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.

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.

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.

A Manifesto For The Future Of Free Music

In the thankfully long gone days of DRM downloads it could be fairly said that ‘music was born free yet everywhere it is in chains’. Now it is free of DRM and, for most consumers, of price also. Of course the majority of consumers have always spent most of their time listening to music for free via TV or radio. But the internet transformed free into something that was every bit as good as the paid for product. So yes, most people have always listened to music for free most of the time, but they listened to what broadcasters decided they would listen to. In the old model free music was something that would sate the appetite of the passive fan but was not be enough for the dedicated fan. Free music thus very clearly played a ‘discovery’ role for the core music fans. On demand free though has changed the equation entirely. For many consumers the free stream is the destination not the discovery journey. So 50 million YouTube views is no longer a marketing success but instead x million lost sales or paid streams.

For younger consumers the picture is particularly stark. 56% stream for free, 65% listen to music radio and 76% watch YouTube music videos. Compare and contrast to over 25s where the rates are 35%, 47% and 76%.   In short, free is more likely to be something that drives spending among over 25s because it is predominately programmed while among under 25’s it is less likely to do so because it is on demand.

Free needs recalibrating. Here are a set of objectives to help fix free, a Manifesto for the Future of Free Music:

• Set the objectives: One of the problems with free is there is too little clarity around what purpose it is meant to serve. And this is because it is simultaneously serving multiple purposes: to monetize the masses (ad supported), to drive sales (discovery), to drive subscriptions (freemium). All three are worthy goals but unchecked each one also competes with the other. A consistent industry vision is needed.
• Programme more: Free has a massive role to play in digital music, but it needs to better targeted. A super engaged music fan should not be able to sate their on demand appetite on free. In short, free music needs to be less on demand and more programmed. That is not to say YouTube or Soundcloud need to become Pandora, but they do need to explore meeting somewhere midway.
• Use data to segment: It is not enough to simply say users can choose between different services, they services need to better use their data to determine who gets what experience within them. Someone who watches 20 YouTube music videos a day is clearly a target for a Music Key subscription. That person should not just be marketed Music Key, s/he should also have their free experience progressively dialled down to push them towards it.
• Fix the models: Pandora is a highly viable ad business that happens to have a radio service built on it. There is a world of difference between Pandora’s ad business and Spotify’s. Spotify’s deals with the rights holders essentially preclude it from making free a viable business, which is fair enough. But it does create the unfortunate vicious circle of there never being a case for Spotify investing enough in ad sales infrastructure to drive up CPMs enough to boost ad supported revenue. Labels and publishers need to think hard about what tweaks may need to be made to business models if they want freemium services to be strong enough financially to drive a vibrant subscription market. Not fixing the models will only skew the market to the companies with ulterior business models who can afford to perpetually lose money on free.
• Don’t give up on free fans: A generation weaned on free music will grow up craving more free music. Just because free dominates younger consumers’ digital lexicon now does not mean that it will inherently always do so. Don’t give up on the lost generation of music consumers with the default position of free.
• Strike the right balance: This is simultaneously the most important and most difficult part to get right. YouTube, Soundcloud and Spotify’s free tier are legal alternatives to piracy. Turn back the dial too much on the legal sources and illegal ones will flourish again. However the fact that more than a third of free streamers use stream ripper apps to turn streams into downloads means that the distinction between licensed and pirated has long since blurred. Nonetheless the balance needs to be better struck, probably somewhere equidistant between YouTube and Pandora. Ultimately it will require lots of real time honing and perfecting to get the right mix.

Free music will always be part of the equation and it has become a key part of the music industry’s armoury. But there is a difference between a controlled burn and an out of control forest fire. The freemium wars have already accounted for some high profile scalps and more controversy will follow. Free will remain a crucial part of the landscape but it is time for a reassessment of its role and that must encompass all elements of on demand free, not just Spotify.

‘Plug In, Tune Out’ with David Byrne, Mark Mulligan, Dave Haslam

I’m excited to announce that next week I will be with Talking Head David Byrne and pioneering DJ Dave Haslam, discussing Byrne’s new book ‘How Music Works’ and many of the issues covered in it, including how digital consumption patterns are fundamentally changing both how music is listened to and how it is made.

It is going to be a great event and a fantastic opportunity to hear David Byrne talk about his views on making and performing music, the evolution of the music business and changes in music culture.  And if you haven’t read ‘How Music Works’ yet I recommend you go out and get yourself a copy, it’s a great read.

The full details of the event and ticketing can be found here, and a synopsis of the event is copied below.

Plug In, Tune Out; Does Music Matter Less In the Current Era?

Join Dave Haslam for a special event featuring David Byrne and Mark Mulligan discussing Byrne’s new book, ‘How Music Works’, in which the Talking Heads co-founder explores the joy and the business of making music, and analyses how profoundly music is shaped by its time and place.

Byrne and Mulligan will discuss the changes in the consumption and production of music in the digital age.

Doors 6.30pm. Event starts 7.30pm prompt (running time approx 90 mins).

Venue: Royal Northern College of Music, Manchester, UK

Waterstones will be providing a bookstall. Pre-signed books of ‘How Music Works’ will be available for sale at the event (there will not be a public book signing).

On Sale from Friday 5 October 2012 at 11am (maximum purchase of 4 tickets per customer).

Why Losing Free Customers is a Good Thing for Spotify’s Business Model

In my Future Music Forum keynote last week I discussed some Spotify metrics which were picked up by Paid Content and have stirred up a bit of a debate.  Here is a little more context to those numbers.

The headline statistic is that in 2011 Spotify had to acquire approximately 1.8 million users per month to retain just 400,000 a month (i.e. ‘losing’ 1.4 million a month), resulting in a total monthly churn rate of approximately 20%.  These estimates are based upon the following reported numbers:

• Spotify’s end of year accounts for 2011 reported a total of 32.8 million registered users.
• In December 2011 Spotify reported 10 million active users on its developer blog.
• In March 2011 Spotify reported 1 million paying subscribers, representing 15% of active users, which put the active user count at 6.7 million.
• In September 2010 Spotify held a press event to announce 10 million registered users.

The headline numbers give a ‘gap’ of 22.8 million between registered users and active users at the end of 2011.  Using all of the reported numbers and applying flat rate growth assumptions for intervening months we can calculate the total number of active and registered user gains throughout calendar year 2011 (see figure 1).  All of which gives approximately 1.8 million new registered users per month but only 400,000 active users per month.

Figure 1

Now of course there will be monthly and seasonal variations in those numbers so the exact count will be different for each calendar month.  Also many of those 1.4 million new monthly inactive users (i.e. the gap between new registered and new active) may well become active later in the year.  But the headline trend remains that Spotify has to gain a lot more users than it holds onto (or at least did in 2011 – though I would expect similar metrics to apply in 2012).

Losing Low-Value Free Users Actually Helps Spotify’s Business Model

None of this is necessarily a reflection of a flawed business model for Spotify.  In fact, in my view, it reflects positively.  Let me explain.  Spotify’s business is all about selling premium subscriptions.  That’s where the money is for Spotify, labels, publishers and artists alike. The free tier of its business is simply a marketing funnel.  Ultimately it doesn’t actually matter that much how many of those free users stay on board as free users, what matters is how many convert to paid.  In fact, it benefits Spotify if those users who have no intention of paying churn out early on from the free service as it means less cost to Spotify’s bottom line.  As challenging a path towards profitability as Spotify may find itself on, it would be a dramatically more difficult road if all of those 32.8 million users were active.  So Spotify’s business model and margins actually benefit from the majority of those new free users churning out of the service early, allowing Spotify to focus on migrating the remaining engaged free users to paid.

Figure 2

Free Churn Does However Raise Questions About the Wider Streaming Market

All in all Spotify has brought a huge amount of value to the digital music market and has achieved many credit-worthy milestones (see figure 2).  But as much sense as the free-user-leakage makes sense to Spotify’s business model, it does raise challenging questions about the streaming model more broadly.

For so many users (two thirds of Spotify’s 2011 total) to effectively say “no to free” indicates that streaming audio, even when free, does not resonate strongly enough with mass market music fans.  There are multiple potential reasons that Spotify free users churn out, such as: usage caps, advertising, being PC only, not being able to burn to CD, even just being a stream rather than a download.  Many of those can be fixed with a 9.99 subscription, but the simple fact is that most consumers do not spend that kind of money on music.  9.99 is actually the average monthly spend of the top 20% of music buyers. So it is a price point for the aficionados not the mainstream, which means that most consumers will never get a proper taste of the ‘complete’ streaming audio experience.  Which is why I continue to argue strongly that subsidized subscriptions and cheaper price points are the crucial routes to the mainstream music fan that need pursuing with haste.

Spotify, Rhapsody, Deezer, rDio etc are all doing a great job of trying to take premium subscriptions to the masses, but until they can work out a way to get cost-to-consumer price points down, the addressable audience remains a subset of that top 20% of music buyers.

The Elephant in the Room

And all of their cases are challenged further by an uneven playing field.  While all those music services have to charge for mobile access and have some gaps in their catalogues, YouTube provides unlimited access, on all mobile devices, with the world’s largest music catalogue, with video, for absolutely no cost at all to the consumer.  As far as streaming goes, there is one rule for YouTube, and another for the rest.  Until that anomaly is fixed, the rest will be swimming against the tide.

The YouTube Dilemma

Back in January 2011 in my Midem address I posited that YouTube was digital music’s  Killer App with about 25% monthly user penetration across all European adults in 2010, up a few percent from 2009.  I also explained that penetration for the under 25s was about double that.  The most important point though wasn’t the scale of adoption, but adoption relative to other digital music activities: the next most popular digital music activity was P-to-P (with about half the adoption rate of YouTube) and paid downloads were fourth with a paltry 11%.  The key takeaway was that YouTube is succeeding with digital music adoption where other services were not, that YouTube had got something right from a user experience perspective that others hadn’t, and that the industry should do a better job of understanding YouTube’s popularity.

19 months on and the latest Nielsen stats reveal it is still the same story.  In some quarters it’s being viewed as a dramatic sea change in the balance of digital power. It isn’t of course, instead it is the successful consolidation of a market leading position by YouTube.   Some of this has happened organically but much is down to sheer hard work by YouTube.

Plan V

Since my 2011 Midem speech, YouTube have upped their game strategically, adding functionality and investing heavily in content channels.  They’ve done so largely because of the V word…Vevo.  Vevo may have its challenges but strategically it was a master stroke by Universal Music: start pull the best music video out of YouTube, put it into an interface that is so deeply integrated into YouTube that it just feels like another YouTube channel to users, and all the while have YouTube deliver the audience. Unsurprisingly YouTube got nervous, particularly when Vevo started ruminating on taking the service out of YouTube entirely and into Facebook.

YouTube is No MySpace

Music matters massively to YouTube: they kick started the online video revolution with short-form video clips, but the momentum firmly shifted to mid-form video providers like Hulu and iPlayer.  If you scraped music video away YouTube was left with skateboarding dogs and ‘Charlie Bit My Finger’.  Hence YouTube’s investment in features like playlist functionality and $200 million in original content channels.  Back when MySpace was beginning to lose ground to Facebook I suggested that MySpace should stop pretending it was a social network anymore and start focusing instead on being a platform for bands and their fans.  They didn’t and they ended up losing out on both counts.  YouTube, to their credit, have recognized what their strengths are and are playing to them.

Why YouTube is Still Music’s Killer Digital App

YouTube is still digital music’s killer app because:

• It’s free. Of course so are Spotify and Pandora et al but YouTube is free and fully on-demand everywhere.  If you want Spotify on your iPhone you have to pay £/$/€9.99 to do so, but you can listen to unlimited on demand YouTube music for free on the iPhone, it’s even integrated into iOS (for now at least).  In fact nearly two thirds of iPhone users use the iOS YouTube app.
• It has all the catalogue in the world, and more. Because of the way YouTube entered music content licensing through the back door in the days before its acquisition by Google by selling stakes to the major labels, YouTube has ended up with effectively being given clearance for much much more content than every other licensed music service.  Granted YouTube have since implemented a largely effective takedown process, but the fact that YouTube’s catalogue is music uploaded by users means it doesn’t have the same restrictions other services do, such as territory restrictions, music not yet being officially available digitally etc.  If there’s a piece of music in the world then the odds are it is on YouTube.  Which cannot yet be said of other music services.
• It just works.  YouTube is available wherever you are in the world (in the main), on whatever device you own, and you don’t have to register or sign up.  It also has effective discovery tools such as user votes, comments and collaborative filtering, and features like playlists.
• You can download to keep too.  Streaming ripping might not be part of the official YouTube featureset, and recent action has been taken to block one such service, but there are dozens of stream ripping apps out there and they are actively used by a meaningful share of regular YouTube users.
• It’s an audio visual experience. And of course, YouTube is so much more than music.  It’s an interactive, social, audio visual experience designed for the digital age.  Whilst most other licensed music services have little or no video.

It would be pretty hard to compete against that combination of features if it had a 9.99 price tag on it, let alone when all of that is available for free, to all consumers in virtually every territory in the globe. Which brings us to the YouTube dilemma.

The YouTube Dilemma

YouTube is simultaneously the most important licensed digital music service on the planet and one of the biggest challenges to all the other licensed music services.  It used to be that YouTube was clearly a discovery mechanism, and indeed it still is, but it is now also firmly a consumption vehicle.  YouTube has become both the journey and the destination rolled into one.

Of course there are plenty of music fans who use YouTube as a complement to buying music or subscribing and as a means of finding and sampling new artists. But plenty more use it instead of those other options, particularly those young Digital Natives who value free, convenience and ubiquity over audio quality.

So the music industry has a difficult balance to maintain, between ensuring the most valuable digital discovery asset it has its disposal remains vibrant, but at the same time ensuring it doesn’t hinder the opportunity for services which generate much higher revenue per user.

YouTube and parent Google can do a lot to help.  They can accelerate their focus on making YouTube’s content unique with further investment in live concerts, exclusive sessions etc.  More importantly they can more deeply integrate with paid music services.  (And if integrating deeply with Apple and Spotify might be a step too far then this should be the development path for Google’s music strategy.)

Meanwhile the music industry can help redress the balance too.  YouTube has defined what the mass market digital consumer expects a music service to look and feel like: namely it needs to have video, work seamlessly on all devices (not just 1 extra device at a time), and have social features.  YouTube has set the blueprint for the next generation music product, the industry now needs to pick up the baton and transform that prototype into a high quality, premium product.

Guest Post: What’s the Future for Ad-Funded Music Services?

Today we have the first in a short series of guest posts by leading music industry consultant Keith Jopling.

Keith is also one of the panel of judges for the Music Industry Blog Start Up Showcase and you can view Keith’s bio on the Start Up Showcase page here.

What’s the Future for Ad-Funded Music Services?

I recently gave a short talk at the IAB entitled “What could happen if the music market truly opened up to advertising?” The point of the talk wasn’t to answer that questions exactly (who could?), but to explore why ‘ad-funded’ music is less of a buzz these days. It was an opportunity to reflect why ad-funded hasn’t delivered on the heady expectations back when it all started in 2005/6.

The IAB event was back in May and since then there have been one or two developments and fresh comment. Most significantly, the UK’s number two ad-funded music streaming service, We7 was bought by Tesco for £10.8m – presumably in time, re-positioning the ad-funded pure-play music service to something of added-value to Tesco music buyers (and presumably, no longer funded by ads). Watch that space.

I also read something from Alexis van de Wyer, President of AdsWizz Inc, suggesting that Spotify had taken its eye firmly off the ad-funded ball and become too focused on premium subscriptions and partnerships for its API platform. I’m not one to doubt the brilliance of Spotify’s strategic plays but I thought this was an interesting viewpoint (even if it was a thinly disguised sales pitch from an advertising salesman).

In its early stages Spotify would wax lyrical about ‘new advertising products’ and various forms of innovation in online advertising. But did it sometimes feel like there really wasn’t much advertising on Spotify, or for that matter, innovation in ad formats? With several strategic shifts since it does to some extent look as though Spotify has accepted that ad-funding isn’t a primary revenue model – but more a springboard to other revenue streams (the so called freemium model).

Wherever this takes Spotify, the other question is – where does it leave ad-funded music as a ‘sector’.

The IAB talk highlighted a few facts of note, as follows:

• The UK online advertising market was worth £4.8 billion in 2001 (the IAB’s official figure)
• The UK online ads market grew by 14% year-on-year
• The BPI reported ad-funded music revenues to labels (therefore trade revenues at the labels’ agreed share) of just £11.4m in 2011
• From the BPI figure – adding in publishing and partner shares – the IAB estimated a total figure for ad-funded music in the UK of circa. £40m

Thus, music’s share of the online advertising market in the UK is well under 1%. As a share of revenues to the music industry (to labels anyway), ad-funded is just under 4%. And it hasn’t grown since 2010.

Why is ad-funded music so small and why is it no longer a growing revenue model?

In a way this is more a European problem. With Pandora generating $250m in advertising revenues in the 2011 and label-backed Vevo bringing in $150m, there are at least two cases studies of success across the pond (provided Pandora can keep it up!).

By mapping the existing music service landscape, it’s possible to make some observations:

• In music streaming – Spotify and ‘3^rd generation players like MOG (also now acquired) and Radio have shifted away from ad-funded
• In music video ad-funded is still the primary model (for You Tube, Muzu and Vevo for example)
• In discovery there is a range of models, but the latest buzz start-ups like Soundcloud and Songkick have stayed clear of ad-funded

What mapping current services doesn’t show is the number of promised or planned ad-funded services that have never materialised – including high-profile flops like the notorious Spiral Frog and Qtrax. More recently Oz-based Guvera’s arrival to market seems protracted even though it is still raising investment.

Is there opportunity to re-energise the sector? What is its real potential in Europe?

The IAB seems interested in this space and continues to examine it, so we may hear more views from the advertising camp. But there are at least a few possibilities:

• In video – original programming and digital music channel creation – exemplified in the UK by the massive successes of SBTV, UKF and the more recent indie play Noisey.com
• Format Innovation – audio ads have lagged behind other formats such as display and didn’t quite live up to early expectations, but perhaps there are breakthroughs still to come here
• New markets – with brands now becoming publishers and ‘Content Strategy’ the buzz section of digital marketing plans, it’s only a matter of time before online sync services such as Cue Songs or others can crack-open a scaleable new way to license music to the millions of small scale uses in corporate video, blogs and other branded content

Ad-funded has places to go then, but isn’t the buzz it used to be. But then part of the music industry’s ‘problem’ is the apparent need to pin big hopes on the next panacea. Currently, it’s cloud services enjoying some time in the sun. But what’s really unfolding is a patchwork economy for music, that’s far more interesting to view as a whole.

The Tale of Emily White, Scarcity and the Future of Music Products

Unless you spent the first half of this week on the digital music equivalent of planet Mars, you will have noticed the Emily White furore. The long and short of which was NPR (US public radio) Intern Emily White blogging that she owned 11,000 songs of which just 15 were albums that she had purchased and pining for a universally available universal database of music.  The post was swiftly followed by reasoned critiques against, for, against, and for, and also by vacuous foul mouthed grandstanding. What surprised me wasn’t the strength of feeling on the topic, but a view by some that this was somehow a watershed moment, a changing in collective perspective.  It wasn’t.  For anyone who has followed this space closely for more than a few years this debate will be seen as another chapter in a long-running discourse.  An important chapter, but just a chapter nonetheless.  Long time readers of my blog will remember a series of posts on ‘why music can’t just be free’ and the heated debate that surrounded them.  For those who didn’t, some of the posts are here and here.  (And for an insight into how ‘free’ impacts an artist take a look at this evergreen artists’ post.)

But the point of this post isn’t just to pour another layer of opinion into the simmering cauldron.  Instead I want to try to move the debate on from diagnosing the symptoms onto identifying a potential cure, or at the very least some palliative care.

For argument’s sake let’s assume the following:

• A large share of consumers have fallen out of the habit of buying music and a larger share of younger consumers have simply never learned the habit
• Fewer people place a monetary value on music than used to and yet more people listen to more music than ever before
• High spending music consumers do exist though, and across all age groups, albeit in declining numbers

Understanding the Role of Scarcity

The key reason fewer people buy music is because they don’t have to.  In the analogue age there was a monopoly on supply of music: if you wanted to get new music you had to buy it in high street shops when record labels decided you could, paying the price they and retailers decided you should. The alternative was making a poor quality cassette copy from the radio or friends.  People who liked music had little choice but to associate a very specific monetary value to music.  Napster threw that scarcity model out the window.  With paying for music now a life style choice the monetary value of music has been subjected to hyper deflation.  The ‘price it and they will come’ logic now only applies to a small subset of music fans, a subset that is at risk of becoming an endangered species.

This doesn’t mean people don’t value music anymore, but instead that a majority no longer value it monetarily.  This dynamic is beautifully encapsulated in a response from a 12 year old file sharer that Feargal Sharky was fond of quoting

“I love music and if I could download my Nike I would pay for my music”.

Nike still has scarcity, that’s why so many kids pay for their trainers but not their music.  Like it or loathe it, as far as music products are concerned,  we are in the post-scarcity age.

What, if Anything, Can Be Monetized in the Post-Scarcity Age?

So if scarcity has gone – and it is gone for good – how can recorded music revenues ever be rebuilt?  Indeed should they?  Some argue that charging for music is an outdated model, but you will find that 99.999% of those people also believe that they should still be able to get that exact same music which they don’t think should be paid for i.e. they value the product, just not the price.  Their world view is shaped by the last decade of experience but lacks grounding in basic economics.  The music needs making and that costs money.  Whether that is the money the label invests when it takes a punt on an artist or the cost of an artist getting by on an often very modest income.

Arguing that artists should make their real money in ‘ancillary services’ misses the bigger picture.  Only a tiny subset of music fans pay for merchandize and only about half of music buyers go to concerts.  And the number 1 music consumption channel?  It’s still radio.  So those ancillary revenues are a much smaller addressable market.  They are also largely irrelevant if you are a songwriter rather than a performer.

Recorded music is still the core product. 95% of us listen to music most days.  The vast majority of music consumption (by all people) is recorded music.  Why shouldn’t it also be the core revenue stream?  Scarcity has been disrupted, not market demand.  None of us would reasonably expect a plumber to fix our washing machine for free and then go out into the street and make his money by selling overalls and tools.  Also let’s not forget that most artists make music because they love making music, not T-Shirts.

Why the Flat-Rate Isn’t the Answer

Don’t get me wrong: of course artists have to learn how to make money across a much wider range of income streams than ever before, but there is no inherent reason that they should have to accept that their core creative asset is no longer monetize-able.  The channel, product and pricing strategies may be broken, but the creative heartbeat of music is not.  Simply applying a ‘flat rate’ fee on all the music in the world might seem like an elegant and ‘convenient’ solution.  But it will only exacerbate the problem.  It will formalize and legitimize the concept that music has little value.  It will also accelerate the demise of those music fans who still like to support their favourite artists by buying their music. ‘Flat Rate’ is a pricing strategy for the low end of the music market, not all of it. Even if music has to end up like water, there should still be a market for bottled mineral water.

Of course unlimited access to music in the cloud will play a really important part of the future of music, it will probably be how most people consume music.  But that is a service which should have clear monetary value.  Everyone accepts that premium Cable and Satellite TV packages are paid for commodities.  In fact consumers pay more to have some of that content provided on-demand.  The reason it is different for music (and indeed news) is of course scarcity.

The New Wave of Scarcity

Scarcity still exists for music, predominately in the form of live, and consumers pay premiums accordingly.  If recorded music spending is ever going to rebound, scarcity must be reintroduced to music product strategy.   Not, however, scarcity in the sense of building walls around content (it will always leak out) but instead by creating scarcity of experience. The success stories of paid content to date (iTunes, Kindle, xBox, PlayStation etc) may be walled gardens but their success is derived from the quality of experience that is delivered within them and cannot be experienced externally.  Music products must learn how to create uniquely valuable experiences around music, fully leveraging the interactivity, connectivity and sociality of the contemporary digital world.  Current digital music products do not do so.  As I outlined in my Music Format Bill of Rights report (which you can download for free here) music products must be:

• Dynamic
• Interactive
• Social
• Connected

The future of music products will be app like experiences that deliver unique, interactive and curated music experiences where the whole will be far greater than the sum of the parts (see figure).  Pirating the individual components will lack the context rich, curated and programmed environments in which the music experiences will occur, and will consequently have massively diminished value.  Scarcity will have returned to music products.

Waiting for an iPad Moment

Monetizing convenience only accelerates a race to the bottom.  Convenience should be an inherent part of the value of music products, but only one part.  Just because current music products don’t deliver enough tangible extra value to persuade the likes of Emily White to pay for music does not mean that it must always be thus.  Until 26 months ago the market between smartphones and laptops was that of netbooks.  At that stage most consumers not only did not own a netbook, they would have reported that they never intended to buy one either.  Then along came the iPad and suddenly we have a product revolution on our hands.  An apparently dead market segment transformed virtually overnight into gold-rush prosperity.

The music industry needs an iPad moment.  When it does come (and it will) even the likes of Emily White may finally start to see the value in paying for music again.

What Happened to the RIAA’s Missing 3.5 Million?

The RIAA has highlighted research which indicates that its closure of P2P site Limewire has significantly reduced P2P levels in the US.  Unfortunately the evidence is not as clear cut as it may first appear.

According to the various sources the RIAA cites (mainly a combination of Nielsen and NPD data) the effects between September 2010 and September 2011 in the US of Limewire’s closure were:

• 95% reduction in usage of Limewire by its users
• Total P2P users declined by 9 million
• Total legal downloaders grew by 5.5 million

An immediately apparent trend is that 3.5 million P2P users appear to have disappeared entirely from the digital music consumption landscape (i.e. 9 million ‘lost’ P2P users minus the 5.5 million new paid downloaders).  For argument’s sake let’s assume that 100% of those consumers that abandoned P2P switched straight to paid downloads. That would mean that 39% just dropped out of digital music.  But of course a 100% transition is improbable.  Also many (the majority?) of the new downloaders will not have previously been P2P users.  So what happened to the missing 3.5 million?  The answer is found in a combination of three factors:

• P2P is a technology in decline for music piracy.  Consumers are going elsewhere, to what I term Non-Network piracy.  That is, activities such as Bluetoothing, harddrive swapping, phone ripping, darknets, binary groups, lockers etc.  Individually each activity is small but collectively this is where music piracy is heading.  I remember in my days as a JupiterResearch analyst that as we watched German P2P penetration decline steadily year-on-year in apparent response to music industry anti-piracy measures, we also saw Germany become Europe’s largest Non-Network Piracy market, actually exceeding P2P penetration.  And that is going back a lot of years now.  Today much more still needs to be done to better understand Non-Network Piracy, particularly so in the age of cloud-based music experiences.  Because the same arguments about ownership mattering less for legitimate services apply to piracy.  Downloading an MP3 file from BitTorrent may seem as incongruous to a Digital Native as buying a CD.  Measuring piracy effectively in the age of cloud means viewing illegal streaming services and even music blog streams in the same way as illegal downloads.
  Bottom Line: many of those missing 3.5 million will actually be happily sating their appetite for free unlicensed music via Non-Network Piracy.
• People lie.  I’ve been tracking music piracy for long enough to know that it is unwise to draw definitive conclusions about year-on-year trends.  In Sweden for example, in the early and mid-noughties P2P penetration dropped from 28% to 18% following the closure of a legal loophole and then again to 12% following government enforcement.  Within a couple of years penetration was back up in the mid 20’s%.  Furthermore the main ISP Telia reported that it had seen no noticeable decline in P2P traffic levels.  As Dr. House’s mantra goes ‘People Lie’.  On the one hand this proves that enforcement is effective in that it makes people conscious they are doing something wrong and don’t want to admit to it, until the heat dies off. But on the other it suggests that the impact can be superficial for many file sharers.  Though untruthful respondents should be less important for Nielsen’s panel methodology than NPD’s survey methodology, bear in mind that file sharers are often pretty savvy consumers who use dedicated computers for download.  So it is not unreasonable to expect many to switch their P2P activity from their metered PC for the same reason they wouldn’t admit to file sharing to a survey vendor.
  Bottom Line: surveys are better at measuring consumer attitudes to piracy than they are actual behaviour. 
• Limewire is closed! A 95% reduction in usage of Limewire by Limewire users sounds pretty impressive until you consider that the site was actually been closed down by the RIAA in October 2010.  Limewire agreed to ‘stop supporting and distributing’ its P2P client.  A number of unauthorized spin-off clients (such as LimeWire Pirate Edition) were created but a visit to Limewire’s site reveals a message urging users to refrain from using these apps and to remove them from their computers).
  Bottom Line:the majority of Limewire users unsurprisingly stopped using the defunct client. 
• P2P users are holding their breath. A significant share of the missing 3.5 million may well have stopped downloading illegally for now.  But if they are not buying downloads nor using Non-Network Piracy then they have markedly changed their music consumption behaviour,  perhaps increasing their use of YouTube, listening to more radio, watching more music TV.  For active music downloaders this means an effective dis-engagement from music, falling on the ‘supporting’ channels as their main behaviour.  This will have 1 of 3 long term outcomes: 1) they remain disengaged, casual music fans 2) they finally opt for legal services 3) they eventually go back to piracy.  Of the three, the third is the most likely outcome.
  Bottom Line: nature abhors a vacuum.

Whack-a-Mole Remains Firmly Game-On

The last factor is arguably the most important, particularly in the context of locker services running scared in the wake of the Megaupload arrests.  The demand for free music remains whatever happens to supply.  Closing most of the current illegal channels creates a demand vacuum that will unfortunately be filled, and the history of music piracy to date teaches us that what comes next will be even more difficult to enforce than its predecessor. However there is a fortuitously timed wildcard factor which may help aid the digital transition.  Since July 2011 Spotify has been available in the US, so many of those lost Limewire users may quench some or all of their free music thirst there.  But because we still don’t have any definitive data to suggest that Spotify is reducing piracy so we must keep Spotify as a wildcard for now.

The slightly depressing conclusion in all of this is that the Whack-a-Mole game is not over. But encouragingly the RIAA’s Joshua Friedlander states:

The single most important anti-piracy strategy remains innovation, experimentation and working with our technology partners to offer fans an array of legal music experiences.

I couldn’t have put it better myself. Of course enforcement remains an important part of the mix, but there is an increasing risk of negative ROI (both in financial and publicity terms) that the music industry can ill afford at the moment. Closing down sites hits supply not demand. The solution to piracy lies first and foremost in innovating to meet those clearly demonstrated consumer needs.

Release Windows, the Cure for the Access vs Ownership Debate?

Back in early 2009 when I was at Forrester Research I wrote a report proposing that the Music Industry should adopt release windows.  It seemed to many something of an anachronistic concept, written just at the time with the Movie Industry – that bastion of release windows – was deeply engaged in a dialogue about compressing windows.  But now, with the growing debate over whether streaming services are cannibalizing CD and download sales, the idea is beginning to look highly relevant.  Because the simple fact is that a structured release window strategy for the music industry would do away with much of the access versus ownership debate once and for all.

Music products and services need segmenting into distinct windows

The basic structure of my release window argument was that music products and services should be segmented into tiers of priority and then each of those tiers be allocated a release window.  The tiering would work something like this:

• Window 1, week 1: CDs, downloads and premium subscriptions
• Window 2, week 3: Radio (excluding web-only radio)
• Window 3, week 4: Subsidized subscriptions and web radio
• Window 4, week 5: Ad supported streaming services

 

All of the new releases would go straight to Window 1 and be available there, and there alone, for a 2 week period, with terrestrial and digital radio coming after that.  This is a contentious point as radio is of course intended to act as a discovery and marketing tool but the time has come for the top tier of the music product pyramid to be held up as exactly that.  After all, why should passive music fans who don’t pay for music get to hear new songs as soon as those who pay 9.99 a month or buy downloads or CDs?  Users of free ad supported streaming services would have to wait a full 4 weeks before they get to hear the latest new music.

 

The problem with differentiating a free stream from a paid download is that there simply isn’t that much difference.  Release windows however, put clear blue water between the download and the free stream.

Coldplay is already pioneering the window strategy

Coldplay’s decision to keep ‘Mylo Xyloto’ off Spotify until album sales have peaked is effectively artist level windowing in practice.  The alternative strategy of just putting the odd track on there – such as Adele’s ‘Rolling In The Deep – treats streaming as a radio-like promo vehicle but if all artists did that then its promotional value would soon disappear as people would stop using streaming services.  A structured, industry level windowing strategy however would bring consistency and effective results.

 

Of course the windowing approach isn’t free of problems.  For example pushing radio to the second window will require a new approach to marketing music and a revision of assumptions of sales cycles.  However both of those things are already in effect happening, forced along by the current streaming status-quo, and of course unlicensed free music.  Windowing is an opportunity for record labels to take control of the situation and simultaneously protect music sales and define a long term, complementary role for streaming services.  The alternative is a prolonged and unproductive debate about cannibalization that will cause deep fault lines across the music industry and may ultimately kill off streaming all together.

 

 

Spotify’s US Launch: First Take

Spotify finally today announced their excessively anticipated US launch. Protracted negotiations with the US labels turned this into one of digital music’s longest running sagas.  And although the $100 million of extra funding for label guarantees and advances seems to have successfully assuaged concerns, the labels weren’t just digging in their heels for the sake of it:  the US digital music market has a lot at risk in the face of Spotify’s arrrival and of course there are growing doubts about the Freemium model.

The label negotiations resulted in the last year in  limits being put on the free element of Spotify so that the full unlimited free offering that got Spotify off to such a great start in Europe will only be available to an initial swathe of invited users in the US.  Once the invite-user phase is over, free users will get 20 hours a month for 6 months, falling to 10 hours thereafter, along with a 5 plays-per-track limit.

When Unlimited Isn’t Actually Unlimited

The 10 hours / 5 plays mix is clearly intended to make people use Spotify as a complement to other services, not as a replacement.  Many listeners simply won’t bump into those restrictions.  Those that do though will be the more engaged music aficionados who will either have the will and means to pay for the unlimited premium offering, or will be young kids and those who can’t pay 9.99 a month and they will look elsewhere i.e. to YouTube and to illegal alternatives.

There is evidence to suggest that both might have happened in Europe: in March Spotify announced it had 1 million paying subscribers (something that no other premium services has yet achieved).  But they also announced that only 6.7 million of their total 10 million subscribers are active.  So a third of Spotify’s users either a) just got tired of the novelty of the service b) don’t use it much c) got fed up of the new restrictions and voted with their feet.  The likelihood is all three play a role.

This all matters because ‘just how free’ Spotify actually is will play a major role in deciding how similar an impact it will have in the US compared to Europe.

Spotify Will Be Net-Positive for the US Digital Music Market

My take is that Spotify will be successful and will also be disruptive but on balance will be net positive for the US digital music market (see figure).

Spotify has that priceless commodity: momentum.  More than that, they have mastered the art of maintaining momentum.  Most other services would have seen their momentum fizzle out in the face of a yearlong delay to a US launch.  Not Spotify. Instead they actually managed to use it to sustain momentum.  How?  Because of another of Spotify’s core strengths: scarcity.  Nothing drives demand like scarcity of supply.  Spotify built its European growth upon a perception of scarcity through its invite-only launch. It is set to do the same in the US, but with additional boon of massive pent up demand from US digital music fans who have had to deal with absolute scarcity this last year.

Can Spotify Afford to Be Successful in the US?

Until Spotify ramps up its US ad sales business every free user will be proportionately more costly than free European users.  But Spotify has learned a lot from its European experience.  It has learned which levers to pull to manage growth.  I expect Spotify to plan and manage US growth on a ratio-target basis, with free users never being allowed to exceed a certain share of total users.  E.g. the 50 million users target touted by an over-zealous Spotify ad sales exec would require 5 million paying subscribers to have signed up.  Spotify can’t afford to screw this up.  Getting the economics right will be crucial to a successful exit, which has surely got to be the next move.

What Do US Music Services Have to Lose?

If Spotify can be successful, to what extent will their gains come at the expense of the incumbent services?

• Rhapsody, Napster, MOG, Rdio et al: the incumbent premium subscription services are right to be nervous: some of them have had years to make the model work yet haven’t managed to reach the 1 million subscriber mark.  Rhapsody has announced that it just hit 800,000 paying subscribers, but despite being 150,000 up from the last tally it is only 25,000 more than Q4 2008 which equates to a net gain of just 833 new subscribers a month. Rhapsody’s position is reflective of the overall stagnant nature of the premium subscription sector in the US.  Prior to Spotify the European subscription market didn’t even get out of the starting blocks, let alone have the chance to become stagnant.  So the US subscription services have good reason to fear Spotify as a premium player.  With the restrictions on free plays I don’t anticipate them losing many subscribers to Spotify Free though.
• Pandora: whatever Pandora’s Tim Westergren says, Pandora will see some of its users defect to Spotify.  Yes it is a different value proposition and yes there are many users for whom Spotify will be no alternative.  But there will be those who simply tolerate not being able to listen to exactly what they want rather than perceiving it as part of the value proposition.  Those users, for whom free is the key driver, will be at risk.  Once again though, the limits on Spotify’s free tier should contain this threat to some degree.
• Apple, Amazon and Goole: none of the big three really have much to fear given their different positioning and products but will watch for new Spotify product features cautiously.  They may even feel the need to accelerate launch of free on-demand streaming in their locker services (i.e. not just of users’ existing music collections)

So it becomes clear that the record labels have a done a decent job of engineering Spotify’s licenses in such a way that the incumbent US services face minimum competitive risk.   One hopes that this doesn’t also mean that Spotify’s wings have been clipped so far that it won’t be able to truly shine in the US.  Because Spotify has done a huge amount in Europe: bringing digital music to the mainstream and freeing it from the chains of the iPod.

I actually hope that Pandora and Rhapsody et al do feel some serious competitive pressure, so that they can focus on what they need to do better and then lean on the labels to give them the licenses to do so.  Because the best way the labels can drive the market is by using licensing to empower services with more functionality rather than using it to restrict disruptive threats.