Access Industries’ full stack music company has, ahem, company: Liberty Media. With a combined market market cap of $37 billion John Malone’s Liberty group of companies is by anyone’s standards is a serious player. In the world of media and telecoms it is one of the biggest. Liberty grabbed the headlines this week with its $2.7 billion acquisition of a 15% stake in Formula One, with an option to acquire the entire company, possibly by year’s end. It is a typically bold move for a company that makes a habit of acquiring companies and consolidating markets. Over the past 11 years Liberty Media and Liberty Global have spent around $50 billion on acquiring companies such as UK TV operator Virgin Media, Dutch cable company Ziggo and (indirectly via a holding company) major league baseball team Atlanta Braves. So far so good, but where’s the music angle I hear you ask. Well, just a few weeks ago Liberty made a bid for a certain Pandora Media to add to its already extensive collection of music assets.
We are at critical juncture in the evolution of digital content. Digital consumption of content, spurred by accelerating adoption of smartphones and tablets, is crashing towards the mainstream, while traditional revenues and business models continue to buckle under the strain. Legal and business disputes between Amazon and book publishers, and Google and independent record labels are small but crucial parts of this process. This period of disruptive flux is giving way to a new era of content distribution in which a few large technology companies are assuming the role of distributor, retailer, channel and playback device as one single package. The emerging new world order is defined by concentration of power, reduction of competition and the subservience of traditional media companies. The 2000’s witnessed the ascendancy of digital innovators, now we are arriving at a new chapter: the Innovator Hegemony, the era of the all powerful, unregulated technology superpower.
Free Is Now the Business Model of Choice
We are mid way through the shift from the distribution era of selling units of stuff, be they newspapers, CDs, packaged games, books or DVDs, to the consumption era where consumers increasingly value access over ownership. This shift manifest itself as a meltdown of the traditional media industries and associated retailing channels. Out of the ruins of these crumbling nation states Amazon, Apple and Google have started to construct sprawling digital content empires. Until relatively recently it looked like Apple was the only company that had learned how to make digital content works as a business, albeit as a loss leading one. But during the last year the market has inevitably buckled under the pressure of Amazon’s willingness to give away access to content as bait for free shipping and Google’s endless appetite for giving content away for consumer data.
Amazon and Google realized they were never going to win if they played the game by the Apple’s rules, which had been transplanted from the analogue age, namely charging for ownership of content. Instead they have opted for the digital zeitgeist: free, or at least feels like free. It is beginning to look like iTunes was a historical anomaly, an isolated outpost for distribution era practices in the digital realm. What Amazon and Google have done is pick up the baton Napster dropped in the early 2000’s and they have run with it.
The Innovator Hegemony
There is little reason media companies would want to cede so much power and pay the inexorable price of devaluing digital content to the price point of zero. They do so because they allowed their partners to get too powerful. This is the Innovator Hegemony. Apple, Google and Amazon all used content as a stepping stone towards achieving global scale, scale that once gained they used to swap the balance of power. Labels, publishers, authors and artists suddenly found themselves beholden to companies they had helped succeed and that success now used against them.
When Competition Legislation Protects Monopolistic Behaviour
But there is an issue of even greater significance at play: the inability of market regulation to appropriately counter the increasingly monopolistic behaviours of the big technology companies’ content moves. Anti-trust and competition legislation neuters media companies but leaves technology companies to operate with near impunity. Dating back to the analogue era when media companies were all powerful, anti-trust legislation was designed to prevent media companies colluding and entering into monopolistic behaviour. But now that technology companies own the platform control points that media companies depend upon in the digital realm, anti-trust and competition legislation has the unintended consequence of consolidating the power of the technology monopolies by stymying media companies.
The three big technology companies have a greater concentration of influence and market share in digital content than any single media company did in the analogue era. Amazon, Apple and Google have become a single, effective monopoly in each of their respective marketplaces. Thus anti-trust legislation currently has the unintended consequence of reinforcing market concentration.
Matters are not helped by the fact that media companies have become something of a busted flush at the legislative level, having over reached with copyright and anti-piracy lobbying efforts. The dramatic collapse of SOPA and the failure of Hadopi illustrate how media companies have lost legislators’ hearts and minds. After years of media industry ascendency the lobbying balance has swung towards the technology companies who are winning over key influencers such as the European Commissioner Neelie Kroes.
Platforms As Integrated Monopolies
Right now Amazon and Google are testing the boundaries, seeing what they can get away with before they are reined in. Amazon is unashamedly abusing its platform to hurt sales of book publishers such as Hachette and Bonnier, while Google is equally brazenly threatening to turn off monetization of music videos of labels that will not sign its overweening YouTube contract. Interestingly both Amazon and Google appear to be testing just how forceful they can be with the independent ends of the media business spectrum. These actions show us how vertically integrated platforms have a tendency to become internal de facto monopolies with effectively limitless internal power. Power that corrupts, and that ultimately turns the ideologies of these once idealistic disruptive start ups into police states where dissension is no more tolerated than it is in North Korea.
It is time for media companies and policy makers to decide whether they are brave enough to stand up to the Innovator Hegemony. Every content company still has the nuclear option of pulling content from the services but few will ever dare to do so – the German YouTube stand off a rare exception. And therein lies the problem, media companies already feel they cannot exist without the big technology partners and the tech companies know it. Without appropriate macro checks and balances the outcome will always be the timeless, asymmetrical roles of bully and bullied.
In my previous blog post I explained that 2014 was going to be the year of taking digital content into the home. That affordable devices such as Google Chromecast, Apple Kindle Fire TV, Apple TV and Roku are set to drive a digital content revolution by connecting digital content with the familiar context it needs for the mass market. These Content Connectors will transform consumers’ relationship with digital content but they will also turn the existing digital content marketplace on its head:
- Breaking down the home entertainment silos: our digital content experiences have evolved entirely isolated from our other media experiences. We multitask because one device is connected and one is not. Our homes have become a collection of content experience silos. Content Connectors break down those walls, brining our digital content experiences onto that most un-connected of devices, the TV.
- On-boarding late adopters: In most developed markets, most consumers are digitally engaged, using Facebook, YouTube, email, tablets etc. on a daily basis. These are digitally savvy later adopters, where their behavior lags is in paying for content. Sure, some will never pay, but others simply haven’t yet been given a solution that makes sense to them. Content Connectors can change that by giving digital content experiences familiar context in the home.
- Smart boxes will leave smart TV’s still born: TV manufacturers are still figuring out how to deal with the hangover of having accelerated the TV set replacement cycle too aggressively with HD. Too many homes have perfectly good HD ready flat screen sets that they won’t need to replace anytime soon. So manufacturers are desperately pushing 3D and Smart TVs as a reason to replace. The problem, for TV makers not consumers, is that Content Connectors turn ‘dumb’ TVs into Smart TVs for a fraction of the cost. A TV isn’t a computing device but plug a Content Connector into it and it becomes one.
- Breaking down media industry walls: Hardware used to create great big walls between different content genres. TVs were for broadcast video, DVDs for recorded video, CDs for audio, games consoles for games. Multifunction devices such as smartphones and tablets started to erode those barriers by being content genre agnostic. Apple’s iTunes Music Store became the generic ‘iTunes Store’ and now Content Connectors want to take this paradigm shift even further by freeing the biggest screen in the home form the constraints of broadcast video.
- Leaving stand-alone stores and services stranded: The disruptive threat of the TV’s liberation is immense. Broadcasters instantly lose their monopolistic hold on the TV and find themselves in the middle of a disruptive threat pincer movement: first non-traditional broadcasters like Netflix and YouTube can get themselves right into the traditional TV heartland; secondly non-video content suddenly finds a home on the TV, whether that be music, photos or games. No matter, all of it competes for TV viewing time. And no coincidence that Amazon’s Kindle Fire TV is equipped with a game controller. What’s more, if you only offer video – which of course applies to most TV broadcasters – you look decidedly limited in the Content Connector era of multi-genre content offerings.
- Using the TV to get consumers over the ‘ownership hump’: While industry leaders obsess over how to make subscription business models work, most mainstream consumers have not even started thinking about moving from the ownership paradigm to a consumption one. That shift will need a generation to truly play out but Content Connectors will give the process an initial adrenaline shot. How? By putting digital content onto the device that consumers already associate with ephemerality. The TV is not an ownership device nor has it ever been one. At most it is a device on which temporary copies are viewed before being deleted. But the majority of the time it is purely access based content consumption. So getting mainstream consumers used to accessing but not owning digital content via the TV is the perfect environment for making an entirely alien concept feel strangely familiar.
- Another changing of the guard: The reversing into the CE market by internet, software and PC companies was the biggest disruption the CE sector ever endured. The likes of Sony and Yamaha used to compete in an almost chivalric manner, agreeing on standards and then competing on implementation. Google, Apple and Amazon pursue no such niceties and compete with incompatible platforms and technology, and in doing so are wining the CE war. The Content Connector revolution is helping the same thing happen to content distribution. A new generation of content providers are emerging that collectively have their eyes set on world domination.
The coming shift in the digital content markets could occur at breakneck pace. Within five years Hulu and Netflix could easily have a 100 million paying subscribers and YouTube’s ad revenue could easily be near $8 billion. If the transition process goes the whole distance traditional content walls could disappear entirely. Google Play could move from selling video, apps or music to simply asking consumers: “How would you like to enjoy this content? Watch? Listen? Or Play?” Traditional broadcasters and media retailers should be scared, very scared.
Two years ago I said that the nightmare piracy scenario for the media industries would be when the pirates gave up trying to fight enforcement and turned their attentions to build great user experiences. Now with the arrival of Popcorn Time that scenario has come to pass. However bad piracy might have been for media companies, it is just about to get a whole lot worse. This is the new era of Experience-First Piracy.
Popcorn Time is an open source interface that sits on the top of pirated video content on torrents. Instead of downloading the video Popcorn Time streams them to the end user, with titles selected from a neat Netflix-like interface. In fact one might argue a ‘Netflix clone’ interface (see figure) but with new releases that Netflix does not even have. On top of all this Popcorn Time is open source, with installer and project files all hosted on developer collaboration site GitHub, and with the app built on a series of APIs. With multiple development forks already this is an entirely new beast in the piracy arena. Forget whack-a-mole, this is potentially a drug-resistant, mutating contagion.
In fact Popcorn Time looks exactly like what I envisaged two years ago:
“What if a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging? If you thought the paid content market was struggling now imagine how it would fare in the face of that sort of competition.”
Piracy for the Mainstream Consumer
Until now, piracy was largely the domain of youngish tech savvy males (69% male, 50% under 35). Popcorn Time and the inevitable coming wave of new Experience-First piracy apps will give piracy truly mainstream appeal. It looks and feels just like the real thing, only for free and with even better content. What’s not to like? Worse still – for media companies, not consumers – these sites might – even have a legal defense as they do not actually host any of the files. The emphasis there is on the ‘might’ as it is an argument that ultimately the Pirate Bay was not able to defend in court.
Three Ways to Hit Back at Experience-First Piracy
So what can media companies do to respond to Experience-First Piracy? Legal action will be the first port of call but ultimately it is a pain killer, not a cure. The problem itself needs addressing with three key strategic focuses:
- Windowing: Netflix can only dream of having the content Popcorn Time has, just as early licensed music services could only dream of having the catalogue Napster had in 1999/2000. The movie studios need to learn that lesson fast, and treat Netflix and Amazon Prime etc. as tier 1 release window partners. As soon as a release is ready for its first post-theatre window it should go straight onto the paid video services. BlueRay and DVD are fading yesteryear technology, the media industries’ most engaged and valuable audiences are online and using online services. It is time to treat them as first class customers, not second class ones.
- User Experience: Before Experience-First Piracy, the retort to media companies was that all they needed to do in order to stay ahead of piracy was to create more compelling alternatives. Now the ante has been well and truly upped. There will never ever be the user experience gulf again. That time has gone. This means licensed services have to be continually pushing the user experience envelope, using their capital to hire the very best designers and developers. Which means that content companies need to saddle them with as little up front rights acquisition debt as possible, freeing them up to spend big on development and design.
- Pricing: The harsh reality of the internet economy is that when something is widely available for free you have to make your paid-for product even cheaper than it was intended to be. For Netflix and Spotify et al, that means getting below $5 a month. Ironically this happens at just the time that Amazon increases its pricing for Prime and Netflix is considering increasing its pricing in order to cover higher rights costs. Media companies have a crucial decision to make: do they want to get more revenue per user out of a user base that will quickly lose share to Experience-First Piracy, or instead do they want to take a near-term revenue hit in order to shore up their digital service partners’ longer term future?
The fact that piracy has spent so long locked in a user experience quagmire is testament to the media industries’ counter measures: pirate sites were just too busy figuring out how to evade enforcement to focus on user experience. But now that era has come to a shuddering halt. It is difficult to over state the dramatic effect Experience-First Piracy will have on the paid content landscape unless media companies do everything within their powers to help the nascent licensed services respond in kind. The smart companies realized long ago that content is not the product, experience is. Unfortunately the pirate’s just figured this out too.
2014 will be another year of growth and of controversy for streaming, with much of the debate set to focus on how streaming may, or may not, cannibalize download sales. The evidence from Sweden and from the US so far suggests that streaming revenues may indeed grow at the direct expense of downloads. But while we may be some way off from a definitive judgment on that issue, there is one cannibalization threat that is looking increasingly incontrovertible, yet has got far less attention: the cannibalization of radio. In fact radio faces a two-pronged attack on its two heartlands, the home and the car.
The Home Front
There are many forms of streaming service and each sub-segment is eager to declare its uniqueness. Spotify and Pandora practically fall over themselves to explain how different they are. And indeed, in many ways they are, but what they have in common is that they are both direct competitors for radio listening time. While they do not compete for all radio listening, nor for all radio listeners, they compete for much of the listening of some of the most valuable listeners. Indeed streaming is looking more like radio with every passing day. The intensifying focus on curation as a means of making sense of 30 million songs is leading to on-demand services delivering a richer suite of lean-back, programmed and semi-programmed experiences. In doing so the competitive threat to radio intensifies. Whereas radio broadcasters can rightly claim that radio delivers a low effort, lean back listening experience, streaming services now wear those clothes too and they are not going to relinquish them.
Where things have really heated up though is the surge in streaming playback technology for the home. Companies like Sonos and Pure have pioneered in-home streaming technology and CES saw this whole sector upping its game. Music hi-fi is disappearing out of the home and these companies plan to bring it back with streaming at its core. While radio is a key component of these devices, any hardware that gives a user the choice between traditional radio and interactive streaming is going to mean that radio is directly competing for listening time on that very device. The home is one of radio’s heartlands, and broadcasters are now having to fend off the unwanted attentions of streaming music services establishing an in-home beachhead with consumer adoption of home streaming devices.
Digital Radio Fragmentation Plays Into the Hands of Streaming Services
Dedicated digital radio devices such as DAB and satellite radio players have only found traction in a handful of markets, with the US and UK notable exceptions at the forefront. But international and domestic squabbles over competing digital radio standards mean that the global digital radio landscape is a fragmented mess of half-baked trials and aborted roll outs. All the while internet streaming adoption accelerates on smartphones and tablets. Radio may even buckle under the weight of this app invasion. The more radio broadcasters rely on internet streaming for digital strategy, the more they put themselves directly in competition with streaming services, both on-demand and interactive radio.
The Battle for the Car
If the onslaught on the home was not enough, the growth of interactive car dashboards means that streaming services are getting straight into the car too. In the US SiriusXM has long been held up as a standout success story for digital content with 25.6 million paying subscribers outshining any on demand music service by a country mile. But the same app invasion that is threating radio on smartphones and tablets is now pouring into the car via interactive dashboards. Car manufacturers are striking up deals at a bewildering rate with streaming providers with Pandora and Spotify being particularly active. SiriusXM had a decent run at things, offering a truly national radio experience in the US, but now more and more consumers will start wondering why they need to pay $15 a month when they can get Pandora and Songza for free.
The Free Music Land Grab
Thus radio finds itself locked in a streaming music technology pincer movement that threatens it like never before. Radio broadcasters have countless assets at their disposal – talk radio, DJs, market-leading programming expertise – but they cannot rely on these alone anymore. They have to up their innovation ante posthaste. They also face a further and utterly crucial disruptive threat from streaming: the free music land grab.
Spotify and Apple only offer free music as a means to sell their core products. Advertising revenue is a nice way of covering some costs but is not their lifeblood in the way it is for commercial broadcasters. This means that they can be more cavalier in their ad sales strategies and undercut radio broadcasters for business with rates that might not be sustainable for a commercial broadcaster. 2014 will see these two powerhouses pursue aggressive advertiser strategies and when coupled with Pandora’s burgeoning ad sales record, traditional broadcasters may find themselves becoming collateral damage in the free music land grab.
Is 2014 a Napster Year for Radio?
2014 will be an important year for streaming, but it will be even more pivotal for radio. It is far too early in the development of streaming to say that this is a make or break year for radio, but it is fair to say that 2014 looks and smells for radio a lot like 1999 did for the music industry. Back then the labels failed to respond to Napster with innovation and they spent the next decade paying the price. Radio broadcasters would be well served to –learn from the labels’ mistake.
For those of you at Midem next week I will be giving a presentation on Monday entitled ‘Making Streaming Add Up’. See you there.
The launch of eBook subscription service Oyster has set the proverbial cat among the pigeons in the publishing world. Publishers and authors are frantically trying to work out just what on-demand subscriptions will mean for their business and whether Spotify or Netflix provides the best analogue for them to benchmark against. It is an intriguing turn of events. Five years ago book publishers looked to the music industry for lessons to learn about digital and they studied voraciously. More recently many book publishers have been of the opinion that are making digital work in a way the music industry has not, and that the roles of student and teacher should be reversed. Now we’ve turned a full 360 degrees. Regardless, this is a fantastic opportunity for the book publishing industry to get subscriptions right at first attempt and to skip many of the painful mistakes the music industry made.
Book Subscriptions Offer a Much Clearer Path to Additive Revenue than Music
There are obviously many, many differences between books and music, but some of these differences actually build a more compelling business case for books:
- Books take longer to read: as with any form of media consumption, there are multiple different types of consumer, and if your content does too good a job of attracting the binge eater then your all you can eat buffet will start loosing money. But if, for argument’s sake, we assume that the average book subscription service user reads a title a week then this means that the approximately $2.30 of a month’s $9.99 subscription is allocated to each title (before all deductions and revenue shares etc.). This might not sound a lot but compare that to music: if an average subscriber listens to around 2,000 songs a month and, for argument’s sake, we consider those to all be album listens, the per-title value is just $0.06. (The share is actually even lower because so much of streaming is single track and playlist based). So because books take longer to read than a CD does to listen, authors and publishers will see the $9.99 split into much larger chunks than for music.
- Increasing readership: $2.30 per title is obviously far below a standard eBook list price, but the business case for subscriptions is based upon growing the overall pie, not slicing it. Ideally subscriptions should both increase the number of people paying and increase the amount people consume. Let’s call the combination of these two metrics the ‘Consumption Quotient’*. The current average price of the Top 10 best selling eBooks is $5.41, so the book service Consumption Quotient only has to be a factor of 2.3 to be delivering just as much industry gross revenue as eBook sales.
- Per-reader value versus per-title value: in theory book subscriptions should encourage readers to read more regularly which could push the $2.30 per-title value down. But the key question publishers and authors need to be able to answer is whether subscriptions will make more readers spend more on books per month. If an average engaged reader only buys 1 top ten title a month then a subscription is already double that value. So the per reader value has doubled while the per-title have more than halved. Thus ARPU (Average Revenue Per User) has gone up while ARPT (Average Revenue Per Title) has declined. This is where the oft-mooted scale argument comes into play. If an author or publisher is simply think in terms of 1 sale becoming 1 rental then it is a net-loss scenario. But if just over twice as many people read the book then it is a net-gain scenario. The more people that subscribe and the more that read more books – the Consumption Quotient -the more likely that subscriptions will become additive rather than substitutive.
Simply because books take longer to read, it is possible to see a much clearer route to a net-positive outcome for book subscriptions than for music. This is a great asset that the book industry should embrace and cherish.
Starting With a Blank Slate
The book industry also has another great advantage in that it can learn from the travails of music subscriptions and start with a blank slate:
- Be transparent: instead of getting skewered on the transparency and fairness debate, publishers should work with the services to provide self-serve author analytics right away. It is a case of when, not if, that this will happen with music, so this is a chance to get ahead of the game and to get authors onside in a way record labels have not yet managed to with artists.
- Don’t talk discovery and curation, do it: if book subscriptions are built form the ground up to drive immersive discovery journeys, then they can avoid the current music service trap of struggling how to guide users through unfeasibly large catalogues. Build these services around discovery narratives that create journeys around authors, genres, periods, countries etc and they will thrive.
- Don’t price out the mass market: $9.99 is a great price for book aficionados, much less so for passive readers. Lower price points are needed for those readers who simply do not want to commit to paying that amount a month (obviously usage caps will be needed). And for those who don’t like the idea of being tied into monthly spending (because most people don’t like to spend a set monthly fee on any media other than TV) get Pay As You Go (PAYG) packages into the market as quickly as possible. Beat the music industry to it!
- Don’t ignore product strategy: music subscription services are an e-commerce mechanism, a billing paradigm. If you get curation right they can be a programming mechanism too. But they are not a product, they are simply a means of getting the core digital product to consumers in a frictionless manner. Which is why the books industry should heed the music industry’s lesson and work with subscription services to ensure that the product itself is innovated too. This means that any video and other multimedia e-book functionality is supported native and that publishers prioritize building such content for these services, where they will become a natural extension of the subscription experience, rather than an under-used novelty in an e-book title.
Subscriptions are clearly the best product set media companies currently have for monetizing the consumption era. For the music industry they continue to raise as many questions as they answer, but for books they might just be the ticket to genuine digital prosperity.
*’Quotient’ in the figurative sense, not the mathematical sense
Today at MIDiA Consulting we have released a new report on the digital content sector entitled ‘Making Freemium Add Up’.
The report combines an unprecedented appraisal of key freemium service metrics with market analysis and recommendations to create a definitive assessment of the freemium marketplace. In the report we analyse an intentionally diverse selection of consumer web services, looking at the distribution and scale of their user bases and the relationship of these with their business models. Services tracked range from music services like Slacker, through utility services like Skype to social services like Google+. It also includes long term data trend analysis of Spotify, Deezer and Pandora.
The report is available for free to all subscribers to Music Industry Blog (to subscribe just add your email address in the Email Subscription box to the right of this post. If you are already a subscriber but have not yet received a copy of the report by email please email mark AT midiaconsulting DOT COM).
Here are some of the key findings of the report:
- Inactive users: inactive user rates range from 13% to 77%. Social services have the highest rates (77% for Instagram and 66% for Twitter). Inactive users are a key characteristic of all registration based services with free-to-consumer tiers, but the registered-to-active rate is below average for all freemium services However freemium inactive users are also often highly interested customers who simply need hooking up with the right pricing and product. In short, freemium inactive user bases are priceless qualified marketing lead databases. The challenge is to separate the wheat from the chaff, to differentiate between disinterested freeloaders and potentially valuable paying customers.
- Paid users: paid user rates range from less than 1% to 90%. But both ends of the scale are outliers. At the low end Soundcloud’s premium tiers are aimed at the smaller audience of creators that are just a small subset of its 180 million active users. While at the other end Valve’s gaming platform steam is more digital retail store than pure freemium destination. The risk for all freemium services is ensuring the free tier isn’t too good, unless free users are your key revenue source (cf Hulu and Pandora). Spotify and Deezer appear to have hit a conversion sweet spot, a solid balance between compelling free tiers and better enough paid tiers.
- Scarcity counts: a music service user risks little by churning because he can still easily get all the same music elsewhere if he cancels his Spotify subscription. But if you stop playing Angry Birds you’ll find few other places where you can hurl bad tempered feathered missiles at egg-stealing green pigs. Similarly churning out of a social network carries a high ‘churn risk’ for consumers as they will weaken their ability to connect with extended social circles online
- The free-to-paid divide needs narrowing: the gap from free to paid is high, a significant leap of faith is required from the user. Whereas the gap from zero to $0.99 for Angry Birds free to paid is a modest step, from zero to $9.99 for Spotify or Deezer portable is a much more sizeable hurdle. Thus converting to paid for music subscription services is a more sizeable achievement than for low priced gaming apps. More needs to be done to bridge the divide. This can be achieved in through bundles and innovative pricing. Though this must be set against the risk of cannibalizing full price tiers.
At Midem this weekend I spent some time talking with Peter Vesterbacka, CMO of Rovio, the company behind the phenomenally successful Angry Birds game. Angry Birds continues to enjoy approximately 1 million downloads a day and as Peter pointed out, that daily download count is more than the majority of music singles ever reach. The conversation got me thinking about why a mobile game can have so much more success than the majority of artists.
Digital Era Products are Tailor Made for Digital Era Devices
To be clear, Angry Birds is not the representative sample of mobile games, to the contrary it is the runaway success story. And the fact that Rovio hasn’t yet been able to build a new brand franchise to rival Angry Birds emphasizes the uniqueness of the brand. Nonetheless, Angry Birds illustrates what happens when you build a content product that is tailor made for the digital devices it is intended to be consumed on. Angry Birds is a content product that does not just utilize the functionality of the smartphones and tablets but depends upon them. Angry Birds is a 21st Century content product build for 21st Century content devices.
Think about when Apple launch a new iPad, they don’t wheel out a senior record label exec with a hot new artist to show off the device, instead they get EA Games to show off a new game that leverages the functionality of the device: graphics accelerator, Retina Display, Accelerometer, Multi Touch etc. Even the best iTunes LPs do not come close to doing that job, let alone a static audio file, which remains the dominant product that the music industry sells on iTunes and other stores.
Analogue Era Products in Digital Era Clothes
But there is something more fundamental at play rather than simply a technology skills gap between record labels and games publishers, and it isn’t just a record label problem either. The inescapable fact is that record labels, publishers of books, magazines and newspapers and even TV and movie studios are trying to shoehorn analogue era products into digital era technology. These companies’ products were built for sitting on shelves and for being consumed in single purpose, non-interactive devices. Games and apps though, are digital era products at home in digital technology while traditional media products are lodgers not yet quite able to keep up the rent payments.
This does not mean that traditional media products cannot have a vibrant future. They can, but they have to truly understand what makes digital era content products work:
- Interactive and Dynamic: digital era content products don’t just leverage the functionality of the devices they are consumed on. They make that functionality core to the content experience itself, to the extent that the content product would not be able to exist without it.
- Visual Experience: digital era content has a visual element at its core. This puts video products at a distinct advantage, but video is an asset that print and music products can leverage too. No coincidence that YouTube is the most successful digital music product in the globe.
- Context and Relevance: digital era content products are increasingly embracing the context of location, social group and time. They both understand the consumer demand-gaps that these factors combine to create, and they also enrich their experiences by meshing these factors into the products themselves.
None of these three areas are insurmountable hurdles for traditional media companies, but at the same time they are not natural paths for many of their products. Embracing these objectives often requires an entirely different approach to product development, rethinking what makes the content valuable in the digital age. For example the audio file in the YouTube video is much less valuable to young teens without the video than with. The video is as important in that product as the music itself. Yet the music product development cycle revolves around creating the audio file, not the video.
Embracing digital era product principles also requires an understanding that just because you can does not always mean that you should. Not all features are appropriate for all types of content. Not even digital era content products use all the device features available to them e.g. Real Racing relies more on accelerometer functionality while Angry Birds leans towards multi-touch.
Learning lessons from digital era products is a must for all traditional media products. Most digital versions of traditional media products are digital adaptations, not genuinely new products. Trying to squeeze the round peg of analogue era products into the square hole of digital era devices clearly is not a long-term solution. Until the circle is squared though, digital era products will continue to leave digital adaptions of analogue era products in their slipstream.
2012 has been a fantastic year for smartphones, with penetration pushing past the 50% mark in key markets such as the UK and US (some estimates even put US penetration as high as 70%). Apple’s iPhone is the leading smartphone in most key markets but Google’s Android Operating System (OS) has much larger market share: c. 70% compared to c. 20% for iOS (Gartner estimated global market shares to be 64% and 19% respectively back in Q2 2012). But these market share statistics can be misleading, particularly when it comes to understanding the digital content and services marketplaces.
Android Fragmentation Complicates Content Strategy
The fragmented nature of the Android landscape is well documented but close analysis of key metrics reveals some startling trends with significant implications for content providers (see figure):
- 60% of iOS devices are on the latest version of the OS (iOS 6) compared to just 3% of Android devices on the latest flavour of Android (Jellybean). Additionally, 88% of iOS devices are concentrated in 3 versions of iOS while Android devices are spread across 10 different versions of the OS, of which 54% are on a version that is 4 releases out of date (Gingerbread).
- There are 260 different Android phone and tablet models, compared to just 6 iOS tablet and phone models.
- There are more than 50 different official Android stores, but just one Apple App Store
Of course there are many mitigating factors, but that simply does not matter from a consumer perspective nor indeed from a content owner’s perspective. Both iOS and Android have got vast App catalogues (750k and 650k respectively) and both have vast numbers of apps downloaded (35 billion and 25 billion respectively). Both also have huge installed bases of devices: 450 million iOS devices and 600 million Android devices. But there is only one clear leader in paid content: Apple.
Looking just at music sales, Apple’s music annual music sales (based on the last reported 12 months) equate to approximately $4.00 per iOS device, compared to just 50 cents per Android device. Apple wins in part because of its longer presence in market, but more importantly because it exercises complete control of the user journey in a closed ecosystem.
The Importance of Closed Ecosystems
The success stories of paid content to date are closed ecosystems: iTunes / iOS, Playstation, xBox, Kindle. Though the controlled nature of these ecosystems may limit user freedom, they guarantee a quality of user experience. In these post-scarcity days of content, the quality of experience becomes a scarce experience which people are willing to pay for. Google simply cannot exercise that degree of control because of its pursuit of a less-closed (but not wholly open) ecosystem strategy. It depends upon device manufacturers to determine the user experience and also gives other value chain members much more control, such as allowing operators (Vodafone) and retailers (Amazon) to open their own Android stores, as well as, of course handset manufacturers (Sony).
Smartphones with Dumb Users
In a pure mobile handset analysis this doesn’t matter too much. But from a content strategy perspective it matters massively so. The problem is compounded by the fact that that as smartphones go mainstream the user base sophistication dilutes. With so many consumers increasingly buying smartphones because they are cheap and on a good tariff, rather than for their smartphone functionality we are ending up with a scenario of smartphones with dumb users. (I am indebted to my former Jupiter colleague Ian Fogg for this phrase). This factor arguably affects Android devices more than it does Apple devices because a) they are more mainstream b) they are often cheaper. This matters for content owners because the more engaged, more tech savvy smartphone owners are also the ones most likely to pay for content.
Google Needs to ‘Do An Apple’ and Not ‘A Microsoft’
With growth slowing in the digital music space, it is clear that new momentum is needed. Google is potentially the strongest opportunity to bring mass market traction to the digital music space, but currently its music strategy, and paid content strategy in general, is falling short due to all of the reasons outlined above.
Google does however have an incredibly strong set of assets at its disposal, in terms of installed based and growing adoption. If Google is serious about making its Play strategy a success then it needs to start putting itself first. Back in the early 2000’s Microsoft expected to be the dominant force in digital music because Windows Media Player was the #1 music player and Windows DRM was the industry standard rights protection. But instead of pushing ahead with a bold Microsoft music offering it relied upon its hardware and services partners to do it for them. Just as Google now is sensitive to the concerns of its commercial partners, so Microsoft was then. Of course Microsoft lost the battle and their softly-softly approach was powerless to fight off the rapid onslaught of iTunes. Microsoft eventually realized that it needed to go it alone, launching Zune, but it was too little, too late. Interestingly there wasn’t much of a backlash from commercial partners when it did so. Launching a standalone music strategy was actually compatible with being a platform partner.
Now Google has an opportunity to learn from both Microsoft’s mistakes and Apple’s success by turning its recently acquired asset Motorola into a closed Play ecosystem to rival iTunes. This doesn’t preclude Android partners from continuing to build their own devices and app stores, but it does create a paid content beachhead for Google, from which it can build a base of highly engaged digital consumers who will quickly learn to value the benefits of a high quality, unified content and device experience. In a Motorola ecosystem Google can truly allow Google+ and Play to become the glue that binds together its diverse set of valuable assets. Without it though, Play will continue to struggle for relevance in a fragmented and confusing Android user journey.
I’ve just published a new post over on Media Industry Blog
Google Consumer Surveys: A Third Way for Content Strategy
Google’s new Consumer Surveys product is a typically disruptive innovation from the search giant. Leaving aside the massive disruptive threat to survey vendors, Google Consumer Surveys gives publishers a new consumer monetization tactic that will help reduce the recurring conflict between paid content and ad strategy. A struggle which often begets strategic paralysis. Freemium just doesn’t translate the same way for news as it does for music.