10 Trends That Will Reshape the Music Industry

The IFPI has reported that global recorded music revenues have hit $19.1 billion, which means that MIDiA’s own estimates published in March were within 1.6% of the actual results. This revenue growth story is strong and sustained but the market itself is undergoing dramatic change. Here are 10 trends that will reshape the recorded music business over the coming years:

top 10 trends

  1. Streaming is eating radio: Younger audiences are abandoning radio for streaming. Just 39% of 16-19-year olds listen to music radio, while 56% use YouTube instead for music. Gen Z is unlikely to ever ‘grow into radio’; if you are trying to break an artist with a young audience, it is no longer your best friend. To make matters worse, podcasts are looking like a Netflix moment for radio and may start stealing older audiences. This is essentially a demographic pincer movement.
  2. Streaming deflation: Streaming music has allowed itself to be outpaced by inflation. A $9.99 subscription from 2009 is actually $13.36 when inflation is factored in. Contrast this with Netflix, for which theinflation-adjusted price is $10.34 but the actual 2019 price is $12.99. Netflix has stayed ahead of inflation; Spotify and co. have fallen behind. It is easier for Netflix to increase prices as it has exclusive content, but rights holders and streaming services need to figure out a way to bring prices closer to inflation. A market-wide increase to $10.99 would be a sound start, and the fact that so many Spotify subscribers are willing to pay $13 a month via iTunes shows there is pricing tolerance in the market.
  3. Catalogue pressure: Deep catalogue has been the investment fund of labels for years. But with most catalogue streams coming from music made in this century, catalogue values are being turned upside down (in the streaming era, the Spice Girls are worth more than the Beatles!). Labels can still extract high revenue from legacy artists with super premium editions like UMG did with the Beatles in 2018, but a new long-term approach is required for valuing catalogue. Matters are complicated further by the fact that labels are now doing so many label services deals, and therefore not building future catalogue value.
  4. Labels as a service (LAAS): Artists can now create their own virtual label from a vast selection of services such as 23 Capital, Amuse, Splice, Instrumental, and CDBaby. A logical next step is for a 3rdparty to aggregate a selection of these services into a single platform (an opening for Spotify?). Labels need to get ahead of this trend by better communicating the soft skills and assets they bring to the equation, e.g. dedicated personnel, mentoring, and artist and repertoire (A+R) support.
  5. Value chain disruption: LAAS is just part of a wider trend of value chain disruption with multiple stakeholders trying to expand their roles, from streaming services signing artists to labels launching streaming services. Things are only going to get messier, with virtually everyone becoming a frenemy of the other.
  6. Tech major bundling: Amazon set the ball rolling with its Prime bundle, and Apple will likely follow suit with its own take on the tech major bundle. Music is going to become just one part of content offerings from tech majors and it will need to fight for supremacy, especially in the ultra-competitive world of the attention economy.
  7. Global culture: Streaming – YouTube especially – propelled Latin music onto the global stage and soon we may see Spotify and T-Series combining to propel Indian music into a similar position. The standard response by Western labels has been to slap their artists onto collaborations with Latin artists. The bigger issue to understand, however, is that something that looks like a global trend may not be a global trend at all but is simply reflecting the size of a regional fanbase. The old music business saw English-speaking artists as the global superstars. The future will see global fandom fragmented with much more regional diversity. The rise of indigenous rap scenes in Germany, France and the Netherlands illustrates that streaming enables local cultural movements to steal local mainstream success away from global artist brands.
  8. Post-album creativity: Half a decade ago most new artists still wanted to make albums. Now, new streaming-era artists increasingly do not want to be constrained by the album format, but instead want to release steady streams of tracks in order to keep their fan bases engaged. The album is still important for established artists but will diminish in importance for the next generation of musicians.
  9. Post-album economics: Labels will have to accelerate their shift to post-album economics, figuring out how to drive margin with more fragmented revenue despite having to invest similar amounts of money into marketing and building artist profiles.
  10. The search for another format: In 1999 the recorded music business was booming, relying on a long established, successful format that did not have a successor. 20 years on, we are in a similar place with streaming. The days of true format shifts are gone due to the fact we don’t have dedicated format-specific music hardware anymore. However, the case for new commercial models and user experiences is clear. Outside of China, depressingly little has changed in terms of digital music experiences over the last decade. Even playlist innovation has stalled. One potential direction is social music. Streaming has monetized consumption; now we need to monetize fandom.

Apple’s Subscription Pivot

On Tuesday Apple announced its arrival on the world stage as a media company, using the lion’s share of its product keynote as the platform for a succession of super star actors, directors and other personalities to tell the story of their respective Apple original TV shows. Breaking with a longstanding tradition of using these keynotes to announce new hardware, Apple used this one to showcase content and its creators. While services revenue is still but a small minority of Apple’s business (11% in Q4 2018), there is no doubt that Apple is placing a far greater priority on content – a strategic pivot made necessary by slowing device sales in a saturated global smartphone market. Apple has already made itself a power player in music, but has the potential to turn the entire digital content marketplace upside down should it so decide.

four phases of media formats midia

Apple’s ramping up of its content strategy is best understood by looking at its place in the four stages of media formats:

  1. Phase 1 – physical media formats:In the old world, consumer electronics companies came together to agree on standards and then competed in a gentlemanly fashion on execution. This approach underpinned the eras of the CD and DVD.
  2. Phase 2 – walled garden ecosystems: In the internet era companies competed fiercely, building proprietary formats into impenetrable walls that locked consumers in. This resulted in the rise of walled gardens such as iTunes and Xbox.
  3. Phase 3 – post-ecosystem: App stores became the chink in the armour for walled garden models, allowing a generation of specialist standalone apps such as Spotify and Netflix.
  4. Phase 4 – aggregation: Walled garden players had inadvertently created global platforms for specialist competitors, so are now figuring out how to avoid going the route of telcos and becoming dumb pipes. The likes of Xbox, Amazon and Apple have started to embrace some of their standalone competitors, adding curatorial layers on top via hardware and software. This is how we have Amazon channels, Fortnite’s marketplace within Xbox and, soon, Apple channels.

Apple just prepped its content portfolio for a subscription pivot

Apple built its modern-day business firmly on the back of content. The iPod was the foundation stone for its current device business and simply would not have existed without music. While its current device portfolio meets a much wider set of user needs, content remains the use case glue that holds its device strategy together. On Tuesday Apple announced new subscriptions for news (News+), games (Arcade) and video (TV+). Interestingly, in an entire keynote focused on media, Apple Music did not even get a mention, despite Zane Lowe’s Beats One show providing the background music prior to the presentations. Perhaps Apple felt Apple Music is so well established that it did not merit a mention, but the lack of an update felt like more than an oversight, intentional or otherwise.

That aside, Apple now has prepped its content proposition for a subscription pivot. Prior to these new announcements, Apple’s content offering (Apple Music excepted) was firmly rooted in the increasingly archaic world of downloads. Shifting from downloads to streaming is no easy task, and Apple will have to tread a cautious path so as not to risk alienating less adventurous download customers. It is the exact same shift that Amazon is navigating. But now Apple has the subscriptions toolset to start that journey in earnest. It has decided that subscriptions are ready for primetime.

This primetime strategy underpins Apple’s early follower strategy across its entire product and services portfolio. As its customer base has gotten older and more mainstream, it has had to progressively stretch out launches, to such an extent that at times it looks at risk of being too late. Apple Music looked too late when it launched, but still made it to a clear number two position. TV+ was even later to market, but don’t count against it plotting a similar path to Apple Music.

What Apple needs from content

Watch and TV could both be long-term contenders for Apple’s revenue growth until it launches a product category to drive new, iPhone-scale hardware growth, but the odds are not yet in their favour. Services look like the best midterm bet. But Apple has some tough decisions to make about what role it wants content to play in its business. This is because subscriptions pose two challenges for Apple:

  • Margin could be a real problem:Apple’s high profile spat with Spotify over its App Store levy hides a bigger commercial issue. With margins in streaming as low as they are, Apple most likely makes more margin on its Spotify App Store levy than it does selling its own Apple Music subscriptions. The amount of money it has invested in its lineup of TV+ originals is also unlikely to do its services margins any favours.
  • Subscriptions have to get really big: Standalone subscriptions will not only be low (perhaps negative) net margin contributors, but will not deliver enough revenue. It would take more than one billion Apple customers paying for two $9.99 subscriptions every month of the year to generate the same amount of revenue it currently makes from hardware. The App Store is Apple’s current services cash cow, and Apple’s new slate of subscriptions are preparing for a post-App Store world. Yet it would take a hundred million $9.99 subscriptions every month of the year to get Apple’s services revenue to where it is now. That number is eminently achievable but generates revenue stagnation, not growth.

Doing an Amazon

So how does Apple square the circle? Probably through a combination of standalone subscriptions, bundles and a single Apple bundle plan. And yes, once again, this is exactly what Amazon has been doing for years now. In fact, you could say Apple is doing an Amazon. The Prime-like bundle could be the most disruptive move of the lot. Imagine if Apple, alongside the full-fat subscriptions, deployed a lite version of Music, Games and TV+ available for a single annual fee and / or as part of a device price (like Amazon Music Unlimited vs Amazon Prime Music). This option would mean that Apple would be simultaneously doing free without ads and subscription with fees. The implications for pure subscription and ad supported businesses are clear.

Whatever options Apple pursues, the permutations will be felt by all in the digital content marketplace.

Why Facebook Can Be the Future of Social Music, But Isn’t Yet

Facebook recently secured licensing deals with music rightsholders in India, an important step in what has thus far been an underwhelming social music strategy since first inking rights deals in June 2018. Facebook has the potential to be a giant in social music, in no small part because most streaming music apps do such a poor job of social functionality themselves. Instead it is Asian streaming apps that are largely setting the pace, with the occasional western breakthrough (normally from Chinese companies). So, what does Facebook need to do to deliver on its undoubted promise? Look east…

Facebook has little motivation to become a streaming service in a traditional sense. There is little room for a new global scale player in the streaming space and the wafer-thin operating margins are not so much well understood as they are simply an open wound for the sector. Facebook’s move was always going to be one that focused on creating social experiences centred around connections and personal expression. It is a sound strategy, but one that has not yet been executed. However, it is not alone; indeed, the streaming music marketplace is woefully non-social.

social music landscape midia research

Personal identity has always been at the heart of what music is. The music we listen to helps express who we are and, especially in formative years, helps shape who we are. In the analogue era, music fans could immediately convey who they were with shelves of vinyl or CDs. The very act of buying an album or single once showed that you had skin in the game for your favourite artists. Saying ‘I’ve got that album’ meant you cared enough about that artist to part with cash. In the streaming era, however, those shelves have been replaced by lists of files stored in the cloud, and ‘I’ve listened to that song’ has little inherent weight.

The self-expression void

This self-expression void needs filling, but in the west YouTube and, to a lesser degree, Soundcloud are really the only global scale streaming services meeting this need with features such as comments, thumbs up/down etc. In Asia though, things look very different. Tencent has built a portfolio of music apps that are either highly social (e.g. Kugou, Kuwo) or that are social expression first and music second (WeSing). Japan’s Line has followed a similar path.

Social music apps serve young audiences

In the west, social takes centre stage outside of streaming apps. A number of smaller apps such as Vertigo are emerging that focus on creating engaged micro communities around music. The standout success story is TikTok, which is run by Chinese company Bytedance. TikTok picks up where Musically left off (which of course was bought and then killed off by Bytedance). But, as exciting as Musically was and TikTok is for giving consumers a way to express themselves through music and dance, they appeal first and foremost to tweens and teens. TikTok is used by 31% of 16-19s, but just 2% of the overall adult population (interestingly, Musically had exactly the same penetration rates at its peak).

Facebook is not fulfilling its potential

All of which brings us onto Facebook. Facebook, through its portfolio of social apps, has an opportunity to deliver a portfolio of social music experiences that appeal to multiple age groups and use cases. This could be TikTok-like experiences for younger Instagram users, music greetings on Messenger, sound tracked stories on Facebook, or even delivering social layers directly into the streaming apps themselves. Of course, it is doing some of this already but to really deliver, Facebook needs to go beyond – far beyond. Social music experiences have not hit mainstream outside of Asia because the right formats aren’t there yet. Facebook has the potential to deliver but needs to innovate out of its comfort zone to do so.

Social music could be the next format

The decline of closed-format consumer electronics was the death knell for music formats – streaming is a business model rather than a format. But it is clear that the market needs something new. Streaming growth will slow and user experience innovation there has been limited. There is a risk that 2019 can look a lot like 1999, i.e. a long-established format going strong in a growing industry with the prospect of a fall around the corner seemingly ridiculous. Social formats may be the next much-needed injection of growth. If streaming monetizes consumption, social can monetize fandom. The question is whether Facebook can seize the mantle.

Guess Who’s The Leading Headphone Brand?

Headphones have been centre stage of the digital music market since the launch of the iPod in 2001. Portable music started more than two decades earlier with Sony’s Walkman, but it was digital’s ability to fill a device with catalogues of music, rather than just one album that empowered music listeners to cut the cord from their home stereos. The mass market home audio sector lurched into a resultant decline that it has only just started to pull itself out of thanks to connected speakers.

Without headphones, streaming music would not have the biggest driver of subscriber adoption: smartphone listening. Back in the peak of the Walkman era of portable audio, headphone listening was still a comparatively niche activity and skewed heavily towards younger consumers. Now though, only 30% of consumers do not have a pair of headphones, and smartphone listening is the second most widespread way of listening to music – behind the car and ahead of home speakers.

Smart speakers and interactive dashboards are both competing for consumer ear time, but will never claim back the same share of listening from headphones that speaker-based listening enjoyed in the 80s and 90s. We live much more itinerant and connected lives now, with the smartphone our eternal companion. Headphones represent a marketplace with an unprecedented scale and ubiquity.

MIDiA has just published a new report exploring this marketplace and one of the key findings may surprise you: Apple is the market leader in headphone ownership.

headphones

Just as Apple stole Sony’s leading position in portable audio players, it is now doing the same with headphones. When its three headphone brand categories are combined (EarPods, AirPods, Beats – an Apple company) Apple has the leading market share in headphone ownership with 24%. Sony is second with 22%, followed by fellow traditional CE stalwarts Panasonic and Bose. The top four corporate-level headphone brands represent 61% of the total, illustrating just how fragmented the rest of the market is, with countless brands competing for share. Interestingly, Apple is the only top 20 headphone brand whose owners are not majority male.

For this and much more detail, including ownership by streaming service user, demographics etc, MIDiA clients can check out the full report here. If you are not a MIDiA client but would like to learn more about this report and MIDiA’s Business Intelligence Platform, email stephen@midiaresearch.com.

MIDiA Research Predictions 2018: Post-Peak Economics

With 2017 drawing to a close and 2018 on the horizon, it is time for MIDiA’s 2018 predictions.

But first, on how we did last year, our 2017 predictions had a 94% success rate. See bottom of this post for a run down.

Music

  • Post-catalogue – pressing reset on the recorded music business model: Revenues from catalogue sales have long underpinned the major record label model, representing the growth fund with which labels invested in future talent, often at a loss. Streaming consumption is changing this and we’ll see the first effects of lower catalogue in 2018. Smaller artist advances from bigger labels will follow.
  • Spotify will need new metrics: Up until now Spotify has been able to choose what metrics to report and pretty much when (annual financial reports aside). Once public, increased investor scrutiny on will see it focus on new metrics (APRU, Life Time Value etc) and concentrate more heavily on its free user numbers. 2018 will be the year that free streaming takes centre stage – watch out radio.
  • Apple will launch an Apple Music bundle for Home Pod: We’ve been burnt before predicting Apple Music hardware bundles, but Amazon has set the precedent and we think a $3.99 Home Pod Apple Music subscription (available annually) is on the cards. (Though we’re prepared to be burnt once again on this prediction!) 

Video

  • Savvy switchers – SVOD’s Achilles’ heel: Churn will become a big deal for leading video subscription services in 2018, with savvy users switching tactically to get access to the new shows they want. Of course, Netflix and co don’t report churn so the indicators will be slowing growth in many markets.
  • Subscriptions lose their stranglehold on streaming: 2018 will see the rise of new streaming offerings from traditional TV companies and new entrants that will deliver free-to-view, often ad-supported, on-demand streaming TV.

Media

  • Beyond the peak: We are nearing peak in the attention economy. 2018 will be the year casualties start to mount, as audience attention becomes a scarce commodity. Smart players will tap into ‘kinetic capital’ – the value users give to experiences that involve their context and location.
  • The rise of the new gate keepers part II: In 2018 Amazon and Facebook will pursue ever more ambitious strategies aimed at making them the leading next generation media companies, the conduits for the digital economy.

Games

  • The rise of the unaffiliated eSports: eSports leagues emulate the structure of traditional sports, but they may have missed the point. In 2018, we’ll see more eSports fans actually seeking games competition elsewhere, driving a surge in unaffiliated eSports.
  • Mobile games are the canary in the coal mine for peak attention: Mobile games will be the first big losers as we approach peak in the attention economy – there simply aren’t enough free hours left in the day. Mobile gaming activity is declining as mainstream consumers, who became mobile gamers to fill dead time, now have plenty of digital options that more closely match their needs. All media companies need to learn from mobile games’ experience.

Technology

  • The fall of tech major ROI: Growth will come less cheaply for the tech majors (Alphabet, Apple, Amazon, Facebook) in 2018. They will have to overspend to maintain revenue momentum so margins will be hit.
  • Regulation catches up with the tech majors: Each of the tech majors is a monopoly or monopsony in their respective markets, staying one step ahead of regulation but this will change. The EU’s forced unbundling of Windows Media Player in the early 2000s triggered the end of Microsoft’s digital dominance. 2018 could see the start of a Microsoft moment for at least one of the tech majors. 

2017 Predictions

For the record, here are some of our correct 2017 predictions:

  • Digital will finally account for more than 50% of revenue
  • Spotify will still be the leading subscription service
  • eSports to reach $1 billion
  • Streaming holdouts will trickle not flood
  • AR will have hype but not a killer device.
  • VR players will double down on content spend
  • Google doubles down on its hardware ecosystem plays
  • 2017 will not be the year of Peak TV
  • Original video content to arrive on messaging apps

Here are some that we got wrong or were inconclusive:

  • Tidal finally sells ($300 million stake from Softbank was a partial sale – full sale likely in 2018)
  • Apple will launch an Apple Music iPhone – didn’t happen but the Home Pod may be the bundled music device in 2018 (see below)
  • Spotify will be disrupted – it actually went from strength to strength with no meaningful new competitor, yet

Shazam Is Apple’s Echo Nest

apple music shazam midia

Shazam finally found a buyer: Apple. Ever since its affiliate sales revenue model crumbled with the onset of streaming (there’s no business in an affiliate fee on a $0.01 stream), Shazam has been trying to find a new business model. It doubled down on providing tools for TV advertisers but never got enough traction for that to be a true pivot. Shazam’s problem has always been that it was a feature rather than a product – as so many VC funded tech companies are. The fact that it sold for $400 million – just 2.8 times its total investment ($143 million) and well below its previous pre-money valuation of $1 billion, illustrates how much value has seeped out of Shazam’s business. The Apple acquisition though, is one of the few ways that Shazam’s ‘hidden’ value can be realised.

Cool tech without a business model

Shazam was a digital music pioneer. I remember getting a demo from one of the founders back in the early 2000s, and I was blown away by just how well the tech worked. However, quality of tech was never Shazam’s problem, and once the app economy appeared it also had a very clear and compelling consumer use case. Despite competition from challengers in more recent years – especially Soundhound, which has also been compelled to pivot but may now decide to double back down on its core competences – Shazam continued to be the standout leader in music recognition. The irony is that its use case is stronger now than it was back in the download era because people are listening to a wider array of music than ever before. The problem was a lack of revenue model.

Shazam tried to position itself as a tastemaker, with its charts becoming useful heat indicators for radio stations and streaming companies. Labels soon learned to game the system with ‘Shazam parties’ but even without that challenge, this still did little to help Shazam build a business model. Apple however, saw beyond the music recognition and Shazam now gives Apple a music recognition engine. Shazam is Apple’s answer to Spotify’s Echo Nest.

Apple Music needs growth and engagement

Apple, which recently passed 30 million subscribers, continues to lag behind Spotify’s growth. Apple Music is adding around half a million new subscribers a month, while Spotify was adding close to two million a month up until it announced 60 million subscribers in July. The fact Spotify hasn’t announced since then may point to slowing growth, but my money is on a big number being announced in the next five weeks.

Apple’s weekly active user (WAU) penetration is far behind Spotify’s, indicating that Apple needs to do a better job of engaging its users. Better playlists, recommendations and algorithm driven curation all help Spotify stay ahead of the curve. Now, Apple will be hoping that Shazam will provide it with the tools to start playing catch up. And that’s not even mentioning the user acquisition potential Shazam could have when it switches to exclusively pointing to Apple Music. Game on.

Content Connectors: How the Coming Digital Content Revolution Will Change Everything

In my previous blog post I explained that 2014 was going to be the year of taking digital content into the home.  That affordable devices such as Google Chromecast, Apple Kindle Fire TV, Apple TV and Roku are set to drive a digital content revolution by connecting digital content with the familiar context it needs for the mass market.  These Content Connectors will transform consumers’ relationship with digital content but they will also turn the existing digital content marketplace on its head:

  • Breaking down the home entertainment silos: our digital content experiences have evolved entirely isolated from our other media experiences.  We multitask because one device is connected and one is not.  Our homes have become a collection of content experience silos.  Content Connectors break down those walls, brining our digital content experiences onto that most un-connected of devices, the TV.
  • On-boarding late adopters: In most developed markets, most consumers are digitally engaged, using Facebook, YouTube, email, tablets etc. on a daily basis. These are digitally savvy later adopters, where their behavior lags is in paying for content.  Sure, some will never pay, but others simply haven’t yet been given a solution that makes sense to them.  Content Connectors can change that by giving digital content experiences familiar context in the home.
  • Smart boxes will leave smart TV’s still born: TV manufacturers are still figuring out how to deal with the hangover of having accelerated the TV set replacement cycle too aggressively with HD.  Too many homes have perfectly good HD ready flat screen sets that they won’t need to replace anytime soon.  So manufacturers are desperately pushing 3D and Smart TVs as a reason to replace.  The problem, for TV makers not consumers, is that Content Connectors turn ‘dumb’ TVs into Smart TVs for a fraction of the cost. A TV isn’t a computing device but plug a Content Connector into it and it becomes one.
  • Breaking down media industry walls: Hardware used to create great big walls between different content genres. TVs were for broadcast video, DVDs for recorded video, CDs for audio, games consoles for games.  Multifunction devices such as smartphones and tablets started to erode those barriers by being content genre agnostic.  Apple’s iTunes Music Store became the generic ‘iTunes Store’ and now Content Connectors want to take this paradigm shift even further by freeing the biggest screen in the home form the constraints of broadcast video.
  • Leaving stand-alone stores and services stranded: The disruptive threat of the TV’s liberation is immense.  Broadcasters instantly lose their monopolistic hold on the TV and find themselves in the middle of a disruptive threat pincer movement: first non-traditional broadcasters like Netflix and YouTube can get themselves right into the traditional TV heartland; secondly non-video content suddenly finds a home on the TV, whether that be music, photos or games.  No matter, all of it competes for TV viewing time.  And no coincidence that Amazon’s Kindle Fire TV is equipped with a game controller.  What’s more, if you only offer video – which of course applies to most TV broadcasters – you look decidedly limited in the Content Connector era of multi-genre content offerings.
  • Using the TV to get consumers over the ‘ownership hump’: While industry leaders obsess over how to make subscription business models work, most mainstream consumers have not even started thinking about moving from the ownership paradigm to a consumption one.  That shift will need a generation to truly play out but Content Connectors will give the process an initial adrenaline shot.  How?  By putting digital content onto the device that consumers already associate with ephemerality.  The TV is not an ownership device nor has it ever been one.  At most it is a device on which temporary copies are viewed before being deleted.  But the majority of the time it is purely access based content consumption.  So getting mainstream consumers used to accessing but not owning digital content via the TV is the perfect environment for making an entirely alien concept feel strangely familiar.
  • Another changing of the guard: The reversing into the CE market by internet, software and PC companies was the biggest disruption the CE sector ever endured.  The likes of Sony and Yamaha used to compete in an almost chivalric manner, agreeing on standards and then competing on implementation.  Google, Apple and Amazon pursue no such niceties and compete with incompatible platforms and technology, and in doing so are wining the CE war.  The Content Connector revolution is helping the same thing happen to content distribution.  A new generation of content providers are emerging that collectively have their eyes set on world domination.

The coming shift in the digital content markets could occur at breakneck pace.  Within five years Hulu and Netflix could easily have a 100 million paying subscribers and YouTube’s ad revenue could easily be near $8 billion.  If the transition process goes the whole distance traditional content walls could disappear entirely.  Google Play could move from selling video, apps or music to simply asking consumers: “How would you like to enjoy this content? Watch? Listen? Or Play?”  Traditional broadcasters and media retailers should be scared, very scared.

Media Companies: Your Nightmare Piracy Scenario has Arrived, And Its Called Popcorn Time

Two years ago I said that the nightmare piracy scenario for the media industries would be when the pirates gave up trying to fight enforcement and turned their attentions to build great user experiences.  Now with the arrival of Popcorn Time that scenario has come to pass.  However bad piracy might have been for media companies, it is just about to get a whole lot worse.  This is the new era of Experience-First Piracy.

Popcorn Time is an open source interface that sits on the top of pirated video content on torrents.  Instead of downloading the video Popcorn Time streams them to the end user, with titles selected from a neat Netflix-like interface.  In fact one might argue a ‘Netflix clone’ interface (see figure) but with new releases that Netflix does not even have.  On top of all this Popcorn Time is open source, with installer and project files all hosted on developer collaboration site GitHub, and with the app built on a series of APIs.  With multiple development forks already this is an entirely new beast in the piracy arena.  Forget whack-a-mole, this is potentially a drug-resistant, mutating contagion.

popcorn time

In fact Popcorn Time looks exactly like what I envisaged two years ago:

“What if a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging?  If you thought the paid content market was struggling now imagine how it would fare in the face of that sort of competition.”

Piracy for the Mainstream Consumer 

Until now, piracy was largely the domain of youngish tech savvy males (69% male, 50% under 35). Popcorn Time and the inevitable coming wave of new Experience-First piracy apps will give piracy truly mainstream appeal.  It looks and feels just like the real thing, only for free and with even better content.  What’s not to like?  Worse still – for media companies, not consumers – these sites might – even have a legal defense as they do not actually host any of the files.  The emphasis there is on the ‘might’ as it is an argument that ultimately the Pirate Bay was not able to defend in court.

Three Ways to Hit Back at Experience-First Piracy

So what can media companies do to respond to Experience-First Piracy? Legal action will be the first port of call but ultimately it is a pain killer, not a cure.  The problem itself needs addressing with three key strategic focuses:

  • Windowing: Netflix can only dream of having the content Popcorn Time has, just as early licensed music services could only dream of having the catalogue Napster had in 1999/2000.  The movie studios need to learn that lesson fast, and treat Netflix and Amazon Prime etc. as tier 1 release window partners.  As soon as a release is ready for its first post-theatre window it should go straight onto the paid video services.  BlueRay and DVD are fading yesteryear technology, the media industries’ most engaged and valuable audiences are online and using online services.  It is time to treat them as first class customers, not second class ones.
  • User Experience: Before Experience-First Piracy, the retort to media companies was that all they needed to do in order to stay ahead of piracy was to create more compelling alternatives.  Now the ante has been well and truly upped.  There will never ever be the user experience gulf again.  That time has gone.  This means licensed services have to be continually pushing the user experience envelope, using their capital to hire the very best designers and developers.  Which means that content companies need to saddle them with as little up front rights acquisition debt as possible, freeing them up to spend big on development and design.
  • Pricing: The harsh reality of the internet economy is that when something is widely available for free you have to make your paid-for product even cheaper than it was intended to be.  For Netflix and Spotify et al, that means getting below $5 a month.  Ironically this happens at just the time that Amazon increases its pricing for Prime and Netflix is considering increasing its pricing in order to cover higher rights costs.  Media companies have a crucial decision to make: do they want to get more revenue per user out of a user base that will quickly lose share to Experience-First Piracy, or instead do they want to take a near-term revenue hit in order to shore up their digital service partners’ longer term future?

The fact that piracy has spent so long locked in a user experience quagmire is testament to the media industries’ counter measures: pirate sites were just too busy figuring out how to evade enforcement to focus on user experience.  But now that era has come to a shuddering halt.  It is difficult to over state the dramatic effect Experience-First Piracy will have on the paid content landscape unless media companies do everything within their powers to help the nascent licensed services respond in kind.  The smart companies realized long ago that content is not the product, experience is.  Unfortunately the pirate’s just figured this out too.

Got Milk?

milkPoor Samsung launched their latest punt at digital music success just as Spotify was stealing all the media oxygen with its acquisition of the Echo Nest.  Samsung’s latest venture, curiously called ‘Milk Music’, is another attempt from the smartphone giant to carve out some mindshare and consumer traction in the digital music space.  Like all but one smartphone manufacturer – you know, that one from Cupertino – Samsung does not have the best of track records when it comes to digital music, having recently culled its previous Hub service.  Milk is a Pandora-like mobile radio app and while it certainly suffers from ‘me-too syndrome’ it is not actually a terrible strategic fit.

With 200 stations and a catalogue of 13 million tracks, Milk Music has some muscle but it is hard not to see it as a thinly veiled attempt to ‘do an iTunes Radio’.  However there is not necessarily that much wrong in doing exactly that.  iTunes Radio is a very neat service that is well geared towards the mainstream, less engaged music fan.  That is exactly Samsung’s addressable audience.  Samsung has been at the vanguard of the mainstreaming of smartphone adoption, so much so that many of its devices are smartphones with dumb users.  Milk Music is however limited to the Galaxy range of handsets, which will to some degree filter its audience towards Samsung’s more engaged users.

No smartphone manufacturer has been able to make music work like Apple has.  In fact no smartphone manufacturer has been able to make content and services as a whole work like Apple has.  Apple’s ecosystem is a fascist state compared to Android’s federated democracy, but at least the trains ran on time in Mussolini’s Italy.  That absolute control of the user experience enables Apple to deliver on the single most important part of digital music product strategy: the service-to-device journey.  It just happens, and seamlessly so.  So many other phone companies have failed to understand the importance of this ineffable magic.

Samsung might be able to get it right with Milk Music, but because they are part of the federated states of Android, they will also have to tolerate a bunch of pre-installed incursions from fellow Android states, not least Google’s Play Store.  Apple meanwhile ensures there is just one place for music on its devices.

Samsung desperately wants to make music work and to its credit continues to throw money at trying to fix the problem.  Free radio might just be the best first step.  Especially considering that just 1% of Android consumers state they intend to start paying for a music subscription service and that a quarter of them say they have no need to pay for music because they get so much for free.  Milk Music might be feeding that free music habit, but it could also be the foundation for something bigger and better.  In the meantime, if you can’t beat them…

Why Spotify’s Acquisition of the Echo Nest is a Test Case for the Age of the API

Spotify’s acquisition of music data and recommendation company the Echo Nest is a clear statement from a pre-IPO Spotify to the market that it takes the challenge of the Tyranny of Choice seriously.  In doing so it has established ideological fault lines between it and rival Beats Music. While Beats has put its faith in human curation Spotify has bet big on algorithms. It’s men against machines.  But the most important implication is neither this nor even the fact that Spotify now powers the discovery tools of many of its competitors, but instead the shockwaves that Spotify could send throughout the entire tech start up ecosystem if its screws up how it deals with the Echo Nest’s API.  This is the first major text case for the Age of the API.

Over the last half decade open APIs have become a central component of the technology space with countless start ups opening up their code and data for other start ups to riff off.  It has been a win-win for start ups on both sides of the equation: the givers more quickly permeate throughout their target marketplaces while the takers get to short cut to functionality that might be otherwise unobtainable.  Consequently we now have countless companies that are built upon a patchwork of interconnected APIs and a richer seam of products and services.

This is the exact strategy the Echo Nest pursued, aggressively pushing their API out into the digital music market place with very liberal usage terms and putting themselves at the heart of the Music Hackday movement.  (Few Hackday entrants worth their salt will be found without the Echo Nets API coursing through their virtual veins.)  Only Soundcloud can lay claim to having been more successful in the music API game.

But now that the Echo Nest is deeply embedded in the digital music marketplace what happens if it turns off or dials back its API? Currently it is making all the right noises, that its API will remain both “free and open”.  But there is a big difference between the aspirations of a newly acquired company and the actual behavior of the buyer 12 months or so down the line.  Indeed, a highly plausible scenario is that Spotify will eventually wind down the Echo Nest as a distinct entity, bringing all of its functionality behind the walls.  After all, if you break down what motivated Spotify’s acquisition, other than the prime motive of sending the right message to the street, the core assets are not the data itself – Spotify has plenty enough of that – but instead the expertise and the technology.  Data is worthless if you cannot interpret it properly.  Why let competitors benefit from that?

So right now the technology sector as a whole should be paying close attention to what Spotify does with the Echo Nest’s API.  If it does indeed eventually turn off the tap then it will rightly make investors and start ups alike question the strategic integrity of building businesses on the foundations of third party APIs.  Spotify needs to get this one right because the implications are far bigger than Spotify’s IPO, or indeed even the broader digital music market.  Instead this is the future of the entire technology start up marketplace.