Spotify and Virgin Media Take The Third Way

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

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

A Marriage of Supreme Convenience

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

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

Digital Music’s Third Way

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

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

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

Go Big Or Go Home

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

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

10 thoughts on “Spotify and Virgin Media Take The Third Way

  1. Well said. Left this response on Glenn Peoples’ BB article:

    This is game-changing, for all the reasons mentioned above but particularly with regard to educating the mainstream music consumer – a large telecom’s marketing reach should not be under-estimated. Two areas of concern: from a consumer’s viewpoint, despite the hyperbole, Spotify’s catalogue is not deep enough, with large gaps evident in the UK, particularly when it comes to major heritage artists (Bob Dylan, The Doors etc. So critical to get the classic albums included).
    Secondly, from a rights holder’s point of view, will the impact of purchase substitution accelerate a decline in CD buying and digital downloading? Can the gap be bridged? I sincerely hope so….

  2. Good points. The substitution question is particularly interesting: if mainstream consumer music consumption is moving to on demand services the question becomes which model represents best chance of generating most revenue. In that comparison subsidized premium tiers win outright over free ad supported.

    As for catalogue, it’s not just heritage. In fact I stopped using Spotify routinely some time ago and swapped for a free on demand service which is legal and has everything…what is it? YouTube!

  3. Pingback: Spotify on Virgin Media | Pansentient League - a Spotify Blog

  4. A very astute post.

    There are two types of scale – the freemium route where free off-sets marketing costs, and the passenger route where you load a service onto the shoulders of a large subscription base. Virgin gives Spotify the latter after a long period of the former.The value for Spotify is a sustainable growth trajectory, whereas the value to Virgin will include churn prevention.

    This is where digital music needs to sit, for it to find its true footing. The time is now.

    Great to have this blog back up and running too.

    WP

  5. Martin – while £6.99 would be good value for money I’d argue that it would still be too expensive to appeal to mass market consumers. Compare against what sort of value that money would deliver in terms of TV content: £6.25 would deliver you 100 TV channels at Virgin! (http://shop.virginmedia.com/digital-tv.html )

    This is the glaring disconnect in consumer peceptions of content value: premium TV content is scarce and can only be easily accessed via pay subscriptions, yet the pricing for monthly access is cheaper than music. Premium music content is easily available across a myriad of illegal ‘channels’ yet is priced more expensively than premium TV content.

    So what we have is effectively a ‘double whammy’ for perceptions of music value. It is more easily, freely availble and yet more expensive. So it is in effect doubly expensive and doubly poor value for money in consumers’ minds compared to premium TV content.

    To be clear, I am not saying that music is not valuable (I of course hold the opposite to be true) but unfortunately it is no longer perceived as valuable as many other content types in the minds of mass market customers.

  6. Will, thanks for your comment. You are of course absolutely correct in your observations. I’d take it one step further and ask whether what we could be starting down the path of music service providers developing the same dependent relationship with aggregators as TV channels. i.e. if we posit not getting premium subscriptions significantly beyond the million mark (for any provider) as evidence that D2C route isn’t working out.

    A former analyst colleague of mine once suggested that music might become like the Discovery channel: something that every bundle benefits from but not something many people would ever pay a stand alone fee for….

  7. Hi Mark. Great post as usual. And that Discovery comment was one of mine, if I recall!

    I’m interested in where this would fit into VM’s offering, in terms of where it is that people want to access music. Which rooms in the house and which devices will consumers favour, and can Spotify reach those via VM’s services?

    As someone who pays top dollar for Virgin’s quad play offering, I’d expect it to be bundled in as an incentive for me to stay there. Another £5 or £10 is hard to justify.They offered me a subsidized Blackberry deal as a loyal customer. Very nice, but I’d have preferred Spotify as a sweetener. That’s where its value may lie, in reducing churn, as TDC and TeliaSonera seem to have found.

    This also has massive implications for other operators with ambitions to own their own content services. Virgin have finally twigged that they don’t have the ability to create a compelling music product themselves so have partnered with the market leader. Will they now stop trying (and failing) to build a decent movie service themselves and join with Lovefilm instead? I do hope so. It has to be a better deal for consumers, operators and content aggregators. A VM package that included Spotify and Lovefilm would be pretty compelling.

  8. Hi Nick – yes it was indeed your analogy – you’ve come up with some good ones over the years!

    As for the role of Spotify as a sweetner. I hear you. I guess the ability of that will boil down to which Virgin Media budget(s) is/are funding this deal. Assuming that marketing and the customer retention team have at least partially funded this then there is absolutely the ability for this to happen. A stumbling block though may be label execs concerned that their content being relegated to something analagous to the free toy with a Happy Meal….

  9. As a virgin media customer I followed a link for existing customers to take up the spotify option, but it seems it is not available to all customers:

    Online order reference: xxxxxxxxxxxx
    Dear Mr xxxxx
    ,
    We are glad you liked our Spotify offer. We are really sorry though, but you can only get the offer if you got an email from us about it. (We would love to make it available to everyone, but we only had a limited amount to give away this time).
    We are bringing out great new offers for our customers all the time, so if youre already with Virgin Media keep an eye on your inbox, or check out the latest offers here.
    http://shop.virginmedia.com/existing-customers.html
    Thanks
    The Virgin Media Team

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