What’s Going On With Free Streaming?

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

Pandora’s Problem Is Wall Street

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

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

Actually, Slowing Growth Is A Problem Too 

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

Pandora Needs A New Wall Street Narrative

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

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

 

Warner’s Streaming Equity Pay Out Is Commendable But Not Enough

During his latest investor conference call Warner Music’s CEO Stephen Cooper announced that the label will pay artists a portion of any income it earns from equity stakes in services such as Spotify and Soundcloud. With Spotify potentially announcing its IPO next quarter the announcement is more than a token gesture. It is a bold move by Warner and follows on from Sony and Universal both announcing last year that they will pay artists a portion of streaming breakage revenue (the difference between what services pay labels in guarantees and how much royalty revenue they actually generate – WMG has been doing this since 2009). The big labels are waking up to the fact that transparency is key if they are going to keep artists on side. Streaming is where consumer behaviour is going, but currently YouTube is growing quicker than everyone else. The labels need premium and freemium services to make up ground fast. Which is why they cannot afford the Black Keys-Taylor Swift-Adele-Coldplay trickle to turn into a torrent. They need artists to be as vested as they are.

Streaming Hostilities May Have Thawed But Underlying Issues Remain

With the exception of the songwriter class action suits that closed out the year, 2015 was actually a pretty good year for streaming service – artist relations. Artists became a little more accustomed to streaming and many started to see a meaningful in their streaming income. But there is still much distance to go. The crucial issue for the majority of mid ranking and lower artists is how to deal with sizeable up front payments being replaced by a long term flow of micro payments. If you are a sizable label or a big artist you won’t feel the pain too much, but for the rest it normally means a very serious tightening of the belt.

The True Value Of Streaming Doesn’t Lie In Equity Stakes After All

There has, wrongly, long been a suspicion among many that streaming services are some sort of elaborate money making scam for labels, with the real value hidden in the money they will earn from their equity stakes. But as the ever excellent Tim Ingham explains, Warner is likely to only make around $200 million from a successful Spotify floatation. Of course $200 million is no small amount of money, and would represent more than half of Warner’s quarterly digital income. But it represents just 16% of the money Warner has earned from streaming since 2010 and just 2% of all global streaming revenue in 2015 (at retail values). Thus the label equity stakes in Spotify & co. are meaningful but they are far from where the real label value exists. Indeed as Cooper stated: “the main form of compensation we receive from streaming services is revenue based on actual streams”.

So If Artist Equity Income Isn’t Going To Fix Streaming, What Will?

All of which then raises the awkward question: if artists getting a Spotify IPO pay out isn’t going to ‘fix’ the model for artists, then what is? There is not really much scope for streaming services to pay out more to rights holders (80% of revenue doesn’t leave much scope for operating profit). While there is certainly scope for increasing ARPU among the super fan subscribers, there is little opportunity to raise prices for the majority of users ($9.99 is already more than most are willing to spend). So the only part of the equation left is how much labels pay artists.

Streaming Is Neither A License Nor A Sale And Its Time Artist Deals Recognise It

Right now the entire recorded music business is trying to figure out whether streaming is replacing radio or sales. The likelihood is that it is doing both and by doing so creating something new in between. That means that labels need to rethink how they pay artists, because currently they typically pay them on either one or the other of those models, and most often on the basis of a stream being a sale. A stream being the equivalent of a sale is completely counterintuitive because streaming is all about consumption not transaction. So why are labels most commonly treating streams as sales? Because the % they have to pay artists is so much lower, often in the 10% to 15% range rather than around 50% for a license. Of course there is as strong an argument to be made for streams not to be considered as a pure license as there is a sale, but there is an even stronger one for a hybrid rate that sits in the middle. Doing so would double the amount of money most artists make from streaming, instantaneously transforming its revenue impact for many. There is some precedent too. In 2012 Universal was successfully sued by FTB Productions over its treatment of Eminem downloads as sales rather than licenses, for which Eminem would have been paid a 50% rate instead of the much smaller sales rate.

Warner Music deserve credit for their commitment to paying artists a portion of equity related income (though no mention of how much of course) but it is just one step on a bigger journey. A wholesale reassessment of artist streaming compensation is required. Increasing artist streaming rates will dent label margins but ultimately the labels need to decide whether they want to build a business that is as sustainable for artists as it is for them.

Postscript: One interesting quote stood out from Cooper: “Although none of these equity stakes have been monetized since we implemented our breakage policy…there are some services from which we receive additional forms of compensation”. Translation(?): Sony used to get paid by the big streaming services on some sort of stock dividend basis and probably still does from some others.

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.

bpi 1

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.

BPI 2

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.

BPI 3

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.

Pandora’s Rate Ruling Reveals The Cracks In Streaming Economics

The much anticipated outcome of yesterday’s Copyright Tribunal decision was a 20% increase of Pandora’s ad supported stream rate from $0.0014 per non-interactive stream to $0.0017. The result was roughly equidistant between the two parties’ preferred rate: Pandora wanted $0.0011, SoundExchange (the body that collects the royalties on behalf of the labels) wanted $0.0025. As with any good compromise neither party will be truly happy, though on balance Pandora probably came out slightly better. Both the rate and the whole rate setting process shine a bright light on the economics of streaming, especially when contrasted against on-demand services.

pandora dec 15 - 1

Pandora’s semi-interactive radio service operates under statutory rates in the US that are set by the Copyright Royalty Board for a few years at a time, with inflation baked in. This means a continual rise in rates (see figure). It also gives Pandora a degree of certainty over its mid term future but prevents record labels from negotiating for better rates (publishers however are able to strike direct deals with Pandora). Spotify, and other on-demand streaming services, negotiates deals directly with multiple record labels, publishers and rights bodies. Deals typically come up for renewal every couple of years, involve large upfront payments and Minimum Revenue Guarantees (MRGs). They also run the risk of core product features being threatened in renegotiations – as we saw with the labels’ dalliance with killing off freemium this time last year.

The most significant difference between the models is how the per stream rate works. For on-demand services a royalty pot as a % of revenue is determined. This is then divided between rights holders based on plays in a given period and allocated on a per stream rate basis. Thus royalty payments remain a comparatively constant share of revenue, assuming of course that the service hits the MRG targets – if it doesn’t the share increases, often above 100% of revenue. This model also implies a clear ceiling to the potential profit an on-demand service can earn. By contrast Pandora pays out on a (largely) pure per stream basis. The direct consequence of this is that Pandora is able to increase it revenue per play faster than its rights cost per play which in turn creates the potential to grow margin (see next figure).

pandora dec 15 - 2

Between 2009 and 2014 Pandora’s content acquisition costs per listener hour increased by 27% from $17.52 to $22.29. This reflects both the CRB set rate as well as deals with rights bodies and publishers. But over the same period Pandora’s revenue per listener hour increased by 114% from $21.48 to $45.97. Now clearly, an increase in revenue per hour does not inherently mean increased profitability, or even profitability at all. Indeed, Pandora’s continued losses have been a perennial bugbear for investors. But Pandora has chosen to invest its increased revenue to grow its business, building out regional ad sales teams and making acquisitions such as Next Big Sound, Ticket Fly and Rdio. In short, Pandora could have been profitable for some time now if it had so chosen. Instead it is chasing a bigger prize, namely to become the single biggest revenue driver in US radio. To get big it needs to spend big.

Pandora’s Core Strength Is Being Able Increase Profitability Per User

The underlying principle is clear: while on-demand services have little meaningful way of increasing revenue per user with the current model, Pandora has more than doubled revenue per user in 6 years while rights costs have declined in relative terms. Content acquisition costs fell from a high of 82% of revenue in 2009 to 48% in 2014. That rate will increase in 2015 due to direct deals struck with publishers and the $90 million pay out for the pre-1972 works ruling. But it still remains well south of Spotify’s 70%+.

On Demand Services Have Similar Fixed Costs But Tighter Margins Because Of Royalties

While there is a clear case for semi-interactive radio rates being markedly lower than on-demand rates many of the fixed costs of both types of streaming business are the same.  Both have to commit similar amounts to product development and tech, bandwidth, data analysis, reporting marketing, customer care, management. This puts on-demand services at an operational disadvantage compared to webradio services.

If paid-for streaming services are going to become commercially sustainable there is going to need to be pricing and product innovation to both reach more mainstream users (cheaper tiers) and to drive more revenue from high value users (more expensive tiers and bolt ons). Right now there is relatively little commercial incentive for on-demand services to innovate upwards as profitability will remain largely the same. There is an opportunity for labels to offer Spotify and co a Pandora-style pure per-play license structure for all products launched above and beyond the standard 9.99 tier. This would give the services the ability to follow Pandora’s path of growing revenue per user faster than rights costs per user, thus improving commercial sustainability and allowing them to invest more in product innovation.

Rights Frameworks Need To Engender Commercial Sustainability

Pandora is one of the few stand out, independent success stories of the entire history of digital music. It has become one of the world’s biggest music services despite being largely constrained to the US, it has built a commercially viable model and it has delivered a big return for investors via its IPO. Only Last.FM, Beatport and Beats Music can genuinely lay claim to having delivered big returns for their investors. There are many mitigating factors, but the unique licensing structure Pandora operates under is the single most important one. Do songwriters and labels feel that they’re getting short changed? Absolutely. But it is in the interest of every music industry stakeholder that the economics of digital music are structured in a way that enables standalone companies like Pandora, Spotify and Deezer to thrive. Otherwise there can be no complaints when the only options left on the table are companies like Apple, Amazon, Facebook and Google whose interest in music all stems from trying to sell something else. That’s when artists and songwriters are really at risk.

Why Profit Doesn’t Come Into It For Apple Music

Apple has only ever been in the music business in order to sell more devices.  Apple does not need to make money from music nor has it ever needed to.  That doesn’t stop it being a crucially important music industry partner (in fact Apple is still pretty much the single most important partner on a global basis).  Nor does that mean that Apple doesn’t care about music or that it doesn’t take its role in the marketplace seriously.  But Apple is not in this game to make money.  Apple routinely ran the iTunes Store at ‘an about break-even basis’ which is financial report code for ‘at a slight loss’.  (Or in fact probably at a big loss if half of the costs of the combined iTunes / iPod ads had been factored in.)  Now Apple is spending big again on marketing its music product, but this time the ads are only for Apple Music so costs can’t be attributed to other parts of the business. Why this all matters is because it shows us just how seriously Apple is taking Apple Music and also its appetite for running it a loss leader.

Why Doesn’t Apple Just Buy Spotify?

One of the recurring questions around Apple’s streaming strategy is ‘why doesn’t it just buy Spotify?’.  Besides the fact it had already acquired Beats Music as part of the much bigger Beats purchase, Apple is not in the business of running other companies’ services.  Apple runs Apple services. This is because Apple is first and foremost a hardware business and its software and services are an extension of this – part of the device value proposition.  If Apple was a software and services business it would build Mac OS, iLife, iWork etc for other platforms.  Apple even made music production software Logic Mac only after buying it from eMagic.  iTunes is one of the stand out exceptions for this strategy but it is a legacy of when iPod was a PC / Mac centric device, where not being on Windows would have stymied iPod growth. (There is of course talk of Apple Apple Music becoming available on Android but if it does so it will only be because Apple wants to win back iTunes customers from Spotify.)

A Tunnel Vision Commitment To User Experience

The hardware-first / Apple-only strategy means that when Apple does buy other services it usually either assimilates them wholesale (remember LaLa?) or it strips them down to the bare bones and rebuilds them entirely (Beats Music).  This is all because Apple needs to own the customer relationship and customer experience in its entirety.  Apple’s tunnel vision commitment to user experience is the ideology that underpins this entire approach.  Which is why Apple didn’t buy Spotify.

Apple Could Make Most Streaming Margin By Promoting Spotify

apple music margin calcs

In fact Apple could make a LOT more money if it simply decided to spend money marketing Spotify to iOS customers.

For argument’s sake let’s assume Spotify has somewhere in the region of 6 million US subscribers, that 60% of those are on iOS and that 60% of those iOS users pay via iTunes, Apple thus generates $8.4 million a month in subscription revenue from Spotify.  To generate the same amount of US subscription margin from Apple Music, Apple would need 16.9 million US Apple Music subscribers (assuming an operating margin of 5%).  In fact, in practice Apple will be in heavy negative margins with Apple Music due to its extensive marketing efforts.

So if Apple was in the business of music for making money it wouldn’t even buy Spotify, it would simply spend money marketing it to the Apple customer base.  But that has never been the Apple way and is patently unlikely to become the Apple way. Thus Apple will continue on its mission to own every ounce of the streaming subscriber’s user journey.  Unfortunately the rest of the marketplace has to try to figure out how to compete while at the same time vainly searching for a profit.

Spotify Plays The Big Numbers Game

Hot on the heels of Apple’s less-than-dazzling entrance into the streaming market Spotify made two big announcements: a further $526 million in funding and 20 million paying subscribers with 55 million free users. Not a bad retort.

spotify 20 million

Subscriber Growth Outpaced Free User Growth, Depending On Which Metric You Use

Between December 2014 and June 2015 added an average of 2 million free users a month and 1 million paid users a month. Although this meant Spotify’s free user base added twice as many users (10 million compared to 5 million) paid users grew faster in percentage terms, increasing by 33% compared to 22% for free.   These numbers can, and will, be taken to support both sides of the freemium argument and things are complicated by the fact that Spotify’s free user base is probably higher than 55 million. However the key takeaway is that based on the publically available numbers subscriber growth was faster than free growth in the first half of 2015.

Spotify Is Now Worth More Than Half Of the Entire Global Recorded Music Industry

Spotify was already the most heavily financed music service in history and it has nearly doubled its total investment in one single round, taking the total to more than $1.1 billion with a valuation of $8.5 billion. That translates to $55 of investment per subscriber. Or on a valuation basis $425 per subscriber which would take 3 and half years of continual subscription per subscriber to recoup in headline revenue terms. However as Spotify only gets 30% of revenue it would actually need 12 years of subscription per subscriber to generate $8.5 billion.

Of course VC funded company valuations are more about potential than they are realised value so the comparisons are slightly unfair. But given that $8.5 billion represents 57% of the entire global recorded music industry revenue in 2014 there are some pretty big assumptions being made.

Apple Music Is Still Likely To Prove A Fierce Adversary Even If It Is No Killer App Yet 

Make no mistake, Spotify has established itself as the global leader in its space and has good reason to feel confident. However Apple has so many structural advantages (owning the platform and billing relationships, massive addressable base etc.) that it is still likely to become the global streaming leader 3 years or so from now. (Assuming of course it ups its game from its entry product.) But that does not mean Spotify cannot be a success too.

Apple entered the download market when none of the existing stores had any meaningful customer base. Even with that supreme head start Apple still only managed around a 65% global market share of the download business. Granted most of the competitors were bit part players but in the streaming arena it is entering an established market with proven customer bases. This will not be a winner takes all market and I fully expect Spotify to be closer to Apple than Deezer (the current #2) is now to Spotify.

These are big numbers from Spotify that prior to Apple’s announcement it probably thought it would need even more than proved to be the case. Regardless, both sets of figures show that Spotify is geared up for a fight for supremacy. Game on!

Spotify Just Parked Its Tanks On YouTube’s Lawn

Today’s Spotify announcement was always going to be about Daniel Ek attempting to regain control of the streaming narrative in advance of Apple’s grand entry in a couple of weeks.  But if you were expecting this to be the launch of a bunch of new music features then you were in for a little bit of a shock.  Though there were some new music features outlined (such as swipe to listen, behaviour-learning programming and fitness features) the core of this event was positioning Spotify’s transition from a pure play music service into an entertainment destination with video taking centre stage.  YouTube has been competing (on uneven terms) with Spotify for years as a music service.  Now Spotify is fighting back by going after YouTube’s heartland.

Moving Beyond The Soundtrack

Spotify’s hook line for the event was ‘Soundtracking Your Day’ but in actual fact Spotify want to do much more than that (after all that’s what they already do), now they want to also be a visual part of your day too.  Spotify announced a host of new video partners including native online video producers, next gen video creators like Vice News and traditional brands like Comedy Central.  Spotify is creating a catalogue of video shorts that are designed to fit into your day.  This is unashamedly YouTube, Vessel and Buzz Feed territory.

Lessening The Music Dependence

While music consumption is booming (25 billion hours of music has been streamed on Spotify so far) Ek and co are spreading their bets.  The last 6 months have been tough for Spotify with the major labels casting doubt on its freemium model due to thinly veiled pressure from Apple.  Spotify will quite rightly feel aggrieved with this shift in attitude considering the fact it now accounts for half of global streaming revenue and is doing a better job of driving subscription uptake than anyone has ever come close to doing.  Running a music service can be a high effort, low reward and frustrating experience at times.  So Spotify can be forgiven for wanting to weaken its utter dependence on the whims of a few big labels.

Reversing Into YouTube Territory

Reversing into YouTube and Buzz Feed’s front lawns though will be easier said than done though.  The nature of the mobile consumption landscape is a diverse mix of content capsules, whether they be apps, mobile bookmarks or notification feeds.  Users have learned to consume mobile content in bite-sized chunks.  Facebook has done what it can to re-aggregate content via timeline but has found that asset more useful for sorting users personal content and shared content snippets.  Messaging platforms are now looking like the place where content audiences are best aggregated.  In fact the history of content audience aggregation can be summarised as:

1 – websites

2 – portals (e.g. Yahoo, AOL)

3 – social networks

4 – messaging platforms

Which is why Facebook is disrupting itself with WhatsApp and Facebook Messenger, it knows where things are heading.  This is the environment in which Spotify will be competing, with Snapchat and Line as much as it is with YouTube and Vice.  In Spotify’s favour is the fact that many of the digital first content destinations, Buzz Feed especially, are entirely willing to envisage a future in which their content could exist entirely on third party platforms.

Return Of The Portal?

In a lot of ways Spotify’s video mini-pivot feels like a back-to-the-future spin on the 20th century portal model but there is clearly an opportunity to re-aggregate our fragmented digital entertainment lives.  Whether Spotify can do that or not is another question and even if it can, it will be a long-term play rather than some short term hit.  Ek might have said he wants to ‘soundtrack our day’ but his product strategy actions show us that he feels Spotify has outgrown being the soundtrack alone.

The Problem With Streaming Exclusives

Jay-Z’s ambitions for TIDAL has triggered a lot of discussion about how streaming models can evolve.  One focus has been exclusives with a number of references to TIDAL ‘doing a Netflix’ by commissioning exclusives.  Netflix can attribute much of its growth over the last couple of years to its flagship ‘Netflix Originals’ such as ‘House Of Cards’ and ‘Orange Is the New Black’.  It is an appealing model but the Netflix Originals approach cannot so easily be transferred to music.

There are three main types of exclusives:

1.    Service Window: album is released exclusively to a single music service for a fixed period of time e.g. only on TIDAL for 1 month

2.    Tier Window: album is released across one type of music service tier before others e.g. only on paid subscription tiers for 3 months

3.    Service Exclusive: music service acquires exclusive rights to an album so that it will never appear anywhere else unless the service decides to let it

The first two will become increasingly common components of the streaming landscape over the next couple of years.  Daniel Ek and Spotify fought a brave rear guard action against Taylor Swift and Big Machine to ensure the Tier Window model did not carve out a beachhead with ‘1989’ but it is an inevitability.  If free tiers are to have a long term role alongside paid tiers they have to be more clearly differentiated.

TIDAL and Apple look set to become the heavyweight players in the Service Window, duking it out for the biggest releases.  TIDAL will argue it pays out more to rights holders (75% compared to 70%) while Apple will argue that it can directly drive download sales (which is where everyone still makes their real sales revenue).  Apple will have to play that card carefully though as it stands just as much chance of accelerating download cannibalization as it does driving new sales.

When Is A Label A Label?

The really interesting, and potentially most disruptive, exclusive is the Service Exclusive.  This model would start blurring the distinction between what constitutes a music service and what defines a record label.  If, for example, TIDAL was to buy out the rights of the next Beyonce album or sign a deal for the next two Calvin Harris albums TIDAL would effectively become the record label for those releases.

The irony is that this ‘ownership of the masters model’ by streaming services is emerging just as the next generation labels are distancing themselves from it.  A new breed of ‘labels’ such as Kobalt’s AWAL and Cooking Vinyl’s Essential Music are focussing on providing label services without taking ownership of the masters and in turn putting the label and artist relationship on a more equitable agency / client basis.  But there are far more impactful challenges to the Service Exclusive model for music than simply being out of step with where the label model is heading:

  • Scarcity: ‘House Of Cards’ is only available on Netflix (and some download to own stores such as iTunes). It is a scarce asset, which is not something that can be said about any piece of recorded music.  As TIDAL found with the near instantaneous Beyonce YouTube leak, music scarcity is ephemeral in the YouTube age.  As long as YouTube is allowed to hide behind its perverse interpretation of ‘Fair Use’ and ‘Safe Harbour’ there will be no music scarcity.  (Of course true scarcity is gone for good, but if that can be made to only mean P2P then the problem is manageable, as it is for TV content).
  • Consumer expectations: Consumers have learned to expect their video experiences to be fragmented across different platforms and services, to not find everything in one place.  For music consumers however the understanding is that catalogues are either near-complete or useless.  So if all music services suddenly started having high profile gaps then subscribers would be more likely to unsubscribe entirely than they would be to take up multiple subscriptions.  Ironically the net result could be a return to download sales at the expense of subscriptions.  Talk about going full circle….
  • Industry relationships: Netflix started out as a pure licensee, paying TV companies for their shows.  Now it competes with them directly when commissioning new shows.  It has become a frenemy for TV companies and is finding many of its relationships less favourable than before.  And this is in an industry that is built up the frenemy hybrid licensee-licensor model.  The music industry does not behave this way, so any service that took up the Service Exclusive model could reasonably expect itself to find itself developing tense relations with labels.  Which could manifest in those labels giving competitor services preferential treatment for their own exclusives.  Labels have long feared the disintermediation threat posed by the web.  It is unlikely to materialize any time soon but they are not exactly going to encourage retail partners to kick-start the process.
  • Appetite for risk: Buying up the rights to the latest release of an established superstar is the easy part, and we already have some precedents though neither were exactly run away successes (Jay-Z’s ‘Magna Carta Holy Grail’ with Samsung and U2’s ‘Songs Of Innocence’ with Apple).  But being a label, at least a good one, isn’t simply about signing proven quantities, it is about taking risks on new emerging talent.  And that doesn’t simply mean having a DIY platform on a streaming service – though that can act as a great talent identification tool.  If streaming services want to start playing at the label game they need to also start nurturing and marketing talent.
  • Limited horizons: Stream is still only a small fraction of recorded music revenue.  There are few non-Nordic artists that rely on streaming for the majority of their sales income.  That will change but not for a few years yet.  So a release that only exists on streaming, let along a single streaming service, is only going to deliver on a fraction of its potential.  TIDAL and Apple especially could easily choose to loss-lead and pay over the odds for Service Exclusives to ensure artists aren’t left out of pocket.  But that only fixes part of the problem.  An artist locked into one single streaming service will see his or her brand diminish.  ‘House Of Cards’ may be one of Kevin Spacey’s most assured performances yet only a few tens of millions of people globally have ever seen it.  If it had been on network TV the audience would have been hundreds of millions.  With touring becoming the main way many artists make money the album is the marketing vehicle and if that album is locked behind the pay wall of one single music service the marketing potential is neutered.

Streaming music services will find themselves locked in total war over the coming years and while Apple’s cash reserves will likely make that warfare appear asymmetrical at times, exclusives of some kind or another will be utilised by most of the services.  Just don’t expect them to deliver them Netflix-like success because that’s not going to happen.

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.

Why Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

BBC Radio One DJ Zane Lowe just announced a shock move to Apple. For the non-Brits and non-Anglophiles Zane Lowe is arguably the most influential radio DJ in the UK and is renowned for being a tastemaker with an eclectic pallet. His left of centre focus and his commitment to supporting and breaking new acts has allowed Radio One the freedom to be unashamedly mainstream in much of its other output. So why does this all matter for Apple? While it is not yet clear what sort of role Lowe will assume at Cupertino it is a move bristling with significance and a clear statement of intent from Apple.

Fixing the Tryanny Of Choice

The Tyranny of Choice remains one of the biggest challenges for streaming services, namely how to make sense of 35 million songs. It has been challenge enough for the Aficionados at the vanguard of the first wave of subscription service adoption. It is a problem of far greater proportions for the next wave of subscribers, the later adopters who do not have the expertise nor intent to invest great effort into discovering new music. It is not as simple as ‘lean forward’ versus ‘lean back’. But instead gradations between the two. Beyond Apple’s inevitable Spotify-subscriber win back efforts, these early followers will be at the core of Apple’s streaming strategy.

The 6th Of March: Man Versus Machine

Spotify showed its own music discovery statement of intent when it acquired the Echo Nest on the 6th of March 2014. Zane Lowe’s final Radio One show will broadcast on the 5th of March 2015, leaving him free to join Apple on the 6th of March 2015, yes, 1 year to the day after the Echo Nest. Coincidence? Perhaps. Either way, the symmetry of Spotify making its bet on algorithmic curation and Apple making its bet on human curation is unavoidable. It is man versus machine, with Apple for once coming down on the side of flesh and blood over technology.

However expensive Lowe’s salary might be, it will be far short of the millions Spotify paid for the Echo Nest, which had burned through $25.6 million of investment to get to that point. Yet there is every chance that Lowe, used properly, could deliver more value to Apple’s music discovery than the Echo Nest can to Spotify. Don’t get me wrong, the Echo Nest is a fantastic outfit with some of the smartest music analytics people going. Along with Pandora’s Music Genome Project the Echo Nest is as good as it gets for music discovery algorithms. In fact when it comes to implementation and cool data driven projects, the Echo Nest leads the way. But there is a limit to how far algorithms can fix the problems posed by the Tyranny of Choice.

Filter Bubbles

As Eli Pariser identified in his excellent Ted Talk ‘Beware Of Filter Bubbles’ there is a risk that recommendation algorithms actually narrow our choice and limit discovery. That by continually refining recommendations based on previous taste and choice they make our world views increasingly narrow and ultimately boring. Music discovery is not simply about finding music that sounds like other music we already like. It is also about serendipitous moments of wonder when something comes at us from the left field and leaves us breathless. That is the antithesis of ‘here are three other bands like this you might like’.

Of course it would be unfair to suggest that the Echo Nest is not sophisticated enough to engineer serendipity and surprise into its discovery system. (And Spotify is beginning to double down on human curation too). But the ability of a stack of code to perform this task versus an expert tastemaker is significantly less. And, another ‘of course’, it is impossible to definitively prove this one way or the other because ultimately the results are subjective and not properly measureable. Because one person’s awesome discovery is another’s sonic tripe. But that is entirely the point of the whole debate.

People Don’t Want Discovery, Well They Don’t Think They Do

There is a fundamental problem with algorithmic discovery: people don’t want it. In numerous consumer surveys I have fielded for numerous clients, respondents show little or no interest in discovery or recommendation features. Yet in the same surveys the vast majority of them state that they regularly listen to music radio, which is of course recommendation and discovery. The big difference is that it doesn’t feel like it. Instead it is an inherent part of the DNA radio. It is not an awkward artificial appendage that most people just don’t get.

Earned Trust

During his Monday – Thursday 2 hour show Lowe will play 20 to 30 or so tracks. Listeners know and understand that these are the tiny tip of the iceberg he has sifted through that week, that these are the songs he has decided are the ones that need to be heard. And when he announces his ‘hottest record in the world’ they know it is probably going to be something pretty special, even if they might not actually like it. His audience appreciates him that way because he earned their trust over weeks, months and years. That is the asset Apple are buying. Even if he has to earn that trust all over again with a new audience, that is the model.

If Lowe was simply to push 20 to 30 songs a day to Apple users (whether that be on a radio show on iTunes Radio, as an iTunes podcast or as an iTunes playlist, or all of the above) the odds are in favour of some or most of those resonating with a large swathe of the target audience. Even if just one track blows away just a quarter of the audience each day, the impact of one fantastic discovery will have more impact than a torrent of ‘sounds a bit like’ recommendations.

30% Not 80%

An Amazon Prime executive recently said that when commissioning shows he didn’t want hits that 80% of his audience quite liked, he wanted shows that 30% of his audience loved. That is what discovery is all about. Not being content most of the time, but being blown away some of the time.   Zane Lowe is not going to solve Apple’s discovery problem all by himself, but the hire shows that Apple is putting its money on moments of human magic being the nitrous oxide in its music discovery engine.