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

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

Fixing the Tryanny Of Choice

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

The 6th Of March: Man Versus Machine

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

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

Filter Bubbles

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

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

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

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

Earned Trust

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

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

30% Not 80%

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

Why The Music Aficionado Was To Blame For Declining Music Sales In 2014

Music revenues declined by 2.9% in 2014, down from $6.9 billion in 2013 to $6.7 billion across the US, UK, France, Italy, Australian, Sweden and Norway. Much has been made of the fact that revenue fell in the Nordic markets where streaming had previously driven growth. One year’s worth of revenue numbers does not make an industry trend. The one year fall off in strong streaming markets is not proof of a fundamental weakness in the streaming model in just the same way a couple of years of growth was not proof of its strength. We are in the midst of a transition period and there will be further anomalies and blips along the way. They key reason for the volatility is the music industry’s growing dependence on an increasingly small group of consumers: the Music Aficionados. Music Aficionados are consumers that spend above average time and money with music. They represent just 17% of all consumers but a whopping 61% of all recorded music spending. These consumers shape the fortunes of the music business. In the past this did not matter so much because:

  1. So many passive majority music fans were spending strongly
  2. Aficionados were behaving predictably

Now that has all changed. Passives are sating their appetites on YouTube while Aficionados are making major changes to their buying habits. Last year 14% of Aficionados said they were stopping buying CDs while 23% said they were buying fewer albums of any kind and 23% also said they were buying fewer downloads. The 2014 revenue numbers show us just what impact these changes had. aficionado impact If we extrapolate those percentages to Aficionados’ share of spending in those markets in 2014 we see:

  • Aficionados spent $192 million less on CDs, which was 67% of the total $326 million lost CD spend in 2014
  • Aficionados spent $250 million less on downloads, which was 86% of the total $290 million lost CD spend in 2014

In total the Aficionados accounted for 76% of the lost CD and download revenue in 2014. So what’s going on? Why are the super fans jumping ship? Well first of all, they aren’t. This is a transition process. They are shifting their spending towards subscriptions. For some of them this will mean spending less (especially the 23% that stopped buying more than an album a month and are now spending $9.99 instead of $20 or $30). For others it will be an increase in spending. At a macro level though, lost download and CD spending accounted for a $617 million decline while streaming growth accounted for a $351 million gain, which means that there was a net loss of $265 million. Because the music industry has largely stabilized after years of dramatic decline, it only takes relatively minor fluctuations one way or the other to determine whether a market grows or shrinks. This is why both the Aficionado needs more attention now than ever and also why the Passive Massive needs engaging at scale. Aficionados have been taken for granted for too long and are now being migrated away from products without a spend ceiling (albums) to a product with a fixed ARPU cap (9.99 subscriptions). When the Aficionados sneeze the music industry gets a cold. It is time for a cure.

What $500 Million And Jay-Z Say About the State Of Streaming In 2015

2014 was a big year for streaming, 2015 will be bigger. Apple entering the fray is the catalyst. Apple enters a market when it is ready for primetime. Apple lets the pioneers establish the market, prove the model and create consumer mindshare before it comes in and most often assumes a leadership role. Apple is certainly leaving it later than normal with subscriptions but it is still the same classic follower model, and the marketplace knows it. Hence Jay-Z’s reported €50 million interest in Norwegian streaming service WiMP and Spotify’s reported pursuit of a further $500 million. The first move is ‘let’s get in a market Apple is about to make huge’ and the second is an Apple war chest

Spotify’s 2014 growth was little short of spectacular, especially its December surge. But it is still not enough to IPO on. Not because 15 million subscribers in itself is not a huge achievement – it is – but because the market place is holding its breath, waiting to see what Apple does. Apple remains the world’s largest digital music company and is on the verge of becoming the world’s leading shipper of smartphones. But most crucially Apple has the iTunes ecosystem and a deep, deep understanding of the world’s most valuable content consumers. If anyone can take subscriptions to the mainstream Apple can. And in the process it will likely take back a chunk of the iTunes Music buyers that Spotify ‘stole’. Which is not to say that Spotify will not be able to continue to grow, but instead that rapid growth will be harder when Apple is snapping at its heels.

Pricing will be key, as will the role of free. If Apple succeeds in bringing the standard price point down to 7.99 (and perhaps a subsidised price point of 4.99) then a whole new swathe of users will be brought into the marketplace. Still not the mainstream, but certainly getting towards the higher end of the mainstream that Netflix competes in. And certainly a bigger marketplace than the current one. If Spotify finds its free tier heavily capped then it will lose much of its customer acquisition strength, which may force it to spend more heavily on traditional acquisition tactics like app marketing and TV ad spots.

In this expanded marketplace a $500 million war chest would give Spotify the ability expand into new territories, double down on churn management and market in core markets. The intent will most likely be to weather the Apple storm and to be in solid enough shape the other end to IPO. As we have seen in the smartphone and tablet business, Apple can be leader but still leave plenty enough space for a vibrant and competitive marketplace. That is the scenario Spotify, Deezer, Rdio, Rhapsody and Jay-Z’s new plaything-to-be WiMP will be hoping for.

What Spotify’s December Growth Tells Us About Pricing

Spotify just announced the addition of 2.5 million paying since mid November to reach 15 million total subscribers. This is unprecedented growth not just for Spotify but for the subscription market as a whole. It also comes at a time when Spotify needs the best possible numbers to keep labels on board during its crucial renegotiations. But what is most interesting is what the growth tells us about pricing.

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Long term readers will know that I firmly believe there is a watertight case for reducing the price of subscriptions. Only about 10% of music buyers spend $10 or more a month on music (across all recorded music formats) and most of those have already been converted to subscriptions. While there is absolutely a case that some consumers can be ‘educated’ to spend more on music, in just the same way cell phones educated them to spend more on telephony, many simply will not because there are such compelling free alternatives.

Spotify Made 9.99 Feel Close To Free 

There are two short term and two long term drivers of Spotify’s December growth:

  • Long Term 1: Student plans – effective discount: 50%
  • Long Term 2: Family plans- effective discount: 50%
  • Short Term 3: Holiday gifting - effective discount: 100%
  • Short Term 4: Holiday 0.99 promotion – effective discount: 90%

Of all of those the 0.99 for 3 months holiday promotion had the biggest impact. There is an argument that customers acquired this way are effectively monetized trialists and it is highly likely a large share, perhaps even the majority, will not continue to pay after the promotion is ended. But that almost misses the point. What the surge in adoption at lower price points shows us is a purer measure of the demand curve for on demand subscriptions, without the distortion of the 9.99 price point. Of course 0.99 is not a feasible long term price point but 4.99 is, or perhaps more realistically for now, 7.99 is.

Some of those trialists will unsubscribe after 3 months, some will forget to unsubscribe and some will decide that 9.99 is actually pretty good value. The net effect for Spotify will be more subscribers than it would have had without the campaign.

Taylor Swift, Labels and Investors

The stellar growth is also intended to catch the eyes of various other vested interests. For investors ahead of a potential IPO these numbers help show that Spotify may have its best days ahead of it. For labels this, ‘conveniently’, creates the best possible numbers for them to consider during contract negotiations. And for Taylor Swift it shows that for all her windowing antics Spotify grew faster than ever. In fact, the wall-to-wall media coverage of the ‘Swiftify’ debacle actually boosted Spotify’s profile and may even have modestly helped the numbers.

2015 will be a huge year for Spotify with the super heavyweights Apple and Google both playing their subscription hands and with growing label concerns about the freemium model. It would be naïve to suggest Spotify will not feel the pressure of those factors alongside the continued growth of competitors such as Rhpasody, Rdio and Deezer. But starting the year with 2.5 million new holiday season subscribers is about as good a start as Spotify could possibly have hoped for.

Spotify, Apple, YouTube And The Streaming Pincer Movement

The Financial Times yesterday reported that Apple is planning on integrating Beats Music into an iOS update as early as the first quarter of 2015. Which means the entire base of Apple’s 500 odd million iOS devices suddenly become Apple’s acquisition funnel. As I wrote back in May, this was always the strategy Apple was most likely to pursue. Of course being available to 500 iTunes customers is not anything like converting them all. Just ask U2. But it does give Beats Music – if Apple keep the name – a reach like no other subscriptions service on the planet. Especially if Apple is willing to roll out free trials to them all.   Currently just 8% of consumers in the US and UK have experienced a subscription trial, which translates into approximately 30 million people. Even if Apple does not quickly succeed in taking subscriptions to the mainstream it is about to take subscription trials to the mainstream, which is the crucial first step.

streaming pincer

Add this to YouTube’s recently announced Music Key subscription service, which should be aspiring to get 5 million or so subscribers in its first year to be considered a success, and a picture emerges of Spotify squeezed in the middle of a streaming pincer movement (see figure). In the near term Apple will be hoping to win back a lot of its lost high spending iTunes customers from Spotify. Longer term it will be looking to grow the market.

None of this means anything like the end for Spotify. Instead it will force Spotify to up its already high quality game. Competitive markets thrive far more than ones in which one or two key players dominate. It could mean that Spotify’s potential flotation or sale value is tempered for a while, which could push out Spotify’s exit timelines until it has proven its worth in a more competitive marketplace. But Spotify has the distinct advantage of being a) the incumbent and b) a pure play. Spotify, Deezer and Rhapsody are all in this game simply for music. That means each and every one of them has a laser focus on making the best possible music service proposition they can. The same is quite simply not the case for either Apple or YouTube. They will need to leverage that asset in their conversations with rights holders to ensure they are given more flexibility in terms to drive true marketplace innovation and experimentation.

subs numbers 11 14

But Spotify et al would be foolish to underestimate the scale of the challenge they will face. Apple has the largest installed base of digital music buyers on the planet (see figure). As creditable as Spotify’s 12.5 million paying subscribers is, it pales compared to Apple’s 200 million iTunes music buyers. Also Apple has many additional assets at its disposal. Integrating into iOS is just one tactic it can employ. Spotify et al depend on Apple’s platform for much of their survival. But there is no reason Apple has to play truly fair. Amazon set a platform precedent with its treatment of Hachette that Apple will have been watching closely. Don’t expect anything too obvious, but little tricks like tilting app store optimizing in favour of Beats over Spotify can go a long way.

Things are hotting up, no doubt. But Apple’s arrival in the subscription market will take the sector to a whole new level, and a high tide should rise all boats.

10 Thoughts On YouTube Music Key

Google just announced its long anticipated YouTube Music Key. You can find out all you need to know about its potential impact on the wider market in MIDiA’s report ‘Unlocking YouTube: How YouTube Will Change Music Subscriptions’. Here are 10 further thoughts:

  1. Identity crisis: We are at a crucial juncture in YouTube’s life. As I wrote last week, artists and labels have a conflicted view of YouTube. 10 million streams on YouTube is a marketing success but 10 million Spotify streams are lost sales. So following that logic does that mean 10 million Music Key free streams are better than 10 million Music Key paid streams?! Either way it will force the industry to reconsider its views on YouTube as a marketing vs a consumption channel. Streaming in order to buy was a model with clear outcomes. Streaming in order to stream is not. Music Key will act as a catalyst for the broader narrative of reassessing YouTube’s music industry role now that the end destination is increasingly streaming itself.
  2. YouTube just got a fantastic upgrade to its free tier: As part of the deal for the paid tier YouTube got new discovery features and full album streaming. Full album streams on YouTube have always been a contentious issue, now they are there officially. This small but crucial product feature transforms YouTube free from a discovery service to a fully-fledged destination.
  3. Two services for the price of one: YouTube Music Key and Google Play Music All Access are for now bundled together but ultimately there is little sense in keeping them both. Just as Ian Rogers is busy trying to integrate iTunes Radio and Beats into a single value proposition, so some one will have to do the same at Google. Let’s just hope the result isn’t a service called Google’s YouTube Play Music Key All Access…
  4. Is 7.99 the new 9.99?: Last month I suggested that the main subscription price point of 9.99 should come down to 7.99. Music Key will be priced at 7.99 for an indeterminate period to its first wave of users. Expect Google to use this as a test case for 7.99 as the permanent price point.   And if it works, expect other services to get the same deal.
  5. Spotify competition: 1 year from now Spotify will still be the leading subscription service but it will be facing fierce competition from YouTube and from Apple. It will also most likely have lost a bunch of subscribers to both. Just as Apple stole Amazon’s music buyers and then Spotify stole them from Apple, expect YouTube and Apple to steal (and steal back) a number of them. Also, neither Apple nor Spotify have video, yet. So with the same catalogue and similar pricing they need something else to differentiate. For now Music Key has the differentiation upper hand.
  6. Vevo competition: Music Key’s core addressable market is super engaged YouTube and Vevo music fans. 15% of Vevo music consumers accounts for in the region of 67% of its music ad revenue. If Music Key converts even half of those users to Music Key, it will leave a gaping hole in Vevo’s ad revenue
  7. Windowing: Taylor Swift has taken the windowing debate to a new level, adding further weight to the argument that free tiers should be treated as a separate window from paid. Google made it clear at the launch of Music Key that a song is on free and paid, not one or the other. While a growing number of artists would willingly sacrifice being on both tiers of Spotify how many would risk not being on YouTube?
  8. Rippers: 12% of consumers and 25% of under 25’s use YouTube rippers like iMusic Tubee Free which effectively do what Music Key does (remove ads, offline caching, playlists etc.). These sorts of apps are of course readily available from the Google Play Store. If Google is serious about Music Key being success they will need to crack down hard on these apps.
  9. What does success look like?: YouTube has 1 billion monthly users and about 140 million weekly music video users. That’s a massive audience to covert from, approximately three times bigger than Spotify’s monthly user base. Given that YouTube already sucks so much revenue potential out of the subscription space (25% of all consumers say they don’t pay for subscriptions because they get all their music for free from YouTube) YouTube’s measure of success needs to be much higher than any other music service. 6 million or so subscribers in year one would be a good start.
  10. Too little innovation, for now: If YouTube can harness all of its unique assets it can create the best music subscription service on the planet. Music Key isn’t yet anywhere near that but it is only a beta product, so expect YouTube to up its innovation game and put further blue water between it and the rest.

Digital Ascendency: The Future Music Forum Keynote

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The Three Things Streaming Needs To Fix Next

I spent a couple of days last week in Barcelona for the annual Future Music Forum, which is developing into an important date on the music conference circuit.   Later this week I will post some of the highlights of my opening address but first I am going to spend some time developing some of the white hot issues surrounding streaming that were raised at the conference.

In a really strong field, two speakers in particular stood out: Beggars head of strategy Simon Wheeler and PledgeMusic founder Benji Rogers.   Their presentations and the conference as a whole were infused with a sense that streaming is changing everything, and more quickly than most people expected. This change is manifesting itself in three big issues:

  1. Deciding what streaming’s main role is
  2. What happens to the middling majority of artists
  3. How to monetize the relationship between artists and fans
  1. Time To Decide Whether Streaming Is Marketing Or Sales

It is clear that most labels are conflicted about streaming. They are waking up to the fact that its promise as a retail channel will take time to realize and even then it may not be a like-for-like replacement for lost album sales. Which is prompting labels to increasingly view streaming as a marketing channel too. But if streaming is both the discovery journey and the consumption destination, then what, as a label, are you trying to actually sell with streaming? Across the bigger labels in particular the digital business teams and the marketing teams need to agree on a common view on what the streaming end game is, else risk accelerating album sales decline without adequately driving streaming revenue growth.

If the question is complex for subscription services for free streaming the picture is much clearer, especially for YouTube. As Simon Wheeler said in his presentation: “YouTube is not driving sales. People are going there to consume music. The end.”  If that isn’t a case for windowing YouTube and free tiers of freemium services then I don’t know what is.

  1. What Case For The Middling Majority?

Wheeler also made a vital observation that the streaming success stories tend to be split between mega hits on the one hand (such as Calvin Harris’ 1 billion Spotify streams and Avicii’s 250 million ‘Wake Me Up’ Spotify streams) and slow burn success stories on the other. He cited the example of the XX’s eponymous album that is still in the Spotify indie top 100 five years after release.

This streaming dualism makes it look like label A&R strategy may have to choose between massive hits or long-term success. And if so, what happens to the rest in the middle? You effectively end up with three key types of streaming artist (see figure):

  • Evergreens
  • Middling Majority
  • Hit Machines

streaming artist segments

Could it be that  streaming will end up being the natural selection process for the challenge of catalogue bloat? There is simply too much music being released at the moment, creating the Tyranny of Choice, where listeners are paralysed by excessive choice. For an artist trying to break through, the background noise can be deafening and also kill any chance of making meaningful cut through. And if you do manage to do so then the endless torrent of new releases pushes you straight back to the margins.

If the streaming natural selection process plays out then unless you have created either an album that people will want to listen to again and again or instead a monster hit, then you will simply drift into oblivion. In the old model you might have sold a couple of tens of thousands of albums and managed to sustain some sort of career. 20,000 album sales would be $180,000 gross revenue but 5 million streams (roughly an equivalence in popularity) would be $50,000 gross revenue. Perhaps streaming’s Dystopian Darwinism will kill off the ability to forge a career built on mediocrity. That may be no bad thing.

  1. Monetizing the Relationship

If streaming is eating into sales then the obvious next step is to drive other spending from streaming music consumers. Hence commerce integrations from the likes of TopSpin, Bandpage and PledgeMusic. Unfortunately it isn’t that straight forward as Pledge’s Benji Rogers pointed out. Rogers rightly found himself turned to at the Future Music Forum as the fan relationship guru and he made a crucially important observation: simply because some one is listening to a song does not mean they are necessarily going to want to buy anything from that artist. Instead streaming services need to think more subtly, looking at how to nurture an artist-fan relationship rather than simply trying to sell someone a t-shirt because they happen to be streaming a track.

Artists and fans are closer than ever but this journey is only getting going. And now that artists are building deeper relationships with their fans while sales revenues decline, they need to get smarter about how to monetize them.  The key question though is whether this can be enough to offset the impact of declining music sales revenue. To help answer that I created a ‘Streaming Ancillary Revenues Model’.

A new MIDiA Research consumer survey shows that 11% of streaming consumers are VERY likely to buy merchandise and tickets from their favourite artists in streaming services. I used this conversion rate against the following artist straw man for a hypothetical Year 1 versus Year 2:

  • 100,000 albums sold decline to 60,000
  • Streams increase from 30 million to 45 million streams
  • Total recorded music revenue (streaming and sales) consequently declines by 17%
  • 11% of fans buy $30 of merch, special editions or tickets each year
  • Ancillary revenues grow to represent 33% of total revenues
  • Revenue decline across all income streams is just 3%

So ancillary revenues can significantly soften the impact revenue decline.

(The additional factor of the longer revenue cycle for albums on streaming services should also push the total revenue up further in the longer-term but is not included in these calculations.)

There are many obvious caveats and assumptions here (not least of which is the varying margins across different revenue streams) but these are broadly the right mix of drivers and levers. You can download the model here: Music Industry Blog Streaming Ancillary Revenues Model 9 14  I invite you to play around with it and test your own theories. If you are an artist you might want to plug some of your actual numbers into Year 1 and your projections into Year 2.

Change Is Difficult But It Is Also A State Of Mind

The streaming picture is changing at an absolutely staggering rate and everyone across the value chain needs to get their heads around all the potential permutations else get left behind.

These are both exciting and daunting times. As the bland management consultancy phrase goes ‘change is difficult’. But it is. However, the way that you view and prepare for change both have as much impact on how it affects you as the change itself. Streaming is changing everything. Those who learn how to reinvent themselves for the realities of this brave new world will be those best placed to survive and perhaps even thrive.

What U2’s Apple Deal Says About The Future Of The Album

If you somehow missed it, Apple just gave 500 million iTunes users U2’s latest album for free.

Album sales are declining, both because people are buying less music and because fewer people are engaging with albums.  The music industry has gone full circle. In the 50’s and the 60’s it was all about singles.  The 80’s and the 90’s were the glory years for the album but ever since the rise of the Internet music fans have been moving progressively away from albums to single tracks again.  We are living in the age of the playlist, not the album.  So for a band like U2, who already are way beyond their music sales peak, selling an album was always more about getting bums on seats at concerts, where they make more money than ever.  Their last album sold poorly so they won’t have been expecting much from this one.  Suddenly Apple transformed it into a global hit and everyone’s a winner.  Sure Apple will have had to pay a heft chunk of cash but they got a nice TV ad out of it too.  Considered as a marketing expenditure this is genius.  It instantly creates the most widely distributed album in history and in doing so creates equally instant headlines.

The album is not dead as a creative construct, far from it.  But as a product it is in a death spiral.  It needs reinventing if the album loyalists are going to be prevented from jumping ship.  They can’t be taken for granted for ever.  What should that reinvention look like?  Well it should include video, lyrics, dynamically updated content, exclusive content, live streams, artist chat…in short everything the 21st century artist has got to give, all in one place.  Artists like the storytelling capabilities of the album.  Imagine how much more storytelling you could do with the addition of visuals, interactivity and text.  Bjork got it.  Even Lady Gaga got it.  Now it’s time for the industry to get it, unless it wants the album to be consigned to a long term future as an Apple freebie.

Why Digital Music Services Always Steal Each Other’s Customers

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

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

customer transition

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

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

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