The Case For A Freemium Reset

Ministry Of Sound’s Lohan Presencer stirred up a hornets’ nest with his impassioned critique of the freemium model at a recent MWC panel. This is one of those rare panel discussions that is worth watching all the way through but the fireworks really start about 16 minutes in. For a good synopsis of the panel see MusicBusiness Worldwide’s write up, for the full transcript see MusicAlly. I’m going to focus on one key element: free competing with free.

Free Isn’t The Problem, On Demand Free Is

Free music is a crucial part of the music market and always has been thanks to radio. The big difference is that radio is not on demand. Even the Pandora model, which quite simply IS the future of radio, is not on demand. The on demand part is crucial. Although labels have a conflicted view about radio there is near universal agreement that the model works because it is a promotional vehicle, it helps drive core revenues. But turn free into an on-demand model and the business foundations collapse. The discovery journey becomes the consumption destination. To paraphrase an old quote from a label exec ‘if you are playing what I want you to play that is promotion, if you are playing what you want to play that is business’.

P2P Is In A Natural Decline, Regardless Of Freemium

The argument most widely used by streaming services in favour of the freemium model is that it reduces piracy. There is some truth in this but the case is over stated. P2P was the piracy technology of the download era. Its relevance is decreasing rapidly for music in the streaming era. In fact mobile music piracy apps (free music downloaders, stream rippers etc.) are now more than twice as widespread as P2P. So the decline in P2P can only partially be attributed to streaming music services as it is in a trajectory of natural decline as a music piracy platform.

Freemium Isn’t Killing Piracy, It Is Coexisting

But even more importantly free streamers are using those new, next-generation piracy apps to turn their freemium experiences into the effective equivalent of paid ones, by creating local device caches for ad free on demand play back. In fact free streamers are 65% more likely to use a stream ripper app than other consumers. They are also 64% more likely to use P2P and 57% more likely to use free music downloader apps. While it is always challenging to accurately separate cause and effect what we can say with confidence is that whatever impact freemium may have had on piracy, freemium users are still c.60% more likely to be music pirates also. (If you are a MIDiA Research subscriber and would like to see the full dataset these data points are taken from email info AT midiaresearch DOT COM)

Monetizing The Revenue No-Man’s Land Between Free and 9.99

So more needs to ensure the path from free to paid is a well travelled one. It might be that the accelerating shift to mobile consumption of streaming music may help recalibrate the equation. Mobile versions of free streaming tiers in principle may not be fully on demand but they often stretch definitions to the limit and some are simply too good to be free. Being able to create a playlist from a single album and then listening to it all in shuffle mode simply is on-demand in all but name. If we can get mobile versions of free tiers to look more like Pandora and less like Spotify premium, or YouTube for that matter, then we have a useful tool in the kitbag. And if users want more but aren’t ready to pay a full 9.99 yet, let them unlock playlists, or day passes for small in app payments. Lohan made the case for PAYG pricing to monetize the user that sits somewhere between free and 9.99 and it is an argument I have advocated for a long time now.

Freemium Is Not Broken, But It Does Need Re-Tuning

Freemium absolutely can work as a model and it has achieved a huge amount already, but it needs recalibrating to ensure it delivers the next stage of market growth in a way that minimizes the risk to the rest of the business. None of this though can happen until YouTube is compelled to play by the same rules as everyone else. Otherwise all that we end up doing is hindering all music services except YouTube and Apple (which won’t have a free tier). Google and Apple are not exactly in need of an unfair market advantage. So a joined-up market level strategy is required, and right now.

19 thoughts on “The Case For A Freemium Reset

  1. Boy, Mark…lots of content from you this week!

    I’ve said it before: the solution isn’t selling recorded music – it’s giving it away for free and monetizing experiences. These apps should let you play whatever you want, whenever you want, but offer a deeper experience of that music with premium paid related content, deeper engagement with the artist or around a genre, and merchandising and concert promotions.

    I can’t believe this industry is still trying to put Napster’s genie in the bottle nearly 15 years later…

  2. Hi Schonne – thanks as always for your insightful feedback.
    I agree whole heartedly about the experiences part. My mantra is the experience IS the product. But there are 4 Cs of digital content:
    Content
    Curation
    Convenience
    Context
    A service that does those well will create its own set of value and people will pay for that. Look at Netflix – only a fraction of the valuable catalogue but what it has that others do not its users really like. It of course does all the other 3 fantastically. Yet you can download it all for free from Torrents. People pay because it delivers value across all 4 of those. Currently licensed free services do the same. Especially YouTube which is awesome across all 4. But remove + / or limit some or all of the 4 Cs and suddenly just being free isn’t enough. Even if you left all the content intact but removed collaborative filtering, playback on smartphones, recommendations, comments, channels etc then YouTube’s popularity would plummet. It would still have a ore user base, the same sort of users that love Napster, but not the mainstream YouTube currently has.

  3. You’re right,as usual, Mark. And I think this is the disconnect that these freemium services are having: that when you make your product a commodity, price becomes a significant factor in choosing where a customer spends their money – and free on demand (or almost on demand by shuffling an album) becomes a viable option. If Spotify lowers it’s price to $6, then we’ll all rush there -until Google offers $5 and then to Apple at $4. If these services are basically similar: music on demand with shared playlists, then they’ve commoditized their market and it becomes a race to the bottom.

    Instead of lowering their prices, they should be increasing value by offering rich, engaging experiences and content unique to the platform (like Netflix’s exclusive content).

    I think we’re saying the same thing.

    I think a more interesting conversation is about how these services can increase value rather than finding the right pricing in a commodity market,

  4. The richness experience/added value/merchandising approach is a dead end. All businesses need to make their money from their core business. We are musicians and record labels, so we need to make our money from selling and licensing our music.

    The richness idea is somewhat back-to-front. Take a business like The GAP. The GAP tries to give customers a rich experience in its stores, to entice us to visit them. But once we are inside, it makes money from us by selling us clothes — its core business. It doesn’t give us the clothes for free, and make us pay for the experience of visiting the store.

    If we can’t figure out a model that involves customers paying for the music we make, we will never make any money.

  5. I just think music buyers don’t want to buy digital music. Vinyl sales are up. When people do buy albums they’re more likely to buy CD’s or Vinyl. When I was a kid a lot of people bought bootleg CD’s but the bootlegs were inferior to the real thing. Having a friend burn a CD for you was inferior to the real thing. You got blurred inserts, CD’s with the title written in permanent marker. If all you wanted was the music you had that but it wasn’t enough, you wanted the full experience. Now music is just audio files. There’s no package, no experience. One kid can buy a digital album and duplicate it an unlimited number of times without any drop off in quality at zero cost. There’s no difference between the file you’d get from a friend and the one you could buy from iTunes. Kids don’t need to stream, they do it because it’s convenient and leaves their devices with more space for gaming apps. Also, I think streaming may effect sales because of the ability to try before you buy. Before we heard a single and would buy the album because of the single. If the album sucked, too bad for you. Now people can stream entire albums prior to buying and if they’re not moved to buy, they won’t. It’s a system that rewards great music and punishes anything that falls below that. If fans don’t consider music to be great, they’ll only spend money if they feel connected to the artist. Taylor Swift, for example, threw parties at her house for her fans, baked them cookies, wrote checks to fans to pay their College tuition. It’s a new reality. The only way to really force people to buy is to treat audio files like software where they’re assigned to registered users and devices and won’t work outside of the devices they’ve been registered to like Photoshop. Outside of that, it is what it is.

  6. The one thing that I never hear discussed, which I think is fundamental, is simply the quality of the “talent”. I’m 33 and I realise that I’m already starting to sound like my parents and grandparents did only a decade ago. I’ll keep it short and I’ll try to be objective: The Beatles for example were a pop act, we can all agree on this and they were around decades before I was even born. If you listen to their music today (after having heard it already millions of times), you still gets you. But who I ask you, who…listens to today’s pop music for more than a few months? The fact is that as much as I would like to sympathize with the labels, the quality the majority of the acts for sale is crap. A label of any stature, like any business is doomed when they simply blame bad sales on anything other than the quality of their product. I don’t have the numbers to back my next words up, but it humbly makes sense in my head: as far as the majority of today’s pop acts are concerned, Universal isn’t down because of piracy, streaming etc, it’s down simply because nobody cares to listen to the music they produce.
    My question is, why is nobody discussing the fact that most music produced today…isn’t worth paying for in any fashion, regardless of the medium on which it’s distributed.

  7. @R.S. “we need to make our money from selling and licensing our music” The music business consists of three players: the artists, the fans and the middlemen. Artists have never really made any significant money from selling and licensing music until they’ve reached multi-platnum status. Almost all artists pick up their income by selling experiences and tangential products: concerts, merch, etc. So an artist’s core business is not selling recorded music, but, rather, selling experiences.

    Traditionally the middlemen make money from selling and licensing music. And middlemen come and go based on market opportunities. The market is speaking pretty loudly since Napster: selling and licensing music is not in demand anymore so the middlemen need to find new models or close shop.

    What the middlemen should be doing is figuring out ways to artists sell deeper, richer experiences to fans. Instead, they are desperately holding onto the old model and using their last bit of leverage to cannibalize the artist’s revenue with 360 deals.

    Like Mark says: “experience is the product” <– this is where the middlemen should be focusing…

  8. @alex I think you’re right about crappy music – sorta. The music marketplace is really saturated now that its cheap and easy to create music. It’s also much more difficult to get discovered since terrestrial radio and Mtv aren’t as significant in the discovery process as they once were. So with this much noise and so many discovery platforms, the drive to get a ‘hit’ is more important than ever for the labels. They are only really putting money behind “manufactured” artists like Katy Perry, Rihanna, Taylor Swift, etc – artists that are really performers under the direction of the labels.

    To be fair, there are some really great artists on the independent side – many that are every bit as good as the great artists of the past – but they are much harder to discover in all the noise. They also don’t make enough to keep the lights on for many of the larger labels.

    TL;DR: we’re not in an era where the cream rises to the top. The labels are selling candy because that’s what sells quickly.

  9. I disagree with the idea that it’s harder to get discovered today. I also disagree with you saying that artists outside of the major acts are struggling. The only artists that are struggling are artists that either aren’t putting out music that moves people or who just don’t know how to operate online. Go to Soundcloud and you’ll see a number of artists you’ve never heard of that doing pretty well for themselves selling directly on Bandcamp, touring, and selling merchandise. Some of them give their fans the option to buy or download for free and the fans CHOOSE to buy.

  10. @schonne
    Artists did used to be able to make money from record sales, licensing and publishing royalities. When I started out in the 1980s, I could get paid every time a record was sold, and of course, receive money for performing rights every time it was played on the radio. The percentages were weighted in favor of the record company, but we also got substantial advances from them back then to pay recording costs, and to live on. It was a viable business model for a band.

    I put out records today, with an established label. We do offer a richer experience — we have nice covers and booklets if you buy the CD, for instance — and that does work with the subset of the audience who like to own that kind of thing. But not really on the scale that it takes to make a big difference.

    We can’t turn back the clock to the pre-digital age.But perhaps it would be better to spend our time developing a model that allows us, once again, to make money directly from selling our music.

  11. Interesting article; got me racking my brains

    Some time back, I was going through analyst commentary on Pandora. One thing that really caught my attention was that some analysts were worried about shift of listeners from ad-supported to subscriptions. In their minds, the long-time financial performance could be negatively impacted due to this shift.

    Now that is serious food for thought – if financial analysts believe ad-supported (i.e. not charged directly) model is better…..can organizations continue to grow subscription revenues?

  12. Enjoying the site and points made. One quick disagreement – Pandora is not the model of the future in my mind; it’s still music from an algorithm. But certainly a difference between on-demand and Pandora.

  13. First let me say I greatly appreciate you for writing this blog and for your clarity. A lot of things made sense…
    To be honest, with everything that’s been going on in the business, I am pretty over whelmed. From my understanding of our economy and “the invisible hand,” the market determines price. What companies are willing to pay to make, and what consumers are willing to pay to take finds a balance… We all know this, but how do you find that magic number or formula with a market that has become used to free, to expect free? Do you not think it is increasingly likely that no matter what we come up with, consumers will just find another way to get their music the way they want? If pushed too hard to pay, most will just turn their backs and find alternatives. It seems impossible to find a business model discrete and attractive enough that will work for a market that expects free.
    Unless, and bear with me, the Napster/P2P sharing generation is slowing down. Perhaps streaming is on the rise because that is what the current generation is growing up with. This generation doesn’t have the experience we did as kids and young adults. Perhaps streaming is the notion, and not stealing.
    Do you think generational differences will have an affect on the shift to streaming as I have described it?

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  16. The problem is that most of us are living in the past. “The past this” “The past that. In the old days. yada yada yada. Heck I pretty much enjoy lots of the music that’s on the charts today. That’s why it’s still able to sell significantly in the age we are in today.

    We are not living in the superstar eras anymore. We are living in the independent scene where now indie acts have the power to delete the middle man, and have the power to connect directly to the fan.

    Before the artist dealt with the label who would record for them, to sell the record at the music store. And the artist would have no direct communication with the artist.

    With sites like Spotify, Youtube, ect. people are still buying music and experiences. The music business is still highly profitable. Look at all these successful kickstarter campaigns from indie acts. Why is it that these people are funding them? Because they are buying an experience.

    There is exclusive things you can sell like Vinyls, merch, a live performance, an after party, concerts through video streaming, and people still buy MP3 or albums to support their band.

    Indie bands have the advantage of fans feelings like its theirs. They found it, so its theirs and they feel privileged to even have communication with them.

    Much different playing field, with advantages and disadvantages. My point is, adapt. We will never go back to the old days. In fact, in the Tape days people were ripping off music too. This isn’t new.

  17. By the way I am in no way saying that the ideas in this article are bad. In fact I loved them, and wish they were implemented. I was referring to most of the comments on this post.

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