Why Apple Music Matters So Much To Apple

Apple today announced a much anticipated refresh to Apple Music at its WWDC event. Apple Music has found itself at the centre of long running criticism from many parts due to its perceived product weaknesses. This is the bar against which Apple is measured. It has spent years building a well earned reputation for high quality products so its users understandably measure its services by the same standards. Apple Music was a highly ambitious version 1.0 that has since been iterated to iron out user journey kinks. Now today’s feature announcements look set to move Apple Music onto its next stage.

Being An Early Follower Requires Super High Standards

As an early follower rather than a leader Apple always sets itself the challenge of being measured against incumbents that have had years to refine their product offerings. With hardware, Apple normally meets and exceeds those standards. With Apple Music it launched a product that was light years ahead of where most of the incumbents were at launch, but that didn’t compare as favourably against their current offerings. Google Music Play All Access faced a similar challenge. The streaming music market has evolved so much since Spotify and Deezer’s inceptions that a music service cannot now afford to simply launch with the basics. It must do so much more.

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Image courtesy of the Verge

The revamped Apple Music includes a new simplified white interface, lyrics integration and better interaction with cloud libraries (a long running bug bear). These are not exactly step change innovations but they are a significant move forward in what is proving to be a process of continual change. Ultimately this update is about making Apple Music more intuitive and for it to make more sense to mainstream users. Is all this enough to blow Spotify and Tidal out of the water? No, but add in Apple’s bottomless pockets for exclusives and marketing, and you have a potent mix.apple music wwdc

Apple also announced a subscriber milestone, hitting 15 million subscribers. The number suggest that Apple’s growth is beginning to outpace that of its key challenger Spotify. Last year I suggested Apple would reach 20 million subscribers by the end of 2016. These numbers show it is well on track. Apple could yet be the leading music service by the end of 2017 if it starts to fully leverage all its ‘unfair advantages’.

Other metrics that Apple announced included:

  • 130 billion App Store downloads
  • 2 million apps available
  • $50 billion paid out to developers
  • 60 million Apple News users

10 Years On, Music Matters To Apple Once Again

Apple Music matters to Apple not because it will generate large profits (it won’t) but because it is the pace setter for Apple’s strategic shift towards being a services company. Apple is building a new narrative for Wall Street that focuses on the revenue it generates from its existing customer base (in order to distract attention from slowing device sales). Apple Music is the proof of concept. If it gets Apple Music right it will demonstrate its ability to deliver on best-in-class digital services. And because Apple still hasn’t been able to launch its TV subscription (it instead launched a partnership integration with Sling TV) it needs to get Music right until it is able to get the requisite TV deals in place.

This why the stakes are so high for Apple Music. Get it right, Apple re-establishes its market leadership role. Get it wrong, Apple’s own rescue plan goes down the pan. Music was so important to Apple in the mid 2000’s because it helped sell the iPod which in turn became the platform for growth that Apple trades upon today. Now 10 years on music has just reassumed its importance, this time to help sell Apple itself not just its hardware.

Quick Take: Soundcloud Goes Premium

 

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

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

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

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

French Music Sales Are In A Tailspin, Get Used To It

france decline2015 was another year of mixed fortunes for the music industry, with Nordic markets showing positive signs (again) while some bigger markets struggle. It is in this context that French music industry trade body SNEP announced that the French recorded music market registered a whopping 7% decline in 2015, which followed hot on the heels of another 7% decline in 2014. The net result is that France’s recorded music market is now 67% smaller than it was in 2000. To give an extra sense of perspective, if the French market had declined by the same €32 million in 2001 that it did in 2015, the market would have reduced by just 2%. Streaming revenues were up an impressive 47% but physical sales fell by 16% and downloads by a staggering 21%.

Streaming is an increasingly important part of the mix but it is still a minority player, increasing its market share from 16% in 2014 to 24% in 2015. Even though the download collapse was seismic, the lost revenue (€12.7 million) was less than half the amount that streaming grew by (€33.2). So however much streaming may be cannibalising downloads (and it is) it is adding more than it is taking, in France anyway. But we are not just experiencing one format transition, the CD is dying off too. So when you add the decline in download sales and physical sales together, the total (€64.3 million) is nearly double what streaming added. The recorded music business is switching from a sales model to an access model but the revenue transition is lagging the behavioural shift.

midia forecastsPerhaps most perplexing though was the fact that ad supported streaming revenue, for both audio and video, declined by 8%. As regular readers will know, I have long advocated that free streaming should move towards a Pandora like model and away from full on demand. Now the revenue story is building to support this case.

Back in October we published our MIDiA Research music forecasts report ‘Global Music Forecasts 2015-2020: Declining Legacy Formats Cancel Out Streaming Growth’ (from which the above chart is taken and which you can buy here). We predicted that the continued decline of legacy formats (i.e. the download and the CD) would undo all the positive growth work of streaming resulting in market stagnation / market decline. As the French experience shows us, this reality is already coming to pass.

The Three Things You Need To Know About The UK Music Sales Figures

As most people expected, the UK recorded music industry returned to growth in 2015. The UK now follows an increasingly familiar European narrative of strong streaming growth helping bring total markets back to growth. Sales revenue increased 3.5% to reach £1.1 billion while total streams increased by 85% to reach 53.7 billion, with audio stream representing 49.9% of that total. There is no doubt that these are welcome figures for the UK music industry but as is always the case, a little digging beneath the surface of the numbers reveals a more complex and nuanced story. Here are the three things you need to know about UK music sales in 2015.

1 – Streaming Growth Accompanied A Download Collapse

Long term readers will know that I’ve long argued the ‘Replacement Theory’, that streaming growth directly reduces download sales. It is a simple and inevitable artefact of the transition process. Indeed a quarter of subscribers state they used to but no longer buy more than one album a month since they started paying for streaming. There have been plenty of opponents to this argument, normally from parties with vested interests. But the market data is now becoming unequivocal. While streams increased by 257% between 2013 and 2015 download sales decreased by 23%. And of course the vast majority of that streaming volume came from free streams, not paid.

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2 – The Transition Follows A Clear Defined Path

The download to streaming transition is an inevitability, whatever business models are wrapped around it. It is part of the fundamental shift from ownership to access of which streaming music is but single component. It comprises consumers progressively replacing one behaviour with another. In fact, the evolution is so deliberate and predictable that it manifests in a clear numerical relationship: the Transition Triangle.

The UK music industry trade body the BPI has created a number of additional classifications for music sales and consumption. These include Stream Equivalent Albums (1,000 streams = 1 album) and Track Equivalent Sales (10 track sales = 1 album). Using these classifications and adding in actual album download sales we see a very clear relationship between the growth of streaming and the decline of downloads. The difference in volumes between downloads and streams each year is almost exactly the same as the amount by which downloads decreased the previous year. At this point even the most ardent replacement theory sceptic might start suspecting there’s at least some degree of causality at play.

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3 – Thanks Are Due To Adele, Again

Back when Adele’s ‘21’ was setting sales records, music markets across the globe owed her a debt of gratitude for helping slow the incessant decline in sales. Global revenue decline fell to less than 1% and US revenue actually grew by 2.9% (falling back down the following year). Now she’s done it again with ’25’, giving album sales enough of a boost to ensure that the growth in streaming revenue lifted the entire market. For although album sales actually declined in 2015 and streaming volumes had grown more strongly in 2014, it was the combined impact of slowed album decline and streaming growth in 2015 that enabled the total market to grow so strongly.

Adele generated around £25 million of retail sales revenue in 2015, which was equivalent to 70% of the £36 million by which UK music sales revenue increased that year. While of course a portion of that £25 million would have been spent on other repertoire if ‘25’ had not been released, the majority would not. With ‘21’ and now with ‘25’ Adele has been able to pull casual music consumers out of the woodwork and persuade them to buy one of the only albums they’ll buy all year, often the only one.

Without that £25 million UK music sales would have increased by just 1%.  So in effect streaming services have Adele to thank for ensuring their growth lifted the whole market even though she famously held ‘25’ back from each and every one of them. Sweet irony indeed.

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As a final postscript, the role of YouTube, while underplayed in the official figures, is crucial. While audio streams grew by an impressive 81% in 2015, video streams grew by 88%. So however good a job the streaming services might be doing of growing their market, YouTube is doing an even better one.

How TIDAL Can Deliver On Its Promises

The continued media feeding frenzy around Jay-Z’s TIDAL demonstrates just how valuable star power is for cutting through the clutter.  What has helped sustain interest is Jay-Z’s vision for delivering better value to artists and better experiences for music fans.  It is a tall order given that TIDAL has to operate under the same basic licensing framework as all other streaming services, the nub of which is paying c. 70% of all revenues to rights holders and having no control over how much of that gets paid back to artists and songwriters.  Working within the constraints of the standard subscription model TIDAL will quite simply not be able to deliver on its aspirations.  But if TIDAL is willing to create a new model to layer on top of it, then it can do something truly transformational.  Here’s how.

The Problem With Streaming

First we need to look at the issue TIDAL has to fix.  The problem with streaming services is that they inadvertently weaken music fans relationships with musical works.  In the pre-streaming, music sales model consumers paid for an album or single and matched their cash investment with an investment of time in listening to it.  The alternative was to listen to their older music collection or the radio.  So even duff albums not only got money spent on them, they got listened to a few times by their buyers.  And even if they didn’t get listened to even once the artist still got paid.   So a portion of music sales revenue had no relationship to the quality of the music.  Streaming changed that, effectively making the music itself more accountable to its audience.

With streaming, music fans don’t need to waste time listening to music they don’t like upon first listen.  They can bypass the duff.  They also tend to listen less to any single piece of music in general because they have so much other music to choose from at no additional cost.  Artists earning a 150th per stream of what they earn from a download is thus only part of the problem.  Most of the time their mainstream fans (and by that I mean not their top 10% of super fans) aren’t listening to them enough.

Scale Will Come, But It Will Take Time

The theory is that this will be fixed by scale, that a massive installed base of users will result in bigger listening volumes.  But it’s not that easy.  To illustrated, let’s assume people listen to albums an average of 5 times each then you need 30 times as many people to listen to generate the same income as a sale.  So until we get much bigger scale from streaming (e.g. 150m+ subscribers globally) we need to look at how to encourage music fans to concentrate their listening more on the artists they really like.  This is where TIDAL can come into play:

  • Artist channels: Earlier this year I laid out a vision for artist subscriptions.  In this model subscribers pay an additional fee (say $1 or $2) to their standard streaming subscription to get access exclusive programming, content and other experiences from an artist. Subscribers choose from a selection of artist channels and subscribe individually or pay for a bundle.  Think of it like adding sports or movies to your Pay TV subscription.
  • Additional content: Because subscriptions already give you access to all the music in the world (well most of it) subscribers will not be paying their extra $1 or $2 to get to the artist’s music. (Taking the music out of the core subscription and locking it into premium channels is a bad idea and doesn’t fix the artist income issue as we’ll see in a moment).  Instead fans will be paying for a mixture of additional content (live streams, interviews, acoustic sessions, photos, videos, games, curated playlists, mobile content, handwritten lyrics etc.) that will be delivered as a curated, programmed whole.  These channels will need to ascribe to the D.I.S.C. principles i.e. they music be Dynamic, Interactive, Social, Curated.  Sure each of the individual components could probably be found somewhere on the web but the real value is the entirety of the experience.
  • Artist revenue share: Where this model gets really interesting is how artists get paid. If all the additional content that is delivered is outside of the standard label catalogue then TIDAL could, after some basic costs are accounted for, split the entire additional $1 or $2 subscription fee 50/50 with the artist.  Or if TIDAL is that serious about making things better for artists, they could give all of the net profits to the artist. (Label 360 deals might complicate things a bit for some artists but they will not account for large percentages). Just how songwriters would benefit is a bit more complex as many artists have multiple songwriters etc. but TIDAL could set aside a songwriter pot to be distributed based on plays of the artist’s core music.

Right now TIDAL is a music service pretty much like the others but with bold ambitions.  This is one way that TIDAL can turn worthy words into meaningful actions. There aren’t too many other ways it can do so.  And of course any of the other streaming incumbents could do this too.  The difference is that that they have had a lot of time to do it and have not done so, yet at least.

So TIDAL, come show us how it is done.  Over to you Jay-Z.

What The Music Industry Can Learn From The Beer Industry

Over the next few weeks I will be writing a series of posts that illustrate what lessons the music business can heed from other industries. This is the first of these posts. Beer sales have been in steady decline for many years with the big brewers coming to terms with changing consumption habits of consumers and the impact of disruptive new models. Sound familiar? The dynamics of the beer industry bear remarkable similarity to the recorded music business and there are some lessons that can be learned. Beer sales have been declining since 2008 with the core baby boomer consumer base changing consumption habits and drinking more hard liquor and wine. In the UK the amount of beer drunk has fallen by 20% over the last 10 years while US beer sales have been falling since 2008. The number of new breweries went into decline and after years of acquisitions and mergers the bigger-than-ever brewers started to feel the pinch. Again the parallels are clear.

The Rise Of Craft Beers

Against this doom laden backdrop there has been a standout good news story: craft brewing and micro breweries. Predominately small independent brewers this market segment has been growing strongly, albeit from a small base, in the last few years. Craft beer sales in the US grew by 10% in 2012, 17% in 2013 and 18% in 2014. In fact 2014 was the year that craft beers broke through to double digit market share (11%) for the first ever time. Craft beers are catering for a market of discerning drinkers, whether they be hipsters or real ale purists, who are willing to pay more for quality and uniqueness. Craft beer is like the music industry’s indie sector and vinyl sales rolled into one.

Big Brewers Get In On The Act

What gets interesting is that the big brewers are realising that if you can’t beat them then you need to join them. So the craft beer growth is not just down to plucky little cottage industries but also the big brewers opening their own micro breweries and creating their own craft ales. In fact some mid sized brewers have gone one step further and stopped producing their own mainstream beer brands, instead having them brewed on license by the big brewers, allowing them to focus on craft ales. The margins on an increasingly commoditised market simply don’t add up unless you can bring vast scale to bear. So the similarities are clear. But there are differences in all this too. I was careful to emphasise that craft beer is like an amalgamation of vinyl and indie. It is both a product strategy pivot and a business culture pivot. What the beer industry is realising is that while there remains a mainstream majority that will continue to drink mainstream beers, the economics of that sector are challenged which means that it is hard to bear the effect of even modest negative trends. The beer industry hasn’t gone out and started finding its equivalent of playing live and selling t-shirts, instead it has looked at how to reinvent its core product to make it relevant to the new generation of its most valuable customers.    And the effects are beginning to be felt at a market level. Beer consumption actually grew by 1% in 2014 in the UK and US sales were up 0.5%.

Reinvent The Product Not Just The Sales Channel

This is what needs to happen with recorded music, not just reinventing the sales and acquisition channel (which is fundamentally what the entire history of digital music sales has been about). The beer aficionado and the music aficionado are more important to their respective industries now than they have ever been and this will only increase. The beer industry is dragging itself out of recession by super serving its super fans. Artists have been doing the same for years with the likes of PledgeMusic, BandPage and now Paetron. Now it is time for the labels and music services to do the same by working together to create a new generation of music products, such as that I laid out the vision for here.  But this must also be part of a cultural shift, from treating the artist as employee to that of an agency – client relationship, a model that many label services and indie labels are already pursuing. Of course the recorded music industry has to grapple with other extenuating factors such as the contagion of free and competition for spend from live. But even with these considerations, it is clear that music industry now needs to find its craft beer.

Digital Ascendency: The Future Music Forum Keynote

I recently keynoted the annual Future Music Forum in Barcelona.  These are some highlights of the keynote.  If you would like the full slide deck please email me at mark AT midia research DOT COM.

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Streaming is turning years of music business accepted wisdom on its head but did not arrive unannounced, it is just one chapter in the evolution of digital music. Each of the four phases of digital music have been shaped by technologies that solved problems. Now we are entering the fourth phase, bringing meaning to the 30 million tracks Spotify et al gave us access to. This might look like a simple honing of the model but it is every bit as important as the previous three stages. 30 million tracks is a meaningless quantity of music. It would take three lifetimes to listen to every track once. There is so much choice that there is effectively no choice at all. This is the Tyranny of Choice.

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But the for all the evolution, today’s digital music marketplace is an unbalanced one. We have more than 500 music services across the globe but too many of them are chasing after the same customers with weakly differentiated offerings. This wouldn’t matter so much is if the competition was focused on where the consumer scale is, but this is anything but the case. The majority of paid music services are targeting the engaged, high spending Music Aficionados who represent just 17% of all consumers.

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The consequences of the imbalance in digital music strategy are also easy to see in total revenues. The last decade has been one of persistent decline in recorded music revenue and by 2018 the most likely scenario is one of stabilization rather than growth. This is because of a) the CD and b) the download.

No one has taken the demise of the CD seriously enough. It still accounts for more than half of global revenue and more than three quarters of revenue in two of the world’s biggest music markets. Yet far too many CD buyers are being left to simply stop buying entirely because they see no natural entry point into the digital services market. No one appears to be putting up a serious fight for them. Meanwhile the streaming services that have been chasing those same aficionados that Apple engaged are now busy turning that download spending into streaming spending, which ends up being, at best, revenue transition rather than growth. Consequently CDs and downloads will end up declining at almost the same rate over the next five years.

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Nonetheless the imbalance remains. Part of the reason we got into this state of affairs is the music industry’s obsession with revenue metrics: chart positions, market share and ARPU. Compare and contrast with the TV industry’s focus on audiences. It is time for the music industry to start thinking in audience terms too.

When we do so we see a very different picture. Here we have the US digital music market plotted by revenue and by audience size. Subscriptions pack a big revenue punch but reach only a tiny segment of the market while YouTube has vast reach but delivers remarkably little in terms of direct revenue. Meanwhile downloads, for all their doomed future, are still by far the best combination of scale and revenue.

The issue of free services stealing the oxygen from paid ones is a perennial one and is effectively a digital rerun of the never-to-be-resolved radio driving or reducing music sales debate. But it has far more impact in digital. With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination. When they don’t lead to sales can they really be called discovery anymore?

Free is of course the language of the web. The contagion of free is legion. And free is where the audience growth is. This is the circle the music industry must square.

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For 15+ years the music industry has been running to catch up, never quite able to get ahead of the game, an unavoidable feature of the process of digital disruption.   But although the consumer behaviour shift is inevitable the future direction of the music business is not and it will be shaped most by three key factors:

  1. The continued evolution of consumer behaviour
  2. Technology company strategy
  3. Income distribution

Consumer behaviour. The most important consumer behaviour trends are not the steady transition of the Aficionados or even the Forgotten Fans but of the next generation of music consumers, the Digital Natives. Free and mobile are the two defining elements of their music behaviour. Of course younger people always have less disposable income, but there is a very real chance that we are beginning to see demographic trends locking in as cohort trends that will stay with these consumers as they age. For a generation weaned on free, the more free you give them, the more they will crave it. Whatever course is plotted, success will depend upon deeply understanding the needs of Digital Natives and not simply trying to shoe horn them into the products we have now that are built for the older transition generation.

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Technology companies: Apple, Amazon and Google each in their own ways dominate digital music. But most importantly they all want very different things from it. For each of them music is a means to an end. All are willing to some degree to loss lead on music to achieve ulterior business objectives. All of which is great for labels and publishers as they get their royalties, advances and equity stakes. But for the pure play start up it means competing on an uneven footing with giant companies who don’t even need music to generate a revenue return for them.

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Revenue distribution: Artists and songwriters found their voices in recent years. Partly because of the rise in social media but also because so many are now paying much more attention to the business side of their careers. The fact they are watching download dollars being replaced by streaming cents only intensifies matters, as does the fact that the top 1% of creators get a disproportionately large share of revenue. It has always been thus but the signs are that the disparity is becoming even more pronounced in the streaming age, with the effects felt all the more keenly because unless you have vast scale streaming can too easily look like chicken feed to an artist compared to download income.

But artist and songwriter discontent alone is not going to change the world. Their voices are just not powerful enough, nor do most fans care enough. Also labels and publishers remain the most viable route to market for most artists. Matters aren’t helped by the fact that artists who demand an audit of their accounts to work out where their streaming revenue has gone swiftly accept their label’s hefty silence payment and the accompanying NDA. Artist discontent while not decisive in impact is beginning to apply important pressure to the supply end of the music business.

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So those are the three big challenges, now here are three sets of solutions. And I should warn you in advance that I am going to use the P word. Yes, ‘Product’.

I get why product sounds like an ugly word. It’s a term you use for baked beans, for fridges for phones. Not a cultural creation like music right? True enough, when we’re talking about the song itself, or the performance of it, product is irrelevant. But as soon as we’re talking about trying to make money out of it as a CD, download, stream or however, then we’re firmly in the territory of product. It is both naïve and archaic to think otherwise. When artists got megabucks advances and never had to worry about the sustainability of their careers and everything revolved around the simplicity of CD sales you could perhaps be forgiven for turning a blind eye. But now there is no excuse.

So with that little diatribe out of the way, on to the first solution.

Music product: The harsh reality is that music as a product has hardly evolved in the digital realm. A lot has been done around retailer and business model innovation, but the underlying product is the same static audio file that we found in the CD. Meanwhile the devices we are spending every growing shares of our media consumption have high definition touch screens, graphics accelerators, accelerometers…audio hardly scratches the surface of what tablets and smartphones do.

Music is always going to be about the song, but it is also about the artist and their story. That’s what a quarter of consumers think, and 45% of aficionados and a third of digital natives. Video, lyrics, photos, reviews, interviews, acoustic sets, art, these are all ways in which the artist can tell their story and they all need to be part of the product. Most of this stuff is already created by labels, artists and managers but it is labelled marketing. Putting this together into a curated, context aware whole is what will constitute a 21st century music product.

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Fans: Artists and fans are closer than ever but this journey is only getting going and artists need to get smarter about how to monetize their fan bases. Artists need to find their popcorn. What do I mean by this? Well when the cinema industry started out it was a loss making business. To try to fix this cinemas started by experimenting with the product, putting on double bills but that wasn’t enough. Then came innovation in the format by adding sound. Then the experience itself by co-opting the new technology of air conditioning from the meat packing industry. Still no profit. Finally cinemas found the solution: popcorn. With a 97% operating margin, popcorn along with soda and sweets quickly became how cinemas become profitable entities. Artists need to find their popcorn. To find out what other value they can deliver their fans to subsidize releasing music. It’s what newspapers are doing with wine clubs and travel clubs, and in some instances even with Spotify bundles!

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Labels: Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Kobalt and Essential and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.

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And finally, the grand unifying concept to pull all this together: experience. Experience is the product. The internet did away with content scarcity. Now the challenge that must be met is to create scarce, sought after experiences that give people reasons to spend money on the artists and music they love.

Why Digital Music Services Always Steal Each Other’s Customers

The next five years will be one of the music industry’s most dramatic periods of change. The last ten years might have been disruptive but the change that is coming will be even more transformative. By 2019 70% of all digital revenue globally will be from on-demand services, representing 40% of total music revenues. It will be a shift from the old world and the ‘old new world’ to a brave new one. The CD and the download will decline at almost the same rates: physical revenue will be 43% smaller while downloads will be 40% smaller. In some ways the CD has less to worry about than the download. The CD has the protection of a vast installed base of players across the globe and growing niches such as deluxe box sets. The download though depends massively upon Apple’s devices, and the tide over at Cupertino is turning.

One of the concerns of the shift to streaming has been revenue cannibalization. It is no new phenomenon. The paid digital music market has still not truly broken out to the mainstream. While the likes of YouTube and Pandora clearly have mass market reach, music download stores and subscription services do not. Each at their respective times have appealed to the same higher spending and tech savvy end of the music buyer spectrum.

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In the 1990’s and early 2000’s Amazon’s online CD store was the home of the globe’s most tech savvy music aficionados. Then Apple came along and poached its iTunes customers directly from Amazon because those same CD buyers were also buying iPods. Then Spotify came along and started poaching Apple’s most valuable customers via Apple’s App Store – the chink in the armour of Apple’s otherwise closed ecosystem.

Now Apple and Amazon are both setting out on their own cloud strategy journeys and each will be hoping to win back a chunk of their lost customers. Apple’s recent elevation of Beats Music to one of the family of ‘Apps Made By Apple’ gives the first hint of what the company can do to ‘encourage’ its users away from other streaming services.

The next three years or so will be a fiercely contested battle for the hearts and minds of the digital music aficionado that will illustrate the strengths and weaknesses of the technology ecosystems of Apple, Amazon and Google. Yet while they all fight to win or win back customers, the attention once again remains firmly on the top end of the market. For as long as music services focus their efforts on the most valuable music customers, the mainstream will continue to be catered by low ARPU ad supported services. And for as long as that happens the evolution of digital music will continue to be one of the latest generation of services stealing the customers of the last.

How The iPhone 6 May Be The Start Of Apple’s ‘Back To Music’ Strategy

With the launch of its new iPhones just round the corner Apple could be forgiven for feeling rather more positive about its smartphone outlook than it has for a while. The sheen has worn off its number one competitor Samsung, with cheap Chinese and Indian competitors seriously eating into its market share and the investor community realising that the smartphone business is actually a lot like the music business: you are only as good as your last hit. But if Samsung is a major label, measured solely on market share and sales, then Apple has managed to partially maintain the role of big indie, where the quality of its output is just as important. Apple’s Eddie Cue believes that Apple are on the cusp of product strategy renaissance. Crucially, Apple’s CE product portfolio has become wide enough now, especially with the acquisition of Beats, to allow Apple some innovation freedom. I think this could translate into an iTunes phone before the end of 2015.

The Mainstreaming of Apple’s Customer Base

Apple’s customer base has changed from the vanguard of the tech savvy early adopters to a much broader group including large swathes of early followers, later adopters and even mass market laggards. The iPhone was primarily responsible for the transformation and while it has brought undoubted success has also caused Apple problems. As a company with a small product number of products in its portfolio, especially within the mobile category, Apple has never been able to play the ‘Hero Phone’ strategy of phone specialists like HTC and Samsung. So while those companies have been able to sway those all-important investors with small selling but super-specced uber phones, Apple has, until the launch of the 5C, had roll its entry and hero devices into one single new product. But even the combined strategy of the 5C and of targeting lower end consumers with older models still leaves Apple little room to be truly adventurous with its product strategy, for fear of alienating its mainstream users.

As I wrote about previously, the acquisition of Beats presents Apple with the opportunity to innovate with more freedom in the Beats product ranges and then take the innovations that work best there back into the Apple product portfolio. Even if Apple more tightly harmonizes its two divisions’ product ranges, Apple will still be left with a larger and more segmented product portfolio, giving it more ability to super-serve important niches. This is where Apple’s music device strategy renaissance can come into play.

 

itunes phone

Music Changed Apple

When Apple launched the iPod in 2001 it was the start of a musical journey for Apple. I remember attending Apple analyst briefing sessions in those early iPod days and being the only one there interested in this small little side project. Of course over the following years the iPod, with music at the core, took Apple’s product strategy in an entirely new direction. You might say that music changed Apple. But even by 2004 the winds of change were stirring: the launch of the iPod Photo with its colour screen was the first tentative step towards turning Apple’s portable device strategy from music to something much bigger. The iPhone and iPad are the current culmination of that shift, multimedia devices that do many things for many groups of people. Not one thing for one group of people in the way the iPod did.

The strategy has been inarguably successful but just as music stopped looking like it mattered so much, it started biting Apple in the behind. Spotify and other streaming subscription services started stealing Apple’s best iTunes music customers, turning them from downloaders into streamers. That in itself should have been an irritation rather than a problem. But these most valuable of customers now have much less reason to stay with Apple when the buy their next phone because their Spotify playlists will work just as well on Android as they will on iPhones.

Apple’s New Music Strategy

Apple needs a stand out music value proposition to win them back. A subscription service built around Beats Music and iTunes Radio will be the fuel in the engine but will not do enough on its own quickly enough. While Beats Music may have different features from Spotify the fundamentals are essentially the same (millions of songs, c $10 a month). So iPhone owning Spotify customers are unlikely to switch straight away just because it’s there.

Apple needs more. That ‘more’ can be delivered in two ways:

1. Price
2. Device

Apple has always been in the business of loss leading with music to sell hardware. Once that was a growth strategy now it assumes the urgency of defence strategy. That should persuade Apple to heavily subsidize the price of a subscription. In the near term this could be 3 month Beats Music trial plus a discounted $5 subscription offer at the end of the trial free with one of the forthcoming iPhone 6 models. Longer term it should translate into something much more ambitious.

 

The iTunes Phone or The Beats Phone?

Before the end of 2015 I expect Apple to launch a music specialist phone. Whether that is branded as an iTunes Phone or a Beats Phone will depend on who wins the internal branding wars at Apple, but expect it to be one of those labels. The device will be squarely targeted at the music aficionado and will crucially combine the music subscription and device into a single purchase by hard bundling a music subscription into the device cost. It will likely also be squarely focused on pushing Beats hardware sales so it may be both bundled with a Beats Bluetooth headphones and also be the first iPhone without a 3.5mm stereo jack, instead offering Bluetooth only.

The broad feature set could look something like this:

• Hard bundled Beats Music subscription
• Unlimited iCloud access
• Ad free iTunes Radio
• Top level UI music apps
• Bundled Beats Headphones
• Bluetooth only headphone support

This strategy is Apple’s best shot at reclaiming its wavering aficionado fan base but be in no doubt, it would also be a game changer for the digital music space by once again tying the importance of music experiences to device not just app.

What Future For The Album In The On-Demand Age?

Recently BBC Radio 1’s head of music George Ergatoudis stirred up something of a storm with his claim that “albums are edging closer to extinction”. Nonetheless there is a growing body of evidence that the album does indeed seem to be losing its relevance in today’s track and playlist led world. And the implications stretch much further than the confines of the recorded music business. (Hint: live music industry, you need to be watching your back too.)

The Advent Of Grazing

When Napster emerged 15 years ago it kick started an irreversible transformation in music consumption. The music business had spent the previous three decades turning the singles dominated market of the 1950’s into the albums led market of the 1990’s, but with Napster consumers suddenly did not have to take the whole album package anymore. The labels had their own fair share of blame. When the vinyl LP had been the dominant format albums typically had 8 tracks, but with the CD labels felt compelled to fill every one of its 74 minutes’ capacity, resulting in a preponderance of filler tracks over killer tracks. Couple this with album price hyperinflation and you had the perfect recipe for consumer revolt. Little wonder that music fans cherry picked tracks, skipping the filler for the killer. Grazing replaced immersion.

Ironically the issue became even more pronounced with the advent of the iTunes Music Store. Whereas with file sharing many users downloaded entire albums – and as bandwidth and storage improved, entire discographies – listening still skewed towards the stand out tracks. Indeed the hoarding mentality of these digital immigrants was one borne out of being children of the age of scarcity, with a ‘fill up quick while you still can’ mentality. With iTunes, price was a limiting factor and so people focused on acquiring single tracks rather than albums. Labels and artists had been scared iTunes would cannibalise album sales, they were right.

Digital Natives Set A New Pace

In the subsequent decade new digital behavior patterns have become more clearly defined, particularly among the digital natives. Playlists and individual tracks have become the dominant consumption paradigm. Even music piracy has moved away from the album to smaller numbers of tracks, with free music downloader mobile apps and YouTube rippers now more widespread than P2P. This is the piracy behavior of the digital natives who have no need to hoard vast music collections because they know they can always find the music they want on YouTube or Soundcloud if they want it.

playlists versus albums

The behavior shift is clearly evidenced in revenue numbers. Since 2008 alone US album sales (CD and digital) have declined by 22% (IFPI), while digital track sales outpace digital album sales by a factor of 10 to 1. The top 10 selling albums in the US shifted 56.4 million units in 2000.  In 2013 the number was 14.7 million (Nielsen SoundScan). Even more stark is the contrast between playlists and albums on streaming service. Spotify has 1.5 billion playlists but just 1.4 million albums (see figure). While the comparison is not exactly apples-to-apples (album count is a catalogue count and playlist count is a hybrid catalogue / consumption count) it is nonetheless a useful illustration of the disparity of scale. (In fact the 1.4 million album assumption is probably high due to a) duplicates b) singles and EPs c) compilations.)

Even the much heralded success of Ed Sheeran’s album ‘X’ does not exactly paint a robust argument for the album. ‘X’ set the record for first week global plays of an album on Spotify with 23.8 million streams. But that represents just 0.27% of weekly Spotify listening (based on Spotify’s reported 40 million active users, 110 minutes daily listening and an average song length of 3.5 minutes).

The Album As A Mainstream Consumption Paradigm Was A Historical Anomaly

This is the consumer behavior backdrop for the demise of the album.  Creatively the album still represents the zenith of an artist’s creativity and many albums are still most often best appreciated as a creative whole. Core fans and music aficionados will still listen to albums but the majority of consumers will not. The album as the mainstream consumption paradigm was a historical anomaly of the 70’s, 80’s and 90’s. In the 50’s and the 60’s the single was the way the majority interacted with music, and now in the early 21st century it is once again. There has always been space for vast diversity of artists along the niche to mainstream spectrum but as a consumption format the album is closer to the Steve Reich end than it is the Katy Perry end.

Artists And Labels Need To Catch Up With Consumer Behaviour

The majority of artists will still make albums and labels will indulge them because their organizations and business models are built around the format. But therein lies the problem: the more that consumer behavior evolves, the more distant the gap between artists’ recorded output and their fans’ demand becomes.

There is more music released now than ever before and most likely more music listened to than ever before. But the amount of music listeners in the world’s top 10 music markets – which account for 91% of revenue – has not increased at anything like the same rate. People are spending less time with individual artists and albums. In the on-demand age with effectively limitless supply they flit from here to there, consuming more individual artists in a single playlist than an average music fan would have bought albums by in an entire year in the CD era. Fewer fans develop deep relationships with individual artists. Right now this translates into fewer album sales. In 10 years’ time it will manifest as a collapse in arena and stadium sized heritage live acts. In fact we are already witnessing the impact, after all what are festivals and DJ sets if not the playlist translated into a live experience?

As painful as it may be for many to accept, the tide has already turned against the album. The challenge to which artists and labels must now rise is to reinvent creativity in ways that meet the realities of the on-demand world.* If they do not, artists will eventually find the chasm between their wants and their audiences’ needs quite simply too wide to traverse.

*For those interested I wrote a couple of reports on this very topic a few years ago:

The Music Format Bill of Rights: A Manifesto For The Next Generation Of Music Products

Agile Music: Music Formats and Artist Creativity In The Age of Mass Customisation