Facebook Is Finally Ready To Become A Media Company

Male Finger is Touching Facebook App on iPhone 6 ScreenFacebook beat estimates with its latest earnings but announced that ad revenues would likely slow in 2017 as the digital ad market feels the pinch of advertiser budgets lagging the shift in user behaviour. Facebook’s stock fell by 7% but it already has Plan B in motion: to become a media company. Facebook delayed this move as long as it possibly could, showing little enthusiasm for getting bogged down with content licenses while it was able to drive audience growth and engagement by piggy backing other people’s content. That strategy has run its course. Facebook is now about to start looking and behaving much more like a media company, but in doing so it will rewrite the rule book on what a media company is.

The Socially Integrated Web

Back in 2011 I published a report ‘The Socially Integrated Web: Facebook’s Content Strategy and the Battle of the Ecosystems’. You can still download the report for free here. In it I argued that Facebook was starting out on a path to become a media company, but not the sort of media company anyone would recognise:

Change is afoot in the Internet.  Facebook’s new Socially Integrated Web strategy is set to make Facebook one of the most important conduits on the web. It is pushing itself further out into content experiences in the outside web while simultaneously pulling more of them into Facebook itself. Facebook is establishing itself as a universal content dashboard – a 21st century cable company for the Internet, a 21st century portal – establishing its own content ecosystem to compete with the likes of Apple and Amazon. While traditional ecosystems are defined by hardware and paid services, Facebook’s is defined by data and user experience.

Now with ad revenues set to slow, Facebook is flicking the switch on phase 2 of this strategy. Think of it as the Socially Integrated Web 2.0.

Wall Street Doesn’t Like Mature Growth Stories In Tech

As Apple, Pandora and others have found to their cost, Wall Street likes its tech stocks to be dynamic growth stories. It doesn’t like mature growth stories – that’s what traditional company stocks are for. So what can a tech company with a mature customer base do? The answer is to switch on new user monetization strategy, with content and services the lynchpin. Apple’s new supplemental investor materials outlining iOS users’ services spend is a case in point. Monetizing audiences is the new black. This is the game Facebook is now starting to play.

How Facebook Will Become A Next Gen Media Company

Moving from curating to licensing is a subtle but crucial shift in Facebook’s role as a content distribution platform. Here are the pieces that Facebook will stitch together as it begins its transition towards become a next generation media company:

  • Games: In August Facebook announced its gaming platform Facebook Gameroom, a Steam for casual games. It followed that with the announcement it will bring Instant Games to Messenger – an extension of its messaging bot strategy. Games is a logical place for Facebook to start carving out its media company role as it has become the default home of casual PC gaming. It also wants to own a slice of the hugely lucrative mobile gaming market.
  • Filters: Snapchat and Line have created global marketplaces for stickers and filters. Facebook is set to follow suit and is now experimenting with Snapchat-like filters. Filters may not look like media assets in the traditional sense, but the whole point about next generation media businesses is that they contain next generation content assets. Filters are an early indication of how the definition of content will change over the next decade and Facebook now has a horse in that race.
  • Video: Despite the embarrassment of having over reported some of its video metrics, Facebook has quickly become a major player in the online video space, accounting for 29% of short form video views. The next step for Facebook is to start building a discovery and curation layer. When it does, expect video consumption to boom. This will be a major step towards its media company future. It will however have to build a lot of tech for rights holders and content creators. Right now, its aversion of getting tied up with policing rights means that many rights holders don’t even post content there. YouTube has a massive head start with its highly sophisticated Content ID stack. Facebook will need to follow YouTube’s lead.
  • Live Stream: Facebook has been doubling down on its live streaming, expanding its focus from user and celeb streams towards more traditional media content such as Steven Colbert’s Showtime Monologue, partnering with 50 media outlets for presidential election coverage, and eSports. eSports could be as lucrative as traditional sports within the next 10 years and the shift has already begun – Twitch accounted for more streaming video bandwidth than the Olympics.
  • Next generation TV operator: One of the most disruptive moves Facebook can make, at least from the perspective of traditional media, is to stitch together its video assets and combine them with video subscription apps like Netflix and TV channel apps like iPlayer and HBO Go to create an all-in-one video destination straddling, UGC, short form, live streaming and TV content. The rise of video apps has created a bewilderingly fragmented video landscape. Facebook can stitch it all together to become a next generation TV operator. It will face direct competition from Apple, Amazon and Alphabet if/when it does.
  • Editorial: Facebook took a lot of flak for its decision to censor, on grounds of nudity, a famous Vietnam photo showing the effects of a napalm attack on Vietnamese children. The photo had been posted by Norwegian newspaper Aftenposten and its editor-in-chief Espen Egil Hansen wrote “Editors cannot live with you, Mark, as a master editor”. Facebook eventually bowed to public pressure and reinstated the photo. While Facebook may have been wrong to censor the photo it revealed that Facebook is already a ‘master editor’ whether Facebook or traditional media like it or not. Facebook hosts such a vast amount of content that the master editor role is inescapable. Aftenposten might have editorial credibility but what about a white supremacist publication? Facebook is already an editor in chief, in short it is already a media company.
  • Music: Facebook’s recent ad for a music licensing executive got music business types all excited. But music is the content vertical Facebook probably has least to gain from switching from host to licensed service. Streaming music is a notoriously difficult business to make money in (Spotify’s gross operating margin is around 17%). Facebook needs to grow margin, not just revenue, and with all its other content options it doesn’t make sense for Facebook to loss lead with an AYCE music service when it can get a bigger return on that investment elsewhere. IF Facebook does do something in music either expect it to be a more radio-like experience for its mainstream audiences (Pandora had a gross operating margin of around 40% in 2015) or – and this is more likely – something for younger users that has music at its core but that is not a streaming service. Think something along the lines of lip synching app Musical.ly.

Facebook is a past master at business model transformation. Its co-opting of younger audience focussed messaging platforms in the face of ageing social network audiences was a best-in-class example of a company disrupting itself before someone else did. Now Facebook is set to make another major change in its strategy before it finds its core business disrupted. Media companies beware, there’s a new player in town and its betting big, real big.

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What Happens When Facebook Hits 1 Billion Users?

In the four short years since Facebook passed 100 million global active users back in August 2008, social networking has gone mainstream and Facebook’s own active user base now numbers in excess of 955 million. Facebook had many predecessors (MySpace, Hyves, Friendster, Orkut to name but a few) but it achieved what none of them did: it created a service that mainstream consumers adopted in their droves.  Yet despite this success, and as Facebook nears the 1 billion user mark, there remains a niggling worry which stubbornly refuses to go away: has Facebook actually taken social networking mainstream or has it just taken Facebook mainstream?

Facebook Has Created a Two-Speed Social Network Landscape

Facebook’ dominance of social networking is clear and its 955+ million user count stands head and shoulders above the rest (see figure).  Twitter is the closest challenger with less than a fifth of Facebook’s active user count, and Google+, despite bold early moves remains approximately a tenth of Facebook’s scale with 100 million active users.  Beyond those key players the social network long tail rapidly fragments into niche sites and also-rans.  What is becoming apparent is that a two-speed social network landscape is emerging with Facebook effectively a lap ahead of the best-of-the-rest.  In short, Facebook has won the race for the mainstream consumer.

The Importance of Network-Effect Scale

There are many reasons for Facebook’s success, but being all things to all people is centre stage, and in the mass-market scale game there is currently only space for one winner, with success intimately tied to ubiquity.  Facebook has the benefit of a crucially important asset: network -effect- scale. Because the majority of people’s contacts are on Facebook it is the network they opt into, thus increasing the number of other people’s contacts, and so on in a continual virtuous circle.  And as mainstream consumers don’t want the hassle of maintaining multiple social networks, a winner-takes-all scenario emerges.

Twitter and LinkedIn owe their success to not competing with Facebook for the mass market consumer: they deliver value to their users as a complement to Facebook rather than as an alternative (at least in most cases).  Long term success for generalist social networks such as Google+ though depends explicitly on taking users and user hours away from Facebook.  The challenge for Google+ is that those entrenched mainstream Facebook users are not going to be wowed by features or functionality.  If they will ever shift from Facebook it will be because of the same reason they went there in the first place: they will go where their friends and family are.

Facebook’s Velvet Handcuffs

Thus the network-effect acts as velvet handcuffs for mainstream Facebook fans.  What Google+ is banking on is that enough of the more sophisticated users get swayed by features and functionality, in turn starting the crank wheel of the network effect.  Which is exactly why Facebook is so actively integrating content partners such as Spotify into its platform: the more content experiences Facebook can funnel through its platform, the more reason there is for sophisticated users to remain loyal.  If friends and family are the velvet handcuffs for the mainstream user, then content plays the same role for the sophisticated user. (For more on Facebook’s Socially Integrated Web Strategy see this free Music Industry Blog report).

As things stand, when Facebook does hit 1 billion users it will say more about its own success than it will about the overall health of the social network landscape.  The catalyst for Facebook’s network-effect was the foundational principle of connecting people, and the human need to connect is the behavioural glue that ties Facebook together.  Mainstream consumer inertia is the most powerful force in the social network marketplace today, not innovation. This is not to say that social networking will remain defined by a mass market monopoly in perpetuity, but it will until (or if) mainstream consumers acquire the tolerance – or need – for more than one social network.  Until then, social networking will remain a two-speed marketplace.

I will be building upon these ideas and others in a forthcoming Giga Om Pro report ‘Facebook and the Two Speed Evolution of Social Networking’ Watch this space for more details.

 

Spotify Hits 20 Million Monthly Users and Could be on Track for 8 Million Paid Users 1 Year From Now

When Facebook flicked the switch on stage two of its Socially Optimized Web Strategy at f8 it was clear that the social network had just found an effective means of embedding itself further into all of our digital lives, by making itself the universal content dashboard.  What wasn’t so clear at that time was quite how significant an impact it would have on music services, Spotify in particular.

Today Spotify hit 20 million monthly users on its Facebook app, having added 500,000 new users in less than two weeks,  from the 3rd to the 15th of May (see figure 1).

Spotify has added 1.5 million users since the end of April, representing a growth rate of 8%.  That compares to 0.5 million new users and 4% growth for the entire month of May in 2011.  Facebook integration, coupled with launching in the US has turbo charged Spotify’s growth trajectory.

And yet, as impressive as Spotify’s total user growth is, it is only par when compared with other streaming music services.  Looking at the growth in total users by month since launch date of service (see figure 2) Spotify is close to the average for streaming music services.

In fact it is only above Pandora and lags imeem  and Last.FM, both of whom were once the future too.  In favour of Spotify, services like Pandora first launched in the US – a much larger addressable audience – and have unlimited free tiers.  Against Spotify, the market is now much more mature in terms of technology and consume readiness. Measuring against current user levels, 20 million users is also a long way south of Pandora’s 100 million users.  3 million paying subscribers is also far off Apple’s 80 million iTunes customers, though the comparison isn’t necessarily apples-to-apples (pun fully intended).

All of this is not to say that Spotify’s growth rate should be questioned but instead to put it into appropriate historical context, namely that Spotify is performing at the rate that streaming music services should perform in their first 40 months.  Not more, not less.

What is different about Spotify, is the need to amass new free users to drive premium subscriptions (see figure 3).

Although Spotify officially quotes 10 million registered users (the same number it first reported in December 2010) it is more instructive to look at paid conversion as a share of the 20 million monthly users reported by Facebook.  (Bear in mind that Spotify first quoted 10 million users back in December 2010, long before the US launch or Facebook integration).

Even with the 20 million users measure, 17% stands out as a highly successful conversion ratio for Spotify, an affirmation of the Freemium model.  Not only that, the conversion rate has grown strongly month upon month.  Spotify has been getting progressively better at converting free users to paid.  The conversion from active users to paid is even more impressive: 27%.

However it is also clear that the acceleration in new user acquisition enabled by Facebook integration is beginning to dent the conversion rate (see figure 4).

This is though just a natural byproduct of rapidly expanding the funnel: these new free users need to have time to get hooked on the service and then get migrated over to paid. The rate of new users is so much higher than previously that it will take time for Spotify’s overall metrics to balance out.  But that should indeed happen.  And if it does , then it augurs well for positive premium growth down the line.

If Spotify converts between 17% and 27% of each of the new daily 45,454 users, it will add between  0.7 and  1.1 million new paid users a quarter, or between 4.8 and 4.5 million a year.  Assuming a 27% conversion rate of these new active users, Spotify could have just over 8 million paying subscribers by May 2013 and 36 million total users.  The lower case, and probably more realistic, 17% conversion rate scenario would result in 6.3 million paying subscribers.

Although the rates and ratios will fluctuate over the coming 12 months, these numbers give us a useful directional sense of the long term impact of Facebook on Spotify’s current growth metrics.  There remains a big question over the scale of the actual addressable market, i.e. is there a demand ceiling that Spotify will hit somewhere south of the 5 million paying subscribers mark?  But ceiling or no ceiling, and low or high conversion scenario, there is one inescapable conclusion, namely that Facebook integration is transforming Spotify’s business, fast.

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These charts and the above analysis feature in a brand new Music Industry Blog free report: ‘ When 2+2=Free: Making Streaming Music Add Up’.  The report is free of charge to Music Industry Blog subscribers.  To receive your copy simply subscribe to email updates of this blog using the box to the upper left of this page.

And Then There Was the Facebook Play Button…

Last week we saw the launch of the Facebook Timeline for Artists and the Spotify Play Button, neither of which were without controversy (click on the links for more).  Now we have the two trends pulled together with the Facebook Listen Button.  The Facebook Listen Button gives artists a Listen button integrated into the front-end of their profile page which when clicked starts their music playing in the music app of the user.

The Good News: Elegant User Experience

  • This is an elegantly simple integration, that is uncluttered and allows a user to achieve their goal quickly and simply
  • It brings further consistency to Facebook artist pages, putting into practice the lessons learned from the anarchic chaos that was MySpace artist pages
  • It will help drive usage of streaming music services

The Bad News: Problematic Integration

  • The same player-integration issues apply to the Facebook Listen Button as do to the Spotify Play Button: a visitor has to a) be a user of one of the supported streaming music services and then b) has to have the app open.  Both of which are speed bumps in the user experience, especially if the visitor isn’t a user of a supported music service, perhaps because they live in a country where the services aren’t yet available
  • Following being shunted off the artist profile front page by the Timeline, artist apps like BandPage, Reverb Nation and FanRX have effectively had their usability further downgraded by their play buttons being a couple of clicks away from the front page compared to the front page click of the Facebook Listen Button

Conclusion

Overall the Facebook user wins here.  The Listen Button is not intended as the consumption mode of choice for aficionado fans, it is a quick discovery tool for people new to the artist who want to learn more.  And with this key use case in mind, the design and implementation is clean, elegant and (reasonably) convenient.  But the flip side is that those artist apps find themselves further let down by the implementation.  Strategically this matters not so much for those apps (though of course to the companies themselves it will feel like a kick in the ribs while on the floor) but instead for what it says about Facebook’s ecosystem and platform aspirations.  Though these apps are a miniscule detail in Facebook’s Socially Integrated Web Strategy, developers will be looking at their experience and trying to learn whether this is a precedent for how Facebook treats its developer partners or just a blip.  Facebook needs to ensure that it is the latter and that this is known clearly and widely.

For now, Facebook has momentum to spare and developers will willingly swallow the risk for a stab at reaching the largest single digital audience on the global web.  But Facebook’s Socially Integrated Web Strategy depends upon those developers helping ensure that momentum is maintained.  Long term Facebook needs the developers as much as they need it.  Facebook may be the future for now  but that confidence could be beginning to beget hubris.  Remember, MySpace used to be the future too.

Spotify Play Button: Digital Music’ Largest Marketing Funnel Just Got Bigger

A quick one….

Spotify today announced its new ‘Spotify Play Button’ feature.  As Giga Om Pro’s David Card Tweeted, it is ‘Spotify’s 1st baby step towards 2-way platform syndication’.  In a nutshell the feature enables publishers to post embedded song stream links on their sites, thus adding music context to their stories.  Publishers at launch include Vogue, GQ, The Guardian and NME.  Crucially the Play Button is not an audio embed but instead a link that will play music from Spotify’s servers, via a user’s Spotify app via the site.  Which means that if you don’t have Spotify you don’t get to listen to the music.

10 Million Users Translates to a Small Share of a Publisher’s Readership

As much as a success story as Spotify is, its 10 million users (or 17.5 million depending on which source you choose) are significant in digital music terms but tiny in Internet user terms. Which matters a lot to mainstream publishers such as Vogue and GQ who appeal to broad demographics.  Only a small share of their readers will actually have Spotify accounts, so the majority of their readers will, as I told the BBC, encounter user experience ‘speed bumps’.  Readers will either not be able to listen to music or instead will have to register for Spotify…assuming of course that they are Facebook users, otherwise they will have to register for Facebook first, and then Spotify.

So non-music specialist publishers (i.e. those whose readers will not in the main have Spotify) will likely get as much reader push back as they will positive feedback.  For Spotify though it is all win-win.  This is a smart customer acquisition tool.  Combined with the Facebook integration Spotify now arguably has the largest marketing funnel of any digital music service (YouTube, and by extension Vevo, excepted).  And this is what it is all about, as the following quote from the Spotify press release attests:

Anyone new to Spotify will be set up with the Spotify desktop app, which powers the button in the background, as soon as they start playing the music.

Another Step in Spotify’s ‘Music API’ Strategy

As I’ve argued before, Spotify want to become the API for Music.  This is part of that strategy.  Soundcloud should probably be concerned – though they are more than smart enough to find out a way to make their universal accessibility a highly visible differentiation point.  YouTube and Vevo though won’t be losing sleep.  The majority of user generated music links will continue to be YouTube embeds, as will the majority of publisher music links.  The web is becoming an ever more video-rich experience and music is no exception.

So, a small but smart move from Spotify that will do wonders for their user acquisition and ‘Music API’ strategies.  The case for publishers though is less clear cut.

Facebook Timeline for Artists (When Platforms Forget Their Responsibilities)

Regular readers will know I’m a big advocate of content platforms and ecosystems.  Indeed device based ecosystems such as iTunes, Kindle and xBox are the success stories of paid content. More recently these platforms have been complemented by a new wave of ecosystems by the likes of Facebook and Spotify, that depend upon software and user data for walls instead of hardware.  Both sets of ecosystems depend upon 3rd party developer and / publisher platforms for success.  A thriving platform is one which is defined as much by 3rd parties as it is the host company.  But just as a blossoming garden requires careful tending so does an ecosystem.  The host has a responsibility to ensure that developers and publishers have the support, processes and transparency necessary to instill the confidence necessary for them to invest their time and resources into the platform.  It is a responsibility that does not always come cheaply to the hosts and isn’t always respected to the full, as we have seen with the impact of Facebook’s Timeline on a number of artist app developers.

Artist Timelines are Throttling Artist Apps

Facebook’s Timeline feature is looking like a great innovation from the social networking behemoth and there are many examples of artists, music services and music publications using the feature to great effect.  (Take a look at Spotify’s Facebook Timeline for a super cool implementation).  However the way in which Timeline was implemented on artist pages has had a dramatic cooling effect on what was beginning to shape up to be a vibrant community of Facebook artist app developers.  Latest data from AppData.com and reported on Digital Music News shows that Band Page (formerly Root Music), Reverb Nation and FanRX (formerly BandRX) all saw a steady decline in usage in the lead in to the Timeline switchover date and then a ‘falling off a cliff’ drop on the date itself.  All three apps have remained stuck at their decimated levels.

The key reason for the collapse in user numbers is that as part of the Timeline feature Facebook prevented these apps being able to act as the landing page for artist profiles.  There is very well thought out reasoning for this move: Facebook remembers only too well the anarchic chaos of MySpace artist pages, indeed the pared-down minimalism of Facebook’s UI was an intentional antidote to MySpace messiness.  But none of this detracts from the fact that Facebook has failed to fulfil its duties as platform host.  It should have done more to accommodate the concerns of artist app developers and would be well advised to work with them now to improve their lot.  Although it would be stretching credulity to claim these apps were responsible for artists switching from MySpace to Facebook, they certainly played an important role in easing the transition for many.

Being a Platform Means Looking Out for the Small Guys Too

If Facebook is serious about becoming a platform for music, it needs to ensure that it doesn’t just lay out the red carpet for Swedish streaming services.  The value of Facebook as a music platform will come from the functionality, utility and experience delivered by 3rd party apps that help artists differentiate the way they engage with fans.  Apps such as Band Page, Reverb Nation, Fan RX and Bopler Games.  Ensuring that strategic priorities can be implemented without destroying the livelihoods of developers is a key responsibility of platform hosts.  Of course sometimes hosts patently ignore the responsibility and use app developers as free R&D – just think about the number of times Apple has killed off app companies by integrating their functionality directly into iOS.  But even Apple knows you can only do that so many times before you risk killing the proverbial golden goose.

I continue to maintain that Facebook’s platform strategy is subtly brilliant, and in the bigger scheme of things the artist app Timeline debacle is pretty small fry.  But if Facebook is to establish itself as a genuine music platform it must learn from the lessons Band Page et al are painfully teaching.

The Digital Music Year That Was: 2011 in Review and 2012 Predictions

Following the disappointment of 2010, 2011 was always going to need to pack more punch.  In some ways it did, and other ways it continued to underwhelm. On balance though the stage is set for an exciting 2012.

There were certainly lots of twists and turns in 2011, including: disquiet among the artist community regarding digital pay-outs, the passing of Steve Jobs, Nokia’s return to digital music,  EMI’s API play, and of course Universal Music’s acquisition of EMI.  Here are some of the 2011 developments that have most far reaching implications:

  • The year of the ecosystems. With the launch of Facebook’s content dashboard, Android Music, the Amazon Fire (a name not designed to win over eco-warriors),  Apple’s iTunes Match and Spotify’s developer platform there was a surge in the number of competing ecosystem plays in the digital music arena.  Despite the risk of consumer confusion, some of these are exciting foundations for a new generation of music experiences.
  • Cash for cache.  The ownership versus access debate raged fully in 2011, spurred by the rise of streaming services.  Although we are in an unprecedented period of transition, ownership and access will coexist for many years yet, and tactics such as charging users for cached-streams blur the lines between streams and downloads, and in turn between rental and ownership. (The analogy becomes less like renting a movie and more like renting a flat.)
  • Subscriptions finally hit momentum.  Though the likes of rdio and MOG haven’t yet generated big user numbers Spotify certainly has, and Rhapsody’s acquisition of Napster saw the two grandaddys of the space consolidate.  Spotify hit 2.5 million paying users, Rhapsody 800,000 and Sony Music Unlimited 800,000.
  • New services started coming to market.  After a year or so of relative inactivity in the digital music service space, 2011 saw the arrival of a raft of new players including Blackberry’s BBM Music, Android Music, Muve Music , and Rara.  The momentum looks set to continue in 2012 with further new entrants such as Beyond Oblivion and psonar.
  • Total revenues still shrank.  By the end of 2011 the European and North American music markets will have shrunk by 7.8% to $13.5bn, with digital growing by 8% to reach $5 billion.  The mirror image growth rates illustrate the persistent problem of CD sales tanking too quickly to allow digital to pick up the slack.  Things will get a little better in 2012, with the total market contracting by just 4% and digital growing by 7% to hit $5.4 billion, and 41% of total revenues.

Now let’s take a look at what 2011 was like for three of digital music’s key players (Facebook, Spotify and Pandora) and what 2012 holds for them:

Facebook
2011.  Arguably the biggest winner in digital music in 2011, Facebook played a strategic masterstroke with the launch of its Digital Content Dashboard at the f8 conference.  Subtly brilliant, Facebook’s music strategy is underestimated at the observer’s peril.  Without investing a cent in music licenses, Facebook has put itself at the heart of access-based digital music experiences.   It even persuaded Spotify – the current darling of the music industry – to give it control of the login credentials of Spotify’s entire user base. Facebook’s Socially Integrated Web Strategy places Facebook at the heart of our digital lives.  And it’s not just Facebook that is benefiting: Spotify attributed much of its 500,00 new paying subs gained in October and November to the Facebook partnership.

2012. Facebook is quietly collecting unprecedentedly deep user data from the world’s leading streaming music services.  By mid-2012 Facebook should be in a position to take this to the record labels (along with artist profile page data) in the form of a series of product propositions.  Expect whatever is agreed upon to blend artist level content with music service content to create a 360 user experience.  But crucially one that does not require Facebook to pay a penny to the labels.

VERDICT: The sleeping giant of digital music finally stepped up to the plate in 2011 and will spend 2012 consolidating its new role as one of the (perhaps even *the*) most important conduit(s) in digital music history.

Spotify.
2011.
 It would be puerile not to give Spotify credit for a fantastic year.  Doubts about the economics of the service and long term viability remain, but nonetheless 2011 was a great year for the Swedish streaming service.  It finally got its long-fought-for US launch and also became Facebook’s VIP music service partner. Spotify started the year with 840,000 paying subscribers and hit 2.5 million in November.  It should finish the year with around 200,000 more.  Its total active user base is now at 10 million. But perhaps the most significant development was Spotify’s Developer platform announcement,paving the way for the creation of a music experience ecosystem.  Spotify took an invaluable step towards making Music the API.

2012: Expect Spotify’s growth trajectory to remain strong in 2012.  It should break the 3 million pay subscribers mark in February and should finish the year with close to 5 million.  And it will need those numbers because the funnel of free users will grow even more dramatically, spurred by the Facebook integration.  But again it will be the developer platform that will be of greatest and most disruptive significance.  By the end of 2012 Spotify will have a catalogue of music apps that will only be rivalled by Apple’s App Store.  But even Apple won’t be able to come close to the number of Apps with unlimited music at their core.  More and more start ups will find themselves opting to develop within Spotify rather than getting bogged down with record label license negotiations.  Some will find the platform a natural extension of their strategy (e.g. Share My Playlists) but others will feel competitive threat (e.g. Turntable FM).  If Spotify can harness its current buzz and momentum to create the irresistible force of critical mass within the developer community, it will create a virtuous circle of momentum with Apps driving user uptake and vice versa.  And with such a great catalogue of Apps, who would bet against Spotify opening an App Store in 2012?

VERDICT: Not yet the coming of age year, but 2011 was nonetheless a pivotal year paving the way for potentially making 2012 the year in which Spotify lays the foundations for long term sustainability.

Pandora
2011.
 Though 2011 wasn’t quite the coming of age year for Spotify it most certainly was for Pandora.  In June Pandora’s IPO saw 1st day trading trends reminiscent of the dot.com boom years.    By July it had added more than 20 million registered users since the start of the year to hit 100 million in total and an active user base of 36 million, representing 3.6% of entire US radio listening hours.  But Pandora also felt the downs of being a publically listed company, with flippant traders demonstrating their fear that Spotify’s US launch would hurt Pandora.

2012: And those investors do have something of a point:  whatever founder Tim Westergren may say, Spotify will hurt Pandora.  A portion of Pandora’s users used Pandora because it was the best available (legal) free music service.  Those users will jump ship to Spotify.  This will mean that Pandora’s total registered user number will not get too much bigger than 100 million in 2012 and the active number will likely decline by mid-year.  After that though, expect things to pick up for Pandora and active user numbers to grow again.  The long term outlook is very strong.  Pandora is the future of radio.  It, and services like it, will get an increasingly large share of radio listening hours with every month that passes in 2012, and with it a bigger share of radio ad revenues.  Pandora will be better off without the Spotify-converts, leaving it with its core user base of true radio fans. Spotify’s new radio play will obviously be a concern for Pandora  but this is Pandora’s core competency, and only a side show for Spotify.  Expect Pandora to up their game.

VERDICT: Since launching in November 2005 Pandora have fought a long, dogged battle to establish themselves as part of the music establishment, and 2011 was finally the year they achieved that.  There will be choppy waters in 2012 but Pandora will come out of it stronger than it went in.

Why Facebook Is The Real Winner With Google’s Mediocre Music Strategy

The digital music market is not in a great place right now and is in need of some major change: CD sales are still shrinking more quickly than digital revenues are growing; doubts are growing over the freemium model; overall consumer adoption remains niche.  So what do Google do? They launch another download store.  Come on Google, you are one of the Internet’s giants.  You thrive upon disrupting markets, and all you do is launch a me-too download store with an unlicensed locker feature?!

The labels and Google must both shoulder blame for the underwhelming outcome

Of course some of the blame has to be laid at the feet of the labels for restricting what services can aspire to with their current licensing structures.  But Google must equally shoulder the blame for not pushing harder and for not offering the labels more in return (and I’m not talking cash).  I’m told that Google had planned to go to market with something much more ambitious but couldn’t get the licenses (or perhaps at the prices they were willing to pay).  Google is arguably the most important digital conduit in the world.  If Google is unable to bring that influence to bear in negotiations then what hope is there for start-ups?  Google really should have pushed harder, until they got something truly amazing to work with.

But even that isn’t an excuse that Google can really hide behind either.  Take a look at what Facebook achieved without having to sign a single licensing deal.  To use the clichéd management consultant saying, Facebook thought ‘out of the box’.  Google meanwhile didn’t so much as think within in it as let the labels tape them into it.

Facebook is gatecrashing the Triple A party

A while ago I wrote a piece talking about the Triple A of digital music (Apple, Android, Amazon) and the increasing consolidation of the market around them.  Those three players are the ones who bring the scale and stability that the major record labels so keenly crave and those are the three that the licensed service space is increasingly consolidating around.  And yet Facebook’s subtly brilliant strategy of becoming the universal content dashboard looks increasingly like being the smartest play on the board.  While everyone outside the Triple A falls over themselves to become a part of Facebook’s coalition of unaligned powers, Facebook quietly becomes arguably the single most important force in digital music by:

  • collecting all of this fantastic music consumption data from a diverse range of music services
  • subverting the brands of those services to Facebook’s own brand
  • making logging in via Facebook and experiencing music within Facebook so convenient it becomes the mode of choice

So while Amazon and Google run around trying to beat Apple at the download game (which by the way, without closed device ecosystems they’ll always come second) Facebook avoids having to deal with labels, brings something new to the digital music equation and quietly builds the data foundations of something potentially transformational to launch further down the line.

Google forgot it was a 21st Century Portal

Facebook can do all this because it is has such massive reach and scale, because as one of the two doorways into our online lives, it is one of the two true 21st Century Portals, that knows and shapes our activity.  The other 21stCentury Portal?  Google.  (See chart).  Google could have done so much more, with or without licences (and I mean legitimately by the way).  Indeed the music industry needs Google to do so much more. Of course the store will be a success. They have such a massive addressable audience they’d really have to screw up not to make it some sort of success.  But Google needs to think whether it wants its digital music success to be measured in terms of download store market share, or something much bigger, something transformational.  The simple question is, do they want to be Apple or do they want to be Facebook?

Free Report: The Socially Integrated Web

I have just released the latest Music Industry Blog report:

The Socially Integrated Web: Facebook’s Content Strategy and the Battle of the Ecosystems

If you are a subscriber to the blog you should already have received your free copy. If you do not yet subscribe to this blog then simply enter your email address into the ‘Email Subscription’ form to the left hand side on this page and you will receive your free copy of the report.  (If you are a subscriber but have not received your copy yet then please email musicindustryblog AT gmail DOT COM.)

Here are some highlights from the report:

The Universal Content Dashboard

Change is afoot in the Internet.  Facebook’s new Socially Integrated Web strategy is set to make Facebook one of the most important conduits on the web.  Facebook is pushing itself further out into content experiences in the outside web while simultaneously pulling more of them into Facebook itself.

The Timeline announcements at f8 saw Facebook establishing itself as a universal content dashboard – a 21st century cable company for the Internet – establishing its own content ecosystem to compete with the likes of Apple and Amazon. While traditional ecosystems are defined by hardware and paid services, Facebook’s is defined by data and user experience.

Joining The Digital Dots

The Socially Integrated Web is the strategic architecture of Facebook’s digital content strategy.  It is a strategy that others’ are following too but that Facebook is currently doing best.  Facebook has been quietly putting many of the building blocks of the Socially Integrated Web into place over the last year or so, but the most dramatic moves were announced at Facebook’s f8 conference in September.  It was there that we heard about Facebook’s controversial Timeline feature.  This – along other functions such as Likes on websites across the web – are Facebook’s attempts to join the dots in our increasingly fragmented and cluttered digital lives.

Four Ecosystems Now Define The Content Landscape

It was not so long ago that content ecosystems were the domain of device manufacturers like Apple, but all of that is changing.  Indeed now it is possible to view the entire digital content landscape through the lenses of 4 different types of content ecosystem (see figure).  If we think about content along two axis, one of ownership and one of openness we end up with four key groups of content types, each of which in-turn leads to a different form of content ecosystem:

  • Device Based Ecosystems. The traditional territory of content ecosystems, these are defined by consumer devices such as the iPad, the Kindle and the xBox.  They revolve around device based consumption of owned content that is either purchased from an integrated store (and typically is tied to the ecosystem with some use of DRM) or is sourced from a user’s own collection.
  • User Based ecosystems.  These are based upon users’ own content collections.  The photos and videos we create ourselves and all of the unprotected professionally created content we have either ripped or purchased.  We create our own ecosystem walls around this content by choosing who we share this content with and where.
  • Open-Web Based ecosystems.  These are the least structured of ecosystems, based around openly accessible web content destinations.  At first sight these might look anything but like ecosystems, yet there are numerous tactics that open-web sites increasingly use to create virtual ecosystems.  For example a video destination might define a narrow set of partner sites where it will make its content available, forcing the user to stay within that ecosystem of sites in order to access that content.
  • Protected-web based ecosystems. Here content companies pull walls down around their content. Sometimes these walls are paid, sometimes they are free but password restricted, sometimes they are created by making content experiences app based, ensuring the content experience can only happen within the app.

To receive your free copy of the report simply enter your email address into the ‘Email Subscription’ form to the left hand side on this page.

Here is the full table of contents:

Setting The Scene

  • Joining The Digital Dots

Analysis

  • Preparing For Long-Term Competitive Strategy
  • Facebook, The Early Follower 21st Century Portal
  • Four Ecosystems Now Define The Content Landscape
  • Ecosystem Co-existence And Competition
  • The Reach And Risks Of Facebook’s Universal Content Dashboard

Conclusion

The Socially Integrated Web and Facebook’s Content Strategy

Click on the video below to view my latest Music Industry Blog podcast.  This episode addresses the Socially Integrated Web, the term I use to describe Facebook’s content strategy.

Topics covered in this episode include:

  • Joining users’ digital dots
  • The four types of digital content ecosystems
  • How Facebook will extend its ecosystem reach
  • The universal content dashboard
  • What will happen to content companies that integrate with Facebook