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.

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.

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.

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.

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.

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.

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.

 

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.

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 21^st century music product.

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!

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 21^st 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 21^st 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.

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.

What Is Really Cannibalising Download Sales

As 2013 music sales figures come in, the picture of streaming growing while download sales slow is coming sharply into focus. It is one of a clear phase  of transition/cannibalization (delete as appropriate depending on your point of view) taking place because the majority of paying music subscribers were already download buyers.  But that is not the whole picture.  There is an even fiercer form of competition for spend that, as far as the music industry is concerned, is inarguably driving cannibalization.

The iTunes Store accounts for the majority of the global music download market and has done so since its inception eleven years ago.  Back when it launched, the iTunes Music Store helped transform the iPod from a modestly performing device into a global hit.  Music was the killer app, music was what Apple used to sell the device and music is what iTunes customers spent all of their money on.  But all of that changed.  As Apple’s devices have done progressively more, Apple has introduced new content types into its store that better show off the capabilities of its devices.  When Apple launches a new iPad it doesn’t have a label exec holding up the new device playing a song with static artwork displayed…that simply would not showcase the device’s capabilities.  Instead an EA Games exec gets up on stage with a new game that fully leverages the capabilities of the iPad’s graphics accelerator, the accelerometer, the multi touch screen etc.

Music may still be the single most popular entertainment activity conducted on iDevices but it is no longer the app that fully harnesses the devices’ capabilities.  In fact because music products and services remain stuck in the rut of delivering static audio files – YouTube notably excepted – it is increasingly failing to compete at the top table in terms of connected device experiences.  Crucially, this is not just a behavioral trend, it is directly impacting spending too (see figure).

Back in 2003 music accounted for 100% of iTunes Store revenue because that was all that was available.  Over the years Apple introduced countless new content types, each of which progressively competed for the iTunes buyer’s wallet share.  The step change though occurred in 2008 with the launch of the App Store.  The impact was instant and by mid 2009 music already accounted for less than 50% of iTunes revenue.   By the end of 2003 the transformation was complete with Apps accounting for 62% of spending and music less than a quarter.  Quite a fall from grace for what was once the undisputed king of the iTunes castle.

Now it is clear that the app economy is a bubble that is likely to undergo some form of recalibration process soon (80%+ of revenues are in app, 90%+ of those are games, and the lion’s share of those revenues are concentrated in a handful of companies) but the damage has already been done to music spending.

If music industry concerns about download cannibalization should be addressed anywhere it is first and foremost at apps.  At least with streaming services consumer spending remains within music rather than seeping out to games.  Though the bulk of the app revenue is ‘found’ incremental revenue, apps are additionally competing for the share of the iTunes’ customers wallet i.e. growth is coming both from green field spend and at the expense of other content types.

So what can the music industry do?  It would be as foolish as it would be futile to try to hold back the tide. Instead, music product strategy needs to do more to embrace the app economy.  That means, among other things:

• More fully leverage in-app payments (and that means labels will have to take some of the hit on the 30% app store tax)
• Learn to harness the dynamics of games (that does not mean ‘gamify’ music products necessarily – though it can mean that too – but to understand what makes casual app games resonate)
• Develop digital era, multimedia products (see this report for some pointers on where music product strategy should go)

Though we are nowhere close to talking about the death of music downloads, apps have turned the tide for music spending.  The music industry can either sit back and feel sorry for itself, or seize the app opportunity by the scruff of the neck.

Release Windows, the Cure for the Access vs Ownership Debate?

Back in early 2009 when I was at Forrester Research I wrote a report proposing that the Music Industry should adopt release windows.  It seemed to many something of an anachronistic concept, written just at the time with the Movie Industry – that bastion of release windows – was deeply engaged in a dialogue about compressing windows.  But now, with the growing debate over whether streaming services are cannibalizing CD and download sales, the idea is beginning to look highly relevant.  Because the simple fact is that a structured release window strategy for the music industry would do away with much of the access versus ownership debate once and for all.

Music products and services need segmenting into distinct windows

The basic structure of my release window argument was that music products and services should be segmented into tiers of priority and then each of those tiers be allocated a release window.  The tiering would work something like this:

• Window 1, week 1: CDs, downloads and premium subscriptions
• Window 2, week 3: Radio (excluding web-only radio)
• Window 3, week 4: Subsidized subscriptions and web radio
• Window 4, week 5: Ad supported streaming services

 

All of the new releases would go straight to Window 1 and be available there, and there alone, for a 2 week period, with terrestrial and digital radio coming after that.  This is a contentious point as radio is of course intended to act as a discovery and marketing tool but the time has come for the top tier of the music product pyramid to be held up as exactly that.  After all, why should passive music fans who don’t pay for music get to hear new songs as soon as those who pay 9.99 a month or buy downloads or CDs?  Users of free ad supported streaming services would have to wait a full 4 weeks before they get to hear the latest new music.

 

The problem with differentiating a free stream from a paid download is that there simply isn’t that much difference.  Release windows however, put clear blue water between the download and the free stream.

Coldplay is already pioneering the window strategy

Coldplay’s decision to keep ‘Mylo Xyloto’ off Spotify until album sales have peaked is effectively artist level windowing in practice.  The alternative strategy of just putting the odd track on there – such as Adele’s ‘Rolling In The Deep – treats streaming as a radio-like promo vehicle but if all artists did that then its promotional value would soon disappear as people would stop using streaming services.  A structured, industry level windowing strategy however would bring consistency and effective results.

 

Of course the windowing approach isn’t free of problems.  For example pushing radio to the second window will require a new approach to marketing music and a revision of assumptions of sales cycles.  However both of those things are already in effect happening, forced along by the current streaming status-quo, and of course unlicensed free music.  Windowing is an opportunity for record labels to take control of the situation and simultaneously protect music sales and define a long term, complementary role for streaming services.  The alternative is a prolonged and unproductive debate about cannibalization that will cause deep fault lines across the music industry and may ultimately kill off streaming all together.

 

 

The Music Format Bill of Rights

Today I have published the latest Music Industry Blog report:  ‘The Music Format Bill Of Rights: A Manifesto for the Next Generation of Music Products’.  The report is currently available free of charge to Music Industry Blog subscribers.  To subscribe to this blog and to receive a copy of the report simply add your email address to the ‘EMAIL SUBSCRIPTION’ box to left.

Here are a few highlights of the report:

Synopsis

The music industry is in dire need of a genuine successor to the CD, and the download is not it. The current debates over access versus ownership and of streaming services hurting download sales ring true because a stream is a decent like-for-like replacement for a download.  The premium product needs to be much more than a mere download.  It needs dramatically reinventing for the digital age, built around four fundamental and inalienable principles of being Dynamic, Interactive, Social and Curated (D.I.S.C.).  This is nothing less than an entire new music format that will enable the next generation of music products.  Products that will be radically different from their predecessors and that will crucially be artist-specific, not store or service specific.  Rights owners will have to overcome some major licensing and commercial issues, but the stakes are high enough to warrant the effort.  At risk is the entire future of premium music products.

D.I.S.C.: The Music Format Bill Of Rights

The opportunity for the next generation of music format is of the highest order but to fulfil that potential , lessons from the current digital music market must be learned and acted upon to ensure mistakes are not repeated.  The next generation of music format needs to be dictated by the objective of meeting consumer needs, not rights owner business affairs teams’ T&Cs.  It must be defined by consumer experiences not by business models.  This next generation of music format will in fact both increase rights owner revenue (at an unprecedented rate in the digital arena) and will fuel profitable businesses.  But to do so effectively, ‘the cart’ of commercial terms, rights complexities and stakeholder concerns must follow the ‘horse’ of user experience, not lead it. This coming wave of music format must also be grounded in a number of fundamental and inalienable principles.  And so, with no further ado, welcome to the Music Format Bill of Rights (see figure):

• Dynamic. In the physical era music formats had to be static, it was an inherent characteristic of the model.  But in the digital age in which consumers are perpetually online across a plethora of connected devices there is no such excuse for music format stasis.  The next generation of music format must leverage connectivity to the full, to ensure that relevant new content is dynamically pushed to the consumer, to make the product a living, breathing entity rather than the music experience dead-end that the download currently represents.
• Interactive. Similarly the uni-directional nature of physical music formats and radio was an unavoidable by-product of the broadcast and physical retail paradigms.  Consumers consumed. In the digital age they participate too.  Not only that, they make content experiences richer because of that participation, whether that be by helping drive recommendations and discovery or by creating cool mash-ups. Music products must place interactivity at their core, empowering the user to fully customize their experience.  We are in the age of Media Mass Customization, the lean-back paradigm of the analogue era has been superseded by the lean-forward mode of the digital age.  If music formats don’t embrace this basic principle they will find that no one embraces them.
• Social. Music has always been social, from the Neolithic campfire to the mixtape.  In the digital context music becomes massively social.  Spotify and Facebook’s partnering builds on the important foundations laid by the likes of Last.FM and MySpace.  Music services are learning to integrate social functionality, music products must have it in their core DNA.
• Curated. One of the costs of the digital age is clutter and confusion: there is so much choice that there is effectively no choice at all.  Consumers need guiding through the bewildering array of content, services and features.  High quality, convenient, curated and context aware experiences will be the secret sauce of the next generation of music formats. These quasi-ethereal elements provide the unique value that will differentiate paid from free, premium from ad supported, legal from illegal.  Digital piracy means that all content is available somewhere for free.  That fight is lost, we are inarguably in the post-content scarcity age.  But a music product that creates a uniquely programmed sequence of content, in a uniquely constructed framework of events and contexts will create a uniquely valuable experience that cannot be replicated simply by putting together the free pieces from illegal sources.  The sum will be much greater than its parts.

Table of Contents for the full 20 page report:

Setting The Scene

• Digital’s Failure To Drive a Format Replacement Cycle

Analysis

• Setting the Scene
• (Apparently) The Revolution Will Not Be Digitized
• The Music Consumption Landscape is Dangerously Out of Balance
• Tapping the Ownership Opportunity
• The Music Format Bill Of Rights
• Applying the Laws of Ecosystems to Music Formats
• Building the Future of Premium Music Products
• D.I.S.C. Products Will Be the Top Tier of Mainstream Music Products
• The Importance of a Multi-Channel Retail Strategy
• Learning Lessons from the Past and Present
• We Are In the Per-Person Age, Not the Per-Device Age

Next Steps

Conclusion

The Digital Music Year That Was: 2011 in Review and 2012 Predictions

Following the disappointment of 2010, 2011 was always going to need to pack more punch.  In some ways it did, and other ways it continued to underwhelm. On balance though the stage is set for an exciting 2012.

There were certainly lots of twists and turns in 2011, including: disquiet among the artist community regarding digital pay-outs, the passing of Steve Jobs, Nokia’s return to digital music,  EMI’s API play, and of course Universal Music’s acquisition of EMI.  Here are some of the 2011 developments that have most far reaching implications:

• The year of the ecosystems. With the launch of Facebook’s content dashboard, Android Music, the Amazon Fire (a name not designed to win over eco-warriors),  Apple’s iTunes Match and Spotify’s developer platform there was a surge in the number of competing ecosystem plays in the digital music arena.  Despite the risk of consumer confusion, some of these are exciting foundations for a new generation of music experiences.
• Cash for cache.  The ownership versus access debate raged fully in 2011, spurred by the rise of streaming services.  Although we are in an unprecedented period of transition, ownership and access will coexist for many years yet, and tactics such as charging users for cached-streams blur the lines between streams and downloads, and in turn between rental and ownership. (The analogy becomes less like renting a movie and more like renting a flat.)
• Subscriptions finally hit momentum.  Though the likes of rdio and MOG haven’t yet generated big user numbers Spotify certainly has, and Rhapsody’s acquisition of Napster saw the two grandaddys of the space consolidate.  Spotify hit 2.5 million paying users, Rhapsody 800,000 and Sony Music Unlimited 800,000.
• New services started coming to market.  After a year or so of relative inactivity in the digital music service space, 2011 saw the arrival of a raft of new players including Blackberry’s BBM Music, Android Music, Muve Music , and Rara.  The momentum looks set to continue in 2012 with further new entrants such as Beyond Oblivion and psonar.
• Total revenues still shrank.  By the end of 2011 the European and North American music markets will have shrunk by 7.8% to $13.5bn, with digital growing by 8% to reach $5 billion.  The mirror image growth rates illustrate the persistent problem of CD sales tanking too quickly to allow digital to pick up the slack.  Things will get a little better in 2012, with the total market contracting by just 4% and digital growing by 7% to hit $5.4 billion, and 41% of total revenues.

Now let’s take a look at what 2011 was like for three of digital music’s key players (Facebook, Spotify and Pandora) and what 2012 holds for them:

Facebook
2011.  Arguably the biggest winner in digital music in 2011, Facebook played a strategic masterstroke with the launch of its Digital Content Dashboard at the f8 conference.  Subtly brilliant, Facebook’s music strategy is underestimated at the observer’s peril.  Without investing a cent in music licenses, Facebook has put itself at the heart of access-based digital music experiences.   It even persuaded Spotify – the current darling of the music industry – to give it control of the login credentials of Spotify’s entire user base. Facebook’s Socially Integrated Web Strategy places Facebook at the heart of our digital lives.  And it’s not just Facebook that is benefiting: Spotify attributed much of its 500,00 new paying subs gained in October and November to the Facebook partnership.

2012. Facebook is quietly collecting unprecedentedly deep user data from the world’s leading streaming music services.  By mid-2012 Facebook should be in a position to take this to the record labels (along with artist profile page data) in the form of a series of product propositions.  Expect whatever is agreed upon to blend artist level content with music service content to create a 360 user experience.  But crucially one that does not require Facebook to pay a penny to the labels.

VERDICT: The sleeping giant of digital music finally stepped up to the plate in 2011 and will spend 2012 consolidating its new role as one of the (perhaps even *the*) most important conduit(s) in digital music history.

Spotify.
2011.  It would be puerile not to give Spotify credit for a fantastic year.  Doubts about the economics of the service and long term viability remain, but nonetheless 2011 was a great year for the Swedish streaming service.  It finally got its long-fought-for US launch and also became Facebook’s VIP music service partner. Spotify started the year with 840,000 paying subscribers and hit 2.5 million in November.  It should finish the year with around 200,000 more.  Its total active user base is now at 10 million. But perhaps the most significant development was Spotify’s Developer platform announcement,paving the way for the creation of a music experience ecosystem.  Spotify took an invaluable step towards making Music the API.

2012: Expect Spotify’s growth trajectory to remain strong in 2012.  It should break the 3 million pay subscribers mark in February and should finish the year with close to 5 million.  And it will need those numbers because the funnel of free users will grow even more dramatically, spurred by the Facebook integration.  But again it will be the developer platform that will be of greatest and most disruptive significance.  By the end of 2012 Spotify will have a catalogue of music apps that will only be rivalled by Apple’s App Store.  But even Apple won’t be able to come close to the number of Apps with unlimited music at their core.  More and more start ups will find themselves opting to develop within Spotify rather than getting bogged down with record label license negotiations.  Some will find the platform a natural extension of their strategy (e.g. Share My Playlists) but others will feel competitive threat (e.g. Turntable FM).  If Spotify can harness its current buzz and momentum to create the irresistible force of critical mass within the developer community, it will create a virtuous circle of momentum with Apps driving user uptake and vice versa.  And with such a great catalogue of Apps, who would bet against Spotify opening an App Store in 2012?

VERDICT: Not yet the coming of age year, but 2011 was nonetheless a pivotal year paving the way for potentially making 2012 the year in which Spotify lays the foundations for long term sustainability.

Pandora
2011.  Though 2011 wasn’t quite the coming of age year for Spotify it most certainly was for Pandora.  In June Pandora’s IPO saw 1^st day trading trends reminiscent of the dot.com boom years.    By July it had added more than 20 million registered users since the start of the year to hit 100 million in total and an active user base of 36 million, representing 3.6% of entire US radio listening hours.  But Pandora also felt the downs of being a publically listed company, with flippant traders demonstrating their fear that Spotify’s US launch would hurt Pandora.

2012: And those investors do have something of a point:  whatever founder Tim Westergren may say, Spotify will hurt Pandora.  A portion of Pandora’s users used Pandora because it was the best available (legal) free music service.  Those users will jump ship to Spotify.  This will mean that Pandora’s total registered user number will not get too much bigger than 100 million in 2012 and the active number will likely decline by mid-year.  After that though, expect things to pick up for Pandora and active user numbers to grow again.  The long term outlook is very strong.  Pandora is the future of radio.  It, and services like it, will get an increasingly large share of radio listening hours with every month that passes in 2012, and with it a bigger share of radio ad revenues.  Pandora will be better off without the Spotify-converts, leaving it with its core user base of true radio fans. Spotify’s new radio play will obviously be a concern for Pandora  but this is Pandora’s core competency, and only a side show for Spotify.  Expect Pandora to up their game.

VERDICT: Since launching in November 2005 Pandora have fought a long, dogged battle to establish themselves as part of the music establishment, and 2011 was finally the year they achieved that.  There will be choppy waters in 2012 but Pandora will come out of it stronger than it went in.

Why The Access Versus Ownership Debate Isn’t Going to Resolve Itself Anytime Soon

Earlier this week I was at 7 Digital’s Annual Media and Partners Meeting.  At the start of the year 7 Digital hit their 7 Year mark, which in Internet Years is probably equivalent middle age.  7 Digital now have 3 million registered paying customers (of which 30% are active) but what is most interesting is the impact of mobile downloads on their business.    Since launching direct-to-mobile paid downloads the segment has become 7 Digital’s most dynamic growth area: in November 2010 mobile device sales accounted for just 1% of total sales, 1 year on and that share has rocketed to 44%.   (Online sales also grew, so this is a case of strong growth in both relative and absolute terms).

Ownership isn’t dead

7 Digital’s CEO Ben Drury used the data shows that ownership isn’t dead.  He has a point.  In these days of cloud and streaming dominated debates it is easy to be led to believe that ownership is an outdated legacy of the analogue era.  Of course in many ways it is, but the unavoidable fact is that we are in a transition phase in which both ownership and access matter and it is a stage which has many years to yet to run.

In simplistic terms there are two key dynamics which determine the pace of the shift from ownership to access:

• Technology-led change
• Generational-led change

Generational-led change

The generational changes are slowest moving, almost glacial in pace.  Yet they give the impression of being quicker than they actually are, because such a small subset of the total population is currently active in digital music.  These 10-20% of consumers (of which I and probably you are part) are not representative of the total consumer base.  But even among us there are discreet groups.  I am of the age group that grew up with CDs.  I am part of the transition generation that has enthusiastically adopted digital but still understands the value of physical media and ownership. The Digital Natives however (i.e. those consumers who have grown up in the digital age without ever having learned the habit of buying physical media) have entirely different concepts of ownership.  These are the true vanguard of the shift towards access based models.  But they are young, so time rich as they might be they are also currently cash poor.  Thus they are opting for free alternatives, such as YouTube, Pandora, Spotify Free.  Only when they start to acquire increased spending power will they start to be the dynamic force in adoption of paid access based services.

Meanwhile, the digital hold outs – i.e. the majority of the total population – are being left behind as the digital music bandwagon rolls on.  Out of habit some of them still buy CDs (some of them even buy a lot of CDs) but most are just falling out of the habit of buying music.  Their sense of ownership however remains unchanged.  In their world view you either buy music and own it, or you listen to it on the radio or TV.  Their worldview remains wholly un-muddied by cloud and streaming services.

Technology-led change

If Generational-led Change is the slow moving backdrop to the access / ownership debate, then Technology-led Change is the fast moving current, the rip tide.  It is technological change which underpins Spotify’s conversion of 2.5 million paying customers (Napster and Rhapsody both offered portable rentals years earlier, but not cached streams).  It is technological change which Pandora has to thank for its 100 million users (adoption only truly lifted off with the launch of the Pandora iPhone App).  Better technology and better connectivity are making the constraints of access based services less visible.

Yet almost paradoxically Technology (in both its advances and limitations) is simultaneously building the case of access and extending the life span of ownership (see figure):

• Pay once. Whether subscription fees are hidden or premium, users know that access to content ends when the subscription does.  Paying individually for a la carte downloads and CDs might be intrusive and clunky, but the fact remains that consumers know they then have guaranteed lifetime of product ownership.  Consumers still ‘get’ ownership and paying (or indeed downloading for free) once and owning for ever is an exceptionally easy concept to communicate. Score: Ownership 1, Access 0
• Play on anything. Subscription services have made great strides in device ubiquity, primarily via smartphone apps, but non-smartphone users are left out in the cold, as are non-paying streaming users. MP3 is the common currency of digital music.  MP3 files play on virtually every connected device consumers have.  Ownership gives the greatest chance of device ubiquity.  Score: Ownership 2, Access 0
• Play anywhere.  Consumers can take their MP3 playing devices with them most places and not have to worry about network connectivity.  However memory size restraints often mean they can only take a portion of their music with them.  Smart use of local device stream caching is freeing subscription services of the chain of the PC but network connectivity remains core to their value proposition and we are far away yet from the ephemeral promise of ubiquitous connectivity.  Score: Ownership 3, Access 0
• Play everything.  Download stores and CD stores have great catalogue, but access is as metered as it gets.  To fill your iPod with paid downloads costs tens of thousands of dollars.  To fill it with subscription music costs less than $10 a month.  It is in the context of unlimited access to vast catalogues of music that streaming services come alive, leaving ownership casting covetous glances from afar. Score: Ownership 3, Access 1
• Share with everyone.  Music has always been an inherently social experience (from the earliest prehistoric musicians playing around the fire through to mix tapes).  But in the digital age music is massively social.  Or at least it is for streaming services.  Sharing owned music means making or lending individual copies.  For streaming services, playlists, APIs and Facebook  place social connectivity at the core of the streaming experience.    Score: Ownership 3, Access 2

So it looks like a narrow victory for ownership, but I’d argue that a tie is a more accurate assessment, because ‘Play everything’ and ‘Share with everyone’ are so important that they carry extra weight.  These factors are core to what makes music different in the digital age.  They are foundations stones for building new pillars of value around music in the post-physical era.

Ownership and Access will co-exist for years to come

And so we have a situation where the case for Access is building all the time, driven by advances in technology (especially mobile), but those same advances also bring limits which extend the case for Ownership.  Mobile is becoming core to the digital music experience, and will only become more so over the coming years.  Right now it is simultaneously encouraging people to buy downloads to guarantee portable access to their music as well as allowing subscription users to take their streaming experience with them on the go.

There is no doubt that Access based models are the future of music, but there are many, many years yet in which Ownership based models will continue to play a pivotal role.  Ownership and Access better learn to get along together, because they are going to be roommates for a long time yet.

Is Digital Music the Next Eurozone Crisis Waiting To Happen?

Much of the contemporary debate about digital music’s financials centres around perceived inequities in artist pay outs, particularly from streaming services.  These are very valid concerns and I continue to argue for an honest and transparent debate.  However there are two equally worrying issues: the sustainability of the stores and services themselves and the class divide that has grown between the US and European digital music markets.

The Trans-Atlantic Digital Divide

It has been clear for a number of years now that the US digital market has been massively outperforming its European peers.  A number of factors contribute to this, including:

• The stronger footprint of Apple in the US
• That the US is a more unified and more easily addressable consumer market
• The fragmented rights landscape in Europe
• European online consumer behaviour lags that of the US

Those factors alone would be enough to stifle European prospects, but paradoxically Europe has developed a much larger number of digital services than the US, both in relative and absolute terms.  According to the IFPI et al’s Pro-Music website, pre-accession Western Europe has 465 services compared to just 24 for the entire US.  In relative terms that translates to 1 service for every 600 thousand European Internet Users compared to 1 for every 10 million US Internet Users.

Music’s Digital Double Whammy

So in effect we have a ‘digital double whammy’: Europe has too many services chasing too few customers.  When we look at the per-service revenue picture the picture becomes even more concerning (see figure).  In the chart we are looking at the Average Margin Per Service (AMPS).  This assumes an operating margin of approximately 20% per service following deductions for recording rights, publishing rights and payments.  20% may sound like a healthy margin but bear in mind that this pot has to pay for a wide range of costs, including Marketing, Technology, Fulfilment, Customer Care, Staff etc.  (In fact scale is crucial and even Apple can only make downloads an ‘on average break even’ business.)  Of course the exact margins vary according to the precise business model, label terms etc but the 20% assumption gives us a good working measure to gauge regional trends.

The first thing that jumps out is the massive disparity in US AMPS ($26.03m) compared to Europe ($0.61m).  In effect the over-supply of European services acts as an accelerator on the disparity between the regions. At a country level there is further diversity, with the UK and France standing out as the strongest – or rather least weak – margin markets.

Scrapping over Apple’s left-overs

But of course the digital music market is not an equally distributed one.  Apple’s iTunes store accounts for the vast majority of the download market, hence the second metric in the chart: AMPS post-Apple.  This shows the average margin per service based upon what is left of the market after Apple’s share has been removed.  (To do this a 70% share assumption was applied to the paid download segment of each digital market.  In some markets this will underrepresent, in others over-represent, but it nonetheless gives us a good comparative directional guide).  Looking at AMPS post-Apple the situation is starker, with the average margin per service in Italy dropping to less than a quarter of a million dollars.

Too many services are chasing too few customers

Back in 2006 at JupiterResearch I wrote a report that made a case for the lack of sustainability in the digital music value chain in Europe and the risk it posed for services.  5 1/2 years on and the situation is unfortunately beginning to come to fruition.  The reason we haven’t had a market implosion yet is because so many of the owners of these services – such as ISPs and mobile operators – continue to show appetite to run them at a loss because of perceived benefits to their core businesses.  But the simple fact is that there are too many services.  In the pre-digital age most markets had but a small handful of national music retailers.  So why in the digital age should that become dozens, particularly when the recorded music market is half its peak size? (The UK alone has 74 services).

When choice doesn’t = choice at all 

And it is not as if these 465 services are bringing extensive choice to European consumers.  The majority of them offer the same catalogue, at the same price with the same device support.  All that this over supply of me-too services does is muddy the water.  There is so much choice that there is no choice at all.  If digital music is ever going to get out of its current impasse, the music industry must fix the over-supply issue. Until it does so, any progress in discussions on artist pay-outs is going to be constrained by the growing concerns posed by an underperforming digital market.

Why It Doesn’t Really Matter Whether Adele Sells More Albums Than Lady Gaga This Year

You may have noticed the unattractive furore surrounding Adele’s contest with Lady Gaga to become the biggest selling artist of the year.  The momentum appears to be with Adele, with her hugely successful ‘21’ album yesterday becoming the first ever album to sell more than 1 million digital copies on iTunes in Europe.

But the simple fact is that albums are no longer the definitive marker of success that they once were.  The shift from the distribution era of the album to the consumption era of the stream and the download have seen a shift from buying to free, and from albums to singles.  The download store allowed music buyers to deconstruct the album into cherry-picked bite size chunk; file sharing enabled people to stop buying albums altogether; and streaming let fans assemble single tracks into their own personal albums (i.e. playlists).

The digital transition makes a case for new measures of success

Income from live, merchandize and other sources have been becoming increasingly important for artists and yet we still measure an artist’s success in terms of how many units of music they sell.  Live revenues are certainly one measure, and of course radio.  But Facebook likes and YouTube views are becoming an increasingly important indicator of success also. And yet, measuring success is not as simple as choosing between one metric or another.  The music industry is in a transition stage, as is consumer consumption of music.  Thus we have a mixture of artists ranging from those that are clearly of the digital age and those that are transition artists, who are entirely contemporary artists but are more at home on a CD than they are YouTube.  I’d put Lady Gaga in the first camp and Adele in the second:  just as measuring Adele solely on her YouTube views would miss the mark, so measuring Lady Gaga on album sales alone would miss the mark.

The chart directly below illustrates the point further.  Here artists are mapped according to their total YouTube views and total Facebook ‘Likes’, with the bubble size representing the total number of albums sold globally.  I have picked a sample of artists that are, or have been, top tier and that represent a range of different artist career models.

A number of trends become apparent:

• A new generation of artist is emerging. Lady Gaga may be the poster girl for the YouTube generation but she also shifts a good number of album units too.    Artists like Cuban American rapper Pitbull are the sharp end of digital age artists. With 1.5 billion YouTube views to his name and tens of millions of singles sold PitBull is a mainstream success story of the highest order, and yet he has sold fewer than 10 million albums.
• Target audience counts. Coldplay and Adele are both top tier contemporary artists, and yet their YouTube views pale compared to Pitbull.  What they have instead are big album sales (50 million for Coldplay, 15 million for Adele).  Why the difference? Because Coldplay and Adele appeal most strongly to people in the their late 20’s and upwards i.e. the people who still buy albums. While Pitbull is much more youth focused.
• The 100 million selling album artist is a dying breed.  Just in case you were wondering why Sir Cliff is in the chart, he achieved the not insignificant feat of selling 100 million albums. He was at his peak during the album’s apogee and although his digital stats are pretty modest, it is hard to see the likes of Pitbull or, perhaps, even Lady Gaga ever matching Cliff’s album sales.  That is not a reflection on those artists but instead on the changing dynamics of the music market.
• The exceptional success stories break the rules.  Lady Gaga and Michael Jackson break the rules.  Lady Gaga is – by contemporary measures at least – a strong album artist as well being in a different league in YouTube and Facebook.  Michael Jackson was firmly an artist of the album apogee era and yet his unique profile has ensured that his success continued into the digital age, and by the rules of the digital age.
• Facebook is the better measure of sustained, organic success.  The problem with YouTube is that it is susceptible to the impact of flashes in the pan.  An artist can have one or two massive YouTube hits and then disappear, or simply be early on in their career.  Facebook ‘Likes’ however are a better measure of longer term, organic popularity.  Take the example of Dev who has close to 300 million YouTube views  – which is nearly as many views as Coldplay.  Yet take a look at Dev’s Facebook ‘Likes’ and you find that she has just 256,00 compared to Coldplay’s 15 million.  YouTube is the key digital popularity measure but needs to be blended with other measures to be truly effective.

Many, rightly, think of YouTube and other free streaming services such as Spotify and Pandora as promotional and discovery vehicles, a digital equivalent for radio.  And yet they are also much more than that: they are increasingly the ends as well as the means.  The chart below shows the number of albums sold per YouTube view.  Cliff Richard’s rate dwarves the rest because his peak was in the album era and his remaining fans aren’t exactly widespread among millennials. But the overall trend is nonetheless compelling: for the true ‘YouTube Generation’ artists, the ratio is dramatically weaker than for album artists.

6 years ago Paul Myers – then CEO of Mp3 download store Wippit – told me that “rock n’ roll was dead”, that the last great album was ‘Thriller’ and that we would never see an album that successful ever again. I was sceptical at the time, but those words are appearing ever more accurate as each year passes.  Looking at the first chart above it is clear that no artist is ever going to come close to selling the amount of albums Michael Jackson did.  But artists will still be successful: we will see artists break the 2 billion YouTube views and we will see artists break the 100 million Facebook ‘Likes’.  As this transition phase continues to play out, artists will evolve how their careers work and the industry will increasingly have to change how it measures their success.  Companies like Music Metric are already starting along this path and the traditional sources of measurement such as Nielsen and the Official Charts Company are also evolving their approaches.  These shifts are crucial, because measuring an artist’s success isn’t just a marketing trick, it is the litmus test with which their fans relate and by which history will remember them.

Just How Important Do You Think iTunes Actually Is?….

I’ll let the chart do most of the talking.

The key takeaway  is that two of the oldest models in the digital marketplace (radio and retail) dominate in terms of users.  Persistence certainly pays off for Pandora and Apple.

The iTunes Store is of course more important than Pandora for music industry revenue as its core function is to sell music.  More than eight years after launch the iTunes Store remains by far the biggest success story in digital music sales, which given Apple’s relative lack of interest in innovating iTunes compared to their hardware, says as much about the competition as it does Apple.

There used to be a line of argument that Apple was a unique case because in its base of iPod owners it had converted the majority of the engaged, tech-savvy music aficionados that there were to be had.  That Apple had already grabbed the addressable market for competitor services.   Prior to the launch of the iPhone that base represented 88 million iPods sold.  Since then though Apple has sold 0.4 billion more devices.  The old argument just doesn’t hold water.  Apple is doing something right – or rather many things right – that can turn (relatively) mass market consumers into savvy and engaged consumers.  Something that the competition is patently not managing to do when it comes to digital music.  And as much as it may be that Apple’s largely closed ecosystem is core to converting this behaviour into paid content behaviour, it is clear that the rest of the competitive marketplace needs to start learning how to better compete with Apple if the balance of power is ever to be altered.

Some methodological notes:

• YouTube is not included because although it is by far the largest online music destination it is not a pure music service.
• There is a mixture of paid and total users numbers in here.  This chart is intended to give a sense of relative scale of service adoption across a diverse range of user experiences and business models.
• The list is illustrative, not exhaustive.  So there are major players such as Amazon, MelOn and smaller players like Sony Music Unlimited, rDio, MOG, 7 Digital, MusicLoad, We7 etc who are not on here.
• The estimate for Apple’s total regular music buyers is based upon an assumption of 40% of the unique owner installed base of iPods, iPhones and iPads.  That is to say that installed base numbers have been created for each device using replacement and new sales assumptions, and that then a unique installed base number was created using assumptions about multiple device ownership etc.  The assumptions were cross referenced and checked in multiple ways including calculating the average number of downloads per buyer, cross referencing against total market level statistics for buyer penetration and digital download sales.  The number is an informed directional estimate not a definitive measure.

The Awkward, Unanswered Questions That Led to Coldplay’s Spotify Embargo

Coldplay have opted to not have their latest album Mylo Xyloto made available on streaming services…all of them, though of course Spotify is the core motive for this move.  It is yet another thrust of the wedge which is inserting itself between the streaming service and artists.

The download / streaming revenue disparity

Coldplay – with apparently begrudging support of their label EMI-  have made a business decision that they would prefer to have a smaller number of people listening to Mylo Xyloto to ensure that a larger number of them are buying it.  The problem with Spotify is that it generates so little income per activity to artists compared to downloads, but this is not just a Spotify issue.  In my earlier post showing PledgeMusic’s Benji Rogers’ digital income I showed how the average pay out per activity for streaming services (premium ones included) is over 300 times smaller than the average pay out per activity on iTunes.   Now to be clear, we are not comparing apples with apples here (no pun intended).  An activity on iTunes is a one-off paid download, whilst an activity on a streaming service is one stream and that play could occur multiple times for the same song.  Yet it still leaves a rather large number of plays required before you start catching up with an iTunes pay out.

The three possible reasons why artists get so little from streaming services

So what is broken with the model?  Streaming services already feel that they pay out too much to rights owners: services typically pay out in the region of 80% of their income to rights holders. So increasing their royalty payments would likely put many services out of business, unless of course they hiked their prices. But 9.99 a month is a hard enough sell as it is, let alone anything higher.

So where is the money going? Here are three possible scenarios:

• The long tail is getting mined, and some.  One possibility is that users of streaming services are spending their time listening to such a vast diversity of catalogue that any one artist only gets a minimal amount of plays and thus only small pay outs.  However, with discovery features so weak on most services, the opposite is more likely to be true for the majority of users.  Indeed 24/7’s CEO Frank Taubert once stated that a third of 24/7’s catalogue had never been downloaded, not even once. (24/7 remember is the service that powers the remarkably successful TDC Play unlimited music service in Denmark).
• Messy metadata is to blame. Streaming service metadata is a complex beast.  With so many different sets of fields from different rights holders having to be blended into one massive dataset by each service, and each time in a slightly different way.  There is always going to be room for error.  This may be causing some proportion – possibly a significant share – of plays not getting reported.  When Benji Rogers decided to test how well Spotify paid out, he left his albums on permanent stream for a month.  Yet his digital income reports for that month not only fell well short of that number of plays, some of the catalogue was listed as not having even been played once.  Given the complexity of rights reporting it is unrealistic not to expect at least some loss of  data quality along the path of point-of-listening: in-service reporting; in-service data cleansing; data warehousing; distributing data to rights holders; rights holder data analysis; rights holder accounting; rights holder pay outs to artists.
• Rights holders aren’t distributing all royalties appropriately. The conspiracy theory is that the big bad labels are collecting swathes of digital income from streaming services and then secretly squirreling away the majority of it for themselves.  Though this is less likely than it may seem, there are a number of label practices which can cumulatively contribute to creating the effect.  All artist/label contracts have stipulations about recouping costs – some of which are skewed against artists – and most have different stipulations about digital pay outs.  So there are contractual and accounting reasons why some artists will not see all the income they expect.  The notoriously Byzantine accounting practices of major labels are another potential related factor.  The Achilles Heel of major label public relations, questionable accounting practices have resulted in many an artist horror story.   The possibility of sums of unpaid royalties, stuck in escrow somewhere until forgotten about is every artist’s nightmare.

The likelihood is that all three scenarios play a role.  I don’t believe that any party, Spotify or the labels included, have intentionally embarked on strategies to cheat artists out of money.  But there is a distinct possibility that not all involved parties are exactly incentivized to plug the holes in their processes to thus bring the increased accuracy and effectiveness which could result in larger artist pay outs.

Digital commercial practices complicate matters further

The waters are further muddied by major labels becoming stake holders in some digital services, raising the prospect of portions of income from those services being joint venture income and therefore not subject to reimbursement to artists.  Add to that the issue of the large advances services have to pay labels in anticipation of actual revenues, how much of that is paid to artists, and when, and especially if the service doesn’t ever generate the income guaranteed by its advance.

All these are valid issues that would benefit markedly from an open dialogue across the value chain.  Spotify is left looking like the pantomime villain but is likely no more than a cog in a machine that nobody seems to really want to fix other than the artists.

But fixed it must be.  Spotify and YouTube massively outpace most other digital music services in adoption and usage, yet they deliver a tiny fraction of the income.  Artists cannot afford for these services to behave like radio (i.e. the tool to drive sales) when they are also becoming the end product for many music fans.

The case is clear for a transparent and robust dialogue between labels, artists and services.

Coldplay have the benefit of being big enough to dictate terms.  Most other artists don’t have that benefit.  Greater transparency, effectiveness and accuracy in revenue reporting and distribution will help drive not only artist trust, but, via increased income, greater support too.  The alternative is that piracy gets another free shot at goal, which is what Coldplay have already likely delivered, driving many Spotify users back to Torrents to find Mylo Xyloto for themselves.