MIDiA’s 2016 Predictions – Here’s How We Did

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Part of our job at MIDiA Research is to help our clients ‘look round the corner’ and see what disruptions and innovations are likely to impact their businesses. In short, our job is to help understand what the future holds. This is why in 2015 we published our ‘2016 Predictions’ report in which we made a number of big calls on the coming year in digital content. Here’s how we did:

Macro Trends

  1. Mobile messaging apps will surpass 6 billion. VERDICT: Correct. (There are now more than 6.5 billion)
  2. Video will eat the world. Whatever media business you are in, in 2016 you will be a video company too. VERDICT: Correct. (2016 was the year video took centre stage)
  3. Some or all of Amazon, Apple, Facebook and Google will start to aggregate TV channel apps and SVOD apps to join the digital TV dots. VERDICT: Correct. (Amazon and Apple both made their first TV app aggregation moves in 2016)

Music

  1. Digital will finally be more than 50% of revenue. VERDICT: Correct. (Q2 major label results showed digital as 54% of recorded music revenue)
  2. Streaming holdouts will trickle not flood. VERDICT: Correct. (Indeed, remarkably few artists held back albums. Exclusives became the new black instead)
  3. Spotify will still be the leading subscription service. VERDICT: Correct. (At the end of September Spotify had 40 million subscribers compared to just under 18 million for Apple Music)

Mobile

  1. Android app revenue will surpass iOS. VERDICT: Wrong. (Apple’s App Store still has almost twice the revenue of Play Store. In our defence on this one this was as a result of Android under performing and Apple over performing. Android increased OS market share but still did not overtake app store revenue which means that Play ARPU reduced while Apple App Store ARPU increased.)
  2. Adblocker disruption will accelerate for publishers. VERDICT: Correct. (Adblock plus now grew big enough to open it’s own adexchange, and publishers can do little but get on board)
  3. Big freemium games will lose steam. VERDICT: Correct. (Fewer apps in the top free and top grossing app charts now compared to January)

Video

  1. More unbundled SVOD services will launch. VERDICT: Correct. (2016 saw a succession of new video services)
  2. Mobile video will blur at the edges. VERDICT: Correct. (Messaging apps have made video central to the user experience with the Snapchat illustrative stories feature now being replicated on Instagram)
  3. Interactive ads will gain traction on TV channel apps. VERDICT: Wrong. (Although still be tested on selected Fox Networks authenticated channel apps, they have not moved into the mainstream…yet )

We’ll be publishing our 2017 Predictions report in the next few weeks. To learn how to get a copy of the report and of our 2017 Predictions report and also our 2016 Predictions report email us at info AT midiaresearch DOT COM.

Streaming Music Health Check Deep Dive: Trial Hopping

At MIDiA we have just published our latest streaming report: ‘Streaming Music Health Check: Streaming’s Watershed Moment’. In it we combine the latest streaming revenue data, subscriber numbers and consumer data to create the definitive assessment of where the streaming music market is now at. The report and accompanying dataset is available to MIDiA Research clients here. For more on how to become a MIDiA client to get access to this report email us at info AT midiaresearch DOT COM

The full details of the report and key findings are listed below, but here’s a small excerpt from the report exploring the issue of trial hopping.

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Free trials are a crucial means of converting streaming users to paid subscriptions, especially when deployed with auto opt-in billing. Although often close to half of these opted in users cancel after their first payment (ie immediately after they realize they have been billed), trials are a proven conversion tactic. That is, until users game the system by hopping from one free trial to another by simply signing up with multiple different email accounts. In the case of Apple Music (which has a 3-month free trial), this means that a user can get a full year’s worth of music by simply changing email address (and iTunes account) three times.

Although this phenomenon is fairly niche across the total population, more than a quarter of respondents that identify themselves as music subscribers do this according to MIDiA’s latest consumer survey data (fielded in September). This means that in a worst-case scenario, between a fifth and a quarter of music subscribers are in fact freeloading trialists hopping from one trial to another.

Nearly a fifth of subscribers also use free trials to get access to exclusive albums. Combine this with email hopping, and Apple and Tidal may find their exclusives strategies are less effective at winning over Spotify subscribers than they had hoped.

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Key Findings (data points have been removed from this preview but are included in the full report):

  • By September 2016, Spotify had X million subscribers while Apple had X million
  • Competition is hotting up with announcements from Amazon, Pandora and Vevo
  • Each of the three major labels experienced strong streaming year-on-year revenue growth in Q2 2016: Sony (X%), Universal (X%) and Warner (X%)
  • In Q2 2016, major label download revenue fell by $X million quarter-on-quarter
  • Subscribers rose from X million in Q2 2015 to X million in Q2 2016 with Spotify and Apple driving the growth
  • X% of all streams were mobile, rising to X% for Napster
  • X% of all streams come from playlists, however, just X% come from push playlists
  • X% of UK subscribers say that playlists are replacing albums, while X% are using curated playlists more than 6 months ago
  • Just X% of Swedes spend more than $10 on music, reflecting that subscriptions have capped spending of super fans
  • X% of subscribers have changed subscription service, falling to just X% in Sweden thanks to Spotify loyalists
  • X% of UK subscribers sign up to multiple streaming trials with different email addresses, while X% use free trials to get access to exclusive albums

Companies mentioned in this report: Alphabet, Amazon, Anghami, Apple, Beatport, Deezer, Google, iHeart, KKBox, Last.FM, MelOn, MP3.com, Napster, Orange, Pandora, QQ Music, Rdio, Sony Music, SoundCloud, Spotify, Tidal, Universal Music, Vevo, Warner Music, YouTube

Report Details

Pages: 16
Words: 3,985
Figures: 8

For more on how to become a MIDiA client to get access to this report email us at info AT midiaresearch DOT COM

Quick Take: Amazon Music Unlimited Comes To The UK

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Amazon announced the anticipated launch of Amazon Music Unlimited in the UK today. For my full take on Amazon Music Unlimited see my previous post here.

Make no mistake, Amazon are taking this launch seriously, with a coordinated PR campaign and press release quotes not only from Amazon’s head of streaming music Steve Boom but also from Jeff Bezos himself. So why the big deal? Music is a low revenue, low margin business for Amazon, just as it is for Google and Apple. But that’s not the point. Music always plays a special role for tech companies, sometimes because the CEO is passionate about music, but normally because it is the service off which other things can be hung. Amazon, like Apple, is starting the transition towards becoming a services company. While Amazon has made much more progress on video than Apple has, it has made much less progress than Netflix has. Music is the wide appeal proposition that can be used to get people onto the first rung of the services ladder. Just like the CD got people onto the first rung of Amazon’s ladder back in the 90’s.

TO READ THIS POST IN FULL VISIT THE MIDIA BLOG

Here’s Why The Music Industry Needs To Dump Non-Discretionary Pricing

Spotify’s 2015 UK accounts painted a vibrant picture with both profits and above average Average Revenue Per User (ARPU). However, a little caution is required before assuming all the answers to the streaming market’s woes can be found here. Firstly, only a portion of Spotify’s costs are based in the UK. For example, much of the (more highly paid) exec team is in the US and much of the development team is based in Sweden. Such are the vagaries of financial reporting for multi-territory companies. More importantly though, is Spotify’s higher UK subscriber ARPU (€6.47 per month compared to €5.20 per month globally according to the ever insightful Music Business Worldwide). On the surface this is clear success (and indeed the UK may well have a higher paid-to-free ratio). However, the main reason for the ARPU difference is the music industry’s fixation with non-discretionary pricing. 9.99 is 9.99 in the US, the UK and the Euro zone, even though each of those currencies have very different values. Especially now post-Brexit referendum.

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At current exchange rates, the Euro Zone €9.99 is equivalent $10.86 and the UK £9.99 price point is equivalent to $12.18. Thus Euro Zone subscribers are paying 9% more than US subscribers while UK subscribers are paying 22% more. What makes matters even worse is that US per capita GDP (a measure of relative wealth of the population) is 55% higher in the US than in the EU and 27% higher than in the UK. So in effect that means a combined pricing ‘swing’ of 63% for the US compared to the Euro Zone and 49% compared to the UK.

In short, European subscribers are getting doubly hit by the music industry’s insistence on non-discretionary pricing for music subscriptions. While there are a host of commercial factors that can be cited in favour of the approach (e.g. it helps mitigate against currency fluctuations) there is zero customer value, unless of course you happen to be a US resident consumer.

Regular readers will know I am a long term advocate of a more sophisticated approach to subscription pricing (e.g. mid tier products and super-premium options) but before we get there, a first step should be to ensure that European music fans get a fair deal compared to their US peers. Or of course, we could try the alternative: increasing US subscriptions by 63% which would mean a $16.32 price point. Sounds crazy right? Exactly…

How Spotify Can Become A Next Generation “Label”

Spotify on iPhoneOne of the themes my MIDiA colleague Tim Mulligan (the name’s no coincidence, he’s my brother too!) has been developing over in our online video research is that of next generation TV operators. With the traditional pay-TV model buckling under the pressure of countless streaming subscriptions services like Netflix (there are more than 50 services in the US alone) pay-TV companies have responded with countless apps of their own such as HBO Go and CBS All Access. The result for the consumer is utter confusion with a bewildering choice of apps needed to get all the good shows and sports. This creates an opportunity for the G.A.A.F. (Google, Apple, Amazon, Facebook) to stitch all these apps together and in doing so become next generation TV operators. Though the G.A.A.F. are a major force in music too, the situation is also very different. Nonetheless there is an opportunity for companies such as these to create a joined up music experience that delivers an end-to-end platform for artists and music fans alike. Right now, Spotify is best placed to fulfil this role and in doing so it could become a next generation “label”. I added the quote marks around the word “label” because the term is becoming progressively less useful, but it at least helps people contextualise the concept.

Creating The Right Wall Street Narrative

When news emerged that Spotify was in negotiations to buy Soundcloud I highlighted a number of potential benefits and risks. One thing I didn’t explore was how useful Soundcloud could be in helping Spotify build out its role as a music platform (more on that below). As I have noted before, as Spotify progresses towards an IPO it needs to construct a series of convincing narratives for Wall Street. The investor community generally looks upon the music business with, at best, extreme caution, and at worst, disdain. To put it simply, they don’t like the look of low-to-negative margin businesses that have little control over their own destinies and that are trying to sell a product that most people don’t want to buy. This is why Spotify needs to demonstrate to potential investors that it is working towards a future in which it has more control, and a path to profitability. The major label dominated, 17% gross operating margin (and –9% loss) 9.99 AYCE model does not tick any of those boxes. Spotify is not going to change any of those fundamentals significantly before it IPOs, but it can demonstrate it is working to change things.

The Role Of Labels Is As Important As Ever

At the moment Spotify is a retail channel with bells and whistles. But it is acquiring so much user data and music programming expertise that it be so much more than that. The role of record labels is always going to be needed, even if the current model is struggling to keep up. The things that record labels do best is:

  1. Discover, invest in and nurture talent
  2. Market artists

Someone is always going to play that role, and while the distribution platforms such as Spotify could, in theory at least, play that role in a wider sense, existing labels (big and small) are going to remain at the centre of the equation for the meaningful future. Although some will most likely fall by the wayside or sell up over the next few years. (Sony’s acquisition of Ministry Of Sound is an early move rather than an exception.) But what Spotify can do that incumbent labels cannot, is understand the artist and music fan story right from discovery through to consumption. More than that, it can help shape both of those in a way labels on their own cannot. Until not so recently Spotify found itself under continual criticism from artists and songwriters. Although this has not disappeared entirely it is becoming less prevalent as a) creators see progressively bigger cheques, and b) more new artists start their career in the streaming era and learn how to make careers work within it, often seeing streaming services more as audience acquisition tools rather than revenue generators.

The Balance Of Power Is Shifting Away From Recorded Music

Concert crowd.In 2000 record music represented 60% of the entire music industry, now it is less than 30%. Live is the part that has gained most, and the streaming era artist viewpoint is best encapsulated by Ed Sheeran who cites Spotify as a key driver for his successful live career, saying “[Spotify] helps me do what I want to do.” Spotify’s opportunity is to go the next step, and empower artists with the tools and connections to build all of the parts of their career from Spotify. This is what a next generation “label” will be, a platform that combines data, discovery, promotion (and revenue) with tools to help artists with live, merchandise and other parts of their career.

How Spotify Can Buy Its Way To Platform Success

To jump start its shift towards being a next-generation “label” Spotify could use its current debt raise – and post-IPO, its stock – to buy companies that it can plug into its platform. In some respects, this is the full stack music concept that Access Industries, Liberty Global and Pandora have been pursuing. Here are a few companies that could help Spotify on this path:

  • Soundcloud: arguably the biggest artist-to-fan platform on the planet, Soundcloud could form a talent discovery function for Spotify. Spotify could use its Echo Nest intelligence to identify which acts are most likely to break through and use its curated playlists to break them on Spotify. Also artist platforms like BandPage and BandLab could play a similar role.
  • Indie labels: Many indie labels will struggle with cash flow due to streaming replacing sales, which means many will be looking to sell. My money is on Spotify buying a number of decent sized indies. This will demonstrate its ability to extend its value chain footprint, and therefore margins (which is important for Wall Street). It could also ‘do a Netflix’ and use its algorithms to ensure that its owned-repertoire over performs, which helps margins even further. But more importantly, indie labels would give Spotify a vehicle for building the careers of artists discovered on Soundcloud. Also the A&R assets would be a crucial complement to its algorithms.
  • Tidal: Spotify could buy Tidal, taking advantage of Apple’s position of waiting until Tidal is effectively a distressed asset before it swoops. Though Tidal is most likely to want too much money, its roster of exclusives and its artist-centric ethos would be a valuable part of an artist-first platform strategy for Spotify.
  • Songkick: In reality Songkick is going to form part of Access’ Deezer focused full stack play. But a data-led, live music focused company (especially if ticketing and booking can play a role) would be central to Spotify driving higher margin revenues and being able to offer a 360 degree proposition to artists.
  • Musical.ly: Arguably the most exciting music innovation of the decade, Musical.ly would give Spotify the ability to appeal to the next generation of music fans. The average age of a Musical.ly user is 20, for Spotify it is 27. Spotify has to be really careful not to age with its audience and music messaging apps are a great way to tap the next generation in the same way Facebook did (average age 35) did by buying up and growing messaging apps. (e.g. Instagram’s average age is 26).
  • Pandora: A long shot perhaps, but Pandora would be a shortcut to full stack, having already acquired Ticket Fly, Next Big Sound and Rdio. If Pandora’s stock continues to tank (the last few days of recovery notwithstanding) then who knows.

In conclusion, Spotify’s future is going to be much more than being the future of music retail. With or without any of the above acquisitions, expect Spotify to lay the foundations for a bold platform strategy that has the potential to change the face of the recorded music business as we know it.

For more information on the analysis and statistics in this post check out MIDiA Research and sign up to our free weekly research digest.

Amazon: Reverse Pricing, And The Rise Of Zero UI

Amazon’s announcement of its AYCE streaming service Amazon Music Unlimited should not come as a surprise to anyone whose been keeping even half an eye on the digital music market. Amazon are the sleeping giant / dark horse (select your preferred descriptive cliché) of digital music. With 60 million Prime Memberships it has a bigger addressable base of subscribers than Spotify, and its 300 million credit card linked customer accounts surpasses most but falls well short of Apple’s 800 million. Nonetheless, Amazon is the last major force to play its streaming hand. However, what the two really interesting things about Amazon Music Unlimited are its ‘reverse pricing’ strategy and the move towards Zero UI music experiences.

Sleeping Or Coma?

Being the sleeping giant of a space can work both ways. It normally implies major resources, a large legacy audience waiting to be tapped, and years of brand equity and trust. Amazon certainly ticks all those boxes, and some. But it can also mean that you’ve left it too late, allowing new entrants steal away your customers with new product offerings. HMV, Tower Records and Fnac were all sleeping giants but they all moved too late and too cautiously to be able to prevent Amazon, and then Apple, and then Spotify from stealing their customers. Things should though, be different for Amazon and streaming. Although streaming is growing fast we are still short of 100 million subscribers globally and in most markets subscriber penetration is below 10%. Even more importantly, the majority of adoption is being driven by music aficionados (those consumers that spend above average time and money with music). The next opportunity is the engaged end of the mainstream. This is where Amazon plays best.

Targeting The Mainstream Music Fan  

Amazon’s streaming strategy to date has revolved around a limited catalogue, curated streaming service bundled into Amazon Prime. Although it has struggled for visibility by being 3rd in the Prime pecking order (behind free shipping and video) it nonetheless deserves much credit for genuinely trying to do something different in the increasingly homogenous streaming marketplace. It is a lean back, curated experience for the music fan that is neither passive nor aficionado. This group is nearly double the size of the high spender group (see our MIDiA subscriber reports on music segmentation for much more detail). What makes this group even more interesting is that none of the other big streaming services are going after it. Why? Because they spend less than $10 a month.

So on the surface Amazon’s new $7.99 is a smart move, pushing a price point into the market that unlocks the next tier of users. The move is less radical than it first appears though, as this price is only available for Amazon Prime subscribers (all others have to pay $9.99). Also Spotify and Deezer’s aggressive price discounting ($1 for 3 months) have both created effective price deflation. That aside, there is however no doubt that Amazon’s $7.99 price point will have a major impact on consumer perceptions of pricing and will in the longer run help bring the main $9.99 price point down to $7.99 (something Apple tried and failed to do when it launched Apple Music).

Amazon’s Reverse Pricing Strategy

But Amazon’s pricing strategy is way smarter than just that, here’s why. Note the name of the service: Amazon Music Unlimited. Not Amazon Music. It echoes Google’s Google Play Music All Access. Each service’s naming convention ensures that it does not give the impression of being the core music offering for each company. In Amazon’s case this is its music sales business (CDs and downloads) and its pre-existing Prime bundled streaming service. The great thing about having a $7.99 / $9.99 product in the market is that it suddenly creates very clear perceived monetary value for its Prime-bundled service. How could consumers understand the value of something that didn’t have a price point anywhere? Now it is abundantly clear that it is $7.99 / $9.99 worth of value. This is Amazon’s Reverse Pricing Strategy: price a decoy product high to make a core product appeal more valuable. Now, a seasoned music exec might argue, ‘ah, yes, but it’s not unlimited on demand, so it’s not worth that’. But if an Amazon user gets full satisfaction from a curated, limited catalogue streaming service then the AYCE distinction doesn’t matter. It’s like telling some one that unless they eat until they are sick at an all you can eat buffet that they are not getting their money’s worth. Let’s just hope that Amazon’s reverse pricing strategy is not accidental…

Music’s Zero UI Era

Finally, onto Alexa and Amazon Echo. For just $3.99 a month Echo owners can get the full Amazon Music Unlimited service, controlling the entire experience via the Alexa voice controlled assistant. Although initially it will prove challenging to do anything other than the more rudimentary elements of using the service with the Echo, voice control is going to come of age over the next five years. Three of the big four tech companies have a voice play (Apple has Siri, Alphabet has Google Assistant and Amazon has Alexa). Also Microsoft has Cortana. Voice will play an increasingly important role in our digital lives and will help move smartphones towards post-app experiences, with app functionality increasingly built into the OS of devices and called upon via voice.

Amazon has pushed the dial for music and voice, it might even have got a little ahead of itself. But more and more of music consumption will be voice and gesture driven and Amazon is setting the pace for the voice side of the ‘Zero UI’ equation. To be clear, Zero UI does not mean Zero functionality nor Zero UX. In fact, functionality has to be even better in a Zero UI context, as it has to be able to deliver user benefits without visual reference points. But what it does mean, is that there is less friction between the listener and the music. The music becomes the experience.

Regardless of whether this ‘sleeping giant’ has timed its entry into the AYCE market right or not, its lasting legacy could well be making the first truly bold step towards music’s Zero UI era.

Spotify May Be Buying Soundcloud, But Who Wins?

spotify-pac-manThe Financial Times has reported that Spotify is in advanced talks to buy Soundcloud. Soundcloud has been shopping itself around for some time, while Spotify needs to continue outpacing Apple as it heads towards an IPO. Which is why the deal has been rumoured for some time. But who would do best out of the deal (if indeed it goes ahead)?

  • Soundcloud has peaked: Throughout the 2010’s Soundcloud’s growth was impressive, growing from 1 million registered users in May 2010 to 150 million by December 2014. But registered user numbers only ever tell part of the story. The most telling statistic is Soundcloud’s Monthly Active User (MAU) number: 175 million. Impressive enough, and 50 million more than Spotify’s 125 million. But Soundcloud hit that number in August 2014 and it hasn’t reported a bigger number since. In fact, it could well be that Soundcloud hasn’t actually issued a new number since, but instead has simply being restating that number. If it had grown, you can be sure we’d have heard about it. If it had fallen, perhaps not. On top of this, in October 2013 CEO Alexander Ljung stated that Soundcloud had hit 250 million MAUs. A number that has not since been repeated. So best case, Soundcloud usage has peaked, worst case it is in decline. DEAL WINNER: Soundcloud
  • Soundcloud users are male super fans: According to MIDiA’s consumer data 7% of consumers are Weekly Active Users (WAU) of Soundcloud, about half the rate of Spotify (again suggesting that Soundcloud’s headline user numbers aren’t all they appear). But crucially 60% of its WAUs are male while Spotify’s are 50/50 male/female. Spotify has spent the last few years diversifying its user base away from this male super fan skew. All that work would be undone if the Soundcloud user base is absorbed. DEAL WINNER: Evens
  • Soundcloud users are a funnel: Spotify’s model relies upon giving new audiences a taste of its offering via its free tier, super trials and telco bundles, before converting to paid. To keep ahead of Apple, Spotify has to keep filling up its funnel. So Soundcloud’s user base will be a welcome boost to Spotify’s user acquisition as it seeks to maintain momentum as it heads towards IPO. DEAL WINNER: Spotify
  • Many Soundcloud users are already subscribers: 28% of Soundcloud users already have a music subscription, with the majority of those already paying for Spotify rather than Soundcloud Go. So many of the low hanging fruit users have already been converted, weakening the value of the audience. DEAL WINNER: Soundcloud
  • Soundcloud has a unique catalogue: A key reason so many Soundcloud users also use Spotify is that so much Soundcloud catalogue can only be found there. This is a rich asset for Spotify but as much of it is not licensed so it could prove to be a licensing quagmire for Spotify. DEAL WINNER: Spotify, if it can sort out the licensing
  • Soundcloud’s valuation is high: Reported valuations for Soundcloud have ranged from $700 million to $2 billion. Even if it comes in at $500 million, unless the deal is heavily skewed towards stock, Spotify will burn through a massive chunk of its latest $1 billion debt round. DEAL WINNER: Soundcloud

There is an additional wild card, that Spotify could use Soundcloud as vehicle for becoming a serious player in ad supported in its own right (which will delight Apple’s Jimmy Iovine, not). The deal of course may not even happen, but if it does, it is far from a guaranteed winner for Spotify. It will help Spotify build a bullish growth story for Wall Street but Spotify will have to IPO before the shine starts to come off if Soundcloud’s user base turns out to be smaller and less valuable pickings than at first appears.

 

Have Spotify and Apple Music Just Won The Streaming Wars?

Spotify has just delivered 2 landmark data points: 40 million subscribers and $5 billion paid to rights holders to date. Although the 3 million added in Q3 was down on the 7 million added in Q2 (boosted by a summer pricing promo) there is no escaping the fact that Spotify’s momentum has accelerated rather than declined since the emergence of Apple Music. 2016 is proving to be Spotify’s year. The question is how well the rest of the market is performing beyond the 2 market leaders?

The streaming music market as a whole is experiencing unprecedented growth, with the major labels collectively reporting a 52% increase in streaming revenue in Q2 2016 compared to the same period 12 months ago. Given that total streaming revenues (including YouTube etc. but not Pandora) grew by 44% in 2015 (according to the IFPI) the picture that is emerging is one of, at worst, sustained growth, at best, accelerating growth.

Although the major label numbers have to be interpreted with caution due to factors such as Minimum Revenue Guarantees (MRGs) – see my previous post for much more detail on this – the headline trend is growth. However, headline growth is not necessarily a reflection of how most of the market is actually performing. In fact, a forensic examination of these numbers cross referenced against reported Apple Music and Spotify numbers reveals that the outlook for the rest of the pack is very different indeed.

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At the end of 2015 there were 67.5 million subscribers, by the end of June 2016 that had increased to 83.2 million – a 23% increase from the end of 2015 and a 63% increase on Q2 2015. Spotify’s subscriber count for Q2 2016 was 37 million (including super trialists) while Apple Music was just under 16 million. This gives them a combined market share of 56%, which in itself is not particularly surprising. However, when we look at what has happened to the rest of the pack that things start to get really interesting…

The Rest Of The Pack Is Getting Left Behind

By end Q2 2015 Spotify had 20 million subscribers and Apple Music none. This meant that the rest had 31 million between them. By Q2 2016 this ‘remainder’ had shrunk to 30.5 million. Among this chasing pack there is a diverse mix of stories, with some services showing solid growth, some losing lots of paid subscribers and some disappearing all together. Meanwhile Spotify and Apple Music added 32.7 million to the global subscriber base. Thus over the same 12 month period these two players combined, became bigger then the entire rest of the market in subscriber terms with a 63% combined market share. An interesting side note: Tidal’s reported revenues of $47 million in 2015 mean that it can’t have had more than around 800,000 commercially active subscribers by year end, which means that the reported and ‘implied’ 4.2 million current subscriber count is probably closer to half that.

Streaming revenue followed a similar trend with Apple and Spotify dominating and the rest falling slightly (by 1 percentage point year on year). Spotify paid around $1.6 billion in royalties in 2015 and a cumulative $6 billion by September 2016, implying about $1.1 billion in 2016 already. The amount that Spotify paid to record labels in Q2 was somewhere between $479 million and $622 million, depending on when and how Spotify paid for those 7 million new super trialists it acquired that quarter. Towards the lower end of that range is probably the safer bet. Apple by comparison paid around $220 million. And as with subscriber numbers, the rest of the pack lost revenue.

It’s A 2 Horse Race

When Apple launched Apple Music some less informed observers suggested that it was too late to the party and that there was only room for one big player. The numbers from Q2 2016 show that Apple was far from too late (fashionably late perhaps) and that the rather than being a winner takes all scenario, the streaming market is a 2 horse race. Unfortunately for the rest of the pack it does look like there is only space for 2 leading global players, with Apple clearly having played a key role in knocking Deezer out of 2nd place and racing on ahead.

Still A Place For Regional Leaders

This does not mean that there is not space for other players, there is. Especially regional leaders like QQ Music, KKBox, Anghami and MelOn. But the consumer marketplace only has so much appetite for global scale $9.99 AYCE services. Which is why pricing and product innovation are so crucial if the recorded music business wants a vibrant streaming sector. Compare and contrast with the streaming video market where there is immense innovation with niche services and a diverse range of price points. Music streaming needs the same approach. Tidal may have (very successfully) differentiated on brand and content but it remains fundamentally an also-ran, $9.99 AYCE service. As things stand, the only really serious attempt to play by different rules is Amazon’s steadily emerging streaming strategy. Expect that dark horse to make up ground by playing by different rules. Perhaps even Pandora may be able to break the mould too.

But it is only through differentiated strategies that serious inroads can be made and unless pricing and product innovation occurs (and the labels and publishers need to enable it) expect the streaming race to continue to be a tale of 2 horses.

Pandora Plus And The Mid Tier Opportunity

Pandora continued its steady path towards subscriptions today with the announcement of a revamp of its premium radio offering Pandora One and confirmation of a forthcoming 9.99 tier. These of course have been in the works since its acquisition of Rdio’s assets back in November 2015. In the update Pandora One becomes Pandora Plus and gets new features including: ‘predictive offline playback’ for when signal drops, unlimited skips and unlimited replays. Pandora Plus may have a mid tier price point ($4.99) but it is not a mid priced subscription service, instead it is a premium priced radio service. This is not a revival of Rdio’s $3.99 Select offering nor is it a shot across Spotify and Apple’s bows. Nonetheless it is the start of a bolder streaming strategy for Pandora and it does raise the perennial issue of the case for mid priced subscriptions. Premium radio offerings like Pandora One Plus represent around 5 million subscribers in the US and are an important part of the market. But they are only the tip of the opportunity.

The case for mid priced subscriptions is clear: $9.99 is not a mainstream price point. It is fantastic value for music super fans, but more than mainstream fans are willing to pay. 9.99 subscriptions will continue to grow solidly for the next few years as the remaining untapped super fans are converted. But once that base is saturated the market needs something more, that’s where mid priced subscriptions come into play, helping unlock the next layer of consumers. Mid priced subscriptions can represent the best of both worlds, delivering large scale and premium revenue.

Mid Price Is No Easy Sell

However, the mid priced market is not without challenges, indeed, of the original wave of mid priced subscription services that came to market Blinkbox is gone, Cur Media is gone, Guvera is all but gone while Psonar and MusicQubed are still in market. The key challenges this market faces are:

  • It is not easy selling to mainstream consumers: mainstream consumers have less disposable income, are less engaged with music than super fans and are harder to convert
  • It is hard to compete against free: while there are on demand free services in the market (YouTube, Vevo, Spotify free) it is hard for mid priced products to compete in value terms. These free services steal much of the oxygen out of the market. $1 for 3 month trials from Spotify and co only compounds this issue
  • It is hard to differentiate: Label licensing constraints mean that the mid priced products deliver far less value than full priced products due to the restrictions imposed on them. Pandora’s INSERT gives the users 100 on demand tracks a month. That is 0.0003% of the 30 million on Spotify for 40% of the price of Spotify, or 1197% of the price of Spotify’s $1 for 3 months trial

Mid Tier Needs To Be Given More Substance

In short, the mid priced segment needs empowering with proper functionality. Mid tier products need more tracks and more on demand playback. Of course this has to be within clear bounds, else the risk of cannibalizing 9.99 tiers is to strong. But there are many other ways to do this rather than creating a painfully restrictive limit on the number tracks that can be played on demand. Here are some examples of how to differentiate mid tier while maintaining genuine user value by delivering more content and more choice in return:

  • Windowed content only (e.g. a 4 week window on new releases)
  • Limit on number of tracks that can be added to a playlist
  • Genre specific subscriptions
  • Strong focus on pushed playlists
  • Cheaper pricing ($2.99 or $3.99 to reflect the changed marketplace)

For mid tier to work, the music industry needs to have the confidence that the $9.99 product is good enough to keep its core customer base, that these users will not jump ship for a product squarely aimed at the mainstream.

After a couple of years in the wilderness it looks like the marketplace is beginning to warm to mid tier once again. In addition to Pandora’s moves, Sony Music and Universal Music quietly launched the £5.99 Now Music app into the UK market earlier this year while MusicQubed’s MTV Trax has been getting large scale TV advertising support from Viacom. Meanwhile QQ Music and Apple Music are both driving scale in China with a price point equivalent to around $2.

$9.99 was always a blunt instrument, a sledgehammer to crack a nut. Now though, while $9.99 adoption is still growing, is the time to have a far more sophisticated approach to pricing. The safe option would be to wait until $9.99 growth slows. But by then it would be too late.

Watch Out Access, Liberty Media Is Building A Full Stack Music Company

liberty-full-stackAccess Industries’ full stack music company has, ahem, company: Liberty Media. With a combined market market cap of $37 billion John Malone’s Liberty group of companies is by anyone’s standards is a serious player. In the world of media and telecoms it is one of the biggest. Liberty grabbed the headlines this week with its $2.7 billion acquisition of a 15% stake in Formula One, with an option to acquire the entire company, possibly by year’s end. It is a typically bold move for a company that makes a habit of acquiring companies and consolidating markets. Over the past 11 years Liberty Media and Liberty Global have spent around $50 billion on acquiring companies such as UK TV operator Virgin Media, Dutch cable company Ziggo and (indirectly via a holding company) major league baseball team Atlanta Braves. So far so good, but where’s the music angle I hear you ask. Well, just a few weeks ago Liberty made a bid for a certain Pandora Media to add to its already extensive collection of music assets.

Read the full post on the MIDiA Blog here.