actually mean is that they like the sanitized pop end of most styles of music.

Next step down the genre ladder we get to the music fans.  These are consumers that have clearly defined music tastes and will think about the genres they like in terms of broad groupings such as heavy rock or indie rock.  Even at this level things start to get tribal.  For example a house fan will often have little time for trance let alone metal.

The third and final step on the genre ladder is the micro genre, where the aficionados are most often found.  This is where music fans think in terms of labels like Psy-Trance, Dirty South and Screamo.  It is where music tastes become most tribal and in many ways behave most like they did in previous decades. Though these consumers are the smallest group they are the ones that the music industry depends upon most heavily.  These are the ones that go to most gigs, that buy most merchandise, that spend most on music and are the most likely to be subscription customers.

In many ways at this end of the spectrum there is a genre renaissance.  There has never been such granularity of styles.  The digital era has enabled bands to build and reach niches on a global scale.  So while genres have become more blurred at the first rung of the genre ladder, here they mean more than they ever did.

What Is Really Cannibalising Download Sales

As 2013 music sales figures come in, the picture of streaming growing while download sales slow is coming sharply into focus. It is one of a clear phase  of transition/cannibalization (delete as appropriate depending on your point of view) taking place because the majority of paying music subscribers were already download buyers.  But that is not the whole picture.  There is an even fiercer form of competition for spend that, as far as the music industry is concerned, is inarguably driving cannibalization.

The iTunes Store accounts for the majority of the global music download market and has done so since its inception eleven years ago.  Back when it launched, the iTunes Music Store helped transform the iPod from a modestly performing device into a global hit.  Music was the killer app, music was what Apple used to sell the device and music is what iTunes customers spent all of their money on.  But all of that changed.  As Apple’s devices have done progressively more, Apple has introduced new content types into its store that better show off the capabilities of its devices.  When Apple launches a new iPad it doesn’t have a label exec holding up the new device playing a song with static artwork displayed…that simply would not showcase the device’s capabilities.  Instead an EA Games exec gets up on stage with a new game that fully leverages the capabilities of the iPad’s graphics accelerator, the accelerometer, the multi touch screen etc.

Music may still be the single most popular entertainment activity conducted on iDevices but it is no longer the app that fully harnesses the devices’ capabilities.  In fact because music products and services remain stuck in the rut of delivering static audio files – YouTube notably excepted – it is increasingly failing to compete at the top table in terms of connected device experiences.  Crucially, this is not just a behavioral trend, it is directly impacting spending too (see figure).

itunes spending shift

Back in 2003 music accounted for 100% of iTunes Store revenue because that was all that was available.  Over the years Apple introduced countless new content types, each of which progressively competed for the iTunes buyer’s wallet share.  The step change though occurred in 2008 with the launch of the App Store.  The impact was instant and by mid 2009 music already accounted for less than 50% of iTunes revenue.   By the end of 2003 the transformation was complete with Apps accounting for 62% of spending and music less than a quarter.  Quite a fall from grace for what was once the undisputed king of the iTunes castle.

Now it is clear that the app economy is a bubble that is likely to undergo some form of recalibration process soon (80%+ of revenues are in app, 90%+ of those are games, and the lion’s share of those revenues are concentrated in a handful of companies) but the damage has already been done to music spending.

If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps.  At least with streaming services consumer spending remains within music rather than seeping out to games.  Though the bulk of the app revenue is ‘found’ incremental revenue, apps are additionally competing for the share of the iTunes’ customers wallet i.e. growth is coming both from green field spend and at the expense of other content types.

So what can the music industry do?  It would be as foolish as it would be futile to try to hold back the tide. Instead, music product strategy needs to do more to embrace the app economy.  That means, among other things:

  • More fully leverage in-app payments (and that means labels will have to take some of the hit on the 30% app store tax)
  • Learn to harness the dynamics of games (that does not mean ‘gamify’ music products necessarily – though it can mean that too – but to understand what makes casual app games resonate)
  • Develop digital era, multimedia products (see this report for some pointers on where music product strategy should go)

Though we are nowhere close to talking about the death of music downloads, apps have turned the tide for music spending.  The music industry can either sit back and feel sorry for itself, or seize the app opportunity by the scruff of the neck.