Apple Music And The Listener-to-Buyer Ratio

The next 6 to 12 months could prove to be some of the most disruptive record labels have ever experienced, and nowhere will this pain be felt more than among smaller independent record labels with strong digital sales.   At the heart of this disruption will be Apple Music and the wider continued ramping up of streaming. If Apple Music is a success over the coming year it will do one or both of the following:

  1. It will convert / cannibalize non-subscribing download buyers
  2. It will convert / cannibalize existing subscribers

The probability is that it will do a bit of both with an emphasis on #1. The market level net impact of #1 will depend on the degree to which Apple converts lower spending iTunes buyers versus higher spending ones i.e. whether it increases or lowers the average spend.   But even if it is the latter the effect for smaller labels could still be net negative over the coming year. If you are a big label with hundreds of thousands or millions of tracks then you have enough catalogue to quickly feel major revenue uplift from 5 or 10 million new subscribers. If you only have a few hundred or a few thousand tracks though then the picture is less rosy.

The Listener-to-Buyer Ratio

At the core is the listener-to-buyer ratio i.e. how many new listeners you get for each ‘lost’ buyer. Let’s say that for every download sale lost due to an iTunes customer becoming an Apple Music subscriber transforms into 10 listens by 3 people within 12 months. So 30 streams instead of one download. The listener-to-buyer ratio here is 3:1. A generous assumption perhaps but let’s work with it. Against a base of $25,000 of download revenue that would translate into $6,250 less download revenue and $2,365 more streaming revenue. So a net loss of $3,885, a 16% decline.

If we reduce the average plays to 5 per user the revenue decline becomes 20%. In order for the revenue impact to be neutral the total new streams would have to be 80, which with a listener-to-buyer ratio of 3:1 would require each person to stream the track 27 times. Or alternatively a 8:1 listener-to-buyer ratio with 10 plays per user would also deliver no change in revenue. A great track could feasibly have an average of 27 plays per user per year, a good track could have 10. But an average track is going to be below both. So realistically, more than an 8:1 ratio is going to be required.

Scale Looks Different Depending On Where You Are Sat

What quickly becomes apparent is that the most viable route to ensuring Apple Music streaming revenue offsets the impact of lost iTunes sales revenue is as big an installed base of streaming users as possible. The more Apple Music users there are, the more likely more of them will find and listen to your music. This is why the scale argument so is so important for streaming and also why small labels feel the effect less quickly. If you have a vast catalogue you don’t need to worry too much about the listener-to-buyer ratio because you have so many tracks that you are a much bigger target to hit. The laws of probability mean that most users are going to listen to some of your catalogue.

Let’s say you are a big major with 1 million tracks out of the 5 million tracks that get played to any meaningful degree in streaming services. That gives you a 20% market share. But if you are an independent with 50,000 tracks that gives you 1%, 20 times less than the major. Which means that you are 20 times less likely to have your music listened to. And that is without even considering the biases that work in favour of the majors such as dominating charts and playlists, and other key discovery points. So in effect the major record label in this example could be 30 to 40 times more likely to have its music listened to. Which is why the listener-to-buyer ratio is unlikely to keep the major label’s exec up at night but could be the difference between sinking or swimming for the independent.

In all probability Apple Music will make streaming revenue a truly meaningful income stream for all record labels but in the near to mid term big record labels are likely to see a very different picture than the smaller independents.

9 thoughts on “Apple Music And The Listener-to-Buyer Ratio

  1. This is a great post and I love your blog in general.

    You are focussing on total number of streams vs an individual purchase of a song. Does that really matter, if the rev-shared pool is fixed, and only the distribution of it depends on total number of stream of a song / total number of streams of all songs?

    Does it not come down to what the ARPU is/was in the various business models? In streaming (premium only) it’s around $7/month, right? Do you have any data on what a comparable ARPU for recorded music was in the CD age, let’s say 1995?

  2. Hi Bjorn – the reason it matters is that although download buyer ARPU is lower (as was CD buyer ARPU), both because there are so many passive infrequent buyers pulling down the average, subscription services convert the higher spenders with higher ARPU than $7p/m. 40% of subscribers used to buy more than an album a month but no longer do so. Their ARPU has been brought down from $20-30p/m to $9.99p/m. Their ARPU has been capped.

  3. Hey Mark,

    While I agree that Apple has a chance to have a significant impact in the streaming space with their current customer base and three month trial, I think they have a lot of work ahead of them if they want to retain these customers as long term subscribers. The software experience is very mediocre, particularly with their value-add Connect and My Music features, both of which feels slapped on.

    I come from the startup world where the mantra “execution is everything” is repeated endlessly. The Apple Music experience is poorly executed. I wish they would have created something game changing instead of creating a “me too” product and relied on its momentum for early growth.

  4. Hi Schonne – I agree with many of your points, and I’d also add that the user journey is a little confused, however I would say that for a version 1.0 Apple Music is a pretty complete experience that should work pretty well for mainstream music fans that are not yet subscribers.

  5. Yes. The only way streaming works long-term is if you can get a bunch of folks to subscribe who were previously infrequent buyers of downloads or hard product. Because for every person who used to buy 12-24 CDs a year but now buys none, there were a lot more people who bought less than 5 CDs a year. If you can convince a large number of these consumers to pay $10/month for music (or even $5 a month), that’s how this works out well for the music streaming model (at least in the aggregate). Otherwise, it’s not looking very good, because of all the super-fans who aren’t buying 12+ CDs a year anymore.

    The problem for independent labels is that these non-super-fans are less likely to be listening to obscure stuff than the kind of consumers who used to purchase 12+ CDs a year. So even if the aggregate revenue of streaming ultimately exceeds current levels (or goes even higher and returns to pre-digital levels), less of this revenue may end up in the hands of smaller players (absent some great discovery tools, curation, etc).

    Nevertheless, I don’t think it’s far-fetched to believe that regular consumers who aren’t super-fans won’t be willing to pay for a monthly music subscription.

    My household’s experience with video streaming bears this out. I wouldn’t call us video watching super-fans. I doubt we would have purchased or rented 12+ movies a year.

    Nevertheless, we do pay for both Netflix and Amazon Prime video in my house and there are many instances where we wonder why we do it, because it feels like we’re aren’t using it very much (i.e., weeks and sometimes months can go by when we don’t use it). But then somebody gets sick or something like that and binge watches 13 episodes of “Daredevil”, six ESPN “30 for 30” documentaries, or an entire season of “Orange is the New Black.”

    At that point, it seems worth it, so we keep paying for it. In essence, we do that to retain the capacity to have those binge watching moments.

    Over the long haul, would it possibly be cheaper to just buy episodes from iTunes? Maybe. But psychologically, at least for me, it’s just easier to pay the monthly fee. I pay a little extra each month to get more data on my cell plan too. If I was really playing it close to the bone, I could probably get by with a plan that was the next tier down. In that instance, I’d need to monitor my data usage more closely, and it would be doable, but it’s no fun to have to do that if you can avoid it. So in essence I pay the extra as insurance that I won’t run out of data (and for the convenience of not having to think about it). Not entirely a rational decision, I know, but I do it anyway (as to many people I suspect).

    This is the psychology of the all-you-can eat subscription.

    I was skeptical about paying $10 a month for Spotify. I listened to free tier for a while. Then, I subscribed on a promotion of 3 months for $10. At that point, I realized that having the Ad-Free experience and the off-line caching of songs was pretty great. So I bit the bullet.

    At times, I’ve had a similar experience with Spotify that we have with Netflix. I feel like I’m not using it enough. But then I have some days where I listen a lot and I realize that it’s totally worth it to have that capacity always available.

    Since I set things up so that I can stream the audio to an airport express in our kitchen, I’m listening even more.

    Maybe I’m in that outlying music geek contingent, although I wasn’t a huge recorded music buyer (more of a live music fan–averaged 100 shows a year for much of the ’90s and ’00s). But I’ve got to say that once you can have a stream of quality music whenever you want it, it’s hard to go back, especially if you’ve got some good playlists.

    Can you get something like that with Youtube for free? Yes. But it doesn’t work quite as well. At this point, I only use Youtube if I can’t find it on Spotify or if I want to share a song with somebody who doesn’t have Spotify (or share on FB). I can see why kids do it, because they have more patience to put up with inconvenience (more time than cash). But if mom and dad were paying for a family subscription to Apple Music or Spotify, one wonders if they’d continue to use Youtube as much.

    Some friends of mine and I started a group on Facebook where a different person shares a “mixtape” each week. That’s been an amazing resource. Subsequently, I’ve aggregated those mixtapes into one master playlist. Then, I can shuffle off of that. I’ve also been listening to a friend’s master “dinner” playlist. It’s a couple of thousand songs. I don’t think I’ve skipped a track yet, which is amazing and a testament to this guy’s great taste (lots of old back-catalog soul and other stuff).

    I’ve heard so much great new music through these channels. Well, at least it’s new to me. With a back catalog as deep and wide as Spotify, you kind of have to change you idea of what “new” music is. And that’s huge shift in terms of how the ecosystem works.

    And while the the Spotify provided discovery tools don’t seem amazing to me, I must give them credit for turning me on to Emitt Rhodes. If you like Beatles inspired pop music from the late 1960s and early 1970s, give him a listen. I was completely scratching my head wondering how I had never heard his stuff before it popped up in the you might like on Spotify.

    So I think you are right about big labels being in a better position on this stuff. It’s like portfolio theory in investing. The bigger and wider your portfolio, the more likely that it’s overall return will stay consistent despite the ups and downs of individual stocks.

    Some big label is making some pennies from me listening to Emitt Rhodes, and they’re making pennies off of a lot of other tracks that weren’t generating any pennies before streaming. Plus they’re making the most pennies from the contemporary hit stuff as well. They are better situated to deal with the changing definition of “new” music, because they have so much back catalog.

    Interesting times….. Hope things shake out in a way that indie labels can survive.

  6. Pingback: Start up: Windows Phone hits the buffers, more Flash woes, do Google ads discriminate?, and more | The Overspill: when there's more that I want to say

  7. Interesting look at this stuff. I guess we’re really just going to have to see as it happens how streaming will help or hurt artists when it comes to the long run. For now, Apple Music is going to have to be doing a lot of work to counteract all the bad PR they’re had lately.

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