Why Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

BBC Radio One DJ Zane Lowe just announced a shock move to Apple. For the non-Brits and non-Anglophiles Zane Lowe is arguably the most influential radio DJ in the UK and is renowned for being a tastemaker with an eclectic pallet. His left of centre focus and his commitment to supporting and breaking new acts has allowed Radio One the freedom to be unashamedly mainstream in much of its other output. So why does this all matter for Apple? While it is not yet clear what sort of role Lowe will assume at Cupertino it is a move bristling with significance and a clear statement of intent from Apple.

Fixing the Tryanny Of Choice

The Tyranny of Choice remains one of the biggest challenges for streaming services, namely how to make sense of 35 million songs. It has been challenge enough for the Aficionados at the vanguard of the first wave of subscription service adoption. It is a problem of far greater proportions for the next wave of subscribers, the later adopters who do not have the expertise nor intent to invest great effort into discovering new music. It is not as simple as ‘lean forward’ versus ‘lean back’. But instead gradations between the two. Beyond Apple’s inevitable Spotify-subscriber win back efforts, these early followers will be at the core of Apple’s streaming strategy.

The 6th Of March: Man Versus Machine

Spotify showed its own music discovery statement of intent when it acquired the Echo Nest on the 6th of March 2014. Zane Lowe’s final Radio One show will broadcast on the 5th of March 2015, leaving him free to join Apple on the 6th of March 2015, yes, 1 year to the day after the Echo Nest. Coincidence? Perhaps. Either way, the symmetry of Spotify making its bet on algorithmic curation and Apple making its bet on human curation is unavoidable. It is man versus machine, with Apple for once coming down on the side of flesh and blood over technology.

However expensive Lowe’s salary might be, it will be far short of the millions Spotify paid for the Echo Nest, which had burned through $25.6 million of investment to get to that point. Yet there is every chance that Lowe, used properly, could deliver more value to Apple’s music discovery than the Echo Nest can to Spotify. Don’t get me wrong, the Echo Nest is a fantastic outfit with some of the smartest music analytics people going. Along with Pandora’s Music Genome Project the Echo Nest is as good as it gets for music discovery algorithms. In fact when it comes to implementation and cool data driven projects, the Echo Nest leads the way. But there is a limit to how far algorithms can fix the problems posed by the Tyranny of Choice.

Filter Bubbles

As Eli Pariser identified in his excellent Ted Talk ‘Beware Of Filter Bubbles’ there is a risk that recommendation algorithms actually narrow our choice and limit discovery. That by continually refining recommendations based on previous taste and choice they make our world views increasingly narrow and ultimately boring. Music discovery is not simply about finding music that sounds like other music we already like. It is also about serendipitous moments of wonder when something comes at us from the left field and leaves us breathless. That is the antithesis of ‘here are three other bands like this you might like’.

Of course it would be unfair to suggest that the Echo Nest is not sophisticated enough to engineer serendipity and surprise into its discovery system. (And Spotify is beginning to double down on human curation too). But the ability of a stack of code to perform this task versus an expert tastemaker is significantly less. And, another ‘of course’, it is impossible to definitively prove this one way or the other because ultimately the results are subjective and not properly measureable. Because one person’s awesome discovery is another’s sonic tripe. But that is entirely the point of the whole debate.

People Don’t Want Discovery, Well They Don’t Think They Do

There is a fundamental problem with algorithmic discovery: people don’t want it. In numerous consumer surveys I have fielded for numerous clients, respondents show little or no interest in discovery or recommendation features. Yet in the same surveys the vast majority of them state that they regularly listen to music radio, which is of course recommendation and discovery. The big difference is that it doesn’t feel like it. Instead it is an inherent part of the DNA radio. It is not an awkward artificial appendage that most people just don’t get.

Earned Trust

During his Monday – Thursday 2 hour show Lowe will play 20 to 30 or so tracks. Listeners know and understand that these are the tiny tip of the iceberg he has sifted through that week, that these are the songs he has decided are the ones that need to be heard. And when he announces his ‘hottest record in the world’ they know it is probably going to be something pretty special, even if they might not actually like it. His audience appreciates him that way because he earned their trust over weeks, months and years. That is the asset Apple are buying. Even if he has to earn that trust all over again with a new audience, that is the model.

If Lowe was simply to push 20 to 30 songs a day to Apple users (whether that be on a radio show on iTunes Radio, as an iTunes podcast or as an iTunes playlist, or all of the above) the odds are in favour of some or most of those resonating with a large swathe of the target audience. Even if just one track blows away just a quarter of the audience each day, the impact of one fantastic discovery will have more impact than a torrent of ‘sounds a bit like’ recommendations.

30% Not 80%

An Amazon Prime executive recently said that when commissioning shows he didn’t want hits that 80% of his audience quite liked, he wanted shows that 30% of his audience loved. That is what discovery is all about. Not being content most of the time, but being blown away some of the time.   Zane Lowe is not going to solve Apple’s discovery problem all by himself, but the hire shows that Apple is putting its money on moments of human magic being the nitrous oxide in its music discovery engine.

What $500 Million And Jay-Z Say About the State Of Streaming In 2015

2014 was a big year for streaming, 2015 will be bigger. Apple entering the fray is the catalyst. Apple enters a market when it is ready for primetime. Apple lets the pioneers establish the market, prove the model and create consumer mindshare before it comes in and most often assumes a leadership role. Apple is certainly leaving it later than normal with subscriptions but it is still the same classic follower model, and the marketplace knows it. Hence Jay-Z’s reported €50 million interest in Norwegian streaming service WiMP and Spotify’s reported pursuit of a further $500 million. The first move is ‘let’s get in a market Apple is about to make huge’ and the second is an Apple war chest

Spotify’s 2014 growth was little short of spectacular, especially its December surge. But it is still not enough to IPO on. Not because 15 million subscribers in itself is not a huge achievement – it is – but because the market place is holding its breath, waiting to see what Apple does. Apple remains the world’s largest digital music company and is on the verge of becoming the world’s leading shipper of smartphones. But most crucially Apple has the iTunes ecosystem and a deep, deep understanding of the world’s most valuable content consumers. If anyone can take subscriptions to the mainstream Apple can. And in the process it will likely take back a chunk of the iTunes Music buyers that Spotify ‘stole’. Which is not to say that Spotify will not be able to continue to grow, but instead that rapid growth will be harder when Apple is snapping at its heels.

Pricing will be key, as will the role of free. If Apple succeeds in bringing the standard price point down to 7.99 (and perhaps a subsidised price point of 4.99) then a whole new swathe of users will be brought into the marketplace. Still not the mainstream, but certainly getting towards the higher end of the mainstream that Netflix competes in. And certainly a bigger marketplace than the current one. If Spotify finds its free tier heavily capped then it will lose much of its customer acquisition strength, which may force it to spend more heavily on traditional acquisition tactics like app marketing and TV ad spots.

In this expanded marketplace a $500 million war chest would give Spotify the ability expand into new territories, double down on churn management and market in core markets. The intent will most likely be to weather the Apple storm and to be in solid enough shape the other end to IPO. As we have seen in the smartphone and tablet business, Apple can be leader but still leave plenty enough space for a vibrant and competitive marketplace. That is the scenario Spotify, Deezer, Rdio, Rhapsody and Jay-Z’s new plaything-to-be WiMP will be hoping for.

Spotify, Apple, YouTube And The Streaming Pincer Movement

The Financial Times yesterday reported that Apple is planning on integrating Beats Music into an iOS update as early as the first quarter of 2015. Which means the entire base of Apple’s 500 odd million iOS devices suddenly become Apple’s acquisition funnel. As I wrote back in May, this was always the strategy Apple was most likely to pursue. Of course being available to 500 iTunes customers is not anything like converting them all. Just ask U2. But it does give Beats Music – if Apple keep the name – a reach like no other subscriptions service on the planet. Especially if Apple is willing to roll out free trials to them all.   Currently just 8% of consumers in the US and UK have experienced a subscription trial, which translates into approximately 30 million people. Even if Apple does not quickly succeed in taking subscriptions to the mainstream it is about to take subscription trials to the mainstream, which is the crucial first step.

streaming pincer

Add this to YouTube’s recently announced Music Key subscription service, which should be aspiring to get 5 million or so subscribers in its first year to be considered a success, and a picture emerges of Spotify squeezed in the middle of a streaming pincer movement (see figure). In the near term Apple will be hoping to win back a lot of its lost high spending iTunes customers from Spotify. Longer term it will be looking to grow the market.

None of this means anything like the end for Spotify. Instead it will force Spotify to up its already high quality game. Competitive markets thrive far more than ones in which one or two key players dominate. It could mean that Spotify’s potential flotation or sale value is tempered for a while, which could push out Spotify’s exit timelines until it has proven its worth in a more competitive marketplace. But Spotify has the distinct advantage of being a) the incumbent and b) a pure play. Spotify, Deezer and Rhapsody are all in this game simply for music. That means each and every one of them has a laser focus on making the best possible music service proposition they can. The same is quite simply not the case for either Apple or YouTube. They will need to leverage that asset in their conversations with rights holders to ensure they are given more flexibility in terms to drive true marketplace innovation and experimentation.

subs numbers 11 14

But Spotify et al would be foolish to underestimate the scale of the challenge they will face. Apple has the largest installed base of digital music buyers on the planet (see figure). As creditable as Spotify’s 12.5 million paying subscribers is, it pales compared to Apple’s 200 million iTunes music buyers. Also Apple has many additional assets at its disposal. Integrating into iOS is just one tactic it can employ. Spotify et al depend on Apple’s platform for much of their survival. But there is no reason Apple has to play truly fair. Amazon set a platform precedent with its treatment of Hachette that Apple will have been watching closely. Don’t expect anything too obvious, but little tricks like tilting app store optimizing in favour of Beats over Spotify can go a long way.

Things are hotting up, no doubt. But Apple’s arrival in the subscription market will take the sector to a whole new level, and a high tide should rise all boats.

What U2’s Apple Deal Says About The Future Of The Album

If you somehow missed it, Apple just gave 500 million iTunes users U2’s latest album for free.

Album sales are declining, both because people are buying less music and because fewer people are engaging with albums.  The music industry has gone full circle. In the 50’s and the 60’s it was all about singles.  The 80’s and the 90’s were the glory years for the album but ever since the rise of the Internet music fans have been moving progressively away from albums to single tracks again.  We are living in the age of the playlist, not the album.  So for a band like U2, who already are way beyond their music sales peak, selling an album was always more about getting bums on seats at concerts, where they make more money than ever.  Their last album sold poorly so they won’t have been expecting much from this one.  Suddenly Apple transformed it into a global hit and everyone’s a winner.  Sure Apple will have had to pay a heft chunk of cash but they got a nice TV ad out of it too.  Considered as a marketing expenditure this is genius.  It instantly creates the most widely distributed album in history and in doing so creates equally instant headlines.

The album is not dead as a creative construct, far from it.  But as a product it is in a death spiral.  It needs reinventing if the album loyalists are going to be prevented from jumping ship.  They can’t be taken for granted for ever.  What should that reinvention look like?  Well it should include video, lyrics, dynamically updated content, exclusive content, live streams, artist chat…in short everything the 21st century artist has got to give, all in one place.  Artists like the storytelling capabilities of the album.  Imagine how much more storytelling you could do with the addition of visuals, interactivity and text.  Bjork got it.  Even Lady Gaga got it.  Now it’s time for the industry to get it, unless it wants the album to be consigned to a long term future as an Apple freebie.

Why Digital Music Services Always Steal Each Other’s Customers

The next five years will be one of the music industry’s most dramatic periods of change. The last ten years might have been disruptive but the change that is coming will be even more transformative. By 2019 70% of all digital revenue globally will be from on-demand services, representing 40% of total music revenues. It will be a shift from the old world and the ‘old new world’ to a brave new one. The CD and the download will decline at almost the same rates: physical revenue will be 43% smaller while downloads will be 40% smaller. In some ways the CD has less to worry about than the download. The CD has the protection of a vast installed base of players across the globe and growing niches such as deluxe box sets. The download though depends massively upon Apple’s devices, and the tide over at Cupertino is turning.

One of the concerns of the shift to streaming has been revenue cannibalization. It is no new phenomenon. The paid digital music market has still not truly broken out to the mainstream. While the likes of YouTube and Pandora clearly have mass market reach, music download stores and subscription services do not. Each at their respective times have appealed to the same higher spending and tech savvy end of the music buyer spectrum.

customer transition

In the 1990’s and early 2000’s Amazon’s online CD store was the home of the globe’s most tech savvy music aficionados. Then Apple came along and poached its iTunes customers directly from Amazon because those same CD buyers were also buying iPods. Then Spotify came along and started poaching Apple’s most valuable customers via Apple’s App Store – the chink in the armour of Apple’s otherwise closed ecosystem.

Now Apple and Amazon are both setting out on their own cloud strategy journeys and each will be hoping to win back a chunk of their lost customers. Apple’s recent elevation of Beats Music to one of the family of ‘Apps Made By Apple’ gives the first hint of what the company can do to ‘encourage’ its users away from other streaming services.

The next three years or so will be a fiercely contested battle for the hearts and minds of the digital music aficionado that will illustrate the strengths and weaknesses of the technology ecosystems of Apple, Amazon and Google. Yet while they all fight to win or win back customers, the attention once again remains firmly on the top end of the market. For as long as music services focus their efforts on the most valuable music customers, the mainstream will continue to be catered by low ARPU ad supported services. And for as long as that happens the evolution of digital music will continue to be one of the latest generation of services stealing the customers of the last.

How The iPhone 6 May Be The Start Of Apple’s ‘Back To Music’ Strategy

With the launch of its new iPhones just round the corner Apple could be forgiven for feeling rather more positive about its smartphone outlook than it has for a while. The sheen has worn off its number one competitor Samsung, with cheap Chinese and Indian competitors seriously eating into its market share and the investor community realising that the smartphone business is actually a lot like the music business: you are only as good as your last hit. But if Samsung is a major label, measured solely on market share and sales, then Apple has managed to partially maintain the role of big indie, where the quality of its output is just as important. Apple’s Eddie Cue believes that Apple are on the cusp of product strategy renaissance. Crucially, Apple’s CE product portfolio has become wide enough now, especially with the acquisition of Beats, to allow Apple some innovation freedom. I think this could translate into an iTunes phone before the end of 2015.

The Mainstreaming of Apple’s Customer Base

Apple’s customer base has changed from the vanguard of the tech savvy early adopters to a much broader group including large swathes of early followers, later adopters and even mass market laggards. The iPhone was primarily responsible for the transformation and while it has brought undoubted success has also caused Apple problems. As a company with a small product number of products in its portfolio, especially within the mobile category, Apple has never been able to play the ‘Hero Phone’ strategy of phone specialists like HTC and Samsung. So while those companies have been able to sway those all-important investors with small selling but super-specced uber phones, Apple has, until the launch of the 5C, had roll its entry and hero devices into one single new product. But even the combined strategy of the 5C and of targeting lower end consumers with older models still leaves Apple little room to be truly adventurous with its product strategy, for fear of alienating its mainstream users.

As I wrote about previously, the acquisition of Beats presents Apple with the opportunity to innovate with more freedom in the Beats product ranges and then take the innovations that work best there back into the Apple product portfolio. Even if Apple more tightly harmonizes its two divisions’ product ranges, Apple will still be left with a larger and more segmented product portfolio, giving it more ability to super-serve important niches. This is where Apple’s music device strategy renaissance can come into play.

 

itunes phone

Music Changed Apple

When Apple launched the iPod in 2001 it was the start of a musical journey for Apple. I remember attending Apple analyst briefing sessions in those early iPod days and being the only one there interested in this small little side project. Of course over the following years the iPod, with music at the core, took Apple’s product strategy in an entirely new direction. You might say that music changed Apple. But even by 2004 the winds of change were stirring: the launch of the iPod Photo with its colour screen was the first tentative step towards turning Apple’s portable device strategy from music to something much bigger. The iPhone and iPad are the current culmination of that shift, multimedia devices that do many things for many groups of people. Not one thing for one group of people in the way the iPod did.

The strategy has been inarguably successful but just as music stopped looking like it mattered so much, it started biting Apple in the behind. Spotify and other streaming subscription services started stealing Apple’s best iTunes music customers, turning them from downloaders into streamers. That in itself should have been an irritation rather than a problem. But these most valuable of customers now have much less reason to stay with Apple when the buy their next phone because their Spotify playlists will work just as well on Android as they will on iPhones.

Apple’s New Music Strategy

Apple needs a stand out music value proposition to win them back. A subscription service built around Beats Music and iTunes Radio will be the fuel in the engine but will not do enough on its own quickly enough. While Beats Music may have different features from Spotify the fundamentals are essentially the same (millions of songs, c $10 a month). So iPhone owning Spotify customers are unlikely to switch straight away just because it’s there.

Apple needs more. That ‘more’ can be delivered in two ways:

1. Price
2. Device

Apple has always been in the business of loss leading with music to sell hardware. Once that was a growth strategy now it assumes the urgency of defence strategy. That should persuade Apple to heavily subsidize the price of a subscription. In the near term this could be 3 month Beats Music trial plus a discounted $5 subscription offer at the end of the trial free with one of the forthcoming iPhone 6 models. Longer term it should translate into something much more ambitious.

 

The iTunes Phone or The Beats Phone?

Before the end of 2015 I expect Apple to launch a music specialist phone. Whether that is branded as an iTunes Phone or a Beats Phone will depend on who wins the internal branding wars at Apple, but expect it to be one of those labels. The device will be squarely targeted at the music aficionado and will crucially combine the music subscription and device into a single purchase by hard bundling a music subscription into the device cost. It will likely also be squarely focused on pushing Beats hardware sales so it may be both bundled with a Beats Bluetooth headphones and also be the first iPhone without a 3.5mm stereo jack, instead offering Bluetooth only.

The broad feature set could look something like this:

• Hard bundled Beats Music subscription
• Unlimited iCloud access
• Ad free iTunes Radio
• Top level UI music apps
• Bundled Beats Headphones
• Bluetooth only headphone support

This strategy is Apple’s best shot at reclaiming its wavering aficionado fan base but be in no doubt, it would also be a game changer for the digital music space by once again tying the importance of music experiences to device not just app.

New MIDiA Research Blog Post on Content Connectors

We’ve just published a new report and blog over at MIDiA Research.  You can read the blog post here: New Report – Content Connectors: How the Coming Content Revolution Will Change Everything

The report topic is an issue I started developing on this blog here and here.  The report includes extensive consumer data as well as analysis of revenue, shipments and content strategy.

Normal service on Music Industry Blog will resume next week following our summer break.

Media, Technology and The Innovator Hegemony

We are at critical juncture in the evolution of digital content. Digital consumption of content, spurred by accelerating adoption of smartphones and tablets, is crashing towards the mainstream, while traditional revenues and business models continue to buckle under the strain. Legal and business disputes between Amazon and book publishers, and Google and independent record labels are small but crucial parts of this process. This period of disruptive flux is giving way to a new era of content distribution in which a few large technology companies are assuming the role of distributor, retailer, channel and playback device as one single package. The emerging new world order is defined by concentration of power, reduction of competition and the subservience of traditional media companies. The 2000’s witnessed the ascendancy of digital innovators, now we are arriving at a new chapter: the Innovator Hegemony, the era of the all powerful, unregulated technology superpower.

Free Is Now the Business Model of Choice

We are mid way through the shift from the distribution era of selling units of stuff, be they newspapers, CDs, packaged games, books or DVDs, to the consumption era where consumers increasingly value access over ownership. This shift manifest itself as a meltdown of the traditional media industries and associated retailing channels. Out of the ruins of these crumbling nation states Amazon, Apple and Google have started to construct sprawling digital content empires. Until relatively recently it looked like Apple was the only company that had learned how to make digital content works as a business, albeit as a loss leading one. But during the last year the market has inevitably buckled under the pressure of Amazon’s willingness to give away access to content as bait for free shipping and Google’s endless appetite for giving content away for consumer data.

Amazon and Google realized they were never going to win if they played the game by the Apple’s rules, which had been transplanted from the analogue age, namely charging for ownership of content. Instead they have opted for the digital zeitgeist: free, or at least feels like free. It is beginning to look like iTunes was a historical anomaly, an isolated outpost for distribution era practices in the digital realm. What Amazon and Google have done is pick up the baton Napster dropped in the early 2000’s and they have run with it.

The Innovator Hegemony

There is little reason media companies would want to cede so much power and pay the inexorable price of devaluing digital content to the price point of zero. They do so because they allowed their partners to get too powerful. This is the Innovator Hegemony. Apple, Google and Amazon all used content as a stepping stone towards achieving global scale, scale that once gained they used to swap the balance of power. Labels, publishers, authors and artists suddenly found themselves beholden to companies they had helped succeed and that success now used against them.

When Competition Legislation Protects Monopolistic Behaviour

But there is an issue of even greater significance at play: the inability of market regulation to appropriately counter the increasingly monopolistic behaviours of the big technology companies’ content moves. Anti-trust and competition legislation neuters media companies but leaves technology companies to operate with near impunity. Dating back to the analogue era when media companies were all powerful, anti-trust legislation was designed to prevent media companies colluding and entering into monopolistic behaviour. But now that technology companies own the platform control points that media companies depend upon in the digital realm, anti-trust and competition legislation has the unintended consequence of consolidating the power of the technology monopolies by stymying media companies.

The three big technology companies have a greater concentration of influence and market share in digital content than any single media company did in the analogue era. Amazon, Apple and Google have become a single, effective monopoly in each of their respective marketplaces. Thus anti-trust legislation currently has the unintended consequence of reinforcing market concentration.

Matters are not helped by the fact that media companies have become something of a busted flush at the legislative level, having over reached with copyright and anti-piracy lobbying efforts. The dramatic collapse of SOPA and the failure of Hadopi illustrate how media companies have lost legislators’ hearts and minds. After years of media industry ascendency the lobbying balance has swung towards the technology companies who are winning over key influencers such as the European Commissioner Neelie Kroes.

Platforms As Integrated Monopolies

Right now Amazon and Google are testing the boundaries, seeing what they can get away with before they are reined in. Amazon is unashamedly abusing its platform to hurt sales of book publishers such as Hachette and Bonnier, while Google is equally brazenly threatening to turn off monetization of music videos of labels that will not sign its overweening YouTube contract.  Interestingly both Amazon and Google appear to be testing just how forceful they can be with the independent ends of the media business spectrum.  These actions show us how vertically integrated platforms have a tendency to become internal de facto monopolies with effectively limitless internal power. Power that corrupts, and that ultimately turns the ideologies of these once idealistic disruptive start ups into police states where dissension is no more tolerated than it is in North Korea.

It is time for media companies and policy makers to decide whether they are brave enough to stand up to the Innovator Hegemony. Every content company still has the nuclear option of pulling content from the services but few will ever dare to do so – the German YouTube stand off a rare exception. And therein lies the problem, media companies already feel they cannot exist without the big technology partners and the tech companies know it. Without appropriate macro checks and balances the outcome will always be the timeless, asymmetrical roles of bully and bullied.

Did Anyone Else Notice Amazon Just Launched A Hard Bundled Music Phone?

Amazon’s long anticipated Fire smartphone was launched to much fanfare last night and includes a host of features designed to make it stand out from the pack.  But one detail that seems to have slipped beneath the radar is that, for now at least, it includes a year long access to Amazon Prime, which following last week’s music announcement, includes free access to an ad-free on demand streaming music service.

What this means is that Amazon have launched a smartphone that gives you a year’s worth of unlimited free music.  Six years ago when Nokia tried to do the same with Comes With Music the concept was ground breaking and looked set to change the future of digital music.  But Nokia’s flawed implementation of the proposition scared most of the marketplace away from the device bundle model.  Beyond Oblivion nearly made it work before folding, and its subsequent offspring Boinc and Yonder are each still trying to prove the model.  Rok Mobile are another new entrant.

I still maintain that the device bundle is the best way Apple can extract full value from its recently acquired Beats Music asset but for now all eyes will be on Amazon to see if the model is finally ready for prime time (pun sort of intended) now that it has been sneaked in through the back door.

YouTube, Record Labels And The Retailer Hegemony

YouTube (i.e. Google) has put itself in the midst of a music industry conflict that may yet turn into a much needed process of soul searching for the labels as they weigh up whether YouTube’s contribution to their business is net positive or net negative.  The controversy surrounds the imminent-ish launch of YouTube’s premium subscription service and the refusal of some independent labels to sign the terms Google is offering them.  Whereas normally this would just result in a service launching without a full complement of catalogue, in this instance YouTube is also the world’s second largest discovery platform after radio.  YouTube execs have been quoted as stating that labels that do not sign their terms will have their videos blocked or removed.  Exactly from where (i.e. the main YouTube service, or the premium offering) remains a matter of conjecture with both sides of the debate more than happy to allow the ambiguity cloud the debate.    But the fundamental issue is clear either way: YouTube has become phenomenally powerful but delivers comparatively little back in terms of direct revenue and is now happy to flex its muscle to find out who is really boss.

The Retailer Hegemony 

Google’s stance here fits into a broader phase in the evolution of digital content, with the big tech companies (Amazon, Apple, Google) testing how far they can push their content partners in order to consolidate and augment their already robust positions.  It fits into the same trend as Amazon making life difficult for book publishers Hachette and movie studio Warner Bros.  The big tech companies are becoming the three key powerhouses of digital content and each is fighting to own the customer.  Media companies are becoming collateral damage as the new generation of retailer behemoths carve out new territory

The record labels, indies included, have to take much of the blame here.  They let YouTube get too big, and on its terms.  The big labels had been determined not to let anyone ‘do an MTV again’ and yet they let YouTube do exactly the same thing, getting rich and powerful off the back of their promotional videos.  But this time YouTube’s resultant power is far more pervasive.

youtube subs impact

Stealing The Oxygen From The Streaming Market

Labels are beholden to YouTube as a promotional channel.  They have turned a blind eye to whether its ‘unique’ licensing status might be stealing the oxygen out of the streaming market for all those services which have to pay far more for their licenses.  The underlying question the labels must ask themselves is whether YouTube’s inarguably valuable promotional value outweighs the value it simultaneously extracts from music sales revenue.  Indeed 25% of consumers state that they have no need to pay for a music subscription service because they get all the music they need for free from YouTube (see figure).  This rises to 33% among 18 to 24 year olds and to 34% among all Brazilians.

Reversing Into Subscriptions Is No Easy Task

Of course the aspiration here is that YouTube is finally going to start driving premium spending, but reversing into a subscription business from being a free only service is far from straightforward.  It is far easier to make things cheaper than it is to raise prices, let alone start charging for something that was previously free.  Add to the mix that free music is not exactly a scarce commodity and you see just how challenging YouTube will find entering this market.  Indeed, just 7% of consumers are interested in paying a monthly fee to access YouTube music videos with extras and without ads.  The rate falls to just 2% in the UK.

The counter argument is that only a miniscule share of YouTube’s one billion regular users are needed to have a huge impact.  But if the price the music industry pays to get there is to kill off the competition then it will have helped create an entity with such pervasive reach that it will truly be beholden unto it.  If the music industry has hopes of retaining some semblance of power in this relationship, it must act now.