Spotify Just Parked Its Tanks On YouTube’s Lawn

Today’s Spotify announcement was always going to be about Daniel Ek attempting to regain control of the streaming narrative in advance of Apple’s grand entry in a couple of weeks.  But if you were expecting this to be the launch of a bunch of new music features then you were in for a little bit of a shock.  Though there were some new music features outlined (such as swipe to listen, behaviour-learning programming and fitness features) the core of this event was positioning Spotify’s transition from a pure play music service into an entertainment destination with video taking centre stage.  YouTube has been competing (on uneven terms) with Spotify for years as a music service.  Now Spotify is fighting back by going after YouTube’s heartland.

Moving Beyond The Soundtrack

Spotify’s hook line for the event was ‘Soundtracking Your Day’ but in actual fact Spotify want to do much more than that (after all that’s what they already do), now they want to also be a visual part of your day too.  Spotify announced a host of new video partners including native online video producers, next gen video creators like Vice News and traditional brands like Comedy Central.  Spotify is creating a catalogue of video shorts that are designed to fit into your day.  This is unashamedly YouTube, Vessel and Buzz Feed territory.

Lessening The Music Dependence

While music consumption is booming (25 billion hours of music has been streamed on Spotify so far) Ek and co are spreading their bets.  The last 6 months have been tough for Spotify with the major labels casting doubt on its freemium model due to thinly veiled pressure from Apple.  Spotify will quite rightly feel aggrieved with this shift in attitude considering the fact it now accounts for half of global streaming revenue and is doing a better job of driving subscription uptake than anyone has ever come close to doing.  Running a music service can be a high effort, low reward and frustrating experience at times.  So Spotify can be forgiven for wanting to weaken its utter dependence on the whims of a few big labels.

Reversing Into YouTube Territory

Reversing into YouTube and Buzz Feed’s front lawns though will be easier said than done though.  The nature of the mobile consumption landscape is a diverse mix of content capsules, whether they be apps, mobile bookmarks or notification feeds.  Users have learned to consume mobile content in bite-sized chunks.  Facebook has done what it can to re-aggregate content via timeline but has found that asset more useful for sorting users personal content and shared content snippets.  Messaging platforms are now looking like the place where content audiences are best aggregated.  In fact the history of content audience aggregation can be summarised as:

1 – websites

2 – portals (e.g. Yahoo, AOL)

3 – social networks

4 – messaging platforms

Which is why Facebook is disrupting itself with WhatsApp and Facebook Messenger, it knows where things are heading.  This is the environment in which Spotify will be competing, with Snapchat and Line as much as it is with YouTube and Vice.  In Spotify’s favour is the fact that many of the digital first content destinations, Buzz Feed especially, are entirely willing to envisage a future in which their content could exist entirely on third party platforms.

Return Of The Portal?

In a lot of ways Spotify’s video mini-pivot feels like a back-to-the-future spin on the 20th century portal model but there is clearly an opportunity to re-aggregate our fragmented digital entertainment lives.  Whether Spotify can do that or not is another question and even if it can, it will be a long-term play rather than some short term hit.  Ek might have said he wants to ‘soundtrack our day’ but his product strategy actions show us that he feels Spotify has outgrown being the soundtrack alone.

Zoe Keating’s Experience Shows Us Why YouTube’ Attitudes To Its Creators Must Change

It is easy to think of the internet as a mature medium, especially for those who were born into the internet era. However we are still at the earliest of stages. We are where radio was in the 1930’s and where TV was in the 1950’s: the first signs of the future markets are in place but the real maturation is yet to come. The greats of those early days, the Marconis and the RCAs, are now long gone but at the time they looked like they would rule forever. A similar long view should be taken to the internet. The dominant powers of the web (YouTube, Google search, Amazon, Facebook) may appear to have unassailable market leads but their time will come. Using more recent history, there was a time when AOL and MySpace looked irreplaceable. So why does all this matter to YouTube? The problem with absolute power is that it corrupts absolutely. YouTube, like those other dominant powers, has fallen victim to hubris. It is behaving like the unregulated de facto monopoly that it is. And in doing so it is taking its creators for granted. Right now that is bad for creators. Soon it may be bad for YouTube too. It Is Time For YouTube To Reassess It s Relationship With Content Creators Online video is truly coming of age. YouTube was one of the ice breakers and remains one the very biggest web destinations but the world is changing. YouTube has changed too of course, migrating skate boarding dogs, through music video to fostering a generation of YouTube stars like PewDiePie, Zoella and Smosh. But just as YouTube had to reinvent itself in the wake of the mid form revolution driven by Hulu et al so the time has come for another reinvention, but this one requires a change in business practices rather than product innovation. Most crucially YouTube needs to reassess its relationships with content creators and owners. When the first YouTube stars started to rise to prominence YouTube was almost positioned as a benefactor, giving the gift of a platform for these people to become stars. But now, a few years on, with millions of subscribers each, these stars are beginning to understand their real potential. In just the same way that a traditional TV star does not feel a debt of gratitude or a commitment to life long servitude to the TV channel that broke him or her, so YouTube stars are now beginning to reassess their options. The online video landscape though is dramatically less competitive than the TV landscape so options are limited. But where there is demand for change and no monopoly of supply of content, change will come. This is the context into which new video service Vessel has launched, offering YouTube stars cold hard cash payments and significantly bigger revenue shares, in return for giving just a few days of exclusivity. Be sure that few days window will change, but for now it is a low risk, high gain option for YouTube stars. Expect plenty more to follow Vessel’s lead. YouTube Is Abusing Its Position Of Absolute Power That should be where the story ends, well starts. But because the dominant internet companies are not subject to the same level of regulation as traditional companies they are able to abuse their power in order to try to maintain their strangle hold. YouTube found itself subject to extensive ire when it tried to foist a hugely restrictive contract on indie labels for its then forthcoming YouTube Music Key service. The indie sector was eventually able, via its licensing arm Merlin, to secure more favourable terms, but the same contract remains on the table for individual creators. Zoe Keating, an artist who sets the gold standard for DIY artists, has been a vocal advocate for YouTube channels as a revenue source. But now YouTube is trying to strong-arm her into signing what looks pretty much like that same original Music Key contract. Their demands include an effective Most Favoured Nation clause whereby anytime she uploads any music to the web she must upload it also to YouTube at exactly the same time. The contract also states a five year period and that failure to sign the contract will result in YouTube blocking both her channel and Keating’s ability (via Content ID) to get revenue from her own music uploaded without permission by others. The implications are:

  • Music must always be available free on YouTube first on the web
  • Artists must take a 5 year bet on streaming, even though there are massive doubts about its sustainability for artists

But it is the Content ID clause that is most nefarious. Content ID is not an added value service YouTube provides to content owners, it is the obligation of a responsible partner designed to help content creators protect their intellectual property. YouTube implemented Content ID in response to rights owners, labels in particular, who were unhappy about their content being uploaded by users without their permission. YouTube’s willingness to use Content ID as a contractual lever betrays a blatant disregard for copyright. Asymmetrical Conflict Zoe Keating is a rare talent and also a rare voice. She is willing to expose her entire digital music commercial life in a way very few artists are willing to. She is standing up to YouTube in a David and Goliath like manner but the deck is stacked against her because YouTube is able to abuse its de facto monopolistic position without any fear of regulatory intervention. If they get their way with independent music creators, expect them to take the exact same approach to other independent video creators in a bid to neuter the threat from disruptive new entrants like Vessel.  Rather than simply try to future proof itself against the emerging competition YouTube should focus on trying to be the best possible place for its creators to be to build prosperous careers. Instead it is trying to lock them in like prison inmates. Ultimately though this sort of action from YouTube reveals strategic hubris, arrogance and complacency. All of which are classic signs of an incumbent company teetering on the brink of disruption. As the Enron experience showed us, no company is too big to fail. And as my former colleague Michael Gartenberg used to say ‘cemeteries are full of irreplaceable people’.

Why the Music Industry Should be Watching Twitter’s Stock Price

This is the chart that the music industry needs to be paying close attention to over the coming weeks and months (it’s Twitter’s stock price).  How well Twitter fares will be a bellwether for digital consumer service investments. Two of the music industry’s biggest bets (outside of the big tech trio of Apple, Amazon and Google) are Spotify and Deezer.  Both of whom are performing strongly (Deezer just hit 5 million paying subscribers and Spotify could be edging towards 10 – see my prediction from last year).  But both have also taken very significant amounts of investment resulting in valuations that markedly narrow the pool of potential buyers.  For Spotify in particular a flotation looks like the best route of realizing a strong return for its investors, particularly the later stage ones.

Facebook’s flotation rattled a lot of the investment community.  Although it eventually recovered and is now trading solidly, it sowed fear and uncertainty about the ability of digital consumer companies to translate business plan valuations into actual market trading value.  Those of a certain age recalled painful memories of the dotcom bubble bursting and the near instantaneous disappearance of billions of dollars worth of dotcom company valuations.

If Twitter’s stock price falters over the next 6 weeks or so then it will make an IPO all the more challenging to sell to the market.  But if Twitter does well, some of those lingering doubts and concerns will be assuaged, paving the way – in a best case scenario – for a new dawn of digital consumer company IPOs.

The stock market is a fickle beast and though underpinned by some of the most sophisticated financial modeling on the planet, is easily swayed by investor sentiment, which in turn is driven by that equally ineffable of qualities: momentum.  If Spotify can report 10 million paying subscribers some time over the coming months it will have a clear momentum story to tell.  If Twitter’s stock price holds up into the start of 2014 Spotify will be able to translate its momentum into market sentiment and build towards an IPO.

There is of course no guarantee Spotify, or Deezer, will IPO, but the option looks like a strong commercial and strategic fit given the direction of travel of the digital music market and the companies’ current valuations. If one or both companies successfully IPO or successfully exit via a trade sale or some other route then the music industry will be able to breathe a huge sigh relief and brace itself for a resurgence in digital music investment.

Right now digital music is not a great investment proposition for professional investors, especially VCs.  They see sizeable chunks of their investment disappearing straight onto the bottom line of record labels in the form of advances and guaranteed payments; a congested market that still remains predominately niche in reach; and the CD still lingering as the world’s largest music sales revenue source.  But get a couple of high profile exits under the belt and the music industry will appear a far more compelling investment proposition, with investors more willing to tolerate the costs of doing business in music.  First though, Twitter needs to deliver the goods. Keep watching that chart!

Why Twitter #music Should Only Be Considered a Small First Step

So finally Twitter leveraged its We Are Hunted acquisition and today launched the much expected, if not necessarily much anticipated, Twitter #music.  I say ‘not necessarily much anticipated’ not so much because Twitter isn’t a big deal in the digital music ecosystem (it is) but more because few expected Twitter to do anything particularly groundbreaking here.

Making Twitter’s Music Experience 3 Dimensional

Twitter #music is a neat integration of Twitter music content, such as artists’ Twitter accounts and tweets, integrated with iTunes previews streams and (for Rdio and Spotify users) full audio playback.  All of which undoubtedly brings genuine additional value and turns the Twitter music experience from something pretty superficial and two dimensional into a three dimensional music experience.  But in doing so (some nice UI and discovery algorithms aside) Twitter is essentially just doing a Facebook.  It is leveraging its audience’s behavior as a navigational front end for existing music services.

This is of course a good thing, pulling together the disparate social, graphic and audio elements of the digital music landscape into a cohesive whole.  But it is also so much less than what Twitter, Facebook and Google+ could and should do.

What Twitter, Facebook and Google+ Could and Should Do

Between them Twitter, Facebook and Google+ have a cumulative 2 billion registered users and 1.5 billion cumulative active users.  In short, just about every online and mobile music fan.  These three social powerhouses between them also provide homes to the majority of artists online. This sort of power, influence and reach is staggering. And yet so far all that the three have seen fit to do is plug into other music services.

Now that might be the most sensible core plank of their respective digital music strategies, but there is also so much more that they could do that would complement, and add to the core digital music services currently in market.

For example:

  • Google+ could create a standard ‘plug and play’ portfolio of creative tools such as remix, karaoke and live jamming apps that artists and fans could plug into hangouts and profiles
  • Twitter could allow fans to follow the journey of a song from its original tweet right through to how it got to them
  • Facebook could create a virtual jukebox app that would use Gracenote database look-ups to create service-agnostic playlist and digital collection data from users streamed music that would auto-port to any other music service via Facebook

These are all of course tactics, not strategies, but collectively they add up to something much bigger.  The strategy of the social powerhouses has to be: bring new, unique value that genuinely moves the needle.  Simply creating another suite of discovery tools is not enough. Twitter #music adds audio to the visual music discovery journey and in doing do runs the risk of making much of the discovery journey the destination.  Which is great from a user perspective, but much less so for artists and labels unless some robust additional commercial models are added.  The harsh reality is that if you give a social user too much value in the social context, the opportunity for converting engagement into transaction is reduced.

The digital music market needs social’s big three to start ramping up their respective music games. Twitter #music is a cute first step, but not the end game.

Here’s What Daisy Could, and Should, Look Like

Beats’ codenamed Daisy subscription service has been getting a puzzlingly large amount of coverage for a service that isn’t even launched yet. Beats’ Jimmy Iovine has somewhat smartly positioned Daisy as a challenger in what he has portrayed as a dysfunctional market in which the incumbents are flailing around, unable to even understand what the big issues are, let alone try to solve them.  Discovery, transparency, reporting, these are all great issues that do need addressing but they are also the exact issues Spotify et al are all busy trying to fix right now. The fact they haven’t points to the complexity and scale of the problems, and also the limitations of what any one music service can achieve on its own.

But rather than get distracted by the grandstanding and hyperbole (from all sides) it is worth taking a look at the what the next generation of music subscription service could look like, building upon some of the challenges that are faced today. These could be done by any streaming service, but they are also all natural extensions of Daisy’s already unique set of assets and DNA. These features are:

  • Artist Led Discovery: one of the big issues with streaming services is that they subjugate the artist brand.  In the single or album model (physical or digital) the fan is seeking out an artist specific experience.  With streaming services the value proposition is all the music in the world so the artist brand and relationship is inherently diluted.  So the next generation of music subscription service will be a confederation of artist sub-sites, combining the benefits of vast catalogue with mainstaining artists’ profile.  Back in the day, MySpace understood the value of unifying disparate artist specific communities with portal-like navigation.  So in the next-generation service you will still be able to use traditional tools like searching by genre, but you will also follow individual artists. This, combined with Spotify-artist app-like experiences would give Daisy a genuinely unique take on streaming discovery and navigation.
  • Artist Communities: again taking a lead from MySpace, the natural next step of artist-led discovery is to let users gravitate around their favourite artists.  To follow them, join communities, join discussions, chat with the artist, get virtual-VIP access.  Currently this sort of fan engagement happens one step removed from the music on Facebook and artist pages. Bring it all together and you turn a disjointed discovery-to-engagement-to-consumption/purchase journey into a seamlessly integrated experience, where each of those previously discreet activities becomes an indistinguishable part of a new whole.
  • Empower the Artist: and a further logical next step would be to then allow artists to plug directly into this platform and engage with their fans here just like they do on Facebook. This would not mean giving them full exposure to how often their tracks are getting played or how much they’re getting paid (labels deals just don’t permit this) but it would translate into self-serve analytics dashboards and powerful CRM functionality.
  • Merchandize and live: and if you’ve got your fans engaging with your music then of course you are going to want the ability to sell them other stuff like vinyl, box sets, merchandize and tickets for gigs. This is where Ian C Rogers’ expertise and the TopSpin hook up will become core assets for Daisy. Expect full eCommerce integration. Also don’t be surprised to see full Songkick integration either.

So what emerges is a picture of a MySpace / Spotify / TopSpin / SongKick / Facebook mashup, as 360 degree music experience platform, joining the dots in a fragmented digital landscape.  If Daisy, or anyone else, pulls this off, we will have a true next generation music subscription service.  One that recognizes that streaming is not a business model, but instead simply a technology means of getting music to people on the devices of their choice. A service that understands streaming is the foundation stone upon which rich, immersive music experiences can be built, but not the product itself.

MySpace is Back, And This Time They’re Serious

The new, new MySpace’s latest promo video has certainly done a good job of achieving buzz and positive buzz at that…something that hasn’t been associated with the MySpace brand for a long time.  Of course there is a big difference between a swish marketing video and the actual product, but the early signs are encouraging.  Most specifically the strong focus on music.

Back when MySpace was failing to fight off the inexorable rise of Facebook I argued that it was time for MySpace to stop pretending it was a social network anymore and instead start focusing on being a social platform for artists before it was too late.  Of course they didn’t and before long it was indeed ‘too late’.  Now they may well have another bite at the cake.

The original MySpace was the trailblazer for bringing artists and their fans closer together, with countless artist success stories.  It connected established artists with their audiences and gave aspiring singers, bands and producers the ability to reach global audiences. In the process it created an entirely new strata of semi-pro artists, too good for their garage but not good enough for a traditional record deal – the current staple of contemporary direct to fan services like TopSpin and Tunecore.

MySpace changed the artist-fan relationship for good, transforming a one-directional shouting dynamic into a two-way conversation.  ‘Bye bye’ email marketing list and static html website, ‘hello’ real time conversations with fans in a dynamic social environment.

Unfortunately MySpace’s inability to give up the doomed fight for the mainstream social network audience also resulted in MySpace failing to innovate to stay ahead of the pack in the artist space too.  An ill-fated foray into becoming streaming music service (when Spotify was but a glint in Daniel Ek’s eye) only hastened the demise.   But what did for MySpace more than anything was the fact that artists soon realized that all of their fans were over on Facebook.  It didn’t matter that Facebook lacked many of the artist-friendly features MySpace had, as those mattered little if your fans were elsewhere.

A Brave New World Faces MySpace Now

Now, many years on, MySpace faces a much more sophisticated and complex competitive marketplace.  The direct-to-fan arena which it helped create is now split across multiple categories and competitors, while Facebook is now firmly embedded in the music ecosystem.  MySpace must now compete simultaneously with Facebook, Topspin, Mobile Roadie, Pledge Music, We Are Hunted and countless others.  That’s without even considering the fight for the social networking consumer.

MySpace is not about to usurp Facebook’s near 1 billion user lead (see my earlier post for why) but it can realistically aim to become the definitive destination for artists and their fans, combining the best of Facebook and Topspin et al into one rich immersive music consumption, discovery and engagement destination.  Not necessarily instead of them, but instead a coexistence strategy, adding value to the existing value chain.

MySpace also has significant legacy assets at its disposal.  It remains one of the world’s most heavily trafficked music destination and has tens of thousands of artist accounts.  Granted the lion’s share of those are inactive, but getting artists to reactivate existing accounts is a much easier task than getting them to start from scratch.

MySpace is at risk of having had more regenerations than Doctor Who, but this latest one is simultaneously the one with the biggest set of challenges and potentially the best set of assets to compete with.  First though, MySpace needs to understand what makes it unique, what would make an artist want to invest time on it in addition to or instead of the many alternatives. Then, and only then, MySpace can start competing, again.

What Happens When Facebook Hits 1 Billion Users?

In the four short years since Facebook passed 100 million global active users back in August 2008, social networking has gone mainstream and Facebook’s own active user base now numbers in excess of 955 million. Facebook had many predecessors (MySpace, Hyves, Friendster, Orkut to name but a few) but it achieved what none of them did: it created a service that mainstream consumers adopted in their droves.  Yet despite this success, and as Facebook nears the 1 billion user mark, there remains a niggling worry which stubbornly refuses to go away: has Facebook actually taken social networking mainstream or has it just taken Facebook mainstream?

Facebook Has Created a Two-Speed Social Network Landscape

Facebook’ dominance of social networking is clear and its 955+ million user count stands head and shoulders above the rest (see figure).  Twitter is the closest challenger with less than a fifth of Facebook’s active user count, and Google+, despite bold early moves remains approximately a tenth of Facebook’s scale with 100 million active users.  Beyond those key players the social network long tail rapidly fragments into niche sites and also-rans.  What is becoming apparent is that a two-speed social network landscape is emerging with Facebook effectively a lap ahead of the best-of-the-rest.  In short, Facebook has won the race for the mainstream consumer.

The Importance of Network-Effect Scale

There are many reasons for Facebook’s success, but being all things to all people is centre stage, and in the mass-market scale game there is currently only space for one winner, with success intimately tied to ubiquity.  Facebook has the benefit of a crucially important asset: network -effect- scale. Because the majority of people’s contacts are on Facebook it is the network they opt into, thus increasing the number of other people’s contacts, and so on in a continual virtuous circle.  And as mainstream consumers don’t want the hassle of maintaining multiple social networks, a winner-takes-all scenario emerges.

Twitter and LinkedIn owe their success to not competing with Facebook for the mass market consumer: they deliver value to their users as a complement to Facebook rather than as an alternative (at least in most cases).  Long term success for generalist social networks such as Google+ though depends explicitly on taking users and user hours away from Facebook.  The challenge for Google+ is that those entrenched mainstream Facebook users are not going to be wowed by features or functionality.  If they will ever shift from Facebook it will be because of the same reason they went there in the first place: they will go where their friends and family are.

Facebook’s Velvet Handcuffs

Thus the network-effect acts as velvet handcuffs for mainstream Facebook fans.  What Google+ is banking on is that enough of the more sophisticated users get swayed by features and functionality, in turn starting the crank wheel of the network effect.  Which is exactly why Facebook is so actively integrating content partners such as Spotify into its platform: the more content experiences Facebook can funnel through its platform, the more reason there is for sophisticated users to remain loyal.  If friends and family are the velvet handcuffs for the mainstream user, then content plays the same role for the sophisticated user. (For more on Facebook’s Socially Integrated Web Strategy see this free Music Industry Blog report).

As things stand, when Facebook does hit 1 billion users it will say more about its own success than it will about the overall health of the social network landscape.  The catalyst for Facebook’s network-effect was the foundational principle of connecting people, and the human need to connect is the behavioural glue that ties Facebook together.  Mainstream consumer inertia is the most powerful force in the social network marketplace today, not innovation. This is not to say that social networking will remain defined by a mass market monopoly in perpetuity, but it will until (or if) mainstream consumers acquire the tolerance – or need – for more than one social network.  Until then, social networking will remain a two-speed marketplace.

I will be building upon these ideas and others in a forthcoming Giga Om Pro report ‘Facebook and the Two Speed Evolution of Social Networking’ Watch this space for more details.

 

Apple’s $1bn Settlement: a New Innovator’s Dilemma

Apple’s $1 billion patent infringement victory against Samsung raises a number of increasingly pressing issues about innovation in the consumer technology space. There is no doubt that Apple has done more than any other single company to shape the smartphone marketplace. It is also clear that the average smartphone form-factor and feature set look dramatically different post-iPhone than they did pre-iPhone.  And there is an argument to be had that those same form factors and feature sets bear more than passing resemblance to the iPhone. But this raises the issue of where the ‘a high tide raises all boats’ market evolution argument stops and the patent infringement one starts.

Samsung is the Buffer State in Apple’s Proxy War with Google

Apple’s case against Samsung was in effect a proxy war against Android.  Samsung became the target because it was doing a better job of making Android compete against Apple than anyone else.   While competitors like Nokia and HTC have laundry lists of product names and numbers, Apple’s elegantly simple iPhone brand cuts through the smartphone name clutter like the proverbial knife through warm butter.  Among numerous other factors Samsung recognized the supreme value of establishing such clear brands (such as the Galaxy) and pivoting their portfolio around them.  Samsung became competitor #1, the Android success story, racking up a 50% share of the smartphone market in Q2012 according to IDC, which compares to just 17% for Apple.

The final impact of the ruling is yet to be seen, with countless potential challenges and subsequent actions likely to come.  There are also interesting geopolitical issues at stake, not least of which is the degree to which a Californian jury and judge will be perceived on the international stage as having the requisite impartiality to rule upon competition between a South Korean and a Californian based company.  But leaving aside the legal permutations for a moment, let’s instead take a look at the known unknowns and their likely impact on the marketplace:

  • Competitive patent strategy. Over the last couple of years we have seen an acceleration of the use of patents in the consumer technology and Internet arenas.  Patents have quickly become established as an extra part of competition strategy among big technology firms.  Now, instead of just relying on product development, marketing, pricing and positioning technology, companies can use patent claims to help strengthen their position at the direct expense of the competition.
  • Patent arms race. With the rise of patent trolls (companies’ whose sole objective is to acquire patents and then try to sue established companies for patent infringement) the big established companies themselves have started to acquire patent arsenals.  For example, earlier this year Microsoft paid AOL $1.1bn for 925 patents, 650 of which it promptly sold to Facebook for $550m.  Before that, in 2011, Microsoft teamed up with long-time rival Apple as well as with just about anyone whose anyone in the smartphone business who isn’t Android (RIM, Sony, Ericsson et) to spend $4.5 bn on 6,000+ patents from bankrupt Canadian teleco equipment maker Nortel.  Google had been on the other side of the bidding war and lost out with what was seen by some as a whimsical bidding strategy.  Google promptly went onto to buy fading handset manufacturer Motorola for $12.5bn, a company that just happened to have c.17,000 patents in its archives.  There are uncanny echoes of the Cold War with both sides stockpiling nuclear weapons.  The difference here is that the arsenals are being thrown straight into battle rather than being held back for fear of Mutually Assured Destruction.
  • Patents no longer fit for purpose? Patents raise as many questions as they provide answers for in the software and technology spaces.  Not only are they subject to legal challenge, the language used in them is often  inadequate.  What gives a piece of technology competitive edge is not having rounded corners, but the digital mechanics underneath the hood. It is the code inside a piece of software that gives it edge, not the broad user behaviour it supports.  That’s why we have market leaders in software and product categories that are crowded with lesser competitors that support the same basic user behaviour. And yet patents focus on the exact opposite of this equation.  Patents are typically vaguely worded affairs that talk about broad behaviours such as “a system for controlled distribution of user profiles over a network” (taken directly from a patent which forms the basis of Yahoo’s case against Facebook). Even the more detailed patents – such as Apple’s recent Haptics filing – have a procedural focus.  And of course they have to. Patent applications are exactly that: applications.  There is no guarantee they will be granted and so a filing company is going to be as secretive as they possibly can rather than give its competition edge.  But even if there was a guarantee there is no way in which a technology company is going to publish its source code on a publically accessible document.

And therein lies the problem, if a company is not ever going to include the secret sauce which gives its product the real edge, then what is a technology patent really going to be able to definitively cover?  If it inherently comes down to a discussion about supporting usage behaviours then we end up with an unusual and potentially restrictive lens placed upon innovation and invention.  The history of innovation and invention is that when something comes along that is good enough, it permeates through the entire market.   Sometimes this involves licensing of patents, more often than not it happens through creating similar but different inventions. Think about any consumer electronics purchase, whether that be a digital camera, a laptop or a TV: the products all have pretty much the same mix of features and form factor in their respective price tiers.  This is what has happened to date with smartphones.

However if the Apple ruling survives all challenges and is then extended it could have the effect of a forced and artificial split in innovation evolution. Instead of the touchscreen smartphone becoming another step on the innovation path it could become the sole domain of Apple and force the competition to pursue entirely different evolution paths.  Now there are obviously both positive and negative connotations of that.  But whatever your view point, it will be dramatically different from how other consumer electronics product categories have evolved.

With its origins in early 18th century England, there is an increasingly strong case for a major review of the global patent system and whether it is the right tool to strike an appropriate balance between protecting intellectual property and fostering innovation in the 21st century consumer technology marketplace.

Who’s Competing with Who?

An interesting post-script to the Apple-Samsung case is looking at who else will potentially benefit other than Apple.  Right now there will be a host of handset manufacturers who will be hurriedly looking for a Mobile OS Plan B.  An uncertain Android future doesn’t leave them many places to turn to other than Microsoft’s Windows 8. Historically no friend of Apple but these days of course part of Apple’s Patent Pact. How long that alliance will remain intact remains to be seen, though a cynic might argue that Apple would leave it in place just long enough for Microsoft to get enough of a foothold to fragment the OS marketplace before it renews hostilities between Cupertino and Redmond. By which stage Apple could have billions worth of patent settlement dollars to wage war with…

Spotify Hits 20 Million Monthly Users and Could be on Track for 8 Million Paid Users 1 Year From Now

When Facebook flicked the switch on stage two of its Socially Optimized Web Strategy at f8 it was clear that the social network had just found an effective means of embedding itself further into all of our digital lives, by making itself the universal content dashboard.  What wasn’t so clear at that time was quite how significant an impact it would have on music services, Spotify in particular.

Today Spotify hit 20 million monthly users on its Facebook app, having added 500,000 new users in less than two weeks,  from the 3rd to the 15th of May (see figure 1).

Spotify has added 1.5 million users since the end of April, representing a growth rate of 8%.  That compares to 0.5 million new users and 4% growth for the entire month of May in 2011.  Facebook integration, coupled with launching in the US has turbo charged Spotify’s growth trajectory.

And yet, as impressive as Spotify’s total user growth is, it is only par when compared with other streaming music services.  Looking at the growth in total users by month since launch date of service (see figure 2) Spotify is close to the average for streaming music services.

In fact it is only above Pandora and lags imeem  and Last.FM, both of whom were once the future too.  In favour of Spotify, services like Pandora first launched in the US – a much larger addressable audience – and have unlimited free tiers.  Against Spotify, the market is now much more mature in terms of technology and consume readiness. Measuring against current user levels, 20 million users is also a long way south of Pandora’s 100 million users.  3 million paying subscribers is also far off Apple’s 80 million iTunes customers, though the comparison isn’t necessarily apples-to-apples (pun fully intended).

All of this is not to say that Spotify’s growth rate should be questioned but instead to put it into appropriate historical context, namely that Spotify is performing at the rate that streaming music services should perform in their first 40 months.  Not more, not less.

What is different about Spotify, is the need to amass new free users to drive premium subscriptions (see figure 3).

Although Spotify officially quotes 10 million registered users (the same number it first reported in December 2010) it is more instructive to look at paid conversion as a share of the 20 million monthly users reported by Facebook.  (Bear in mind that Spotify first quoted 10 million users back in December 2010, long before the US launch or Facebook integration).

Even with the 20 million users measure, 17% stands out as a highly successful conversion ratio for Spotify, an affirmation of the Freemium model.  Not only that, the conversion rate has grown strongly month upon month.  Spotify has been getting progressively better at converting free users to paid.  The conversion from active users to paid is even more impressive: 27%.

However it is also clear that the acceleration in new user acquisition enabled by Facebook integration is beginning to dent the conversion rate (see figure 4).

This is though just a natural byproduct of rapidly expanding the funnel: these new free users need to have time to get hooked on the service and then get migrated over to paid. The rate of new users is so much higher than previously that it will take time for Spotify’s overall metrics to balance out.  But that should indeed happen.  And if it does , then it augurs well for positive premium growth down the line.

If Spotify converts between 17% and 27% of each of the new daily 45,454 users, it will add between  0.7 and  1.1 million new paid users a quarter, or between 4.8 and 4.5 million a year.  Assuming a 27% conversion rate of these new active users, Spotify could have just over 8 million paying subscribers by May 2013 and 36 million total users.  The lower case, and probably more realistic, 17% conversion rate scenario would result in 6.3 million paying subscribers.

Although the rates and ratios will fluctuate over the coming 12 months, these numbers give us a useful directional sense of the long term impact of Facebook on Spotify’s current growth metrics.  There remains a big question over the scale of the actual addressable market, i.e. is there a demand ceiling that Spotify will hit somewhere south of the 5 million paying subscribers mark?  But ceiling or no ceiling, and low or high conversion scenario, there is one inescapable conclusion, namely that Facebook integration is transforming Spotify’s business, fast.

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These charts and the above analysis feature in a brand new Music Industry Blog free report: ‘ When 2+2=Free: Making Streaming Music Add Up’.  The report is free of charge to Music Industry Blog subscribers.  To receive your copy simply subscribe to email updates of this blog using the box to the upper left of this page.

And Then There Was the Facebook Play Button…

Last week we saw the launch of the Facebook Timeline for Artists and the Spotify Play Button, neither of which were without controversy (click on the links for more).  Now we have the two trends pulled together with the Facebook Listen Button.  The Facebook Listen Button gives artists a Listen button integrated into the front-end of their profile page which when clicked starts their music playing in the music app of the user.

The Good News: Elegant User Experience

  • This is an elegantly simple integration, that is uncluttered and allows a user to achieve their goal quickly and simply
  • It brings further consistency to Facebook artist pages, putting into practice the lessons learned from the anarchic chaos that was MySpace artist pages
  • It will help drive usage of streaming music services

The Bad News: Problematic Integration

  • The same player-integration issues apply to the Facebook Listen Button as do to the Spotify Play Button: a visitor has to a) be a user of one of the supported streaming music services and then b) has to have the app open.  Both of which are speed bumps in the user experience, especially if the visitor isn’t a user of a supported music service, perhaps because they live in a country where the services aren’t yet available
  • Following being shunted off the artist profile front page by the Timeline, artist apps like BandPage, Reverb Nation and FanRX have effectively had their usability further downgraded by their play buttons being a couple of clicks away from the front page compared to the front page click of the Facebook Listen Button

Conclusion

Overall the Facebook user wins here.  The Listen Button is not intended as the consumption mode of choice for aficionado fans, it is a quick discovery tool for people new to the artist who want to learn more.  And with this key use case in mind, the design and implementation is clean, elegant and (reasonably) convenient.  But the flip side is that those artist apps find themselves further let down by the implementation.  Strategically this matters not so much for those apps (though of course to the companies themselves it will feel like a kick in the ribs while on the floor) but instead for what it says about Facebook’s ecosystem and platform aspirations.  Though these apps are a miniscule detail in Facebook’s Socially Integrated Web Strategy, developers will be looking at their experience and trying to learn whether this is a precedent for how Facebook treats its developer partners or just a blip.  Facebook needs to ensure that it is the latter and that this is known clearly and widely.

For now, Facebook has momentum to spare and developers will willingly swallow the risk for a stab at reaching the largest single digital audience on the global web.  But Facebook’s Socially Integrated Web Strategy depends upon those developers helping ensure that momentum is maintained.  Long term Facebook needs the developers as much as they need it.  Facebook may be the future for now  but that confidence could be beginning to beget hubris.  Remember, MySpace used to be the future too.