Sonos @ 15

Sonos_2015-LogoSonos, granddaddy of the connected home audio marketplace, is now 15 years old. Sonos was a pioneer that was so far ahead of its time, it inadvertently found itself as one of the key early drivers of streaming subscriptions. Visionary founders John MacFarlane and Tom Cullen had some long-term inkling that streaming would eventually be a major force for them, but their near-term vision was built on getting music downloads piped around the home. Now, 15 years on, Sonos has effectively achieved two missions: deploying iTunes around the home, as well as Spotify and co around the home. But now, the outlook is less clear. Sonos’s marketplace is complex and competitive more than ever. Furthermore, the departure of MacFarlane, a round of lay-offs and having ‘missed voice’, may have left Sonos looking less vibrant than it once did. So, where next for Sonos?

These are some of the key challenges Sonos faces:

  • Battle of the apps: Sonos hardware reflects the company’s obsession with elegance and attention to detail. But, as with so many hardware companies (in fact the majority of them), Sonos’s weak point is software. Apple makes seamless software-hardware integration look deceptively easy – it is, in fact, nigh on impossible to do well. The Sonos app works well enough, certainly much better than it used to, and the networking of devices is usually relatively pain free. But in the app economy, consumers expect apps to work perfectly, not ‘well enough’. They expect high-quality user experiences, not functional experiences with lots of clicks and swipes, which is what Sonos can feel like when doing activities like building playlists. In spite of this, the biggest software threat for Sonos is the very fact that it is a standalone app. A Spotify user does not want to have one app to use on the train, or in the car, and a different one to use in the home. This is what Sonos effectively does right now. Sonos’s new CEO, Patrick Spence, knows this needs fixing but the question is whether Sonos can make the fix before Spotify and co come up with their own fix.
  • Just play: Traditional home audio just works. You press play and there’s music. Sonos stood out way ahead of the pack – an admittedly poor quality pack – for out-of-the-box simplicity, though even now it remains a marker of good practice. However, the convenience benchmark for connected home audio still falls far short of traditional home audio. Sonos works most of the time, emphasis on most of the time. Every so often there’s a network problem; sometimes this is due to a firmware issue, other times it is the network itself. The network glitches of course aren’t Sonos’s fault but that doesn’t matter to the user experience. A CD player works every time, Wi-Fi or not. That is the convenience benchmark Sonos and all other connected audio players must meet. But even without Wi-Fi issues, pressing play is not always so straight forward because Sonos’s app experience is not on a par with its hardware experience.
  • Sonos…sonos….sonos…: Ok, that was meant to be an Echo. Yes, Amazon’s Alexa vehicle has totally shaken up the connected home audio space. And with Amazon Music integration, it sets a standard for what an integrated hardware-software service experience should be. One voice command pulls up a song in an instant, no having to select which music source to choose. Yet Echo is far from the end game. In fact, voice is not an ideal interface for music. It’s fine for when you know exactly what you want to play, it’s also pretty good for when you want to select a lean back experience e.g. ‘play me music to work out’ – but it struggles with the more nuanced use cases that lie in between. Voice is another thing that Spence knows needs fixing.
  • Good enough: And of course, the Echo is not a super high-quality audio experience. It’s a decent audio experience. Sonos might grumble at otherwise sophisticated users tolerating modest audio playback, but ever since the advent of MP3s and iPod earbuds, convenience trumps quality for most when it comes to music. Even Sonos is guilty of playing the convenience game. Though its speaker quality has improved, Sonos speakers are still a long way off the audio specs audiophiles seek. And yet, even this isn’t the biggest challenge for Sonos. The core problem Sonos faces is that the likes of Amazon, Google and even Apple are not focused on winning the home audio race, instead they view smart speakers as a beachhead for controlling the smart home. That is the war, home audio is the first battle. Just as Apple used the iPod as the first step towards winning the personal digital life war, smart speakers are being used in the same way in the home.

Under attack from all sides

There are countless other challenges too. Sonos’s mission of filling rooms with audio might not actually be what most people want. A smart speaker in the kitchen and a sound bar under the TV might be enough for most, and those may be best served via a native hardware / software / content ecosystem like Amazon’s Prime. At the bottom end of the market, cheap Bluetooth speakers are flooding the market, while for those consumers who do value audio quality over convenience, incumbent audio companies like Bose, Panasonic and Sony are all upping their games. (In virtually all markets MIDiA tracks, Bose wireless speakers are more widely adopted than Sonos.)

Foundations for success

Sonos is also upping its game and tweaking its strategy. The recently launched PlayBase shows both high-quality product design and a recognition that TV is the next big battle Sonos needs to fight, having already made good ground with its PlayBar. Sonos needs all the strategic nous and product excellence it can get. It has the low-end and high-end squeezing it in a pincer movement, while the big tech companies carpet bomb its heartland simply to gain a foothold in the smart home. Five years ago, Sonos was the golden child of its market. Now it is a company with a very strong brand in need of some laser focussed positioning in a remarkably competitive field. Sonos has enviable foundations, it now needs to build a new house.

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The Internet’s Adolescence: The Real World Catches Up Eventually

I started my career as an internet analyst back in the period of the dot-com bubble. They were heady days in which anything seemed possible. The world was changing in unprecedented ways and the possibilities were endless. The rules that governed the old world didn’t apply. Except they did. Investors soon twigged that dot-com startups were simply not able to deliver on their revenue promises and so pulled their funding. In an instant, the whole edifice came tumbling down. It turned out that those old fashioned and outdated concepts such as turning a profit actually applied to internet companies too. We have come a long way since the dot-com bubble, but it would be wrong to think of the internet as being a mature medium yet. Instead, it is entering its market adolescence and consequently still has a lot of growing up to do.

Regulation Comes Eventually

Although the internet and its associated technologies (apps, social, streaming, e-commerce, etc) are deeply embedded in our daily lives in the developed world (and increasingly so in emerging markets), it is still fundamentally just getting going. On a global level, each key sector of the internet economy is dominated by 1 company (Amazon/e-commerce, Google/search, Facebook/social, etc). A single dominant company is typically an indication of an early stage market and/or one that is about to be opened up with regulation. In the case of internet industries, it is likely to be a combination of both. Thus far, regulation has not yet properly caught up with internet companies. The global, borderless nature of their propositions and their relative lack of precedents makes regulation a highly challenging task. But it will happen.

Regulatory Repercussions

To be clear, regulation is not some shining panacea for business. But it is the price of being part of society and global commerce. The more deeply integrated into civic society that internet companies become, the stronger the likelihood for them to become regulated. And when regulation happens, the effects can be devastating for companies that have previously operated with free reign. When the European Commission, under lobbying pressure from Real Networks, compelled Microsoft to unbundle the Windows Media Player (then by far the most popular music player) from Windows in 2004, it was the trigger for a long period of decline for Microsoft, from which it is only just beginning to recover. Clearly, there were other market factors that contributed to its decline, but regulation was the tipping point. And the model of a competitor (Real Networks) shamelessly using regulation to give it a competitive edge over an established rival could reoccur. For example, any number of big Chinese companies looking to extend their reach to the west may view EU regulators as an opportunity to prize open the market for them.

The Pendulum Swing Of Disruption

When a new technology disrupts a traditional incumbent, it normally does so by being 3 things to the end user:

  1. Cheaper/free
  2. Quicker
  3. More convenient

Napster, YouTube, Amazon, Uber, Netflix, all of these companies have done exactly this. Because they most often build market share and presence using external funding, such companies turn existing economics upside down with loss leading tactics. The result is that audiences switch in their millions and incumbents are left in tatters. Any old business that relies on scarcity economics will be swept away.

Take Uber’s impact on taxi drivers across the world. In the UK, a black cab driver will spend 5 years riding around every street in London on a scooter, memorising every street before taking a $60,000 loan on a black cab. 8 or 9 years into the venture, a black cabbie might be in the money. In the days of Google Maps and Uber, those principles go out of the window. Uber has had such an impact in London, that the cab rank queues at train stations can be miles long because black cabs have so little street side business left. In New York, yellow taxi medallions (the city’s government certification for official taxis), once traded as high as $1.3 million each in secondary markets, but have dropped to $240,000 now that Uber and Lyft have ensured that you no longer need a medallion to operate as a taxi in New York.

This is the pendulum swing of disruption. But pendulums eventually swing back. That is when regulations, real world economics and new business model innovation come into play. The original market disruptors often either disappear or get bought. The recorded music industry is now finally building a new set of effective businesses around the disruption brought by Napster, which died as an entity before the millennium really got going. YouTube transformed video and was bought by Google, Skype cannibalized mobile carriers and was ultimately bought by Microsoft, Linkedin disrupted recruitment advertising and was also bought by Microsoft, PayPal disrupted credit card companies and was bought by eBay.

All Of This Has Happened Before And Will Happen Again

Today’s internet giants may have the appearance of being permanent features of the digital landscape, but they’re not. AOL, Yahoo, Netscape or MySpace looked immortal in their days, as the GAAF (Google, Apple, Amazon, Facebook) do now. That doesn’t mean these companies cannot become long serving global superpowers. But history has a habit of repeating itself. Or as the fictional mythical Sacred Scrolls of Battlestar Galactica said: “All of this has happened before and will happen again.”

Never mistake normality for permanence.

 

Music Subscriptions Passed 100 Million In December. Has The World Changed?

In streaming’s earlier years, when doubts prevailed across the artist, songwriter and label communities, one of the arguments put forward by enthusiasts was that when streaming reached scale everything would make sense. When asked what ‘scale’ meant, the common reply was ‘100 million subscribers’. In December, the streaming market finally hit and passed that milestone, notching up 100.4 million subscribers by the stroke of midnight on the 31st December. It was an impressive end to an impressive year for streaming, but does it mark a change in the music industry, a fundamental change in the way in which streaming works for the music industry’s numerous stakeholders?

Streaming Has Piqued Investors’ Interest

The streaming market was always going to hit the 100 million subscriber mark sometime around now, but by closing out the year with the milestone it was ahead of schedule. This was not however entirely surprising as the previous 12 months had witnessed a succession of achievements and new records. Not least of which was the major labels registering a 10% growth in overall revenue in Q2, driven by a 52% increase in streaming revenue. This, coupled with Spotify and Apple’s continual out doing of each other with subscriber growth figures, Spotify’s impending IPO and Vevo’s $500 million financing round, have triggered a level of interest in the music business from financial institutions not seen in well over a decade. The recorded music business looks like it might finally be starting the long, slow recovery from its generation-long recession.

100-4-million-subs

Spotify Continues To Set The Pace

Spotify has consistently led the streaming charge and despite a continually changing competitive marketplace it has held determinedly onto pole position since it first acquired it. Even more impressively, it has also maintained market share. According to data from MIDiA’s Music Streamer Tracker, in Q2 2015 Spotify’s share of global music subscribers was 42%, H2 15 41%, H1 16 44%, H2 16 43%. Not bad for a service facing its fiercest competitor yet in Apple, a resurgent Deezer and an increasingly significant Amazon. Spotify closed out the year with around 43 million subscribers, Apple with around 21 million and Deezer with nearly 7 million. 2nd place is thus less than half the scale of 1st, while 3rd is a third of 2nd place. Meanwhile Apple and Spotify account for 64% of the entire subscriber base. It is a market with many players but only 2 standout global winners. Amazon could change that in 2017, largely because it is prioritising a different, more mainstream market (as long as it doesn’t get too distracted by Echo-driven Music Unlimited success). Meanwhile YouTube has seen its music streaming market share decline, which means more higher paying audio streams, which means more income for rights holders and creators.

A Brave New World?

So far so good. But does 100 million represent a brave new world? In truth, there was never going to be a sudden step change but instead a steady but clear evolution. That much has indeed transpired. The music market now is a dramatically different one than that which existed 12 months ago when there were 67.5 million subscribers. Revenues are growing, artist and songwriter discontent is on the wane and label business models are changing. But 100 million subscribers does not by any means signify that the model is now fixed and set. Smaller and mid tier artists are still struggling to make streaming cents add up to their lost sales dollars, download sales are in freefall, many smaller indie labels are set to have a streaming-driven cash flow crisis, and subscriber growth, while very strong, is not exceptional. In fact, the global streaming subscriber base has been growing by the same amount for 18 months now: (16.5 million in H2 2016, 16.5 million in H1 2016 and 16.4 million in H2 2016). Also, for some context, video subscriptions passed the 100 million mark in the US alone in Q3 2016. And streaming music had a head start on that market.

At some stage, perhaps in 2017, we will see streaming in many markets hit the glass ceiling of demand that exists for the 9.99 price point. Additionally the streaming-driven download collapse and the impending CD collapses in Germany and Japan all mean that it would be unwise to expect recorded music revenues to register uninterrupted growth over the next 3 to 5 years. But growth will be the dominant narrative and streaming will be the leading voice. 100 million subscribers might not mean the world changes in an instant, but it does reflect a changing world.

MIDiA Research Predictions 2017: The Year Of The Platform

MRP1611-coverFollowing an 84% success rate for our 2016 Predictions report, we today launch our 2017 predictions report: ‘MIDiA Research Predictions 2017: The Year Of The Platform’. The report is immediately available to all MIDiA subscription clients and can also be purchased for individual download from our report store here.

Here are some highlights:

2016 was the year that video ate the world. 2017 will be the year of the platform, the year in which the tech majors will fight for pre-eminence in the digital economy, competing for consumer attention through formatting and distribution wars. Companies that are already using mobile Operating Systems to achieve global reach will take the next step, creating Mobile Life Ecosystems that both break out of the app silo walls and straddle them. Facebook, Amazon, Tencent, Microsoft, Apple and Google/Alphabet will be the main players. 2015 was about parking tanks on each other’s front lawns, in 2016 shots were fired, 2017 will be all-out war. Artificial Intelligence (AI) and voice assistance will be key battlegrounds and indeed will form the glue of Mobile Life Ecosystems.

Some of MIDiA’s other key predictions for 2017 are:

  • Services are the new black: Maturing ‘phone and tablet markets mean that hardware companies will place a greater focus on digital content and services in 2017. Services are an opportunity to drive strong growth that will compensate for slowing device sales
  • Ad market growing pains: Digital advertising inventory supply will exceed demand in 2017. Audience engagement will grow more quickly than advertisers’ appetite. Consequently, ad rates will decline with the bloating of the market by content farms accentuating the problem. Facebook will not be alone in seeing slowing ad revenues in 2017.
  • A tech major will be hit with the first stage of an anti-trust suit: The incoming US Presidency has made its anti-trust inclinations clear. A likely early target will be the AT&T/Time Warner merger. The global-scale tech companies may be mature companies but their respective sectors are not. Regulation is one of the inevitable growing pains of maturing business sectors. Digital is next.
  • Snapchat’s IPO will be digital’s canary in the mine: App store era unicorns and their attendant Initial Public Offerings (IPOs) will redefine the media and tech landscape. Not only will the success, or failure, of Snapchat’s IPO affect those of Uber and Spotify, poor showings could deflate the VC bubble andput an end to the grow-at-all-costs For the music industry, the stakes are even higher, as an under-achieving Spotify IPO would create a crisis in confidence in the entire streaming market.

Among our music predictions for 2017 are Spotify’s IPO and the subsequent start of a new generation of experiential streaming services, Tidal selling (probably to Apple) while Spotify closes out the year with around 55 million subscribers to Apple Music’s 30 million.

Facebook Is Finally Ready To Become A Media Company

Male Finger is Touching Facebook App on iPhone 6 ScreenFacebook beat estimates with its latest earnings but announced that ad revenues would likely slow in 2017 as the digital ad market feels the pinch of advertiser budgets lagging the shift in user behaviour. Facebook’s stock fell by 7% but it already has Plan B in motion: to become a media company. Facebook delayed this move as long as it possibly could, showing little enthusiasm for getting bogged down with content licenses while it was able to drive audience growth and engagement by piggy backing other people’s content. That strategy has run its course. Facebook is now about to start looking and behaving much more like a media company, but in doing so it will rewrite the rule book on what a media company is.

The Socially Integrated Web

Back in 2011 I published a report ‘The Socially Integrated Web: Facebook’s Content Strategy and the Battle of the Ecosystems’. You can still download the report for free here. In it I argued that Facebook was starting out on a path to become a media company, but not the sort of media company anyone would recognise:

Change is afoot in the Internet.  Facebook’s new Socially Integrated Web strategy is set to make Facebook one of the most important conduits on the web. It is pushing itself further out into content experiences in the outside web while simultaneously pulling more of them into Facebook itself. Facebook is establishing itself as a universal content dashboard – a 21st century cable company for the Internet, a 21st century portal – establishing its own content ecosystem to compete with the likes of Apple and Amazon. While traditional ecosystems are defined by hardware and paid services, Facebook’s is defined by data and user experience.

Now with ad revenues set to slow, Facebook is flicking the switch on phase 2 of this strategy. Think of it as the Socially Integrated Web 2.0.

Wall Street Doesn’t Like Mature Growth Stories In Tech

As Apple, Pandora and others have found to their cost, Wall Street likes its tech stocks to be dynamic growth stories. It doesn’t like mature growth stories – that’s what traditional company stocks are for. So what can a tech company with a mature customer base do? The answer is to switch on new user monetization strategy, with content and services the lynchpin. Apple’s new supplemental investor materials outlining iOS users’ services spend is a case in point. Monetizing audiences is the new black. This is the game Facebook is now starting to play.

How Facebook Will Become A Next Gen Media Company

Moving from curating to licensing is a subtle but crucial shift in Facebook’s role as a content distribution platform. Here are the pieces that Facebook will stitch together as it begins its transition towards become a next generation media company:

  • Games: In August Facebook announced its gaming platform Facebook Gameroom, a Steam for casual games. It followed that with the announcement it will bring Instant Games to Messenger – an extension of its messaging bot strategy. Games is a logical place for Facebook to start carving out its media company role as it has become the default home of casual PC gaming. It also wants to own a slice of the hugely lucrative mobile gaming market.
  • Filters: Snapchat and Line have created global marketplaces for stickers and filters. Facebook is set to follow suit and is now experimenting with Snapchat-like filters. Filters may not look like media assets in the traditional sense, but the whole point about next generation media businesses is that they contain next generation content assets. Filters are an early indication of how the definition of content will change over the next decade and Facebook now has a horse in that race.
  • Video: Despite the embarrassment of having over reported some of its video metrics, Facebook has quickly become a major player in the online video space, accounting for 29% of short form video views. The next step for Facebook is to start building a discovery and curation layer. When it does, expect video consumption to boom. This will be a major step towards its media company future. It will however have to build a lot of tech for rights holders and content creators. Right now, its aversion of getting tied up with policing rights means that many rights holders don’t even post content there. YouTube has a massive head start with its highly sophisticated Content ID stack. Facebook will need to follow YouTube’s lead.
  • Live Stream: Facebook has been doubling down on its live streaming, expanding its focus from user and celeb streams towards more traditional media content such as Steven Colbert’s Showtime Monologue, partnering with 50 media outlets for presidential election coverage, and eSports. eSports could be as lucrative as traditional sports within the next 10 years and the shift has already begun – Twitch accounted for more streaming video bandwidth than the Olympics.
  • Next generation TV operator: One of the most disruptive moves Facebook can make, at least from the perspective of traditional media, is to stitch together its video assets and combine them with video subscription apps like Netflix and TV channel apps like iPlayer and HBO Go to create an all-in-one video destination straddling, UGC, short form, live streaming and TV content. The rise of video apps has created a bewilderingly fragmented video landscape. Facebook can stitch it all together to become a next generation TV operator. It will face direct competition from Apple, Amazon and Alphabet if/when it does.
  • Editorial: Facebook took a lot of flak for its decision to censor, on grounds of nudity, a famous Vietnam photo showing the effects of a napalm attack on Vietnamese children. The photo had been posted by Norwegian newspaper Aftenposten and its editor-in-chief Espen Egil Hansen wrote “Editors cannot live with you, Mark, as a master editor”. Facebook eventually bowed to public pressure and reinstated the photo. While Facebook may have been wrong to censor the photo it revealed that Facebook is already a ‘master editor’ whether Facebook or traditional media like it or not. Facebook hosts such a vast amount of content that the master editor role is inescapable. Aftenposten might have editorial credibility but what about a white supremacist publication? Facebook is already an editor in chief, in short it is already a media company.
  • Music: Facebook’s recent ad for a music licensing executive got music business types all excited. But music is the content vertical Facebook probably has least to gain from switching from host to licensed service. Streaming music is a notoriously difficult business to make money in (Spotify’s gross operating margin is around 17%). Facebook needs to grow margin, not just revenue, and with all its other content options it doesn’t make sense for Facebook to loss lead with an AYCE music service when it can get a bigger return on that investment elsewhere. IF Facebook does do something in music either expect it to be a more radio-like experience for its mainstream audiences (Pandora had a gross operating margin of around 40% in 2015) or – and this is more likely – something for younger users that has music at its core but that is not a streaming service. Think something along the lines of lip synching app Musical.ly.

Facebook is a past master at business model transformation. Its co-opting of younger audience focussed messaging platforms in the face of ageing social network audiences was a best-in-class example of a company disrupting itself before someone else did. Now Facebook is set to make another major change in its strategy before it finds its core business disrupted. Media companies beware, there’s a new player in town and its betting big, real big.

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.

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.

streaming-market-share-q2-16

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.

What Frank Ocean’s Bombastic Blond Moment Tells Us About The Future Of Artists And Labels

When frank-ocean-blond-compressed-0933daea-f052-40e5-85a4-35e07dac73dfFrank Ocean’s latest album ‘Blond’ dropped, it did so like a nuclear bomb, sending shockwaves throughout the music industry. In one of the audacious release strategies of recent years Ocean and his team at 360 fulfilled the final album contractual commitment to Universal Music by ushering his breaking-the-mold visual album ‘Endless’ onto Apple Music.  Featuring collaborations from the likes of Sampha and James Blake and set as a loose soundtrack to art house visuals, ‘Endless’ looked like the sort of digitally native, creative masterstroke that would win plaudits and awards in equal measure. But no sooner had Universal executives started daydreaming about Grammys then along came what turned out to be the ‘actual’ album ‘Blonde’, self released by Ocean (Universal contractual commitments now of course conveniently fulfilled) and, for now at least, exclusively available on Apple Music. You can just imagine seeing the blood drain from (Universal CEO) Lucian Grainge’s face as the full magnitude of what had just happened came into focus. In truth ‘audacious’ doesn’t even come close to explaining what Ocean pulled off, but where it gets really interesting is what this means for the future of artist careers.

Artist-Label Relationships Are Changing

Quickly sensing the potential implications, Grainge swiftly sent out a memo to Universal staff outlawing streaming exclusives…though voices from within Universal suggest that this diktat had been in the works for some time . A cynic might even argue that it was politically useful for Universal to be seen to be taking a strong stand ahead of the impending Vivendi earnings call. As the ever excellent Tim Ingham points out, in practice Universal could put a streaming exclusives moratorium in place and still have a good number of its front line artists put out streaming exclusives. This is because many of the deals these artists have are not traditional label deals where Universal owns all the rights. And that itself is as telling as Ocean’s bombastic blond moment. Not so much that Universal is probably the major with the highest amount of its revenue accounted for by licensed and distributed works, but that any label’s roster is now a complex and diverse mix of deal types. Artists are more empowered than ever before, and thanks to the innovation of label services companies and next generation music companies like Kobalt, labels have been forced to steal the disruptors’ clothing in order to remain competitive.

Streaming Exclusives Represent Another Option For Artists

Just as labels had started to successfully co-opt the label services marketplace by launching their own – e.g. Universal’s Caroline – or by buying up the competition – e.g. Sony’s acquisition of Essential Music & Marketing – along come streaming services giving artists another non-label route to market. In truth, the threat has remained largely unrealised. Exclusives on Tidal have most often proved to be laced with caveats and get out clauses (e.g. Beyonce’s ‘Lemonade’ arriving on iTunes 24 hours after landing ‘exclusively’ on Tidal). Chance The Rapper’s (in name only) mixtape ‘Colouring Book’ and Ocean’s ‘Blond’ are exceptions rather than the rule. So all that’s about to change now right? Not necessarily…

Album Releases Require More Time Than Apple Probably Has

As anyone who works in a label will tell you, releasing an album is typically a long, carefully planned process with many moving parts. It’s not something you do in a couple of weeks (Ocean started building the hype and expectation for his latest opus a year ago). If, for example, Apple was going to start doing exclusives routinely, even if it just did 20, that’s still a new exclusive to push every 2 weeks. That might work, at a stretch, for music service retailing promotional pushes but is far short of a fully fledged album release cycle. Which means that even for just 20 exclusives Apple would have an intricate mesh of overlapping release campaigns. This is something that labels do with their eyes closed but would it require new organizational disciplines for Apple. Not impossible, but not wholly likely either.

In practice, exclusives are likely to be limited to being the crown jewels of streaming services, their most valuable players, creative playmakers if you like. Even for Netflix, that pioneering exemplar of the streaming originals strategy, only spends 15% of its $3 billion content budget on originals and probably won’t break 20% even by 2020. What Apple and Netflix have in common is that they are using exclusives as a customer acquisition strategy, achieving their aims by making a big noise about each one. But if you’re releasing exclusives every week or two the shine soon wears off. And suddenly the return on investment diminishes.

Streaming Exclusives Are Unlikely To Turn Into A Flood

None of this means that we won’t see more artists striking streaming exclusives. We will, regardless of what labels may actually want to happen. And most of those will probably be on Apple – the service with bottomless pits masquerading as pockets. But the trickle will not turn into a flood, a fast flowing stream perhaps (see what I did there) but not a torrent.

Although they might not realise it yet, Kobalt might find themselves hurting more than the majors from this latest twist in the Exclusives Wars. Kobalt has probably done more than any single other music company to drive change in the traditional music industry in the last 5 years, showing artists and songwriters that there is another way of doing things. But Frank Ocean has just shown that there is now new another option for established artists looking for options at the end of a label deal.

Most importantly of all though, is that streaming exclusives (and indeed label services deals) work best when an artist has already established a brand and an audience. Most often that means after an artist has had a record label recording career. Apple cannot be relied upon to build anything more than a handful of artist brands. One of the founding myths of the web was that it was going to do away with labels and other traditional ‘gatekeepers’. Now, decades later, labels still account for the vast, vast, vast majority of music listening. Make no mistake, a momentous value chain shift is taking place, with more power and autonomy shifting to the creators, but that is a long journey and ‘Blond’ is but one part of this much bigger shift.

Understanding ’15’: How Record Labels And Artists Can Fix Their YouTube Woes

The artist-and-labels-versus-YouTube crisis is going to run and run, even if some form of settlement is actually reached…the divisions and ill feeling run too deep to be fixed solely by a commercial deal. What’s more, a deal with better rates won’t even fix the underlying commercial problems. Music videos under perform on YouTube because they don’t fit YouTube in 2016 in the way they did YouTube in 2010. The 4 minute pop video was a product of the MTV broadcast era and still worked well enough when online video was all about short clips. But the world has moved on, as has short form video (in its new homes Snapchat, Musical.ly and Vine). Short videos are no longer the beating heart of YouTube viewing and quite simply they don’t make the money anymore. This is why music videos represent 30% of YouTube plays but just 12% of YouTube time. If record labels, publishers, performers and songwriters want to make YouTube pay, they need to learn how to play by the new rules. And to do that they need work out what to do with ‘15’.

youtube monetization

There Is A Lot More To YouTube Revenue Than Some Would Have You Think

The recorded music industry gets radio, and it is beginning to get streaming. Both are all about plays. Each play has, or should have, an intrinsic value. They are models with some degree of predictability. But YouTube does not work that way, which is why the whole per stream comparison thing just does not add up. In MIDiA’s latest report ‘The State Of The YouTube Music Economy’ we revealed that YouTube’s effective per stream rates (that is rights holder revenue divided by streams) halved from $0.0020 in 2014 to $0.0010 in 2015.

Sounds terrible right? And make no mistake, there is no way to spin it into a good news story. However, it didn’t fall because of some nefarious Google ploy. It fell because of many complex reasons (all of which we explore in the report) but the 2 biggest macro causes were:

  • YouTube pays out as a share of ad revenue (55%) not on a per stream basis. So when the value of its ad inventory goes down (due to factors such as more views coming from emerging markets with weaker ad markets) the revenue per stream goes down too. This is something the labels can do little about, though an increased revenue share will soften the blow as YouTube globalizes.
  • YouTube serves its in-stream video ads (the most value ad format) on a time-spent basis, not on a per-video basis. Our research found that the average number of video ads per hour of viewing comes out at about 4. That means if you have 15 minute videos (like many YouTubers do) you will get a video ad every play. But if you have 3 or 4 minute pop videos you may only get 1 video ad for every 4 or 5 plays. Which means 4 or 5 times less video ad revenue. In fact, our research revealed that just 26% of music video views have video ads. This is the underlying issue the industry needs to address, and unlike global ad market dynamics, this is something it can indeed fix.

The 15 Scale

This is where the magic number 15 comes in. Right now music video sits in the same 3-4 minute slot it has done so ever since MTV said it wanted videos that length. Yet video consumption is now polarized between the 15 second clip on lip synch apps like Musical.ly and Dubsmash and 15 minute YouTuber clips. Falling in between these two ends is revenue no-mans land. As I have written about before, labels and publishers need to figure out how to harness the 15 second clip as an entirely new creative construct and shake off any old world concepts that this is actually anything about marketing and discovery. It is consumption, plain and simple…it just happens to look unlike anything we’ve seen before.

At the opposite end of the 15 scale labels and artists need to start thinking about what 15 minute formats they can make. Think of this as a blank canvas – the possibilities are limitless. For example:

  • 3 track ‘EP’ videos interspersed with artist narrative and reportage coverage
  • Live sessions (recorded by, and uploaded by labels so they get revenue as well as publishers)
  • Mini-documentaries such as ‘the making of’s
  • On-the-road features

15 Minutes Does Not Have To Break The Bank

And before you cry out ‘but this stuff will cost so much more to make’, it doesn’t have to if more is made out of current assets and processes. For example, ensure that one of the support crew has a handheld camera to film some shoulder footage for reportage. The whole thing about YouTube is that it doesn’t have to be super high production quality, in fact the stuff that does best patently isn’t. YouTube videos that work best are those that are an antidote to the old world of inaccessible glamour. If you really want to do things on the cheap, simply splice three music videos together into a single long form video (e.g. tag 2 older tracks onto the new single). Doing so will nearly treble the video ad income.

And before you think this isn’t what audiences want, ask Apple about ‘The 1989 World Tour LIVE’ and Tidal about ‘Lemonade’.

And (yes another ‘and’) if you can’t get your head around the inescapable need for a completely new music video construct, just think about it this way: 15 minute videos will make you 5 times more video ad revenue. This really is a ‘no brainer’.

Back To The Future

As a final piece of evidence (not that it is needed), cast your mind all the way back to 1982, to Michael Jackson’s landmark video ‘Thriller’. A 13:42 video that is widely recognized as one of the all time music video greats that has also racked up 330 million views on Vevo. So you could say the case for 15 minute video was already made a quarter of a century ago (thanks to MIDiA’s Paid Content Analyst Zach Fuller for pointing that one out).

The 4 minute music video is dead, long live the 15 minute music video.

For more detail on our ‘State Of The YouTube Music Economy’ report check out our blog.

You can also buy the 25 page report with 8 page data set here.