Why Moving Video Centre Stage Is About More Than Just Doing Deals With YouTube Stars



This is the fourth post in my YouTube economy series. You can read the other posts here, here and here

The music industry has a long history of underplaying the role of video, insisting on seeing it as merely a tactic for driving sales.  In doing so it let two businesses that understood the wider value of music video become global superpowers.  MTV and YouTube knew that music fans, especially younger ones, could connect with their favourite artists via video in way that they could not with audio alone.  The labels were able to put MTV and YouTube down as an irritating mistake (albeit the exact same one made twice) because for a long while they were still selling units of music product, albeit in reducing numbers by the time YouTube arrived on the scene.  Now though, as we accelerate into the consumption era all bets are off.  Consumers want to pay for access to content – either with money (subscription) or with attention (ads).  With revenue generated by streams rather than up front transactions, both access models demand increased engagement.  This means that video must shift from marketing tactic to revenue bearing product.  Slowly but surely labels are waking up to this new reality and Sony Music’s deal with YouTube star Kurt Hugo Schneider hints at what the future may hold.


Sony’s Schneider Deal Is A Nod To The Future Music Economy

Sony’s partnership with Schneider will see the creation of a 10 episode series of shows featuring Sony artists performing their songs with him.  Crucially the shows will be distributed via Schneider’s YouTube channel which has 6 million subscribers and 40 million monthly views.  5 years ago, even trying to build the business case for such a project around a frontline Sony artist would have been nigh-on impossible with production costs failing to justify likely TV licensing revenue.  But with YouTube Sony can both spend less on production and cut out the TV network middleman, going direct to the audience. Whilst a big part of the internal business case justification at Sony will likely centre around the ‘exposure’ Sony’s artists will get, there will be no small number of Sony execs who know that the real value of this is the video series itself, both in terms of audience engagement and revenue.

As I explained in my previous YouTube posts, the platform is emerging as the single most important content destination for Millennials and their younger siblings Generation Edge (i.e. those born since 2000).  Right now traditional music artists are at a marked disadvantage to native YouTube creators: they put out 1 music video maybe once every 3 months while a YouTuber will put out that many videos a week.  A middle ground exists between those two extremes, one that can provide the vital ingredients for helping music artists get more viewing time and help transition music video from low income marketing tool into a meaningful revenue generating product in its own right.

Universal’s KSI Deal Only Scratches The Surface

Universal Music have taken a more traditional approach to tapping YouTube, picking a successful YouTuber and turning him into a pop star.   The YouTuber in question is British gamer KSI who numbers 2 billion YouTube views, 11 million subscribers and $4.5 million in annual YouTube earnings, making him the fifth highest YouTuber globally.  So far his cross over pop/Grime singles have had modest success though Island will be hoping his latest collaboration with JME, ‘Keep Up’ will make bigger sales waves.  But even if it does that will be missing so much of KSI’s potential.  By his own admission KSI is a YouTuber first and a rapper second.  Island should be exploring all the ways they can make that distinction blur into insignificance.  Partnering with YouTubers like KSI is an invaluable first step, but the real opportunity for Universal is to explore how KSI can take them on a journey into the YouTube industry not for them to take KSI on a journey into the music industry.

Online Video Momentum Is Acclerating, And Some

The direction of travel of the video market is hard to discount.  Short form video is growing at an unprecedented rate: there were 5.9 trillion short from video views in in the first three quarters of 2015 with growth more than doubling from Q4 2014.  (See the MIDiA report ‘Short Form Video Growth’ for more).  Meanwhile the glut in online display ad inventory driven by content farms like Outbrain and Taboola is making video advertising an increasingly sought after commodity.  Will video revenue ever be enough to offset lost music sales revenue at an industry level? Perhaps not, but it certainly can at an artist level.  Not too many artists can boast KSI’s $4.5 million annual income.

The Business Case For YouTube’s Music Economy Role Needs To Be More Rounded

We need to take a realistic view of YouTube’s current role in the music ecosystem.  It can no longer be justified as a loss leader for driving sales and ‘exposure’.  The number one activity that consumers do after they discover a new artist on YouTube is….watch them on YouTube some more.  65% of under 25’s say they use YouTube this way. So more value needs to extracted from those users when they are on YouTube, rather than hoping for them to pop over to Spotify or iTunes to do something that creates bigger chunks of direct music industry revenue.  Sure some of that is still going to happen but it will do so in dwindling numbers over the next 5 years, with music sales revenue declining by 39% by 2020.

The business case for YouTube has to be much more rounded and nuanced while the industry continues through its transition phase. Sales and access will coexist for many years, occasionally giving the impression of a schizophrenic nature. Adele encapsulates the twin-speed nature of the music industry as it transitions between eras.  As impressive as Adele’s sales figures are they are an anomaly, a temporary high tide while the music sales waters continue to irretrievably recede.  Plotted against the longer music sales trend it is clear that ‘21’ followed exactly the same path – a dramatic stand out success that was a blip on the downward curve.  Adele is also unique in having such strong audience reach among older consumers that still buy music and younger ones that stream. So while she’s been busy breaking sales records she has also excelled on streaming, racking up half a billion views of her ‘Hello’ video.

For Better Or For Worse, YouTube Is Generation Edge’s Punk

Music fans exist in multimedia, on demand environments where video, social engagement are the norm and authentic connections with stars are the gold dust that they seek out.  YouTube is the punk movement of Generation Edge.  It is an antidote to the over-produced, generic, middle of the road, overtly commercialism of traditional media.  YouTube creators may still be finding their creative voices but the fact Sid Vicious couldn’t really play bass was part of the entire point of the Sex Pistols.  It was a big fat two fingers up at the establishment.  Sure, most YouTubers are hardly rebels without a cause but they are outside the traditional media establishment and therein lies the real power of video that the music most learn how to participate in without ending up looking like a dancing dad.

Pandora Buys Rdio To Become A Global Streaming Powerhouse


pandora rdioPandora today announced that it was acquiring the assets of now failed subscription service Rdio.  While the whispers about Rdio’s future had been building for some time, the deal is more interesting for what it says about Pandora’s plans than what it says about the state of the subscription business.


Rdio Battled Bravely And Set Innovation Standards But Fell Short

For what Rdio lacked in subscriber numbers it made up for in innovation.  It continually set product and feature precedents that Spotify and others subsequently aped, and its $75 million dollar ad inventory deal with US radio giant Cumulus sets a business model blueprint that other streaming services will follow. But for all its efforts and extensive marketing efforts Rdio was simply not able to get to the same sort of level as Spotify’s 2nd tier competitors, let alone to seriously challenge Spotify itself.  The music subscription business is not a winner-takes-all market.  But it is one in which some degree of meaningful scale is required to trigger the telco partnerships and brand advertiser deals that are necessary to achieve sustainability.  Eventually a company transitions from ‘bright new hope with potential’ to an ‘also ran that isn’t ever going to make it’.  Once that imperceptible line of market perception has been crossed it is only a matter of time before the end comes.

Pandora Will Use Rdio’s Assets To Go Global

Crucially Pandora is not acquiring Rdio as a going concern but only its assets, which won’t include licenses (as they have to be renegotiated when a music service changes corporate hands).  What those assets represent, or at least the bits that matter to Pandora, are teams, product and tech, licensing know how and an international footprint.  That last bit is particularly pertinent.  Rdio’s 100 markets contrasts sharply with Pandora’s 3 (US, Australia and New Zealand).  Indeed Pandora CEO Brian McAndrews stated “We seek to be the definitive music source for music discovery and enjoyment globally”.  While 100 markets is probably a step too far for Pandora, expect a healthy selection of top tier and emerging markets to feature in Pandora’s roadmap.  And if you’re eager to identify which ones, just take a look at the bigger radio markets globally (Japan possibly excepted).

Pandora’s Success Is Built On Lean Back Not Lean Forward

Pandora’s success is firmly rooted in delivering a high quality, lean back experiences to largely mainstream audiences.  That’s how it reaches 78 million monthly listeners, more than a quarter of US adults.  That positioning has served Pandora well and made it one of the few success stories of digital music.  In fact, other than Beatport and Last.FM, it is one of the very few music start ups that had an exist that considered to be a true financial success. Crucial to that success has been the fact Pandora has operated under statutory licenses for semi-interactive radio, which leaves it with dramatically higher (potential) operating margins than on demand services.  Which begs the question, just why is Pandora getting into the subscription business?

This Is The Latest Part Of A Major Strategic Pivot

The answer is that it forms part of a much bigger, much bolder plan.  Pandora has spent the last couple of years quietly amassing the assets that will transform it into a music platform super power.  In 2015 it acquired music data company Next Big Sound (c.$50 million), then came ticketing company Ticketfly in October ($450 million) and now Rdio ($75 million).  The combined $0.6 billion is a truly sizeable investment in a streaming-centred business model by anyone’s standards.  It also accompanies a concerted and costly investment in Pandora’s regional ad sales teams across the US to compete on a level footing with traditional radio’s sales teams.  Couple all that with November announcements to become the exclusive streaming outlet for popular podcast series ‘Serial’ and the landmark direct deal with Sony/ATV Publishing and a picture of something truly ambitious starts to emerge.

Pandora was fortunate to be able to IPO at a time when public offerings were still a highly viable option for digital start ups.  Spotify and Deezer (which just cancelled its IPO) will look on with no little jealousy at the power that a market capitalisation of nearly $3 billion gives you.  Now it is using this financial firepower to take the next step on its streaming journey.  Whatever that will prove to be, expect it to be a platform in its truest sense, rather than simply a streaming service with a few loosely attached ‘alternative revenue’ models, which is a mistake some of the subscription incumbents have made thus far.

Discovery Doesn’t Lead Anywhere Anymore, At Least Not To Sales

Pandora may aspire to be the definitive source of ‘music discovery’ but streaming discovery is becoming streaming consumption.  i.e. it is increasingly not leading to sales.  Live music sales is one alternative way to make money from ‘discovery’ but if ‘free music to sell tickets’ is Pandora’s end game then some difficult conversations with songwriters (who of course often don’t play live) will need to be had.

Pandora has just thrown its hat into the ring as a top tier player in the global streaming business.  By some measures you could say it is poised to become the biggest.  McAndrews left no room for doubt by stating “We plan to substantially broaden our subscription business.”  But in doing so Pandora will have to look itself in the mirror and ask itself “what am I now?”.




YouTube And The Attention Economy

This is the third in the series of posts exploring how the music industry can better leverage the potential of the YouTube economy.  You can see the first post here and the second here.

Short form video is accelerating at a rapid pace, racking up 4.2 trillion views in the first half 2015.  While challengers Facebook, Snapchat and others now account for just over half of that total, few platforms of scale yet provide content creators and owners comparable ability to build engaged audiences and income.  For music the situation is even more pronounced – no other platform is even on the same lap of the race (and I include Vevo as an extension of YouTube). YouTube is the most popular online music destination by far (46% of consumers use it regularly) and its role for Digital Natives cannot be exaggerated – 65% of US under 25’s use YouTube for music regularly.  But the share that regularly watch YouTube as a whole is even higher: 76%.  The added complexity is that most artists and labels do not feel that YouTube is pulling its weight in revenue terms.  Free music streamers – of which YouTube is the largest single component – comprise 92.5% of all music streaming users and just 32% of all streaming revenue.  Yet a whole generation of non-music creators like PewDiePie, Smosh and the Janoskians have via YouTube built audiences and income that most artists could only dream of.  So what’s the secret?

Talk Don’t Shout

One of the key factors is the way in which YouTubers use the platform, releasing 2, 3 or more videos every week.  Contrast this with an artist releasing a music video maybe once every couple of months.  YouTubers treat the platform as place to build relationships with their audiences and to engage them in regular interaction.  The prevailing approach among artists, their managers and labels is to simply view YouTube as a place to promote.  YouTubers use YouTube as an interactive digital platform for engaging in conversations.  The music industry uses it as a broadcast channel, a soap box from which it can shout about its wares.

While clearly it doesn’t make sense for most artists to be creating 3 videos a week there has to be a compelling middle ground between that and one promo video every quarter.  Nearly half of music’s super fans say that music for them is more than just the song, that they want to know the artist’s story.  Music videos, the highly stylized form that they are, are hardly a vehicle for telling the artist’s story.  In fact there are few mediums less suited for the task.  But there is so much around the video that can be harnessed.  Imagine how much extra content could be created by adding half a day to the video shoot to film extras such as goofy outtakes, the band talking about the song, a making of, behind the scene reportage etc.

Think Of It Like DVD Extras That People Actually Want To Watch

And the costs should be modest.  YouTube is DIY.  Part of the authenticity most YouTubers deliver is by not being over produced.  So only a fraction of the crew used for the music video shoot would be needed.  The resulting video extras could then be planned into a release schedule on the artists’ YouTube channel, building up weekly to the main music video and then maintaining interest thereafter.  This is just one illustration of how it is entirely feasible to create lots of added value content with relatively little additional burden on the artist.  Yes, this might feel like creating the extras for the bonus disc on a DVD, and in some ways it is.  But there is a crucial difference.  DVD bonus discs are a means of charging more for a release and usually go unwatched.  Among young YouTube viewers this sort of content is often of comparable – though different – value to the song itself.

Prospering In The Attention Economy

In the sales era fans invested in their favourite artists by buying an album.  That cash investment usually meant a fan would spend time listening to the album again and again.  And that familiarity became the foundations of a long term relationship that would result in buying concert tickets and future albums.  But now as sales dwindle (down by 29% in the last 5 years) music fans are investing in their favourite artists in time and attention rather than money.  We now operate in an attention economy.  YouTubers totally get this, artists and labels less so.

This is all so important to artists because YouTube is not suddenly going to start delivering dramatically better music stream rates, largely because labels and publishers haven’t had the courage to demand the requisite fair share it should pay.  Rights owners’ fears are understandable: one senior label executive recounted a YouTube negotiator saying ‘Don’t push us.  Right now you don’t like us much and we’re your friend.  Imagine what we’d be like if we weren’t your friend.’  Sooner or later bullying tactics need standing up to.  But that will not be a quick process, regardless of the steps currently being taken behind the scenes.

So in the meantime artists and labels need to figure out how to get more out of YouTube in a way that complements the other ways they make money digitally.  Put simply that means making more non-music video content to generate more viewing hours and thus more ad revenue from YouTube. Heck, they might even generate some YouTube subscription revenue some time.  But do it they must, else they’ll forever be leaving chunks of YouTube money on the table.

The irony of it all though is that the biggest reason of all for doing it isn’t even about the money.  Treating YouTube as a fan engagement platform rather than a marketing tool is currently the most sure fire way artists have of creating engaged fan bases at scale in the digital marketplace.

Ad Supported Is 56% Of US Streaming Revenue

Late 2014 a minor crisis emerged in the music industry, with major record labels at one stage looking like they were going to kill off freemium.  The outcome of the Freemium Wars was actually less dramatic, resulting instead in an effective continuation of the status quo.  The labels had however made it very clear to Spotify who held the whip hand.  Though their tones have softened, major label execs retain an at best sceptical view of free streaming.  The net result is that freemium has almost become the inconvenient streaming truth that no one really talks about.  However free is too big to ignore.  In fact free is much bigger than some would like to admit.

freemium what freemium

According to the IFPI ad supported streaming accounted for just 19% of all US streaming revenues in 2014, down from a high of 30% in 2011.  Which points to the success of subscriptions.  Except that those numbers ignore a major part of the equation: Pandora (and other semi-interactive radio services).  The IFPI has Pandora hidden away with cloud locker services, SiriusXM and a mixture of other revenues in ‘Other Digital’.  Extracting the semi-interactive radio revenues that count as label trade revenues wasn’t the most straight forward of tasks but it was worth the effort.  Once Pandora is added into the mix it emerges that 56% of US streaming revenues are from free, ad supported services.  While that share is down from a high of 66% in 2012 it remained flat in 2013 and 2014.  Which means that however fast subscriptions grew Pandora, Slacker, Rhapsody UnRadio and co grew even faster in order to offset the decline in on demand ad supported income.

us subscriber growth and pandora

Semi-interactive radio revenues grew by 40% in 2014 compared to 35% for subscriptions.  Subscriptions had grown much faster in 2013 (76% compared to 25%) but Pandora and co found their mojo again in 2014.  None of this is to suggest that subscriptions aren’t making great progress but it does show us that free is more than an inconvenient truth, it is both the most widely adopted behaviour and the largest revenue source in the US (which accounts for 48% of global digital revenues).

The music industry is beginning to get its head around the fact that the role of streaming as a retail channel (i.e. subscriptions) is always going to be smaller (in reach terms at least) than its role as a radio channel (i.e. free streaming).  This more accurate view of the US streaming market shows us that free is even more important than many thought.

Free streaming also has much bigger growth potential. The percentage of consumers that have the inclination to pay 9.99 a month for music is inherently limited, thus constraining subscriptions to a niche addressable audience.  Music radio listening by contrast has near ubiquitous reach.  Most significantly Pandora currently only represents about 10% of all US radio listening time.  The addressable market is much bigger and the vast majority of it remains untapped.

Spotify Plays The Big Numbers Game

Hot on the heels of Apple’s less-than-dazzling entrance into the streaming market Spotify made two big announcements: a further $526 million in funding and 20 million paying subscribers with 55 million free users. Not a bad retort.

spotify 20 million

Subscriber Growth Outpaced Free User Growth, Depending On Which Metric You Use

Between December 2014 and June 2015 added an average of 2 million free users a month and 1 million paid users a month. Although this meant Spotify’s free user base added twice as many users (10 million compared to 5 million) paid users grew faster in percentage terms, increasing by 33% compared to 22% for free.   These numbers can, and will, be taken to support both sides of the freemium argument and things are complicated by the fact that Spotify’s free user base is probably higher than 55 million. However the key takeaway is that based on the publically available numbers subscriber growth was faster than free growth in the first half of 2015.

Spotify Is Now Worth More Than Half Of the Entire Global Recorded Music Industry

Spotify was already the most heavily financed music service in history and it has nearly doubled its total investment in one single round, taking the total to more than $1.1 billion with a valuation of $8.5 billion. That translates to $55 of investment per subscriber. Or on a valuation basis $425 per subscriber which would take 3 and half years of continual subscription per subscriber to recoup in headline revenue terms. However as Spotify only gets 30% of revenue it would actually need 12 years of subscription per subscriber to generate $8.5 billion.

Of course VC funded company valuations are more about potential than they are realised value so the comparisons are slightly unfair. But given that $8.5 billion represents 57% of the entire global recorded music industry revenue in 2014 there are some pretty big assumptions being made.

Apple Music Is Still Likely To Prove A Fierce Adversary Even If It Is No Killer App Yet 

Make no mistake, Spotify has established itself as the global leader in its space and has good reason to feel confident. However Apple has so many structural advantages (owning the platform and billing relationships, massive addressable base etc.) that it is still likely to become the global streaming leader 3 years or so from now. (Assuming of course it ups its game from its entry product.) But that does not mean Spotify cannot be a success too.

Apple entered the download market when none of the existing stores had any meaningful customer base. Even with that supreme head start Apple still only managed around a 65% global market share of the download business. Granted most of the competitors were bit part players but in the streaming arena it is entering an established market with proven customer bases. This will not be a winner takes all market and I fully expect Spotify to be closer to Apple than Deezer (the current #2) is now to Spotify.

These are big numbers from Spotify that prior to Apple’s announcement it probably thought it would need even more than proved to be the case. Regardless, both sets of figures show that Spotify is geared up for a fight for supremacy. Game on!

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.

A Manifesto For The Future Of Free Music

In the thankfully long gone days of DRM downloads it could be fairly said that ‘music was born free yet everywhere it is in chains’. Now it is free of DRM and, for most consumers, of price also. Of course the majority of consumers have always spent most of their time listening to music for free via TV or radio. But the internet transformed free into something that was every bit as good as the paid for product. So yes, most people have always listened to music for free most of the time, but they listened to what broadcasters decided they would listen to. In the old model free music was something that would sate the appetite of the passive fan but was not be enough for the dedicated fan. Free music thus very clearly played a ‘discovery’ role for the core music fans. On demand free though has changed the equation entirely. For many consumers the free stream is the destination not the discovery journey. So 50 million YouTube views is no longer a marketing success but instead x million lost sales or paid streams.

For younger consumers the picture is particularly stark. 56% stream for free, 65% listen to music radio and 76% watch YouTube music videos. Compare and contrast to over 25s where the rates are 35%, 47% and 76%.   In short, free is more likely to be something that drives spending among over 25s because it is predominately programmed while among under 25’s it is less likely to do so because it is on demand.

Free needs recalibrating. Here are a set of objectives to help fix free, a Manifesto for the Future of Free Music:

  • Set the objectives: One of the problems with free is there is too little clarity around what purpose it is meant to serve. And this is because it is simultaneously serving multiple purposes: to monetize the masses (ad supported), to drive sales (discovery), to drive subscriptions (freemium). All three are worthy goals but unchecked each one also competes with the other. A consistent industry vision is needed.
  • Programme more: Free has a massive role to play in digital music, but it needs to better targeted. A super engaged music fan should not be able to sate their on demand appetite on free. In short, free music needs to be less on demand and more programmed. That is not to say YouTube or Soundcloud need to become Pandora, but they do need to explore meeting somewhere midway.
  • Use data to segment: It is not enough to simply say users can choose between different services, they services need to better use their data to determine who gets what experience within them. Someone who watches 20 YouTube music videos a day is clearly a target for a Music Key subscription. That person should not just be marketed Music Key, s/he should also have their free experience progressively dialled down to push them towards it.
  • Fix the models: Pandora is a highly viable ad business that happens to have a radio service built on it. There is a world of difference between Pandora’s ad business and Spotify’s. Spotify’s deals with the rights holders essentially preclude it from making free a viable business, which is fair enough. But it does create the unfortunate vicious circle of there never being a case for Spotify investing enough in ad sales infrastructure to drive up CPMs enough to boost ad supported revenue. Labels and publishers need to think hard about what tweaks may need to be made to business models if they want freemium services to be strong enough financially to drive a vibrant subscription market. Not fixing the models will only skew the market to the companies with ulterior business models who can afford to perpetually lose money on free.
  • Don’t give up on free fans: A generation weaned on free music will grow up craving more free music. Just because free dominates younger consumers’ digital lexicon now does not mean that it will inherently always do so. Don’t give up on the lost generation of music consumers with the default position of free.
  • Strike the right balance: This is simultaneously the most important and most difficult part to get right. YouTube, Soundcloud and Spotify’s free tier are legal alternatives to piracy. Turn back the dial too much on the legal sources and illegal ones will flourish again. However the fact that more than a third of free streamers use stream ripper apps to turn streams into downloads means that the distinction between licensed and pirated has long since blurred. Nonetheless the balance needs to be better struck, probably somewhere equidistant between YouTube and Pandora. Ultimately it will require lots of real time honing and perfecting to get the right mix.

Free music will always be part of the equation and it has become a key part of the music industry’s armoury. But there is a difference between a controlled burn and an out of control forest fire. The freemium wars have already accounted for some high profile scalps and more controversy will follow. Free will remain a crucial part of the landscape but it is time for a reassessment of its role and that must encompass all elements of on demand free, not just Spotify.

Zoe Keating’s Experience Shows Us Why YouTube’ Attitudes To Its Creators Must Change

It is easy to think of the internet as a mature medium, especially for those who were born into the internet era. However we are still at the earliest of stages. We are where radio was in the 1930’s and where TV was in the 1950’s: the first signs of the future markets are in place but the real maturation is yet to come. The greats of those early days, the Marconis and the RCAs, are now long gone but at the time they looked like they would rule forever. A similar long view should be taken to the internet. The dominant powers of the web (YouTube, Google search, Amazon, Facebook) may appear to have unassailable market leads but their time will come. Using more recent history, there was a time when AOL and MySpace looked irreplaceable. So why does all this matter to YouTube? The problem with absolute power is that it corrupts absolutely. YouTube, like those other dominant powers, has fallen victim to hubris. It is behaving like the unregulated de facto monopoly that it is. And in doing so it is taking its creators for granted. Right now that is bad for creators. Soon it may be bad for YouTube too. It Is Time For YouTube To Reassess It s Relationship With Content Creators Online video is truly coming of age. YouTube was one of the ice breakers and remains one the very biggest web destinations but the world is changing. YouTube has changed too of course, migrating skate boarding dogs, through music video to fostering a generation of YouTube stars like PewDiePie, Zoella and Smosh. But just as YouTube had to reinvent itself in the wake of the mid form revolution driven by Hulu et al so the time has come for another reinvention, but this one requires a change in business practices rather than product innovation. Most crucially YouTube needs to reassess its relationships with content creators and owners. When the first YouTube stars started to rise to prominence YouTube was almost positioned as a benefactor, giving the gift of a platform for these people to become stars. But now, a few years on, with millions of subscribers each, these stars are beginning to understand their real potential. In just the same way that a traditional TV star does not feel a debt of gratitude or a commitment to life long servitude to the TV channel that broke him or her, so YouTube stars are now beginning to reassess their options. The online video landscape though is dramatically less competitive than the TV landscape so options are limited. But where there is demand for change and no monopoly of supply of content, change will come. This is the context into which new video service Vessel has launched, offering YouTube stars cold hard cash payments and significantly bigger revenue shares, in return for giving just a few days of exclusivity. Be sure that few days window will change, but for now it is a low risk, high gain option for YouTube stars. Expect plenty more to follow Vessel’s lead. YouTube Is Abusing Its Position Of Absolute Power That should be where the story ends, well starts. But because the dominant internet companies are not subject to the same level of regulation as traditional companies they are able to abuse their power in order to try to maintain their strangle hold. YouTube found itself subject to extensive ire when it tried to foist a hugely restrictive contract on indie labels for its then forthcoming YouTube Music Key service. The indie sector was eventually able, via its licensing arm Merlin, to secure more favourable terms, but the same contract remains on the table for individual creators. Zoe Keating, an artist who sets the gold standard for DIY artists, has been a vocal advocate for YouTube channels as a revenue source. But now YouTube is trying to strong-arm her into signing what looks pretty much like that same original Music Key contract. Their demands include an effective Most Favoured Nation clause whereby anytime she uploads any music to the web she must upload it also to YouTube at exactly the same time. The contract also states a five year period and that failure to sign the contract will result in YouTube blocking both her channel and Keating’s ability (via Content ID) to get revenue from her own music uploaded without permission by others. The implications are:

  • Music must always be available free on YouTube first on the web
  • Artists must take a 5 year bet on streaming, even though there are massive doubts about its sustainability for artists

But it is the Content ID clause that is most nefarious. Content ID is not an added value service YouTube provides to content owners, it is the obligation of a responsible partner designed to help content creators protect their intellectual property. YouTube implemented Content ID in response to rights owners, labels in particular, who were unhappy about their content being uploaded by users without their permission. YouTube’s willingness to use Content ID as a contractual lever betrays a blatant disregard for copyright. Asymmetrical Conflict Zoe Keating is a rare talent and also a rare voice. She is willing to expose her entire digital music commercial life in a way very few artists are willing to. She is standing up to YouTube in a David and Goliath like manner but the deck is stacked against her because YouTube is able to abuse its de facto monopolistic position without any fear of regulatory intervention. If they get their way with independent music creators, expect them to take the exact same approach to other independent video creators in a bid to neuter the threat from disruptive new entrants like Vessel.  Rather than simply try to future proof itself against the emerging competition YouTube should focus on trying to be the best possible place for its creators to be to build prosperous careers. Instead it is trying to lock them in like prison inmates. Ultimately though this sort of action from YouTube reveals strategic hubris, arrogance and complacency. All of which are classic signs of an incumbent company teetering on the brink of disruption. As the Enron experience showed us, no company is too big to fail. And as my former colleague Michael Gartenberg used to say ‘cemeteries are full of irreplaceable people’.

Streaming Report Card 2014

2014 was the year streaming broke through to mainstream consciousness, not because of the marketing prowess of Spotify but because Taylor Swift decided to withdraw her content from the Swedish streaming heavyweight and other freemium services. It was a mixed year of momentous achievement and intensifying controversy, which makes it an opportune moment for an end of term report card.

Growth – 8/10

No complaints here. Impressive growth for both paid and free streaming with a likely combined annual growth of about 50% and total subscribers getting to about 35 million. Although there are some signs of slowdown this is to be expected as much of the addressable audience for the 9.99 price point is reached. In fact the growth slowdown was less pronounced than expected in some markets. If it hadn’t been for the fact that download sales for the year will be down about 10% this would have been a 9/10.

Transparency – 2/10

Two years ago I asked the CEOs of 10 leading streaming companies what the coming years would hold. Unfortunately for 5 of them it meant looking for a new job. One thing most were in agreement on however was the need to introduce far greater transparency for artists. Two years on and the issue is every bit as problematic. For the most part the discontent has been voiced by smaller artists or those later in their careers, but not by frontline artists in their prime. Until last week that is, when Ed Sheeran told the BBC that it is ‘fact’ that labels are holding money back from artists. Some time soon, some time very soon, labels are going to have to get on top of this if they want the model to work.

Platform – 5/10

I had high hopes for Spotify’s app platform, it looked like it was heralding the dawn of the ‘music platform’ that the digital market has needed, well, forever. Unfortunately label wrangling ensured that Spotify was not able to get the deals to allow app developers to monetize their apps so the venture was effectively still born, save for the highly credible efforts of some traditional media brands, such as the BBC, Now! And Deutsche Grammophon who didn’t have to worry about making money from the apps. Luckily the streaming companies haven’t given up on the ‘streaming as a platform’ vision and a host of integrations with the likes of Bandpage and PledgeMusic have the potential to help artists transform streaming cents into digital dollars.

Pricing – 3/10

I’ve been banging the pricing drum for so long the stick has broken. Unfortunately there was pitifully little progress in 2014, with label fears of cannibalising 9.99 dominating thoughts. On the plus side there is a huge amount of negotiating activity taking place right now and that should bear fruit in 2015. Expect Apple to try to get to market with the same 7.99 that YouTube’s Music Key is currently in market with (and expect that short term promotion for YouTube to eventually become permanent). And if 7.99 is the new 9.99 then prices will have to cascade. 4.99 will be the new 3.99, 3.99 will become 2.99 and so forth. And there remains the super urgent need for PAYG pricing leveraging in app payments. I predicted pricing innovation in 2012 and 2013 and it didn’t happen. Here’s to third time lucky.

Global expansion – 6/10

Deezer had already set a great precedent for rolling out into a vast number of global territories and Spotify played an admirable game of catch up in 2013 which continued with another five new countries in 2014. Rdio’s acquisition of Indian streaming service Dhingana was another interesting move.  Meaningful revenue is yet to follow in these Rest of World markets though – the US and Europe accounted for more than four fifths of global streaming revenue in 2014.  But the foundations have been laid and that in itself is an important step worthy of credit.

Sustainability – 4/10

The ripple effects of Taylor Swift’s windowing antics will be felt throughout 2015 with countless other big artists and their managers already making it very clear to labels that they want to do the same. The sooner Spotify can agree to having the free tier treated as a distinct window the sooner the streaming space can start rebuilding.   The whole ‘changing download dollars into streaming cents’ issue continues to haunt streaming though. And with streaming services struggling to see a route to operational profitability the perennial issue of sustainability remains a festering wound. The emerging generation of artists such as Avicii and Ed Sheeran who have never known a life of platinum album sales will learn how to prosper in the streaming era. The rest will have to learn to reinvent themselves, fast, really fast.

Overall Streaming gets a 6/10 for a year that saw huge progress but also the persistence of perennial problems that must be fixed for the sector to succeed.

Why It Is Time To Make YouTube Look Less Like Spotify And More Like Pandora

2014 has been a dramatic year for the music industry and may prove to be one of its most significant. The brief history of digital music is peppered with milestones such as Napster rising its head in 1999, the launch of the iTunes Music Store in 2003, Spotify in 2008. The 2014 legacy looks set to be more nuanced but equally important: it is the year in which streaming started to truly transform the music industry. The significance though lies in how the music industry is responding. With download sales tumbling, royalty rates still being questioned, and Taylor Swift’s hugely publicised windowing, the music industry is taking a long hard look at what role streaming should play. Spotify and Soundcloud will find themselves in the cross hairs, but there is also a case for redefining YouTube’s remit too.

Don’t Throw Out Freemium With the Windowing Bathwater 

Swift’s windowing move centred around free streaming. If Spotify had been willing to treat the free tier as a separate window from its paid tier, the odds are it would have got ‘1989’. Spotify’s argument that weakening the free tier could affect their ability to convert is logical. But ultimately the purpose of the free tier is to persuade people to pay to stream, not to deliver a fantastic free experience. I first made the case for windowing back in 2009 and I remain convinced it will be crucial to long term success.

By playing an all-or-nothing negotiating game freemium services risk being left with the latter. And it would be a tragedy if freemium got thrown out with the windowing bath water. Windowing will quite simply make free tiers more palatable. Windowing can drive huge success. Look at Netflix: with 50 million subscribes gloably Netflix has the traditional broadcast industry running scared yet is far more heavily windowed than Spotify – how many new movies do you find on Netflix?

One Rule For YouTube Another For The Rest

But the core problem is that Spotify does not exist in a vacuum. While Swift windowed Spotify her videos stayed on YouTube and Vevo. Unless YouTube is treated with a similar approach to other free services then any windowing efforts will simply drive more traffic to YouTube rather than drive more sales or subscriptions. 5 years ago a YouTube stream could be seen as driving sales, now a YouTube stream drives another YouTube stream.

Among the Top 10 fastest growing YouTube channels (in terms of views), half are music. More people are streaming more music on YouTube than ever. The reason YouTube remains untouchable has much to do with the fact labels still see it as a promotional vehicle despite the fact it has become a fully fledge consumption platform. Without doubt YouTube plays the discovery role for youth that radio does for older generations. But it is also the end point for youth.

Time For A New Role For YouTube

So what is the solution? Simple. If YouTube is the radio equivalent for youth, make it look and feel more like radio, not like Spotify premium with video. Instead, make YouTube look like Pandora with video. If YouTube is all about promotion then swap out unlimited on demand mobile plays for DMCA compliant stations. Let any user search and discover a new song but once they have discovered it the next few music videos are automatically selected related videos.

I remember Beggars’ Martin Mills quoting music industry veteran Rob Dickens:

‘If you play what I want when I want I’ll accept it is promotion. If it is what you want when you want it is business.’

That is at the core of what makes a streaming service additive versus substitutive. This is why Pandora stands out as a complement to ‘sales’ revenue and why YouTube no longer can. If YouTube’s core value to the music business is still discovery then this approach is how that role can be protected without damaging the ability of subscription services to proposer.

Do Not Conflate Music Key With YouTube

Now of course, YouTube has its own subscription service too in the form of Music Key, which is great: YouTube is a hugely welcome addition to the subscription market. But this does not mean YouTube music videos should be free on demand to all. Only 3% of UK and US consumers say they would pay for Music Key (and consumer surveys typically over report on intent to purchase).   Instead, YouTube’s free on demand music videos should be only available for users that register for Music Key. This would be Music Key’s freemium base, not the entire installed base of YouTube users.

With on demand free music it is all about the conversion path: how many of those consumers that listen for free are likely to pay. With YouTube’s 1 billion users it is a tiny per cent so there is little business rationale for letting them take the Ferrari out for a test drive when they are only ever going to get the bus.

Is 9.99 too expensive for most free music users? Of course it is. Should PAYG options be added in to the mix? Yes, absolutely. But none of those will work unless the music industry takes a consistent and fair approach to freemium.

Turning YouTube into a video enabled Pandora is clearly a controversial proposal and it will have huge opposition. It may even cause some meaningful disruption in the mid term, but unless equally meaningful change is made the music industry will remain locked on course to a future in which subscription services will never be able to realise their full potential.