Making Streaming Work (Fixing Playlists and Churn)

UPDATED 28/3/13 (see sections labelled ‘UPDATED’

During my SXSW panel I presented a slide that showed the distribution of paid, active free, and inactive users of the two big streaming services Spotify and Deezer based upon the latest data for both services.  What the numbers show is that inactive users is a big problem for streaming services, which in actual fact means that churn is a bid problem for streaming services.  (Something I discussed last week).

Paul Resnikoff at Digital Music News and Stuart Dredge at MusicAlly have since written pieces about the data and something of a debate is emerging.  But the important point is not whether Deezer has more inactive users than Spotify, but that streaming services as a whole have a problem with churn.

To illustrate the fact that this is not a Deezer problem I have created a new chart (below) that uses the latest available official numbers for all three types of users from both services.  The most recent total user numbers for Spotify are Facebook app users and are therefore not official stats.  The most recent official Spotify data for all three metrics is from year-end 2011 – when these numbers were filed in a company report – and for Deezer this means early 2013 when the numbers were quoted in the press.

UPDATED: Note that Spotify only ever mentions its total registered user number in company reports while Deezer have quoted theirs more frequently. So the Deezer numbers below are a more accurate representation of the current scenario whereas Spotify’s user base dynamics have changed markedly since end-2011.  (Whether that translates into more or fewer inactive users we’ll have to wait and see.)

Retention is a Freemium Issue not a Spotify or Deezer Issue

What is clear is that both services have essentially the same distribution of users, with the vast majority of both services’ installed bases being inactive users.  If you spread Spotify’s 2011 numbers over the course of the year, from the end of 2010 base numbers, this translates into Spotify acquiring 1.9 million new users every month but only keeping hold of 200,000 of them.

Again, this is not a Spotify problem, it is a fundamental issue with the freemium music model: many more people decide its not for them than continue using the service.  Over time this effect will soften, as people become more familiar with the idea of on-demand streaming.  But it will always be a key part of the mix for both free and paid users.

UPDATED: It is also not even just a music service issue.  As I discussed in a previous blog post about Facebook, social networks like Google+ and Twitter also have a big issue with inactive users, as this chart illustrates. In fact only a quarter of Google+ users are active, as are less than half of Twitter users.  As Daniel Ek correctly identified on Twitter, this is a problem that affects all businesses that have a free tier that requires registration.

Currently Deezer and Spotify are in growth stage and are more focused on acquisition than retention, but sooner or later they’re going to have to recalibrate their metrics if they want to move towards sustainable financial models.  It can be done, as Rhapsody shows us, but it is not an easy task, and it also doesn’t leave a lot of spare cash in the kitty for aggressive growth.

Any established subscription business – such as a cable or satellite TV provider – will tell you that managing churn is the overriding strategic objective.  Any subscription service – especially a nice-to-have like music – is going to be vulnerable to churn.  But this does not mean that the music subscription business is fundamentally flawed, rather that the industry needs to start thinking in terms of a much more fluid movement of users than was ever the case for downloads.  In the download model Apple locked in its customers with devices.  Streaming services have no such asset – at least not yet.

Playlists Belong to Users not Services

With time, clear blue water will emerge between the value proposition of streaming services, and this should be considered not just as a loyalty driver, but also as reason for people to swap and change subscription services just as people swap and change cars.  And for that to happen streaming services need to stop thinking about users’ playlists and libraries as the property of the streaming service to be used as velvet handcuffs and instead as the transferable property of the user, and by extension, the communal property of the marketplace.

Locking music consumers into devices sort of made sense for companies like Apple that were largely using music to sell hardware.  But for companies like Deezer and Spotify that are just in the business of selling music – or at least access to it  – there is no such justification.  The subscription market is only just getting going and there is far too much green-field opportunity for services to get bogged down in internecine conflict.  As MusicAlly’s Dredge correctly identifies, opening up Playlists could prove to be crucial to the long term validity of streaming and subscriptions (and Tomahawk is a great first step). But to really work, streaming services need to stop thinking about Playlists as their property and instead as the property of their users.  That’s when services like Tomahawk could come into their own and it is when mainstream music fans will view streaming services with less scepticism.   In the words of ShareMyPlaylists: Long Live The Playlist!