Why The Next Few Months Of Apple Music Will Throw Up A Few Surprises

Finally Apple is in the streaming game. Other than to say that it looks like Apple has made a big first step towards making streaming ‘ready for primetime’ and to becoming a music platform I’m not going to add to the list of reviews and first impressions, there are plenty of good one’s like Walt Mossberg’s.   Instead I’m going to run through a few of the likely milestones and unintended consequences that we could see over the coming months.

Expect Impressive Numbers Real Soon

As we revealed on our MIDiA Research report on Apple Music back in March 28% of iOS users stated they were likely to pay for the service. Among downloaders the rate is 39% and for existing subscribers that rate rises to 62%. Consumer surveys of course always over-report so we shouldn’t expect those rates of paid adoption but the relative values are interesting nonetheless. Given that 50% of existing subscribers are iOS users the implications are that a big chunk of Spotify et al’s subscribers will at the very least try out Apple’s 3 month trial, which is plenty enough time to get build a comprehensive library of playlists and to get hooked. But there is also going to be a big wave of downloaders that do not currently subscribe that will try it out. Given how the iOS 8.4 update virtually pushes iTunes Music users into starting the trial on updating, expect pretty widespread uptake of the trial.   Apple reached 11 million users for iTunes radio within 5 days of launch, 21 million within 3 months. Apple Music has had a far bigger build up and is much more deeply integrated into iOS so a fairly safe bet is that those numbers will at the very least be matched.

A Mixed Bag Of Royalty Implications

Apple Music will also have a series of aftershocks:

  • Apple royalties will be a mixed bag: As the ever insightful David Touve pointed out with iTunes Radio, Apple has proven adept at striking licensing deals that appear to pay above market rates at a headline level but that in practice can work out lower. A key reason for this is the fact iOS users’ existing music collections are integrated into the service and plays from these will generate much lower per stream rates, more in line with licensed locker services. Add into this the fact that semi-interactive radio and broadcast radio are part of the proposition (both of which also have lower per stream rates than on demand) so the blended per stream rate may disappoint. Expect a stream (pun intended) of irate artist CD Baby statements showing their Apple per stream rates.
  • Download sales will suffer: If a streaming service does its job properly users should have no reason to buy downloads any more. Initially there may be a mini surge, a dead cat bounce as first time streamers discover new music and buy downloads out of habit. If this happens expect Apple to make a song and dance about it. But that will be a temporary phase. iTunes downloads will decline thereafter. Artists may have complained about theoretical lost sales from Spotify, they will be actual lost sales from Apple. What everyone will be hoping for is that enough lower and infrequent spending download customers get transformed into 9.99 a month customers. But that will take more time. So expect three, possibly four key stages to Apple (lower case ‘m’) music revenue: 1 – mini revival; 2 – sharpish decline; 3 – steady recovery; 4 – growth?
  • Spotify per stream rates could go up: If enough existing subscribers take up the Apple Music trial but don’t cancel their subscriptions, the royalty pot for Spotify et al will remain the same but play volumes will decrease. This means that the per stream rates for Spotify and co could actually increase for a while because the revenue will be split across a smaller number of plays. So expect artists to see a very pronounced, albeit temporary, difference between what Spotify pays from (paid) streams versus Apple.

So Apple will be for once upsetting everyone else’s streaming apple cart with its long anticipated entrance but there will be a superficially confusing set of mixed messages and metrics. Which means the time to properly measure Apple Music’s progress will be 6 months or so from now. Until then expect to be simultaneously impressed, concerned and confused.

‘Awakening’ Now Available In Paperback

UnknownRegular readers will know that I recently published the Kindle version of my book “Awakening: The Music Industry In The Digital Age”.  Many of you have already bought it (thank you!) but some of you also wanted to know when the paperback edition was going to be available. Well you need wait no longer, you can buy the paperback version of ‘Awakening’ right now by clicking here.

If you are interested in the music industry then this is the book for you. Whether you are a label executive, music publisher, artist, songwriter, entrepreneur or simply interested in what you can learn from the music industry’s experience and want to know what the future holds then this is the book for you.

I wrote this book with three key objectives in mind:

1.    To provide the definitive account of the music industry in the digital era, as an antidote the distorted picture that is painted by the biased and often poorly informed extremes that dominate the industry narrative

2.    To help anyone in the music business better understand how the other parts of the industry work, what they think and what their priorities are

3.    To act as a primer for anyone wanting to build career or business in the music industry, so they know exactly what they’re getting in to, how the business works, the relationships, the conflicts and what’s been tried before.  I want to help people not waste energy making the same mistakes others have, and to also benefit from the insight and experiences of the super smart people I interviewed in the book

The book is full of data, analysis and interviews with more 50 interviews with the CEOs, senior decision makers, artists, managers, start up founders and other decision makers that have shaped the music industry over the last 15 years.  It includes chapters on every key part of the industry (labels, artists, songwriters, start ups, tech companies etc.) and is split into three sections:

  1. How We Got Here
  2. The Digital Era
  3. A Vision For The Future

This really is the only book you need to read on the music industry’s digital transition.  But don’t just take my word for it, check out these 5 Star Reviews:

“I really enjoyed this book. It gives a wide view to music industry, consumption tendencies and much other useful information. Is a must for all of the music industry professionals.”

“Great book on today’s digital music business – how we got here, who did what and most crucially why they did it. There’s no shortage of firmly held opinions and theories about the music industry and how it has navigated its digital transformation and Mulligan’s book is an essential analysis of what’s actually been going on. Insightful, non-judgemental and very well researched and informed, if you want to understand today’s digital music business, read this book.”

And if you’re still not convinced, take a read of the sample chapters on Amazon.  ‘Awakening’ is also available on iTunes and Google Play.

I hope you find the book as interesting to read as I did writing it.

Taylor Swift, Streaming And The Changing Tide

Taylor Swift made big waves over the weekend with her open letter to Apple protesting it should pay for its 3 month free trial.  Her voice was just one more following protests from across the indie community of which Swift and her label are both members. But it turned out that her voice was the loudest and Apple’s Eddy Cue swiftly announced a u-turn on Apple’s free trial pay outs. This is just one more twist in the much bigger streaming story but it does highlight some interesting dynamics, not least of which is how Swift’s worldview differs from many of her contemporaries.

Taylor Swift’s Sales Outlook Is Surprisingly Old School

As paradoxical as it may sound for such a digitally savvy artist as Taylor Swift, she is in fact from the old school when it comes to recorded music.  Swift started her career so early – she signed her first label deal when she was just 14 years old – that she is effectively further into her recording career than most successful 30 something artists.  So she is an album era artist who, with her label Big Machine, managed to build a long-standing successful music sales career.  Streaming, with all of its substitutive impact on sales, does not fit well with the Swift / Big Machine model.   In many respects Swift’s recorded music worldview has more in common with artists of Coldplay’s generation than it does hers.  The contrast with successful contemporary mainstream pop artists is stark. The take of Ed Sheeran (who is just one year younger than Swift) on the role of recorded music is “I’m in the music industry to play live. That’s why I make records” while Calvin Harris (currently romantically linked with Swift) is famously a co-owner of streaming platform TIDAL.  Both of those artists have been supremely successful on Spotify and neither has a decade of platinum selling albums behind them.  For them, streaming is simply how it is and they are learning how to make that work.

Streaming Is Fundamentally Substitutive

None of this is to belittle the hugely disruptive impact of going from a sales model which guaranteed up front revenue to an access model where revenue is fractionalised over many years.  In the sales era a purchased album generated $10 of gross revenue whether it was listened to once or a thousand times.  In a streaming service an album that is listened to once generates $0.10 and only reaches $10 when listened to a hundred times.  If you are a superstar artist you can probably swallow the near term pain because a) your streaming volumes are in the billions so the pennies add up and b) you make the majority of your money from playing live.  If you are a smaller artist the outlook is bleaker for getting through the transition period i.e. until streaming services are big enough to ensure a high tide rises all boats.

Live Is Where The $$ Are For Superstars

Interestingly for Swift, for all her sales success, live is also where she makes her money.  She ranks as the highest earning artist on Billboard’s top earners list with $39 million but $30 million of that came from live.  She explains in her post that “[I] can support myself, my band, crew, and entire management team by playing live shows” and that she is raising her voice for “the new artist or band that has just released their first single”.  This may well be the case but she is also very much doing this for her label Big Machine Records (which doesn’t get to benefit in any truly meaningful way from Swift’s live revenue).   Swift’s rise to prominence and continued success is intrinsically linked to that of her label Big Machine Records and it is fully understandable why she has been so perfectly aligned with Big Machine’s stance on streaming.  But it is a position nonetheless.

Apple Doesn’t Need Any Commercial Bail Outs To Launch Apple Music

None of this though detracts from the core issue at stake here, namely Apple not paying for a 3 month free trial.  Apple is in the business of selling music in order to sell hardware.  Apple’s primary concern is not what % of iTunes sales become substituted by free trials (near term) and subscriptions (long term) but instead how it helps them gain and retain device buyers. Swift, Big Machine and the rest have very good reason for being very cautious with Apple’s streaming strategy.  Apple is the leading source of digital music sales and accounted for approximately $2.8 billion of music sales revenue in 2014, or 40% of all digital music revenue.  If Spotify messes up a free trial the labels risk slowing the rate of new streaming revenue growth.  If Apple messes it up the money that keeps the lights on is at risk.

Apple doesn’t need any financial assistance in launching Apple Music (it does after all have $178 billion in cash reserves) but it does need careful attention from labels and artists alike to ensure it gets the strategy right. Whatever the outcome though the streaming transition is an inevitability and Taylor Swift is no more able to hold it back than King Canute was able to hold back the tide.

Apple, The Indies And The Rise Of The Digital Monopsony

Much of the independent label community have come out in public opposition to Apple’s request for a 3 month free trial that crucially would not involve any royalty payments to labels. Besides the fact this has revealed inconsistency in major label licensing strategy (some services have to pay royalties for their free trials) it also raises questions about Apple’s growing role as a content platform. In the old model (i.e. selling CDs on the high street and mall) retailers held all the power, charging labels for prime placement, priority shelf space and carving out additional commercial benefits such as breakage (whereby they were given a discount on a set assumption of a % of shipments that would break in transit, even if they didn’t). In the old new model (i.e. where we are now) the power shifted to the labels with music stores and services having to pay advances, minimum guarantees etc. in order to sell the labels’ content. Even breakage got reinvented and turned into a commercial benefit for labels (they get paid for under usage of services). Now a new model is emerging where a few big platforms are beginning to exercise the power they have been quietly building for the last half a decade or so.

Apple, Amazon And Google – The Digital Superpowers

Apple, Amazon and Google are all digital content platforms. They each own the customer, control billing, know everything about him/her, control some or all of the hardware and have a diverse portfolio of content assets. Each has also become super important to media company partners. For music labels Apple has become the dominant source of digital retail revenue, Amazon the dominant source of physical retail revenue and Google the dominant digital discovery platform. Each holds the whip hand in their respective area of dominance. Now they all want more. They may each want slightly different things but none are shy of wielding their respective spheres of influence to get to what they want. This is where the indies’ dispute with Apple comes into play. Apple is in the business of music in order to sell hardware and has known for a number of years that streaming is going to be how it transitions that role in a post-download world. It has thus far taken a very responsible approach to its sales role and has been sensitive to the risk of decimating label revenue if it does not time its streaming transition properly. But the first step on that journey has now been taken and the point of no return is fast approaching. Which is why it is crucial that all rights holders have the right agreements in place and which is why the indies are making the noise they are.

The Power Of The Platform

In an echo of Google’s heavy-handed YouTube Music Key negotiations with indies and DIY artists, one independent artist has claimed that Apple has threatened to remove his music from the iTunes Store if he does not allow his music to be used in the free trial. Whether this is true or not (and it may well not be) is almost not the point. What it highlights is Apple’s power as a platform. Artists and labels alike simply cannot do without iTunes revenue. Whether Apple needs to overtly play the card or not, the implication of the veiled threat is clear. And Apple is not exactly alone. Last year Amazon clashed with book publisher Hachette over eBook pricing and during the dispute employed a number of pressure tactics including: refusing to take pre-orders on Hachette titles, placing a 6 week delay on delivery of them and even pointing users to competitor titles when they searched for an Hachette book. All of these were clear misuse, possibly even abuse, of Amazon’s role as distribution platform but no regulatory body even raised an eyelid. Apple will have watched the development with acute interest.

The Rise Of The Digital Monopsony

Apple, Amazon and Google are all unique cases. They have become de facto monopolies for their respective sectors, exercising control over the entire platform of user, supplier and interaction between them. There isn’t really an economic term that properly explains them but monopsony is the closest: a company that is the only effective buyer and seller of a product and can thus dictate terms at both ends of the equation. These digital monopsonies are growing pains of the digital economy. After all, we are still in the very early stages of the digital economy. If this were the industrial revolution Robert Stephenson wouldn’t have developed the steam locomotive yet. Consider this phase market adolescence. This raises challenges for regulation with regulatory bodies largely unable to deal with companies that exercise effective monopoly power but that do not meet the criteria of a pre-digital era economy monopoly. Of course the indie labels cannot afford to wait for that dynamic to change so in the meantime they must seize the initiative in this issue and others like it.

An Opportunity To Change The Narrative

Right now though the indies have an opportunity to use this case to genuinely move the needle. Apple has pushed them out of their comfort zone. Instead of just digging in their heels they can decided to push Apple out of its comfort zone and request something similarly game changing of Apple in return. In short, turn a defensive move into an offensive one and help set the agenda rather than being stuck in the familiar rut of responding to the one set by the major labels and Apple. Apple Music may have underwhelmed at launch but the company still has the most important music monetization platform on the planet. Most indie labels and majors alike would all but collapse if iTunes revenue disappeared overnight.

Right now Apple still wants to play the role of good partner, albeit one that negotiates hard. So the labels still have a chance to help shape what the next chapter in Apple’s music story can look like. That may not always be the case, especially if Artist Connect has developed into a label like service layer 3 years from now, which I suspect will be the case. Apple is no Google, it still wants first and foremost to sell music rather than give it away. That may not always hold true.   Similarly the power of the digital monopsonies will likely strengthen over the coming half decade or so. So right now the indies are probably in the strongest position they will be in for some time, even if it might not feel like it to them. They need to seize this moment.

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!

What I Want To See Next From Apple

With Apple Music barely a few hours old it might seem a little perverse to focus on what Apple needs to do next but Apple’s potential remains more latent than realized. Apple has an opportunity to launch the sort of music platform the industry has been waiting for during the entire digital era but has not yet seen. It hasn’t done it yet but it now has the right materials with which to build it.

If Apple is going to make a meaningful long term impact on the streaming market it will need to play the innovation card.  Apple music products have been something of the poor relation in innovation terms over the last half decade or so, looking on wistfully from their music downloads backwater while Apple’s devices undergo an innovation and design revolution.

If Apple can seamlessly integrate all its assets (radio, podcasts, downloads, on demand streaming, apps etc.) then it could create the most comprehensive and engaging music experience in the marketplace. Imagine listening to a Zane Lowe show on demand, but tracks are played in sequence.  You like one of the tracks so you click ‘more by this artist’ and start listening to the latest album.  After a few tracks you pull back into the show, listen a bit more and then see a link to an Artist Connect video of an interview by Zane with the last artist you listened to. You jump to listen to that then jump back into the show, decide you want to hear the first couple of tracks and what Zane had to say about them again and jump back to there.

In that scenario the user has jumped from semi-interactive radio, into on demand, back into semi interactive radio, non-music content, back into semi-interactive radio, then into fully interactive radio. Of course there are multiple business models at play with multiple rights frameworks but if a user was able to top up on Apple Music credit to use across the entire platform then s/he need never know when boundaries are crossed and the credit would simply get auto deducted from the balance.

Implementation wouldn’t be simple (especially form a licensing perspective) but that is the sort of innovation bar that Apple should now be aspiring to. Apple has a unique opportunity to become a true music platform. The first step has been taken (and some of the Artist Connect functionality may prove to be super cool) but now it is time for the real innovation fun to begin.

Apple Music: A Platform Play With Hidden Nuance

Today Apple finally announced its long, long anticipated entry into the streaming music space with Apple Music. Apple has spent the last few years as the sleeping giant of streaming music watching Spotify et al seize the innovation mantle and dominate both consumer behaviour and the industry narrative. With all the anticipation expectations were understandably high, too high perhaps. Thus in many respects Apple Music underwhelmed (a 9.99 on demand service;  a 24/7 live broadcast radio offering Beats1; a fan / artist engagement platform Artist Connect). But there is also more than first meets the eye, there is a nuanced strategy at play.

Radio Takes Centre Stage

Placing radio centre stage is smart, as that’s how Apple will engage the early follower consumer, who will be Apple’s core target (other than winning back some existing Spotify users). Remember, Apple’s core priority is delivering the best possible music experience to as many of its device owners as possible. A 9.99 subscription service that works for 10% of them is much less interesting than a free radio service that works for 500 million of them.

There’s no little irony that Apple triggered an industry knee jerk reaction against free music only to go and put free music at the core of its streaming play. Of course the crucial difference here is that the free music is not on demand. Apple is using radio, real time broadcast and high profile DJs as a way of bringing context and meaning to internet radio for the Apple mainstream (which of course is slightly different from the broader mainstream). Whether Beats1 is enough on its own for that purpose is another question.  Beats2 and 3 to follow shortly?

Taking The First Step Towards A Platform Play?

Apple continues to be ridiculed for its failed Ping! music social network. While it was no killer app it nonetheless represented an attempt to turn iTunes into a music platform. Now that same strategy has been rekindled with the launch of Artist Connect. This is Apple’s attempt to turn itself into an artist-fan engagement platform. Artist-fan engagement is the gold dust of the digital era music business. It’s the scarce, invaluable commodity that music fans crave in a post-scarcity music world. The non-music content is also interesting. Artists can push photos, videos and works in progress to their fans. This combines elements of the D.I.S.C. music format I wrote about here and also the Agile Music concept I wrote about in 2011. There is no reason why music should be a creative full stop in the digital era nor why the static audio file should be the be all and end all. Music fans want more than just the song.

There’s no shortage of competition in this space but while DIY sites of various guises are niche, Apple presents the opportunity to reach more than a hundred million of the world’s most valuable (i.e. highest spending) music fans. Sure some of them now pay for Spotify but they’re still iTunes users also.  If Apple’s featureset for artist is strong enough, expect strong uptake, especially from the bigger labels and artists.

Apple Is Making A Play For A Bigger Role Than Ever In Music

The long term implications are intriguing. If Apple establishes itself as one of the key engagement platforms it will change some of the core dynamics of music marketing. All the while strengthening its hand and establishing an indispensable role for itself if it doesn’t make meaningful inroads into the subscription market. Consider it a back up plan. But even more interestingly, if it succeeds at both subscriptions and marketing then it suddenly has more power than it ever did in the hey day of the iTunes Store. Apple could emerge with the power to break and then make an artist. Once it gets there record labels will rightly start casting nervous glances over their shoulders.

The Streaming Maturation Effect

What do Netflix and music subscriptions have in common?  They both experienced slowing growth in 2014 in the US.  Subscriptions are the monetization focal point of streaming but there have long been signs that the market opportunity is far short of the mainstream. Reports suggest that Spotify may (finally) be about to launch video, as a means of differentiating in an increasingly competitive marketplace that is about to get a whole lot more competitive on the 9th of June (i.e. when Apple announces its long mooted arrival into the space).  Spotify needs a differentiation point.  It may be the runaway market leader but it doesn’t have the feature badge of identity that many of its competitors do (e.g. Rdio is the social discovery service. TIDAL is the high def service. Beats is the curation service etc.).  However, even with a feature differentiation point, Spotify and all of its subscription peers face a more substantial challenge than competing with each other: they are collectively in danger of banging their heads on the ceiling of demand for music subscriptions.

Behaviours Will Change, But Slowly

The world is unequivocally moving from ownership to access and streaming will be a central component of this new consumption and distribution paradigm.  9.99 subscriptions however have no such mainstream inevitability.  They are too expensive for most consumers but most crucially they require consumers to pay for music every month when most people instead spend when one of their favourite artists is in cycle with a new album, single or tour.  Over time (a half generation or so) some consumers will have their behaviours modified, but the majority will not.  In some sophisticated markets (such as South Korea, the Nordics and, to some degree, the Netherlands) subscriptions are showing some sign of edging towards a wider audience (though still far short of mainstream).  In most major music markets though, they remain firmly locked in single digital percentage adoption ranges. They are niche services for the high spending aficionados.

maturation effect

But this isn’t solely a music subscription problem.  It is a dynamic of digital subscriptions more broadly.  Take a look at the US. In 2014 net new subscribers (i.e. the amount of subscribers by which the market grew) fell to 1.5 million, down from 2.8 million in 2013 – which translated to a 46% decline in net adds.  And that was in one of the highest profile years yet for subscriptions.  Over the same time period, Netflix’s net new US subscriber growth fell from 6.4 million to 5.7 million, which was a more modest 11% decline in net adds.

This is not to say either business model has run its course – far from it, and of course both sectors still gee in 2014 – but instead that premium subscriptions are not mass market value propositions. And once you have mopped up your early adopters and early followers growth inherently slows.  The music industry may be locked in an identity crisis over how it deals with freemium services, but it needs to have a realistic understanding of just how far subscription services can go without lower price tiers and more ability for users to easily dip in and out and, ideally, pay as they go rather than being tied to monthly commitments.

The incessant success of YouTube and Soundcloud show us that mainstream consumers want on-demand music experiences but the slow down of subscriber growth in the US shows us that the incumbent model only has a certain amount of potential. Sure, Apple will doubtlessly unlock a further tier of early followers to meaningfully grow the market, but it will only be a matter of time before it hits the same speed bumps.

Access based models are the mainstream future, subscriptions can be too, premium subscriptions though are not.

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.

My New Book – Awakening: The Music Industry In the Digital Age

I am very excited to announce the launch of my book ‘Awakening’ which charts the rise of digital music and how it is changing the music industry. ‘Awakening’ is the definitive account of the music industry in the digital era. With exclusive interviews with the people who shaped today’s industry it tells the inside story of how the music business grappled with the emergence of an entirely new digital economy

coverThe music industry is on the brink of an utterly transformative period of change that will result in the creation of an entirely new industry tailor made for the digital era. ‘Awakening’ presents the vision of how and why this change will come, what this future will look like and how the first steps on the journey are already being taken. The book includes interviews with 60 of the music industry’s leading figures, including globally successful artists and more than 20 CEOs (a full list of interviewees can be found at the bottom of the page). Alongside the insight from this unprecedented executive access, ‘Awakening’ uses exclusive consumer data, official market statistics, proprietary models and multiple additional data sources. In doing so it constructs an unparalleled picture of the new global music economy presented across 60 charts and figures.

All good stories start in the beginning. ‘Awakening’ deconstructs the failed state experience of the analogue era music industry with the definitive account of the music industry’s transition from booming $28 billion powerhouse to today’s much humbled $15 billion business. Music fans used to be told what to listen to when, where and how. In the new music industry the balance of power lies with the fans with themselves. The old music industry had the record labels at its centre, the new digital era industry will have the consumer at its core. The change will be generation defining and will transform forever what it means to be an artist and a fan. Livelihoods will be destroyed, others created, millionaires made, culture transformed. The change is already underway. ‘Awakening’ looks at each individual component of the music industry today and looks at each one is dealing with change and preparing for the future. From the superstar artist to the small independent label, from the pirate company CEO to the major label CEO, in the book I explore the incredibly varied picture of confusion and innovation, uncertainty and brilliance, fear and confidence. Most of all it is the story of a rebuilding, an Awakening of the new music industry.

The book has three sections:

  • How We Got Here: A detailed history of the years up until the launch of the iTunes Music Store, exploring how Napster changed the music industry forever and how the industry responded, or rather didn’t
  • The Digital Era: This section has 7 chapters, one for each of the key stakeholders (labels, artists, songwriters, pirates etc) and explores what the current market means to each of them
  • A Vision For The Future: A vision for what the next music industry will look like and what needs to happen to enable this to take place

I was extremely fortunate to interview many of the most important figures in the music industry of the last 15 years, including CEOs of major record labels, CEOs of all the major streaming services and platinum selling artists. I’ve managed to get the inside track on exactly what was happening behind the scenes.  I personally learned a huge amount while writing this book and I am confident virtually every reader will do so too.

In short, once you have read this book you will know practically everything that there is to know about the digital music market and where it is heading!

For anyone interested in the music industry and the lessons it provides for all media and technology businesses in the digital era, this is the only book you will ever need.

The book is available now on Amazon and iTunes and Google Play.

Also 10% of net profits will go to the music therapy charity the Nordoff Robins trust.

If you are a journalist and would like a review copy please email me at mark AT midiaresearch DOT COM

People interviewed for this book

Adam Kidron             Founder and CEO, Beyond Oblivion
Alexander Ljung         Founder and CEO, Soundcloud
Alexander Ross        Partner, Wiggin
Alison Wenham        CEO, AIM
Axel Dauchez           CEO, Deezer
Barney Wragg          SVP Universal Music eLabs / Global Head of Digital, EMI
Ben Drury                 Founder and CEO, 7 Digital
Benji Rogers             Founder and CEO, PledgeMusic
Brian Message          Manager, Radiohead, Nick Cave / Chairman MMF
Cary Sherman          CEO, RIAA
Chris Gorman           Founder and CEO, MusicQubed
Cliff Fluet                   Partner, Lewis Silkin / Director 11
Daniel Ek                   Founder and CEO, Spotify
David Boyle              SVP Insight, EMI
David Byrne              Solo artist / Talking Heads
David Isrealite           CEO, MPAA
David Lowery           Camper van Beethoven / The Trichordist
Edgar Berger            President & CEO International, Sony Music Entertainment
Elio Leoni Sceti         CEO, EMI
Erik Nielsen               Manager, Marillion
Geoff Taylor              CEO, BPI
Gregor Pryor             Partner, Reed Smith
Helienne Lindvall       Award winning songwriter
Ian Hogarth                Founder and CEO, Songkick
Ian Rogers                 CEO, Beats Music / CEO TopSpin
Jack Horner               Founder Frukt
Jay Samit                   SVP, EMI / EVP & GM, Sony Corp America
Jeremy Silver            VP New Media EMI / Chairman musicmetric
Jim Griffin                   CTO Geffen Records / CEO, Cherry Lane Digital
Jon Irwin                    President, Rhapsody
Jonathan Grant          Above and Beyond / Founder, Anjunabeats Records
Justin Morey              Senior Lecturer Music Production, Leeds Beckett University
Keith Harris                Manager, Stevie Wonder / GM, Motown
Keith Thomas            Grammy Award Winning Producer and Songwriter
Ken Park                    Chief Content Officer, Spotify
Larry Miller                 COO, a2b Music / President Reciprocal
Liz Schimel                VP Music, Nokia
Lohan Presencer       CEO of Ministry of Sound Group
Mark Kelly                 Marillion / CEO, FAC
Mark Knight               Founder and Chief Architect, Omnifone
Martin Goldschmidt   Founder and MD, Cooking Vinyl
Martin Mills                Founder and Chairman, Beggars Group
Michael Robertson   Founder and CEO, MP3.com
Nenad Marovac        Partner, DN Capital
Oleg Fomenko          CEO, Bloom.fm
Paul Hitchman          Founder and Director Playlouder/ MD Kobalt
Paul Vidich                EVP, WMG / Director, Reverbnation
Peter Jenner             Manager Pink Floyd, Billy Bragg / MD Sincere
Peter Sunde              Founder, The Pirate Bay
Phil Sant                    Founder and Chief Engineer, Omnifone
Ralph Simon             EVP Capitol & Blue Note / Founder Yourmobile
Robert Ashcroft        SVP Network Services Europe / CEO PRS for Music
Roger Faxon             CEO, EMI
Scott Cohen              Founder, The Orchard
Simon Wheeler         Director of Strategy, Beggars Group
Sumit Bothra             Manager, The Boxer Rebellion, PJ Harvey
Tim Westergren        Founder and Chief Strategy Officer, Pandora
Tom Frederikse        Partner, Clintons
Tony Wadsworth      Chairman & CEO, EMI Music UK & Ireland/Chairman BPI
Wayne Rosso           President, Grokster
Will Page                  Chief Economist, Spotify

Note: positions either refer to current position held by interviewee or key position held during the narrative of this book.

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