How Apple Music And Tidal Transformed Streaming (And Why Apple May Be Buying Tidal)

 

It is 15 months since the launch of Tidal (which was 2 months after Jay-Z’s Project Panther Bidco bought Aspiro) and it is 12 months since the launch of Apple Music (which was a year after Apple bought Beats Music). The streaming world has changed a lot in that time and both those companies have had a disproportionately large amount on influence on the market’s direction of travel. Their arrivals defined Spotify’s role as incumbent while simultaneously casting Apple and Beats as challengers. They have performed their roles of disruptive entrants well, reshaping the competitive marketplace with a strong focus on brand and artist exclusives. Now reports emerge that Apple is in talks to buy Tidal. First victory in the exclusives war or overspending for market share?

When Is An Exclusive And Exclusive?

In the streaming video world an exclusive means exactly that. If you want to watch ‘House Of Cards’ you need Netflix, if you want to watch ‘Man In The High Castle’ you need Amazon Prime. But in music the rules are far more flexible.

exclusives

Looking at the flagpole exclusives across Apple Music, Tidal and Spotify, most of these are available on other platforms as downloads, while many are available to stream. For example, Beyoncé’s ‘Lemonade’ is only available to stream via Tidal but was available to download on iTunes within 24 hours of release. Understandably, the exclusive albums of each company’s respective godfather are genuinely exclusive. But Rihanna’s ‘Anti’ was given away by Samsung while Spotify’s rock legends exclusives are streaming only.

Apple is beginning to push the envelope though, pitching creative solutions to labels and artists, resulting in output like videos for The Weekend and Drake. At the same time it is beginning to look suspiciously like a record label with the release of Chance The Rapper’s ‘Colouring Book’ mixtape. The net result of all this clamouring to be seen as the ‘home’ of an artist is resounding confusion and frustration for music fans. An avid TV fan may well accept the need to have both a Netflix and Amazon subscription because no video service claims to have all the TV shows and movies on the planet. However, the central proposition of streaming music services is exactly that…or at least it was until Tidal and Apple Music upset the the apple cart (ahem). The irony is that in scoring a quick win against Spotify, Tidal and Apple may have fundamentally undermined the long term positioning of the entire streaming music product.

Exclusives Cannot Recreate The 1990s

Apple Music’s head of original content Larry Jackson has said he wants to make Apple Music to emulate the success of MTV in the 80’s and the 90’s, creating the sense that artists ‘live there’. It is an admirable goal but the music world of the 2010’s is a dramatically different one. In those days there was scarcity (you had to buy music to listen on demand) and there was a finite amount of radio and TV. It was possible to control both the message and the audience. Now we are in the Era of Distributed Audiences where people are simultaneously in multiple digital places, with artists and labels racing after them in all those places. No amount of exclusive windowing is going to change that. The genie is well and truly out of the bottle.

The Economics Of Exclusives

Where the streaming video and streaming music markets match up is that content budgets are currently being used to drive user acquisition. While streaming services have a long way to go before they reach Netflix’s $6 billion annual content budget, both types of streaming service will overspend to get market share and will reel budgets back in later. So it should be no surprise that the amounts being spent on artists don’t really add up.

For example, Apple is reported to have spent $19 million on Drake and was rumoured to have bid up to $25 million for Harry Styles. If Styles had signed, even if he had racked up the same number of streams as Drake on Spotify in 2015 (1.8 billion, the highest number of any artist) he would still only have generated gross revenue of $18 million and net revenue of revenue of around $14 million, leaving something like an $8 million loss for Apple when Apple Music’s additional retailer margin is factored in. Apple would however have been able to make up the remainder on album sales, but Styles would have needed to have shifted a good number of albums. (Adele’s ‘25’, the biggest selling download album in the US in 2015 drove around $15 million in label revenue.) So for now, it takes selling albums to make the economics of streaming exclusives add up.

apple vs tidal

Jay-Z paid $56 million for Aspiro’s 512,000 subscribers, $110 per subscriber. Assuming he’d want a similar per subscriber price, that would put Tidal’s price tag at around $440 million. That’s no small amount of money for around 5% of the global subscriber market. Or to put it another way, Apple could another 23 Drake exclusives for that money which most likely would have a bigger impact on subscriber growth. Indeed, on all growth measures Apple Music has outperformed Tidal over the last 12 months, adding 12.5 million new subscribers to Tidal’s 3.1 million, growing by an average of 1.4 million subscribers a month compared to 0.3 million for Tidal. Apple even has the edge in % growth terms (352% compared to 328%).

So why is Apple in the market for Tidal (albeit reportedly)? Probably more than anything it is about taking an irritatingly threatening competitor out of the market. Tidal has been stealing Beat’s core customer base from right under its nose. It’s no coincidence that Apple Music’s exclusives strategy has had a strong urban bias. Apple wants its Beats customers back, just like it wants its iTunes customers back from Spotify.

Even if Apple does buy Tidal, don’t expect the exclusives wars to go away. Indeed, Spotify just acquired its own exclusives supremo in the shape of Troy Carter, and Apple clearly has its mind set on continuing to spend heavily. So the next few years of streaming will be  defined by streaming services getting closer to artists (with Connect becoming much more important for Apple) which in turn will see the distinctions between what constitutes a streaming service and a record label blur all the more.

As science fiction write William Gibson wrote: the future is already here, it’s just not evenly distributed yet…

 

Apple Music: A Platform Play With Hidden Nuance

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

Radio Takes Centre Stage

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

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

Taking The First Step Towards A Platform Play?

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

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

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

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

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

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

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

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

The book has three sections:

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

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

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

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

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

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

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

People interviewed for this book

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

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

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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.

How The iPhone 6 May Be The Start Of Apple’s ‘Back To Music’ Strategy

With the launch of its new iPhones just round the corner Apple could be forgiven for feeling rather more positive about its smartphone outlook than it has for a while. The sheen has worn off its number one competitor Samsung, with cheap Chinese and Indian competitors seriously eating into its market share and the investor community realising that the smartphone business is actually a lot like the music business: you are only as good as your last hit. But if Samsung is a major label, measured solely on market share and sales, then Apple has managed to partially maintain the role of big indie, where the quality of its output is just as important. Apple’s Eddie Cue believes that Apple are on the cusp of product strategy renaissance. Crucially, Apple’s CE product portfolio has become wide enough now, especially with the acquisition of Beats, to allow Apple some innovation freedom. I think this could translate into an iTunes phone before the end of 2015.

The Mainstreaming of Apple’s Customer Base

Apple’s customer base has changed from the vanguard of the tech savvy early adopters to a much broader group including large swathes of early followers, later adopters and even mass market laggards. The iPhone was primarily responsible for the transformation and while it has brought undoubted success has also caused Apple problems. As a company with a small product number of products in its portfolio, especially within the mobile category, Apple has never been able to play the ‘Hero Phone’ strategy of phone specialists like HTC and Samsung. So while those companies have been able to sway those all-important investors with small selling but super-specced uber phones, Apple has, until the launch of the 5C, had roll its entry and hero devices into one single new product. But even the combined strategy of the 5C and of targeting lower end consumers with older models still leaves Apple little room to be truly adventurous with its product strategy, for fear of alienating its mainstream users.

As I wrote about previously, the acquisition of Beats presents Apple with the opportunity to innovate with more freedom in the Beats product ranges and then take the innovations that work best there back into the Apple product portfolio. Even if Apple more tightly harmonizes its two divisions’ product ranges, Apple will still be left with a larger and more segmented product portfolio, giving it more ability to super-serve important niches. This is where Apple’s music device strategy renaissance can come into play.

 

itunes phone

Music Changed Apple

When Apple launched the iPod in 2001 it was the start of a musical journey for Apple. I remember attending Apple analyst briefing sessions in those early iPod days and being the only one there interested in this small little side project. Of course over the following years the iPod, with music at the core, took Apple’s product strategy in an entirely new direction. You might say that music changed Apple. But even by 2004 the winds of change were stirring: the launch of the iPod Photo with its colour screen was the first tentative step towards turning Apple’s portable device strategy from music to something much bigger. The iPhone and iPad are the current culmination of that shift, multimedia devices that do many things for many groups of people. Not one thing for one group of people in the way the iPod did.

The strategy has been inarguably successful but just as music stopped looking like it mattered so much, it started biting Apple in the behind. Spotify and other streaming subscription services started stealing Apple’s best iTunes music customers, turning them from downloaders into streamers. That in itself should have been an irritation rather than a problem. But these most valuable of customers now have much less reason to stay with Apple when the buy their next phone because their Spotify playlists will work just as well on Android as they will on iPhones.

Apple’s New Music Strategy

Apple needs a stand out music value proposition to win them back. A subscription service built around Beats Music and iTunes Radio will be the fuel in the engine but will not do enough on its own quickly enough. While Beats Music may have different features from Spotify the fundamentals are essentially the same (millions of songs, c $10 a month). So iPhone owning Spotify customers are unlikely to switch straight away just because it’s there.

Apple needs more. That ‘more’ can be delivered in two ways:

1. Price
2. Device

Apple has always been in the business of loss leading with music to sell hardware. Once that was a growth strategy now it assumes the urgency of defence strategy. That should persuade Apple to heavily subsidize the price of a subscription. In the near term this could be 3 month Beats Music trial plus a discounted $5 subscription offer at the end of the trial free with one of the forthcoming iPhone 6 models. Longer term it should translate into something much more ambitious.

 

The iTunes Phone or The Beats Phone?

Before the end of 2015 I expect Apple to launch a music specialist phone. Whether that is branded as an iTunes Phone or a Beats Phone will depend on who wins the internal branding wars at Apple, but expect it to be one of those labels. The device will be squarely targeted at the music aficionado and will crucially combine the music subscription and device into a single purchase by hard bundling a music subscription into the device cost. It will likely also be squarely focused on pushing Beats hardware sales so it may be both bundled with a Beats Bluetooth headphones and also be the first iPhone without a 3.5mm stereo jack, instead offering Bluetooth only.

The broad feature set could look something like this:

• Hard bundled Beats Music subscription
• Unlimited iCloud access
• Ad free iTunes Radio
• Top level UI music apps
• Bundled Beats Headphones
• Bluetooth only headphone support

This strategy is Apple’s best shot at reclaiming its wavering aficionado fan base but be in no doubt, it would also be a game changer for the digital music space by once again tying the importance of music experiences to device not just app.

Google’s Acquisition Of Songza And ‘Fixing Discovery’

Google yesterday confirmed the much rumoured purchase of curated music service Songza for somewhere between $15 and $39 million. While it is not a vast investment for a company with the recent $3.2 billion acquisition of Nest as a benchmark, it is nonetheless a significant one for a company that already has a couple of streaming music services of its own. It is not a Beats sized deal but then if Google had wanted one of those it would have bought Spotify. So just why did Google splash the cash on Songza?

Access to all the music in thee world can be overwhelming, with so much choice that there is effectively no choice at all. This is the Tyranny of Choice. For all the efforts and intent of music services to ‘fix’ discovery no one has yet nailed it. Listen Services like Nokia Mix Radio, O2 Tracks and Pandora present one solution: effectively removing the burden of excessive choice by delivering a curated stream of music that requires little or no effort from the user. But this approach does not translate well to All You Can Eat (AYCE) services like Spotify and Googles’ Play Music All Access. These services are built on the foundations of giving access to everything, the exact opposite of what Listen Services are about. Which is why AYCE services are doubling down on enhancing their internal curation and recommendation capabilities. Spotify moved first with its acquisition of the EchoNest, Rdio followed by acquiring TastemakerX and now this move from Google. Beats Music took a different route entirely, building its service on the foundations of programming rather than superimposing it.

Google should be able to extract great value from Songza but as with all of these technologies it is just part of the solution. Human programming, as resource intensive as it might be, remains a pivotally important part of the equation, and though all the AYCE services have teams of curators, only Beats so far has done it at large scale.

First, Show People How To Find What They Have Already Found

And still the discovery problem is not fixed. Progress has been made in the last few years, but in many respects it is a case running before learning to walk. Recommendations, discovery and programming are just one part of the music consumption journey i.e. discovering new music. Arguably the most important aspect of the journey is the one that is most neglected: navigating the music people have already discovered. As counter intuitive as it may sound, people first of all need to be shown how to find what they have already found…their pre-existing music collections but also the music they have listened to in a service. Creating playlists and tags of songs is an often burdensome task that requires no small amount of discipline. Which means that newly discovered gems can all too quickly disappear back into bottomless pit of 30 million songs, rendering a discovery journey wasted.

Smart of use of data can provide the foundations for the solution, ensuring that people’s streaming ‘collections’ are dynamically created and programmed. But data alone is not enough. What is needed is an entire new paradigm in music navigation. For all the faults of CDs they were visual reference points. A consumer might not remember the name of an artist or an album but would know roughly where the CD was on a shelf or what colour the cover was. (I remember as a DJ often identifying a record I was about to play only by the colour of the label on the centre of the vinyl).

Digital music lacks such visual reference points. iTunes transformed our music collections into featureless spreadsheets, with playlists emerging as simply another means of sorting the data. New visually rich interfaces in music services help enhance the user experience but most often simply try to shoe horn in the old album art approach into a digital context. This new navigation paradigm must start with a blank sheet and think in terms of multimedia, interactive, dynamic experiences. It will need to leverage rich visuals, touch, dynamic context aware programming, sound, voice control and Shazam, to create an immersive whole that gives the consumer clear, immediate results in a way that engages multiple senses. Only once we have fixed this first step of the music consumption journey can we really start thinking about ‘fixing discovery’.

Why Amazon’s Streaming Music Service Is A Bigger Deal Than You Might Think

Amazon today entered the streaming music foray with the launch of its own bundled music service. Amazon Prime subscribers get free access to on demand streaming from a catalogue of 1 million tracks, the majority of which are older catalogue titles rather than frontline hits. Amazon’s move has received considerably less interest and hype than Apple’s acquisition of Beats but is in many respects every bit as important.

The future of digital content is going to be defined by the content and device strategies of three companies: Apple, Amazon and Google.  Each has a very different approach resulting in an equally diverse set of products and audiences (see figure).  Amazon and Apple have mirror opposite content strategies: Apple loss leads on content to sell devices whereas Amazon loss leads on devices to sell content.  (Google loss leads on both because its end goal is your data).  All three have a strong focus on music but all three understand clearly that the future of digital content lies in having multiple genre stores that traverse music, games, apps, video, books etc.  All three also recognize the importance of hardware for delivering the crucial context for the content experience.  Similarly, all three have a Content Connector strategy aimed at opening up the mass-market digital content opportunity in the home via the TV.

content strategies

Amazon’s inclusion of music streaming in its Prime offering speaks volumes about the perceived importance of music as a product to the retailer.  Music used to be the crucial first rung on the ladder for Amazon customers.  Buyers would start off with a low consideration purchase item like a CD or DVD and the next thing they knew they were buying microwaves and computers.  Music is still plays an important role in Amazon’s customer life cycle, but it is no longer a product needs paying for with a separate payment.  Music has become the ‘feels like free’ soundtrack to a video subscription with the added benefit of free shipping for online shopping.  Out of those three core value pillars of Amazon Prime, music streaming is probably the smaller. Music has become the National Geographic channel in the cable subscription: a nice part of the overall proposition but not something that carries inherent monetary value on its own.

The harsh reality is that this is probably a sound strategy for engaging the mainstream consumer with music streaming (the extensive selection of curated playlists on top of a modest 1 million track catalogue hints at the mass market positioning).  But whether this is the best strategy for the mainstream is another thing entirely.  Labels fear that free services like Spotify free and Pandora threaten to erode consumers’ perceptions of music as a paid for commodity.  But at least in those environments they are actively adopting a music service in its own right. With Amazon Prime there is a real risk that music is being relegated to the role of muzak in the elevator.

Apple, Beats and Streaming’s Mutual Fear Factor

Although the Apple-Beats deal is about far more than just streaming music, it is nonetheless an important part of the puzzle.  Apple has been going slow with streaming, introducing cloud experiences (iCloud, iTunes Match, iTunes Radio, Video rentals) slowly so as not to alienate its less tech-adventurous mainstream user base.  That strategy remains valid and will continue, but it has failed to protect the defection of its core, high value, early adopters.  This is why Apple has to get serious about streaming fast: it is scared of losing its best customers.  It is also why all other streaming companies, whatever they may admit publically, are getting ready to run scared.  This is streaming music’s mutual fear factor:

  • Velvet handcuffs: Music downloads are monetized CRM for Apple, a means of enhancing the device experience.  Purchased tracks and an iTunes managed library act as velvet handcuffs for Apple device owners.  But for those consumers that use a streaming subscription app, the playlists and music collection can exist on any device.  Suddenly the handcuffs slip off.  This is why Apple has to get streaming right in short order.  It simply cannot afford to lose swathes of its most valuable device customers at the next handset replacement cycle.
  • Chinks in the iTunes armour: Until the launch of the App Store, 3rd party music services had no way of breaking into the iTunes ecosystem and were, in the main, doomed to the role of also rans.  The App Store was the chink in the otherwise impregnable iTunes armour that allowed those 3rd parties to not just launch punitive raids but to set up camp in Apple’s heartlands. It was the price Apple had to pay to enter the next phase of its business, but now it is ready to shore up its defences once more.
  • Eating from Apple’s table: The vast majority of streaming music subscribers were already digital download buyers first, and of those the majority were either current or past iTunes Store customers when they became subscribers.  On a global scale, subscriptions have first and foremost been about transitioning existing spending rather than creating new digital customers. The picture is very different in Nordics, the Netherlands and South Korea but those markets contribute far less to global scale than the markets (US, UK, Australia etc.) where this trend dominates.  Apple has provided the core addressable market for streaming services for the last five years.  Now those companies worry over where will they be able to get new subscribers if Apple start taking subscriptions seriously.
  • Apple will not have to play fair: Although Apple knows it is under the watchful eye of various regulatory authorities following the eBook price fixing episode, there is still plenty it can do to make life hard for 3rd party streaming services.  Just take a look at what Amazon is reportedly getting away with in its book pricing dispute with Hachette: delaying shipments of the publisher’s books to customers, removing buy buttons from pre-ordered books, even pointing Amazon customers to competitive titles when searching for Hachette books.  Fair play or foul, the power of the retailer is huge.  Whether Apple simply ensures Spotify et al don’t appear in search results, or that they are never quite able to integrate seamlessly with iOS anymore for no specific reason that anyone can quite put their finger on….But even without resorting to such behavior, simply by deeply integrating an Apple (or Beats) branded subscription service natively into its devices and ecosystem, Apple will have the upper hand and 3rd parties will find it a whole lot harder to fish in Apple’s waters.

None of this is necessarily bad for the market either.  In fact it could be just what the subscriptions business needs.  To finally focus on green field opportunity beyond the confines of the Apple elite.  Nor should Apple even limit its subscription focus to streaming or to music.  The rise of the Content Connectors points to Apple, Amazon and Google pursuing digital content strategies in the round, that do not get bogged down with super serving any individual content type at the expense of the rest.  Apple’s best mid-term subscription play may yet simply prove to be a monthly allowance of iTunes credit across all content types, bundled into the cost of the device.  Put that on top of iCloud, iTunes Radio, Beats Music and suddenly you have a very compelling multi-content offering.  Something far out of the reaches of the current product roadmaps of any of the stand alone music services.

Can Apple afford to loss lead with music subscriptions to pursue such a strategy?  Well, remember Apple’s entire digital music business has been built on loss leading.  Whatever the final outcome, the mutual fear factor balance looks set to tip in Apple’s favour for a while.

Apple: The Bigger Beat

As a music industry analyst, my post last Friday on the rumoured Apple / Beats deal focused squarely on the Beats Music part of the equation – if you are a hammer everything looks like a nail right?  There are of course much bigger pieces in play than an unproven music service, so to illuminate some of the bigger picture, here are some of the broader product strategy implications of what the deal could mean if it does close:

  • Wearable tech: Apple is a consumer tech company whose reputation for innovation was dented in recent years while it grappled with the challenge of retaining relevance for the mass market with a limited device portfolio while at the same time trying to nudge the innovation needle forward.  Wearable technology is an area in which Apple can innovate bravely while leaving its more mainstream phone and tablet product lines to evolve at more conservative paces.  The nascent nature of the wearable tech space means that there is much that Apple can do to both push the boundaries and gain innovation kudos.  Beats is a wearable products company, Apple is a portable technology company.  It is a wearable tech partnership waiting to happen.  Beats could even conceivably be the Apple brand / division for wearable tech, keeping it cleanly differentiated from the core device business.Whether the outcomes would be smart headphones, fitness devices, smart watches etc. almost doesn’t matter.  The important implication would be that Apple would have a fantastic platform and brand for opening up new markets.    For more on the wearable tech angle, watch this fantastic video blog from my former Forrester colleague James McQuivey
  • Segmenting music consumers: When Apple’s portable device business portfolio consisted of iPods alone it was immediately obvious who the music fans were within its customer base.  Now it is far more difficult for Apple to identify the media preferences of potential customers until they have actually started using an Apple device.  That is one of the retailing implications of producing multi-purpose devices. But start selling device-headphone bundles, or even device-headphone-music service bundles and Apple will find itself with a highly effective tool for targeting the music aficionados.  These super fans can be sold premium music products without the risk of alienating other customers with premium price points in the main product portfolio.
  • Reinvigorating the brand: Apple is not a high-end brand and never has been.  Instead Apple plays in the same brand space Sony did in the 1980s and 1990s, namely that of the aspirational premium mainstream: the top end of the mass market and just scraping the lower reaches of the upper echelons.  But the price Apple has paid for large-scale success is that its user base and brand have crept downwards.  No product can take more blame than the iPhone: the smartphone market is the most commoditized of sectors, with fixed replacement cycles, carrier subsidies, fierce competition, aggressive marketing all reducing brand loyalty and value.  Beats, for all the criticism of the technical quality of its headphones, has created an aspirational, youth focused brand built on the foundations of the aesthetics of quality.  Like Apple, Beats is a brand focused on the upper end of the mainstream and would be a great strategic complement, presenting the opportunity for Apple to reinvigorate its core brand values and at the same time enhance youth resonance.
  • Putting cash to work: Apple is a very cash generative business with an investor community that has consistently higher expectations than Apple is able to deliver on.  Consequently Apple has had to face the paradoxical situation of delivering results of unprecedented quality only to see tepid investor response.  Couple that with ever growing demands to redistribute its vast cash reserves to investors in the form of dividends and it is little wonder that Apple has been on something of a spending spree of late.  Spending big on Beats kills two birds with one stone: it puts cash to work and sends a strong message to investors.

Whatever happens to the prospective deal, what it clear is that there are countless potential benefits to Apple.  And if the deal does not transpire then it is equally clear that Apple either needs another such partner quick, or instead needs to put its cash to work right away on addressing each and every of these strategic permutations.

What Acquiring Beats Could Do For Apple (And Everyone Else)

Stories emerged last night that Apple is in talks to buy Beats, citing well-placed sources. If true – and if it actually goes through – the acquisition has countless potential impacts of seismic proportions, particularly if the deal includes nascent subscription service Beats Music. Apple has always been in the business of selling music for the business of selling hardware, and the potential acquisition must be considered in those terms. With download sales declining and subscriptions gaining traction, Apple has been locked in a process of soul searching, trying to work out what it can do to remain relevant in the digital music business in order to remain relevant in the device business. Beats is a ‘if you can’t beat them, buy them’ solution.

download slow down

There are a number of key considerations and potential impacts:

  • Digital music Plan A has run its course: Despite dynamic growth in Northern European markets, digital music growth nearly shuddered to a halt in 2013, slowing from 11% year-on-year growth in 2012 to just 2% last year, and that is unlikely to be much higher than 4% in 2014. The reason is quite simple: streaming subscriptions are, outside of Northern Europe, predominately converting the most valuable download buyers – who are most often iTunes buyers – into subscribers. Aficionados who bought a few digital albums a month are instead spending 9.99 a month. So instead of bringing up the average spend of music buyers it is bringing down the spending of many – I’ll be publishing some data on this in the coming weeks. Digital music needs a Plan B to reinvigorate growth
  • Apple is paradoxically holding back digital growth: Apple almost singlehandedly created the global digital music in the 2000’s but it is now actually holding back growth in the 2000’s. Streaming has taken off most quickly where Apple never got a foothold (see figure). Where Apple is firmly established streaming is a transition story, of download revenue shifting to streaming. Where it is not, streaming is green field growth. An interesting side effect of this is that because English speaking Apple has prospered most in English speaking markets, it is in these countries – US, UK, Canada, Australia, all of which are top ten music markets – where digital growth is now slowest. Apple has inadvertently passed the digital baton to the non-English language world.
  • Apple’s go-slow streaming strategy is too slow: All this translates into weakening digital relevance for Apple, which infers weakening hardware relevance. Apple has been here before, back in the heyday of Last.FM when Apple was still predominately a computer business, it tried to steal the social music revolution’s clothes with the launch of the now-defunct Ping and the just-about-still-around Genius. Yet Apple came out of that era stronger than ever. Now though, portable devices are the beating heart of Apple’s business, and with the relentless onslaught of Android it cannot afford its next music move to be another Ping. However Apple has had to go slow with streaming. Its user base is more mainstream than ever – as the growing popularity of Now compilations in its store attests – so it has to introduce new features in a way that does not overwhelm its less tech-adventurous customers. iCloud and iTunes Radio are great transition technologies to help introduce streaming to Apple users at a steady pace and to demonstrate clear relevance in the iTunes context. Unfortunately this long-term strategy for its mainstream users has done little to halt the defection of its more sophisticated and, crucially, most valuable, customers. Beats Music could be the defensive strategic option for them.
  • Subscriptions don’t have to be AYCE 9.99: 9.99 AYCE services have done a great job of monetizing the super fans, but with less than 5% penetration in major music markets, there is a clear need for something else for the more mainstream fan in top 10 music markets. Cheap priced subscriptions and telco hard bundles are both solutions to this problem. Apple should not feel compelled to jump on the 9.99 bandwagon. Digital content stores are breaking down the genre walls – as Google’s Play demonstrates so well. Apple gets much more revenue from other content genres – see this figure – so a multi-content genre subscription would be a much cleaner fit for Apple. As would a subscription that gave users a certain amount of credit to use on any iTunes products, sort of a virtual iTunes Gift Card subscription. Pricing would be blissfully simple – e.g. $10, $20, $30 etc. – and would help protect Apple from revenue cannibalization until it makes the full switch to access from ownership. $10 could include ad-free iTunes Radio, $20 and upwards could include unlimited music streaming.
  • Apple could make hard bundling work, and some: If Apple does get Beats Music, it would have an unprecedented opportunity to make bundled subscriptions work. Hardware has always been key to making digital content work, whether that be the Kindle, Xbox, Playstation, iPhone or the new generation of Content Connectors like Chromecast. Subscriptions are working now because Apple opened up a chink in its vertically integrated ecosystem armour by allowing streaming services to exist on its devices. In fact mobile access is responsible for the majority of the 9.99 model’s growth. Retailing an iPhone / Beats headphones subscription bundle would communicate clear value to users, and with the cost largely hidden in the premium price point associated with the bundle, could help consumers get over the hump of committing to monthly spending.
  • Beats would redefine Apple as a CE company: The implications on Apple’s device portfolio are intriguing tool. The simplicity of Apple’s limited product range has always been key to its success. Being able to retail a single phone when competing with the excessively vast portfolios of incumbent smartphone companies was a major differentiation point. Since those first iPhone days though Apple has multiplied its number of product SKUs. Incorporating a range of headphones would take that to another level. Whether Apple has the ability to seamlessly transform from a computer company with a small range of portable computing devices, to a fully-fledged CE company remains an intriguing open question.

There is no doubt that if Apple does buy Beats and Beats Music, that the impact on the competition will be dramatic. Spotify will be rightly worrying about the impact on its impending IPO – though expect words to the effect that this is simply a resounding validation of the model. But the competition should be welcomed. To date most digital music services have been strategically lazy, focusing their efforts on trying to sell new products to already existing digital customers, the majority of whom, in the big markets at least, are Apple customers. Now digital music companies will have to start thinking much more creatively about how they can compete around, rather than with Apple. About how they can create revenue in new consumer segments, not simply trying to extract more revenue from the preexisting ones. Some companies are doing this already but they are in the distinct minority – this should be a good time for them. If Apple does buy Beats, it will bring some much needed momentum to market that was beginning to suffer from hubris.