Amazon today entered the streaming music foray with the launch of its own bundled music service. Amazon Prime subscribers get free access to on demand streaming from a catalogue of 1 million tracks, the majority of which are older catalogue titles rather than frontline hits. Amazon’s move has received considerably less interest and hype than Apple’s acquisition of Beats but is in many respects every bit as important.
The future of digital content is going to be defined by the content and device strategies of three companies: Apple, Amazon and Google. Each has a very different approach resulting in an equally diverse set of products and audiences (see figure). Amazon and Apple have mirror opposite content strategies: Apple loss leads on content to sell devices whereas Amazon loss leads on devices to sell content. (Google loss leads on both because its end goal is your data). All three have a strong focus on music but all three understand clearly that the future of digital content lies in having multiple genre stores that traverse music, games, apps, video, books etc. All three also recognize the importance of hardware for delivering the crucial context for the content experience. Similarly, all three have a Content Connector strategy aimed at opening up the mass-market digital content opportunity in the home via the TV.
Amazon’s inclusion of music streaming in its Prime offering speaks volumes about the perceived importance of music as a product to the retailer. Music used to be the crucial first rung on the ladder for Amazon customers. Buyers would start off with a low consideration purchase item like a CD or DVD and the next thing they knew they were buying microwaves and computers. Music is still plays an important role in Amazon’s customer life cycle, but it is no longer a product needs paying for with a separate payment. Music has become the ‘feels like free’ soundtrack to a video subscription with the added benefit of free shipping for online shopping. Out of those three core value pillars of Amazon Prime, music streaming is probably the smaller. Music has become the National Geographic channel in the cable subscription: a nice part of the overall proposition but not something that carries inherent monetary value on its own.
The harsh reality is that this is probably a sound strategy for engaging the mainstream consumer with music streaming (the extensive selection of curated playlists on top of a modest 1 million track catalogue hints at the mass market positioning). But whether this is the best strategy for the mainstream is another thing entirely. Labels fear that free services like Spotify free and Pandora threaten to erode consumers’ perceptions of music as a paid for commodity. But at least in those environments they are actively adopting a music service in its own right. With Amazon Prime there is a real risk that music is being relegated to the role of muzak in the elevator.
Although the Apple-Beats deal is about far more than just streaming music, it is nonetheless an important part of the puzzle. Apple has been going slow with streaming, introducing cloud experiences (iCloud, iTunes Match, iTunes Radio, Video rentals) slowly so as not to alienate its less tech-adventurous mainstream user base. That strategy remains valid and will continue, but it has failed to protect the defection of its core, high value, early adopters. This is why Apple has to get serious about streaming fast: it is scared of losing its best customers. It is also why all other streaming companies, whatever they may admit publically, are getting ready to run scared. This is streaming music’s mutual fear factor:
Velvet handcuffs: Music downloads are monetized CRM for Apple, a means of enhancing the device experience. Purchased tracks and an iTunes managed library act as velvet handcuffs for Apple device owners. But for those consumers that use a streaming subscription app, the playlists and music collection can exist on any device. Suddenly the handcuffs slip off. This is why Apple has to get streaming right in short order. It simply cannot afford to lose swathes of its most valuable device customers at the next handset replacement cycle.
Chinks in the iTunes armour: Until the launch of the App Store, 3rd party music services had no way of breaking into the iTunes ecosystem and were, in the main, doomed to the role of also rans. The App Store was the chink in the otherwise impregnable iTunes armour that allowed those 3rd parties to not just launch punitive raids but to set up camp in Apple’s heartlands. It was the price Apple had to pay to enter the next phase of its business, but now it is ready to shore up its defences once more.
Eating from Apple’s table: The vast majority of streaming music subscribers were already digital download buyers first, and of those the majority were either current or past iTunes Store customers when they became subscribers. On a global scale, subscriptions have first and foremost been about transitioning existing spending rather than creating new digital customers. The picture is very different in Nordics, the Netherlands and South Korea but those markets contribute far less to global scale than the markets (US, UK, Australia etc.) where this trend dominates. Apple has provided the core addressable market for streaming services for the last five years. Now those companies worry over where will they be able to get new subscribers if Apple start taking subscriptions seriously.
Apple will not have to play fair: Although Apple knows it is under the watchful eye of various regulatory authorities following the eBook price fixing episode, there is still plenty it can do to make life hard for 3rd party streaming services. Just take a look at what Amazon is reportedly getting away with in its book pricing dispute with Hachette: delaying shipments of the publisher’s books to customers, removing buy buttons from pre-ordered books, even pointing Amazon customers to competitive titles when searching for Hachette books. Fair play or foul, the power of the retailer is huge. Whether Apple simply ensures Spotify et al don’t appear in search results, or that they are never quite able to integrate seamlessly with iOS anymore for no specific reason that anyone can quite put their finger on….But even without resorting to such behavior, simply by deeply integrating an Apple (or Beats) branded subscription service natively into its devices and ecosystem, Apple will have the upper hand and 3rd parties will find it a whole lot harder to fish in Apple’s waters.
None of this is necessarily bad for the market either. In fact it could be just what the subscriptions business needs. To finally focus on green field opportunity beyond the confines of the Apple elite. Nor should Apple even limit its subscription focus to streaming or to music. The rise of the Content Connectors points to Apple, Amazon and Google pursuing digital content strategies in the round, that do not get bogged down with super serving any individual content type at the expense of the rest. Apple’s best mid-term subscription play may yet simply prove to be a monthly allowance of iTunes credit across all content types, bundled into the cost of the device. Put that on top of iCloud, iTunes Radio, Beats Music and suddenly you have a very compelling multi-content offering. Something far out of the reaches of the current product roadmaps of any of the stand alone music services.
Can Apple afford to loss lead with music subscriptions to pursue such a strategy? Well, remember Apple’s entire digital music business has been built on loss leading. Whatever the final outcome, the mutual fear factor balance looks set to tip in Apple’s favour for a while.
Stories emerged last night that Apple is in talks to buy Beats, citing well-placed sources. If true – and if it actually goes through – the acquisition has countless potential impacts of seismic proportions, particularly if the deal includes nascent subscription service Beats Music. Apple has always been in the business of selling music for the business of selling hardware, and the potential acquisition must be considered in those terms. With download sales declining and subscriptions gaining traction, Apple has been locked in a process of soul searching, trying to work out what it can do to remain relevant in the digital music business in order to remain relevant in the device business. Beats is a ‘if you can’t beat them, buy them’ solution.
There are a number of key considerations and potential impacts:
Digital music Plan A has run its course: Despite dynamic growth in Northern European markets, digital music growth nearly shuddered to a halt in 2013, slowing from 11% year-on-year growth in 2012 to just 2% last year, and that is unlikely to be much higher than 4% in 2014. The reason is quite simple: streaming subscriptions are, outside of Northern Europe, predominately converting the most valuable download buyers – who are most often iTunes buyers – into subscribers. Aficionados who bought a few digital albums a month are instead spending 9.99 a month. So instead of bringing up the average spend of music buyers it is bringing down the spending of many – I’ll be publishing some data on this in the coming weeks. Digital music needs a Plan B to reinvigorate growth
Apple is paradoxically holding back digital growth: Apple almost singlehandedly created the global digital music in the 2000’s but it is now actually holding back growth in the 2000’s. Streaming has taken off most quickly where Apple never got a foothold (see figure). Where Apple is firmly established streaming is a transition story, of download revenue shifting to streaming. Where it is not, streaming is green field growth. An interesting side effect of this is that because English speaking Apple has prospered most in English speaking markets, it is in these countries – US, UK, Canada, Australia, all of which are top ten music markets – where digital growth is now slowest. Apple has inadvertently passed the digital baton to the non-English language world.
Apple’s go-slow streaming strategy is too slow: All this translates into weakening digital relevance for Apple, which infers weakening hardware relevance. Apple has been here before, back in the heyday of Last.FM when Apple was still predominately a computer business, it tried to steal the social music revolution’s clothes with the launch of the now-defunct Ping and the just-about-still-around Genius. Yet Apple came out of that era stronger than ever. Now though, portable devices are the beating heart of Apple’s business, and with the relentless onslaught of Android it cannot afford its next music move to be another Ping. However Apple has had to go slow with streaming. Its user base is more mainstream than ever – as the growing popularity of Now compilations in its store attests – so it has to introduce new features in a way that does not overwhelm its less tech-adventurous customers. iCloud and iTunes Radio are great transition technologies to help introduce streaming to Apple users at a steady pace and to demonstrate clear relevance in the iTunes context. Unfortunately this long-term strategy for its mainstream users has done little to halt the defection of its more sophisticated and, crucially, most valuable, customers. Beats Music could be the defensive strategic option for them.
Subscriptions don’t have to be AYCE 9.99: 9.99 AYCE services have done a great job of monetizing the super fans, but with less than 5% penetration in major music markets, there is a clear need for something else for the more mainstream fan in top 10 music markets. Cheap priced subscriptions and telco hard bundles are both solutions to this problem. Apple should not feel compelled to jump on the 9.99 bandwagon. Digital content stores are breaking down the genre walls – as Google’s Play demonstrates so well. Apple gets much more revenue from other content genres – see this figure – so a multi-content genre subscription would be a much cleaner fit for Apple. As would a subscription that gave users a certain amount of credit to use on any iTunes products, sort of a virtual iTunes Gift Card subscription. Pricing would be blissfully simple – e.g. $10, $20, $30 etc. – and would help protect Apple from revenue cannibalization until it makes the full switch to access from ownership. $10 could include ad-free iTunes Radio, $20 and upwards could include unlimited music streaming.
Apple could make hard bundling work, and some: If Apple does get Beats Music, it would have an unprecedented opportunity to make bundled subscriptions work. Hardware has always been key to making digital content work, whether that be the Kindle, Xbox, Playstation, iPhone or the new generation of Content Connectors like Chromecast. Subscriptions are working now because Apple opened up a chink in its vertically integrated ecosystem armour by allowing streaming services to exist on its devices. In fact mobile access is responsible for the majority of the 9.99 model’s growth. Retailing an iPhone / Beats headphones subscription bundle would communicate clear value to users, and with the cost largely hidden in the premium price point associated with the bundle, could help consumers get over the hump of committing to monthly spending.
Beats would redefine Apple as a CE company: The implications on Apple’s device portfolio are intriguing tool. The simplicity of Apple’s limited product range has always been key to its success. Being able to retail a single phone when competing with the excessively vast portfolios of incumbent smartphone companies was a major differentiation point. Since those first iPhone days though Apple has multiplied its number of product SKUs. Incorporating a range of headphones would take that to another level. Whether Apple has the ability to seamlessly transform from a computer company with a small range of portable computing devices, to a fully-fledged CE company remains an intriguing open question.
There is no doubt that if Apple does buy Beats and Beats Music, that the impact on the competition will be dramatic. Spotify will be rightly worrying about the impact on its impending IPO – though expect words to the effect that this is simply a resounding validation of the model. But the competition should be welcomed. To date most digital music services have been strategically lazy, focusing their efforts on trying to sell new products to already existing digital customers, the majority of whom, in the big markets at least, are Apple customers. Now digital music companies will have to start thinking much more creatively about how they can compete around, rather than with Apple. About how they can create revenue in new consumer segments, not simply trying to extract more revenue from the preexisting ones. Some companies are doing this already but they are in the distinct minority – this should be a good time for them. If Apple does buy Beats, it will bring some much needed momentum to market that was beginning to suffer from hubris.