Announcing MIDiA’s New Research Practice: Paid Content

We are proud to announce the launch of MIDiA’s latest research practice: Paid Content. We’ve been working on this service for the past 9 months and it is headed up by our Paid Content analyst Zach Fuller.

The Paid Content service is the definitive source of analysis, data and research on the digital content marketplace, the trends that are shaping it, the technologies that are disrupting it and the companies and the consumers that are driving innovation.

It enables clients to get smart fast on the latest new technologies and start ups that are looking to change the marketplace. It shows them best practices in user acquisition, monetization and retention. Clients can benchmark themselves against competitors and against other industries, as well as getting the inside track on where tomorrow’s audiences are heading.

Some of the reports we have already published include:

  • Facebook The Media Company: If It Looks Like A Duck
  • How Consumers Adopt Technology: Why The S-Curve Rules
  • VR Vendor Landscape: Virtual Reality’s Path to Mainstream Entertainment
  • The Death of the Monthly Active User: Redefining User Metrics For The App Era
  • Paid Content Consumer Deep Dive: The Emergence Of A Sophisticated Audience
  • Instagram User Profile: Edging Towards Mainstream
  • SoundCloud User Profile: Male Dominated Music Sophisticates
  • Netflix User Profile: Mass Market Streaming Video Users

The topics we cover in the service include:

  • Full Stack media companies
  • Content strategy for virtual reality
  • Making digital audience measurement work
  • Media Consumption, cannibalization and wallet share
  • Freemium strategy and conversion
  • Blockchain and the payments landscape
  • How consumers adopt technology
  • Emerging market paid content trends and adoption
  • Paid content user profiles by individual app
  • How to utilize messenger app audiences

Who should subscribe?

Streaming media companies, mobile app companies, TV and online video companies, music companies, telcos, consumer electronics companies, investors

If you’d like to learn more about how to get access to Paid Content email us at info@midiaresearch.com

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The End Of Freemium For Spotify?

‘Leaked’ Spotify numbers emerged today indicating that the streaming service has just hit 37 million subscribers, which puts more clear water between it and and second placed Apple Music, despite the latter’s recent growth. It also means that Spotify is now nearly 10 times bigger than Tidal and probably Deezer (which hasn’t reported numbers since its France Telecom bundle partnership ended). It is beginning to look suspiciously like a 2 horse race. But there is a more important story here: Spotify’s accelerated growth in Q2 2016 was driven by widespread use of its $0.99 for 3 months promotional offer. Which itself comes on the back of similar offers having supercharged Spotify’s subscriber growth for the last 18 months or so. In short, 9.99 needs to stop being 9.99 in order to appeal to consumers. Which is another way of saying that 9.99 just isn’t a mainstream price point.

spotify june 1

As the IFPI’s 2015 numbers revealed, the average label revenue per music subscriber fell globally from $3.16 in 2014 to $2.80 in 2015, with price discounting a key factor. According to Music Business Worldwide, 4 million of Spotify’s newly acquired 7 million subscribers were on promotional offers and around 1.5 million of those are expected to churn out when their promotional period ends. That might sound high but it actually represents a 79% conversion ratio, which is a stellar rate by anyone’s standards. Meanwhile Spotify’s total user base is 100 million which means the free-to-paid ratio is 37%. So price promos are converting at more than double the rate of freemium. Does this mean the end of freemium?

spotify june 2

Freemium proved highly valuable to Spotify in its earlier years and continues to be an important entry strategy for new markets. But last year record label execs started to observe that free just wasn’t converting at the same rate it once did in mature markets like the US. This was because most of the likely subscribers had already been converted and so the majority remaining were freeloaders who were never going to pay, and warm prospects who just couldn’t bring themselves to pay 9.99. This is where price promos come into play. They deliver the impact of mid priced subscriptions, which is enough to to hook those wavering free users. Once they get used to paying the majority tend to stick around when the price goes back up.

Mid Priced Subscriptions Will Drive The Market, Even If By Stealth

I have long argued that mid priced subscriptions are crucial to driving the streaming market, and the burgeoning success of Spotify’s mid-priced-subscriptions-by-stealth strategy provides a bulging corpus of supporting evidence. In fact, the average spend of Spotify’s 7 million net new subscribers in Q2 2016 was $3.09 a month.  The tantalizing question is whether that 1.5 million promo users that are expected to churn out would take a $3.99 product if it was available?

As the streaming market becomes increasingly sophisticated, the leading players will have to rely ever more heavily on differentiation strategies. For Tidal and Apple that means urban focused exclusives, for Spotify (for now at least) that means algorithmic, personalized curation and aggressive price discounting. And in Q2 2016 it is Spotify’s strategy that is winning out, resulting in 2.3 million net new subscribers each month compared to 1.4 million for Apple Music and 0.3 million for Tidal.

Freemim is dead, long live price promos?

 

 

Streaming Hits 67.5 Million Subscribers But Identity Crisis Looms

MRM1601-fig1 for blog

For our recently published MIDiA report ‘State of the Streaming Nation’ we conducted an exhaustive programme of research to assess the global streaming music market, from each of the consumer, market and service perspectives. In pulling together subscriber numbers for each of the music services (there’s a full table in the report) we found that there were 67.5 million subscribers globally in 2015. That was 24 million more subscribers compared to 2014 (also nearly double the number of new subscribers in 2014). It is clear that global subscriptions are gathering pace. However, all is not as it may at first appear:

  • Zombies still walk the streaming streets: Back in 2013 I ruffled a few feathers highlighting the issue of zombie subscribers, music subscribers that are recorded in the headline numbers but that are actually inactive, normally because they are on telco bundles. Fast forward to 2016 and the issue is more firmly in the public domain due to Deezer’s IPO filings. Zombies coupled with overstating by music services accounted for around 12 million subscribers in 2015 so the active ‘actual’ subscriber number was nearer 55 million.
  • Emerging markets are gaining share: Emerging markets will play a key role for streaming over the next few years. They are already driving growth for Apple and Spotify and they will collectively bring the most dynamic growth with western markets nearing saturation for the 9.99 price point. Much of the growth though will come from indigenous companies, such QQ Music (China), KKBOX (Taiwan), MelOn (South Korea) and Saavn (India).
  • Free still dominates: For all the scale of of subscriptions, free still leads the way with free streaming services accounted for nearly 600 million unique users (1.3 billion cumulative users if you add together the user counts of all the services). Free thus outweighed paid by a factor of 10-to-1.

Streaming’s Identity Crisis

Streaming must overcome its identity crisis. Depending on where you sit in the music industry, streaming is either the future of retail or the future of radio. It can be both, but there is increasing pressure for it to be retail only. That would see only a fraction of the opportunity realised. Throughout its history, a small share of people have accounted for the majority of spending. Casual buyers and radio accounted for the rest.

17% of music buyers account for 61% of spending. These are the people who are either already subscribers or that will become subscribers over the next couple of years. Which leaves us with the remaining 83% of consumers. The majority of these listen to radio while a growing minority use free streaming (mainly YouTube). The question the music industry must now answer is how seriously does it want to treat the opportunity represented by these consumers? Does it want to only serve its super fans or does it also want to be global culture? Radio enabled music to be global culture in the 20th century, free streaming will enable it to be in the 21st.

The Free Streaming Debate Is As Complex As It Is Nuanced

This is why the free streaming debate is important but also so complex. Yes, too much free music will curtail the opportunity for paid subscriptions, but too little could consign music culture to the margins. With streaming there is an opportunity to monetize a bigger audience at higher rates than radio ever enabled. At the moment free streaming bears the burden of being all about driving sales (either subscriptions or music purchases) but that misses the far bigger opportunity for free in the streaming era: mass monetization.

What we have now is a dysfunctional system. Freemium services have licensing minimas (the minimum that must be paid per stream) that effectively prevent them from building profitable ad supported businesses, while YouTube has licenses unlike any other but is the industry’s bête noire. Only Pandora has a model that is both (largely) acceptable to the industry and (theoretically) profitable. I say, ‘theoretically’ because Pandora could get towards a 20% margin if it wasn’t investing so heavily in ad sales infrastructure and other companies.

Out of those three disparate models an effective middle ground can and should be found so that the streaming debate becomes one of free AND paid rather than free VERSUS paid. Then we will have the foundations for creating a market that enables subscriptions to thrive within their niche and for global audiences to be monetized like never before.

Quick Take: Soundcloud Goes Premium

 

SoundCloud_logo.svgFollowing weeks of licensing announcements, Soundcloud has finally launched its premium subscription service, a $9.99 tier ($12.99 on iOS), currently only in the US. The move is both encouraging and disappointing. Soundcloud has a truly unique market footprint and has the potential to be a platform for an entirely new approach to monetizing streaming music. But it is also a poor fit for a cookie cutter $9.99 freemium model.

Soundcloud has a whole set of unique challenges and characteristics that make it so different than the rest of the pack:

  • Artist-first experiences: Unlike its now-direct streaming competitors Spotify and co, Soundcloud is an artist-to-fan platform. Most streaming services are effectively a music-store-meets-HBO hybrid. A place you go to get music. Music as a service, or even a utility. Soundcloud is that as well of course, but it is first and foremost it is a place where artists connect directly with their fans. A $9.99 All You Can Eat (AYCE) is not the right model for a place where fans go to engage with artists rather than looking to turn on the water tap.
  • This is a pivot for Soundcloud: Unlike Spotify and Deezer, whose free tiers have long been geared towards driving subscriptions, for Soundcloud this is not a funnel tweak, it is a pivot. It is a complete change in strategy.
  • Competing against free: The problem with giving something away for free for years is that its really difficult to convince people to start paying for it. It is the same challenge YouTube faces with YouTube Red Which is why instead of simply whacking a pay wall around previously free content, YouTube is investing so much in creating new original content only available on Red. In short, Soundcloud needs to explore how it can deliver new, unique value to paid users rather than simply charging them for what they already get (plus a few convenience features).
  • Non-traditional content: Soundcloud’s strength lies in the music that you just don’t find elsewhere, much of which also happens to be dance music. All of the mash ups, bootlegs, un-authorized remixes, 2 hour long mixes are what make Soundcloud such a valuable component of the music landscape. The only problem is that most of them are not covered in standard major label licenses. In fact, many of them aren’t covered at all. Even Dubset, which is trying to build a business around this type of non-traditional content, hasn’t yet been able to get a full suite of licenses in place. For now, it appears that the majors are willing to turn a blind eye to that content. Which raises an interesting question: who gets paid for the revenue generated by unlicensed tracks?
  • Major labels are shaping an indie platform: Major label content is a massive part of Soundcloud but not the majority. In fact, in dance mixes majors typically account for only 30% of the tracks. Yet it is the major labels that are shaping the future of Soundcloud, forcing it down a road that works well for majors on the AYCE services but could skew Soundcloud against its indie community.

No doubt, Soundcloud had to get licenses in place. It had traded on label good will for long enough. But the current model will not maximise Soundcloud’s vast potential. Instead of Spotify-like 15-20% conversion rates instead expect King and Supercell-like 1.5-5% rates. Let’s hope this is simply a hygiene release, preparing the way for a set of products that fit Soundcloud like a glove rather than odd boots. What could a next iteration look like? Well for a start it could be artist focused and secondly it could be cheaper. Imagine a $4 a month, 5 artist subscription that gives you everything by your favourite artists, including premium-only exclusives. Every month you can swap any number of those artists for different ones for the next month. That is the sort of thinking that needs to be applied to Soundcloud’s subscription business if it is going to live up to its capabilities. The alternative is being condemned to being a freemium also-ran.

What’s Going On With Free Streaming?

Earlier this week Soundcloud’s financials revealed that the company was haemorrhaging cash (even before it had to start worrying about content license fees). Now news comes that Pandora is working with Morgan Stanley to meet with potential buyers. Back in Q4 2014 free streaming got a stay of execution when the majors decided to put their weight behind freemium after a period of many executives seriously considering canning the model. In 2015 free streaming was the growth story, with YouTube out performing everyone. Now though free streaming looks to be in seriously troubled waters. So what gives?

Pandora’s Problem Is Wall Street

Probably the biggest problem of all that Pandora has is the story it tells Wall Street. Every year Pandora accounts for a little bit more of total US radio listening, builds ad revenue and steadily strengthens its business. But that’s not the sort of story Wall Street expects from a streaming media company. Investors expect dynamic growth. But Pandora is, along with Rhapsody, the granddaddy of streaming and had 10 million users before Spotify was even launched in Sweden, let alone the US. Pandora long since passed its dynamic growth stage in the US and is now a mature business that is going about sensibly building a sustainable business.

The standard thing to do at this stage for streaming companies is to roll out internationally and find new markets where you can start a new dynamic growth story. This is exactly what Netflix is doing now that US subscriber growth has slowed. The approach has also served Spotify well. But the unique compulsory licensing structure in the US the underpins Pandora’s business model does not exist elsewhere. There is no global landscape of SoundExchanges for Pandora to plug into. With the exception of Australia and New Zealand Pandora has not been able to negotiate rates that it launch internationally with.

Actually, Slowing Growth Is A Problem Too 

All of which explains why Pandora has gone down the acquisition route, buying Next Big Sound, Ticket Fly and Rdio in a bid to become a full stack music company. The problem is that Wall Street either does not buy it, or simply does not get it. In fact, Wall Street does not really make much of a distinction between semi-interactive radio or on-demand streaming. The pervasive view among the investor community is that Pandora is being out competed by Spotify, regardless of the fact that there is only partial competitive overlap in terms of value proposition, target audience and business model. The net result is that Pandora’s market capitalization has fallen from $7bn to $1.8bn and to make matters worse it had to raise $500 million in debt, with revenue growth slowing.

Pandora Needs A New Wall Street Narrative

In just the same way Apple needs a new Wall Street narrative, so does Pandora. Even if just to maintain some market value while it finds a buyer. The full stack music strategy should be central to that narrative, even though the real story is that Pandora is the future of radio. Unfortunately that story will take a decade or more to play out and most investors do not have that kind of patience. (Spotify, these are the sorts of problems you’ll be having to worry about this time next year). And, to be precise, it is the Pandora model that is the future of radio, not necessarily Pandora itself.  Though the odds are still on Pandora playing that role, in the US at least.

If Pandora really does not have the stomach for seeing out the long game it should not find it too difficult to find a buyer, if the price is right. Exactly because Pandora is the future of radio, some of those big radio incumbents are likely buyer. Hello iHeart Media.

 

The Beatles, Streaming And The End Of The Record Label Business Model

So the Beatles are finally coming to streaming…well much of the Beatles’ catalogue is at least.  Is it a big deal?  Kind of. The Beatles were late to iTunes and they’re now late to streaming.  Fashionably late though. No so soon as to be left standing awkwardly waiting for something to happen and not too late to miss the real action.

The Beatles are unique enough, and important enough to dictate their own terms and set their own timetable. For streaming services the Beatles catalogue is strategically important in the way it was for iTunes in that it helps communicate the value proposition of all the music in the world…well most of it. For the Beatles it represents the opportunity to reach younger audiences that sales are currently missing (which in large part explains why the catalogue is being made available on free tiers too).

It’s All About Targeting

20 years ago everyone pretty much bought the same product, the CD. Now though the music consumer landscape is fragmented and siloed. The fact that Adele’s ‘Hello’ simultaneously delivered stellar performance across audio streaming, video streaming, download sales and radio illustrates that there are many highly distinct groups of consumers that do one but not the other. This what Universal will be banking on with bringing the Beatles to streaming: they’ll be hoping that most of the future prospective buyers of Beatles albums are not streaming. For as long as this elongated transition phase continues, this sort of approach can work.

What Happens When The Bottom Falls Out Of the Catalogue Business?

The business model of record labels has long depended on revenue from back catalogue propping up the loss-leading new artists, on whom labels have to spend heavily to break. That model works as long as back catalogue sales are vibrant. But cracks are now showing in that model. Labels, especially the big ones, are increasingly spending even more heavily on a smaller number of big bets. For major labels many of these are either manufactured or laser targeted pop acts that grow big fast but like genetically modified crops, soak the nutrients out of their fan-base soil and are less likely to have long term careers. This means breaking artists are costing more to break and have less long term revenue potential.

That double whammy in itself would be bad enough, but there is an even more important structural factor at play. Catalogue sales depend on people buying classic albums, reissues and retrospectives. The secret is in the term ‘sales’. The model does not translate the same way to sales. Getting someone to spend $10 on an album for old times’ sake that they might listen to a handful of times but value having in their collection is very different from earning $0.20 or so from the same number of listens. But that is the way the world is heading. Older music buyers (i.e. from late 30’s onwards) are the lifeblood of catalogue sales.

That model works for older consumers that grew up buying music and thus have the habit. But what happens what happens when the first millennials enter their late 30s? Which is exactly what is going to start happening from 2016 onwards. As each new cohort of aging millennials passes 35 a smaller percentage of them will have ever regularly bought music. Thus from 2016 onwards every year will mean an ever smaller number of catalogue buyers coming into the top of the funnel.

The long term implications are clear. While this will not be anything like an instant collapse, the impact will be progressively more painful as each year passes. The old label model of developing a vast bank of copyrights will become less and less relevant.

So Beatles, welcome to streaming, this will be your last new format hurrah.

Making Free Work (Hint Cannibalize Radio Not Sales)

2015 started with freemium fighting for its life. 7 months in and it’s still alive and well but the free debate rages on. It is clear that some form of free experience drives paid subscription uptake but it is also clear that too much free reduces the conversion opportunity. A one month trial is probably too little but a year of free is too much. 3 months is emerging as the free, or close to free, sweet-spot as evidenced by Apple’s 3 month free trial and Spotify’s 3 months for $1 a month. In fact Spotify’s cheap trial strategy underscores the constrained ability of unlimited free to convert to paid. Free is crucial to ensure the acquisition funnel is filled but a new approach is needed, one that is more sophisticated than simply stating it is all free or no free.

COMPETING WITH FREE

One of the biggest concerns about free streaming is that it cannibalises sales. Just for the record, it undeniably does. At least on-demand free does. Free has always been part of the music industry, mainly in the form of radio. But the crucial difference with radio is that listeners do not choose what they are listening to. Free streaming needs to start behaving much more like radio, to follow the Pandora model. Crucially it needs to compete head on with traditional radio. Radio is a $46 billion industry globally yet less than 10% of that flows back to labels and publishers, and then on to artists and songwriters (see figure). By contrast the majority of music sales flow back to rights holders and creators. So the music industry needs to optimise streaming to cannibalise radio more than it does sales. To make the majority of free streaming only partially on demand.

The number one streaming metric that the music industry should be paying attention to is the share of total radio listening time that Pandora accounts for. The more that that increases, the more direct revenue flows into the industry.

free decision tree

But at the same on-demand time free streaming’s role in converting subscribers must be protected, albeit within very strictly defined parameters. Subscribers have two key user journey entry points: 1) a trial 2) free. Streaming services need to make better use of their analytics (which are increasingly sophisticated) to identify which free users to invest time and effort into trying to convert and which to side line. Neither Spotify or Deezer is in the business of free music, they are in the business of subscriptions and simply use free as a marketing tool. So they have no reason to cling doggedly to free users that show no sign of converting. Instead after a sufficient period of free music has been offered users should be pushed to subscriptions or onto a radio tier (see figure). There is no business benefit to the streaming services nor rights holders to have perpetual on demand free users.

The assumption that free music is some sort of internet right is symptomatic of the internet’s growing pains. In terms of market development we’re probably at the adolescence stage of the internet, the stage at which carefree childhood starts to be replaced by responsibility and consequences. We’re seeing this happen right across the internet economy, from privacy, data, free speech, jurisdiction etc. Because music has been free online for so long consumers have learned to accept it as fact. That assumption will not be changed any time soon, and try to force the issue too quickly and illegal services will prosper.

Of course YouTube is, and always has been the elephant in the room, buoyed by the schizophrenic attitude of record labels who simultaneously question its impact on the market while continuing to use it as their number 1 digital promotional channel. While the tide may finally be beginning to turn, don’t expect YouTube to go anywhere any time soon. But should the screws tighten do expect YouTube to stop playing ball. As they have made clear in various rights holder conversations, an onside YouTube, warts n’ all, is far more appealing prospect than a rogue YouTube. But implicit threat or otherwise YouTube must be compelled to play by the same rules as everyone else. As I’ve said before, YouTube needs to look more like Pandora.

Competing against radio needs to become the modus operandi of streaming. Only when free music on the internet evolves to more closely resemble radio will the industry be able to fix the apparent paradox of increased consumption translating into reduced revenue.

Soundcloud Edges Towards Making YouTube The Odd One Out

Soundcloud took another step away from being an ‘under licensed’ service to a ‘fully licensed’ one with its deal today with indie licensing body Merlin. This follows on the footsteps of deals with Warner and the National Music Publishers Association. Soundcloud is a long way yet from being out of the licensing woods but momentum is clearly building. Most importantly though, Soundcloud is inadvertently playing the role of ice breaker in the new wave of deals for sites that traded as promotional sites in the download era and are having to, willingly or not, accept a new role that looks and feels a lot more like a straight forward streaming service.

Merlin’s CEO Charles Caldas nailed it in this quote from an interview with Music Ally:

As the value of the streaming market grows, people are starting to realise that consumption is the new sales. Anywhere that people are listening to music is actually the end-game now. This notion that everything is promotional: that way that people used to talk about YouTube as a ‘promotional channel’. When that becomes the destination for music fans, it needs to compete in the marketplace with all the platforms that are monetised,” said Caldas.

Soundcloud always had a lot of goodwill within the indie community and indeed even within the marketing and A&R departments of majors because of its roots as a platform for helping labels, artists (and more recently) fans interact more effectively. The labels’ commercial affairs teams however have been far less enamoured, instead asking why Soundcloud should be able let people listen for free, on demand, without licenses when others can’t.

The role of standalone promotional streaming services made sense when everyone was still buying music, but with download sales and CD sales both on the slide globally the model is less obvious. The discovery journey has also become the consumption journey but the change is happening so fast that it is easy to confuse the two. This is why we have the paradoxical situation where 10 million streams on Spotify is considered to be x amount of lost sales while 10 million YouTube views is considered a marketing success. Right now a large chunk of digital marketing activity that is driving streams on YouTube and Soundcloud is tactic without purpose. It is marketing for marketing’s sake without a clear enough sense of what the end goal is.

This is why Soundcloud needs to get these deals in place. It will completely transform the commercial dynamics of Soundcloud, and there will undoubtedly be disgruntled artists and fans, but the music world has changed and it needed to also. All of which leaves YouTube the odd one out without a chair to sit on when the music stops.

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An honourable mention goes to Songkick who today announced a merger with Crowdsurge and a combined raise of $16m. Congrats to Songkick and Crowdsurge co-CEO Ian Hogarth who is one of the smartest minds in the music industry.

The Music Industry’s 6:1 Ratio

One of the many things that the digital revolution has done to the music industry is to create and accentuate a number of imbalances. Imbalances that will either change, become the foundations of the next era of the music business, or both. In fact there are three key areas where, coincidentally, the lesser party is 6 times smaller than the other: 6 to 1

  • Digital music revenue share: A common refrain from songwriters and the bodies that represent them (music publishers, collection societies etc.) is that everything starts with the song. And of course it does. However it is the recorded version of the song that most people interact with most of the time, whether that be on the radio, on a CD, a download, a stream or a music video. This has helped ensure that record labels – usually the owners of the recorded work – hold the whip hand in licensing negotiations with digital music services. Labels have consequently ended up with an average of 68% of total on-demand streaming revenue and publishers / collection societies just 12%. The labels’ share is 6 times bigger. Publishers are now actively trying to rebalance the equation, often referred to as ‘seeking out a fair share’. For semi-interactive radio services like Pandora the ratio is roughly 10:1.
  • Artist income: While music sales declined over the last 10 yeas, live boomed. And although there are signs the live boom may be slowing, a successful artist can now typically expect to earn as little as 9% of their total income from recorded music, compared to 57% from live. Again, a factor of 6:1. There are many complexities to the revenue split, such as the respective deals an artist is on, fixed costs etc. but these splits tend to recur. Ironically just as everything starts with the song for digital music, everything starts with the recorded work (and the song) for the live artist. The majority of an artist’s fan base will spend most of their time interacting with the recorded work of the artist rather than live. The recorded work has become the advert for live. In fact the average concert ticket of a successful frontline artist costs on average 8 times more than buying their entire back catalogue. Thus for fans the ratio is even more pronounced at 8:1.
  • Free music users: The freemium wars are dominating the contemporary music industry debate. Spotify and other services that have on demand free tiers are under intense scrutiny over how these tiers may be cannibalising music sales. However YouTube’s regular free music user base is about 350 million compared to approximately 60 million free freemium service users across all freemium services. Again a ratio of 6:1. Whatever the impact freemium users may be having, it is 6 times less than YouTube.

The music industry has never been a meritocracy nor will it ever be one. So it would be fatuous to suggest equality is suddenly going to break out. However there will be something of a righting process in some areas, especially in the digital music revenue share equation. Most significantly though, these ratios are becoming the foundational dynamics of the new music industry. These are the reference points that artists, rights holders, and all other music industry stakeholders need in order to understand what their future will look like and how they can help shape it.

NOTE: This post was updated to reflect that the songwriter ratio is actually 10:1 for semi-interactive radio.  The 2:1 ratio applies to label revenue versus collection society revenue, which includes revenue for performers who are often but not always also the songwriter.

The Case For A Freemium Reset

Ministry Of Sound’s Lohan Presencer stirred up a hornets’ nest with his impassioned critique of the freemium model at a recent MWC panel. This is one of those rare panel discussions that is worth watching all the way through but the fireworks really start about 16 minutes in. For a good synopsis of the panel see MusicBusiness Worldwide’s write up, for the full transcript see MusicAlly. I’m going to focus on one key element: free competing with free.

Free Isn’t The Problem, On Demand Free Is

Free music is a crucial part of the music market and always has been thanks to radio. The big difference is that radio is not on demand. Even the Pandora model, which quite simply IS the future of radio, is not on demand. The on demand part is crucial. Although labels have a conflicted view about radio there is near universal agreement that the model works because it is a promotional vehicle, it helps drive core revenues. But turn free into an on-demand model and the business foundations collapse. The discovery journey becomes the consumption destination. To paraphrase an old quote from a label exec ‘if you are playing what I want you to play that is promotion, if you are playing what you want to play that is business’.

P2P Is In A Natural Decline, Regardless Of Freemium

The argument most widely used by streaming services in favour of the freemium model is that it reduces piracy. There is some truth in this but the case is over stated. P2P was the piracy technology of the download era. Its relevance is decreasing rapidly for music in the streaming era. In fact mobile music piracy apps (free music downloaders, stream rippers etc.) are now more than twice as widespread as P2P. So the decline in P2P can only partially be attributed to streaming music services as it is in a trajectory of natural decline as a music piracy platform.

Freemium Isn’t Killing Piracy, It Is Coexisting

But even more importantly free streamers are using those new, next-generation piracy apps to turn their freemium experiences into the effective equivalent of paid ones, by creating local device caches for ad free on demand play back. In fact free streamers are 65% more likely to use a stream ripper app than other consumers. They are also 64% more likely to use P2P and 57% more likely to use free music downloader apps. While it is always challenging to accurately separate cause and effect what we can say with confidence is that whatever impact freemium may have had on piracy, freemium users are still c.60% more likely to be music pirates also. (If you are a MIDiA Research subscriber and would like to see the full dataset these data points are taken from email info AT midiaresearch DOT COM)

Monetizing The Revenue No-Man’s Land Between Free and 9.99

So more needs to ensure the path from free to paid is a well travelled one. It might be that the accelerating shift to mobile consumption of streaming music may help recalibrate the equation. Mobile versions of free streaming tiers in principle may not be fully on demand but they often stretch definitions to the limit and some are simply too good to be free. Being able to create a playlist from a single album and then listening to it all in shuffle mode simply is on-demand in all but name. If we can get mobile versions of free tiers to look more like Pandora and less like Spotify premium, or YouTube for that matter, then we have a useful tool in the kitbag. And if users want more but aren’t ready to pay a full 9.99 yet, let them unlock playlists, or day passes for small in app payments. Lohan made the case for PAYG pricing to monetize the user that sits somewhere between free and 9.99 and it is an argument I have advocated for a long time now.

Freemium Is Not Broken, But It Does Need Re-Tuning

Freemium absolutely can work as a model and it has achieved a huge amount already, but it needs recalibrating to ensure it delivers the next stage of market growth in a way that minimizes the risk to the rest of the business. None of this though can happen until YouTube is compelled to play by the same rules as everyone else. Otherwise all that we end up doing is hindering all music services except YouTube and Apple (which won’t have a free tier). Google and Apple are not exactly in need of an unfair market advantage. So a joined-up market level strategy is required, and right now.