Sicilian Musings

I’m currently on holiday in Taormina in Sicily for a couple of weeks and though I come here every year (my wife is Sicilian) I never cease to be amazed by just how different the profile of technology adoption is here compared to northern Europe.  Just trying to get online over the last couple of weeks has been a case in point.

I had a few pressing work tasks which I needed to do during my stay so I ensured I was well stocked up with credit on my USB modem.  Unfortunately the Italian network of my UK mobile operator didn’t seem to have read the script about discounted international data roaming fees and I managed to burn through 35 pounds of credit in 2 and a half days (which included 3 extended ‘help’ line calls – I use the term ‘help’ in the loosest possible sense – and getting a relative to buy more credit in the UK).  The fact that the download speed made a 56k modem look like Fiber just added to the pain.  Unlike my friends and family in northern Italy, the majority in Sicily don’t have home Internet connections so I have to resort to Internet cafés, the majority of which share one sub standard connection between a couple of dozen computers.  However this year I needed to connect my laptop directly and my normal Internet café of choice wouldn’t let me plug in my laptop directly.  Finally, I found one with Wi-Fi (just arrived this year) and got online.

It really shouldn’t be this difficult just to get online in the 2009.  Which got me thinking about the implications of these sort of technology hurdles on European digital content strategies. Taormina is no decrepit backwater, it’s a sophisticated and prosperous town, but the Internet just doesn’t feature that highly in most people’s priorities here.  Life functions perfectly well without it.  And sure, the Italians love their mobiles, but most of the people I know here use their phones to talk and text, not to download digital content.

So how do you reach would-be digital content buyers here?  You might argue that they don’t need to, that they’re still buying CDs and DVDs.  I’m afraid that not many people I know here buy much music anymore.  There are a couple of hardcore aficionados who I normally rely on for tips for new sounds, but even one of those (who’s actually an ex-minor Italian pop star) has stopped buying CDs.  Where’s he getting his music from?  He’s one of the few who has broadband at home and he got it mainly to download music and video from file sharing networks.  So file sharing plays the familiar role of the killer app for driving broadband adoption.

None of this is new of course, Europe is a diverse region of technology adoption, but what my experiences here have reminded me of is that headline figures about technology adoption hide the fact that sub regional adoption trends vary massively.  It’s all well and good saying that Italian broadband penetration is x%, but what is more important to understand is how adoption varies between Milan and towns in the south.  It’s simply not realistic to expect consumers in so many areas of Europe to be ready yet for paying for digital content.  They are however, easy and quick converts to file sharing.  We could debate the pros and cons of that equation, but it’s a fact.  Better to spend the time deploying compelling free and ad supported services which are genuine immediate alternatives to illegal downloading.

Future Business Models for the Pirate Bay and Historical Revenues

Yesterday evening I spoke with Hans Pandeya, CEO of Global Gaming Factory, the company that bought Pirate Bay.  I asked him a few specific questions about his plans for the Pirate Bay.

The plans revolve around building a new  peer-to-peer network from scratch, with a new application that uses smart peering technology to ensure bandwidth usage is as local as possible.   The intention is then to sell this localized peer based distribution capacity to ISPs (though I’m not quite sure why ISPs would buy back this bandwidth when it is theirs in the first place).

Mr Pandeya stressed his commitment to supporting rights holders’ interests and incentivizing users to download legal content.  The direct implication of incentivizing users of course is that they’ll get to chose from unlicensed content also, which suggests that the commitment to rights holders will fall far short of what they’ll need.

Besides likely rights holders problems, the other challenge will be to convince Pirate Bay users to download a new application to run on a new  and unproven network that at outset will have minimal content.

He also explained that he expects to generate strong ad revenues from the Pirate Bay website.  Yet the site, which he positions as a ‘search engine’ is a massive series of links to torrents which have been established in the Swedish court to contain extensive unlicensed content.  So either he removes these and loses his traffic, or he retains them and puts himself on a collision course with the rights owners.  Basically it looks like the Pirate Bay site could just be continuing as is with stronger and more robust financial backing.

My Pandeya was very bullish about the ad revenue potential of the site (though he insisted the peering business would be the main revenue source).  Based upon his calculations of Pirate Bay impressions and page views he expects the site to generate €40 million a month.   (FWIW those numbers feel high to me, but I’m not an online ad expert).  When I asked him what he though the Pirate Bay was currently earning he said he didn’t know because it had been ‘illegal’.  I found it hard to believe he will not have done the due diligence.  Indeed, to have such a strong sense of the inventory and audience of the site suggests he has in fact delved deeply.  So I pressed further, and eventually he said he thought that the Pirate Bay “probably” generated about €3 million a month in ad revenue, but that he “couldn’t know because it was illegal”.

Even if we say that Pirate Bay was earning a third of that, it still gives the site an annual income of €12 million, which doesn’t sit very well with the founders’ claims that it was not a strong revenue generator.  Indeed if you consider the upper end of Mr Pandeya’s estimates the Pirate Bay was a €66 million business.  Not shabby at all for a bunch of Robin Hoods, and far above the $1.2 million estimated in the trial.

Why Would Anyone Buy the Pirate Bay?

A small Swedish company Global Gaming Factory today announced the acquisition of the Pirate Bay.  The acquisition poses far more questions than it does answers.

The acquisition was for $7.7 million, which the founders described as “great bit underneath its value”.  Which is kind of interesting considering that they argued strongly in court that the Pirate Bay was not a cash cow.  Of course the fee neatly covers the fines $3.6 million handed out in the trial with over $4 million on top.  And it comes hot on the heels of the ‘bias’ claim against the judge being thrown out and the bid for a retrial being refused.  It isn’t clear whether GGF have acquired the liabilities of the Pirate Bay.  (When Roxio bought the assets of Napster it pointedly left the liabilities with Bertelsmann who then went on to face settlement fees with major record labels.)

GGF claim that they intend to launch “new business models that allow compensation to the content providers and copyright owners.”  This appears to involve some sort of supra-distribution model and GGF are at pains to stress they intend to compensate copyright owners.  Of course it is one thing to argue this and another to do it.  Normally in such situations there is a massive gulf between content owners’ valuation of their own content and that of software companies seeking to build business around it.  Also why buy a site that is diametrically opposed to copyright if you want to build a service which upholds copyright?

The history of file sharing networks and sites ‘going legit’ isn’t exactly a vibrant one:

  • Napster sold its brand and mailing list to Roxio.  As a file sharing network it peaked at over 20 million users, as a subscription service it has less than 5% of that.  And really the new business has nothing to do with the old one, nor its user base.
  • Grokster closed down in 2005 following legal action, stating that it would be back ‘soon’ with a legal alternative.  We’re still waiting.
  • iMesh re-launched, again after legal action, as a licensed service, with modest success.
  • Kazaa owners Sharman Networks settled with the music industry $100 million including provisions for launching a legal music service, which we still haven’t seen any sight of.

The trend is clear, and in many ways it is important that the message is clear that you do not get to the content licensing table by building an audience with unlicensed content.  (Though to be fair imeem did push the boundaries).

So why have GGF bought Pirate Bay?  All that Pirate Bay is is a list of locations of files.  It’s not a network, it doesn’t have content per se.  But it does have an audience. If they at some stage want to launch a licensed music service they have a number of problems:

  • I can’t see them getting licenses from the majors for a file sharing service (Play Louder have been admirably fighting this battle with little success for years)
  • If they do get licenses for some other form of music service they’re unlikely to be able to monetize that successfully with advertising given the current malaise that ad supported content finds itself in.  Not to mention the fact that Pirate Bay users are not the most attractive audience for many advertisers.
  • If they intend to charge they’ll have a minimal conversion ratio: Pirate Bay users are there for finding free content, plain and simple.

So what other revenue models are left?  There are a number of possibilities:

  • GGF’s CEO is doing this as a philanthropic act because he believes in the cause.  Though he asserts that he sees this as a viable business proposition.
  • Pirate Bay has other (cash?) assets that were not revealed in the court case.  The experience of Sharman Networks shows us that owners of file sharing properties tend to have incredibly opaque and convoluted business structure to obscure accountability and ownership.  I have no evidence that this is the case with Pirate Bay, instead I’m simply making the case that this has happened before elsewhere.
  • The last, and probably the most likely, option is that GGF will launch an adware business, building a client that tracks users’ behaviour and serves up ads based on context and behaviour, typically superimposed on publishers’ inventory.  This pretty much the Kazaa model.  The fact GGF have additionally bought a peer-to-peer technology company Peerilism points to this also, as does their current internet café ad business model.  The big issue here is around whether the application will run on other networks or a proprietary one.  If it is the former they simply won’t be able to meet content owners’ requirements and if it is the latter, do they really intend to block out all non-licensed content.

Returning to where I started, this acquisition leaves a lot more questions than it does answers.  The only thing that is clear is that the Pirate Bay owners, despite claiming to be modern day Robin Hoods have now become multi-millionaires, making them more like the rich Sheriff of Nottingham than the swashbuckling archer.

Virgin and Universal Announce Unlimited MP3 Subscription: First Take

Today Universal Music and UK ISP Virgin Media announced the launch of an unlimited MP3 subscription service.  Yes, you read correctly, ‘unlimited MP3’.  And, perhaps even more significantly this goes hand in hand with Virgin committing to a graduated response (i.e. Three Strikes and You’re Out) policy for music file sharers.    Universal and Virgin have come to the negotiating table with their highest stakes and in doing so each has got their respective Holy Grail.    And don’t underestimate how high those stakes are for each party – basically Universal and Virgin have each delivered as much as they have to offer and conceded as much as they can give: they’ve both played their Aces.  Once again Universal put themselves in the position of digital trailblazers, leaving the other majors to follow in their slipstream.

Also, there’s no coincidence about the timing of the announcement i.e. the day before the final Digital Britain report is published.  The graduated response approach runs counter to the more modest ‘technical solutions’ that the then Culture Minister Andy Burnham suggested the Digital Britain report will propose.  He even went as far as to say that the graduated response approach wasn’t workable.

But he also told the music industry and the ISP’s to fix their own problems rather than wait for the ‘heavy hand of legislation’.  Given that this is exactly what has happened, it will be interesting to see how the government responds.  Its also worth noting that the release is at pains to stress that disconnections will be temporary and that Virgin will not use its own traffic management technology to enforce the action.  Thus the ISP’s arguments that their traffic management technology isn’t well suited to dealing with individual accounts remain in play.

The service itself will come in two tiers: a premium tier which is the unlimited MP3 offering, in return for a 1 year broadband bundle subscription commitment, and a second lower tier that has limited MP3s.  Unlimited streaming is available on both also.  The 12 month MP3 model is what I’ve been advocating should happen with music subscriptions for some time now, and leaves Napster’s UK offering looking even more in need of fundamental revision.

The pricing of course will be key.  UK consumers have historically shown little appetite for premium subscription services: HMV and Virgin Megastores both tried and failed – though HMV is back for a second stab, Napster has failed to break out of a small niche, Wippit closed shop and Yahoo and Rhapsody didn’t ever bother to launch here.  Of course, none of those were as compelling an offering as this, and this is smartly targeted at households not individuals.  But pricing will be key.  Price it too highly and you’ll miss the disengaged music households this and just switch over already high spending ones.  Price it too low and CD sales will be cannibalized.

It will also be interesting to see whether this announcement means that the UK’s other major label backed unlimited MP3 offering Datz will be breathed new life.

Whatever the political fall out of this announcement, there is no doubting that this is a massive step forward and shows that where there’s a will there’s a way.  If the other majors come on board Virgin Media will have a market leading digital music service that will bring real value to their subscribers.  At the same time the labels will get a major ISP implementing a twist on their preferred anti-piracy measures without needing the government to do it for them.

Three Strikes: Two Strikes Out and Counting…

Today the French Constitutional Court threw out the controversial Hadopi bill, better known as the ‘Three Strikes’ bill due to the provisions for terminating Internet accounts of repeat file sharers.  The bill already fell at the first hurdle of the Parliamentary vote, requiring a redraft and revote.  Now with this development you could say it’s Two Strikes Out and counting for the Three Strikes bill.

This isn’t the end of the road by any means.  In fact there’s every chance it will end up implemented….some time.  And there’s the rub.  By the time this bill has cleared the successive challenges of domestic legislature, domestic courts, European legislature, European courts etc. the very nature of online piracy is likely to have morphed to such a degree that the Hadopi provisions could be left looking hopelessly outdated and insufficient.  This is in microcosm the history of file sharing: every time the industry finally catches up with file sharing via courts and legislation the problem has moved on.  This was exactly the process with Napster and Kazaa.

The danger with relying upon legislation and the courts to drive your business ends is that you lose control and become subject to others’ priorities and agendas, which are not always complementary to your own.  The bottom line is that it is always preferable to solve business problems with business solutions.  It is in the interests of music companies and ISPs alike to reach commercial solutions to their common-interest problems.

At last week’s Music Week conference the then Culture Secretary Andy Burnham (who is now tackling NHS waiting lists as Health Secretary) advised the labels not to rely up government to do their work, but to find common ground with the ISPs and push ahead with solutions.  His exact words were:

Don’t wait for the heavy hand of legislation, just do it.

The experience of the much maligned Hadopi bill to date is evidence that legislation alone cannot be relied upon to solve the problem.  It simply isn’t agile enough.  I will say that there remains a strong case for revising legislation to better protect intellectual property in the digital age.  So the legislative process is important, but it should be the foundation and the framework for commercial solutions, not instead of them.

Making Online Music Pay – Round Up

Firstly let me apologize for not having posted for a while on here, and thanks to the messages and emails from those prompting me to get posting again.  I’ve been snowed under with project work but normal service will now resume!

Today I ran a series of panels (well, a succession of thinly disguised vendor presentations) at Music Week’s Making Online Music Pay conference in London.  Here are my highlights of the day.

First up was Andy Burnham, the UK Secretary for Culture, Media and Sport.  I have to say I was really impressed by him, he came across as a genuine guy with a real interest in and understanding of the media business.  His speech was a master class in how to land a series of killer punches by nuanced implication.  He was keenly aware that the audience was hoping for some pointers on what the final Digital Britain report is going to look like.  He said he wasn’t going to be able to do so, but went on to give some pretty solid indications, largely by ruling out what wouldn’t be there.

He built up a case for broadband access being comparable to water and electricity as a basic necessity of modern day existence and cited his ideological belief that access to information was key to enabling the right of equality of opportunity.  So it was no surprise that he then explained he didn’t believe that the graduated response or ‘Three Strikes Approach’ would work, that it was “too abrupt” and that “you don’t go straight to a solution that cuts people off.”

But just as the head of the ISP association guy started to visibly lift and the shoulders of the label execs sag, he delivered this:

“One option we are considering is giving Ofcom (the telecoms regulator) reserve powers to compel ISPs to apply technical measures to limit and restrict activity [of file sharers]”,

So in short, ‘Three Strikes You’re Out’ is, well, out, and ‘Speed Bumps’ are in.

As with any good compromise both sides will doubtlessly be dissatisfied with the solution, but my first instinct is that this is a workable, realistic, solution that should deliver results.  Assuming of course (and this is crucial) that these measures are backed up with compelling legal services for the ISPs.  The BPI’s Geoff Taylor suggested that ISPs may be able to get compensated for converting file sharers to legal services.  This is innovative thinking that shows understanding of the need for their to be meat in the game for the ISPs (who when it comes down to it are facing a similar race to the bottom as the labels are).  Here’s a left field thought (well, wild hypothesizing): Spotify’s long term future road map incorporates MP3s and the viability of the business model is defined by becoming part of subsidized ISP bundles.  Just a thought….

Back to the real world and Andy Burnham.  He made an apparently harmless well meaning comment that the debate needs to be “internationalized” and that “we need to find the right balance and then internationalize that”.  Which is all well and good, but when coupled with his comments about graduated responses effectively dismisses the recently pass French ‘Three Strikes’ legislation as bunkum.  What we might be seeing here is the start of a political digital face-off between France and the UK.  France used its Presidency of the EU to drive the debate on defining European policy on ‘creative content’ in the digital arena.  It looks like the UK government might be planning to use the “Digital Britain” report as a blueprint for a “Digital Europe”….and perhaps beyond.

Geoff Taylor also asked Andy Burnham whether the government was still committed to reducing music file sharing by 70-80% within 3 years, now that we’re 1 year into that commitment.  The response was that the government would absolutely “not retreat”.  Something pretty drastic is going to have to happen in the next 24 months to deliver those results.  More realistically the government will change and targets with it.

The following panel took the discussion a bit farther though back within the more familiar realms of debate that have characterized the MOU-related process.  The Music Publishers Association’s Stephen Navin was nothing short of hilarious (though insightful also).  He delivered my favourite quote of the day (in the context of device manufacturers and digital content:

“The fine wines of Bordeaux are not just content for the glass manufacturers.”

He also highlighted the different state of affairs for the music publishing business compared to that of the record labels, expressing his continual surprise at

“spending 95% of our time making 5% of our business pay.  The business of making music available is still a buoyant world.”

In my first panel we had representatives of many of the current bright hopes of digital music (Spotify, Last.FM, We7, 7Digital).  Though each of the ad supported guys tried to paint a bright picture for the rude health of ad supported, they each in fact highlighted its failings, albeit unwillingly and by implication rather than directly.  For example Last.FM talked about the hundreds of markets which had now become subscription markets i.e. the ad supported business just didn’t work in those territories.  When I pressed on this issue Last.FM’s Miles Lewis cited the example of Poland, which had accounted for about 10% of their streams but where the “online ad market was worth about three pence” and the affiliate market even less.  When I asked whether this was a short term necessity or long term strategic shift he said that it was likely to be the latter unless the online ad market suddenly exploded.  Similarly Spotify’s Paul Brown emphasized the importance of their premium models succeeding and spoke about the mobile offering which will likely include 30 minute stream caching.  (Which by the way I’ll be interested to see if they can convince rights holders that this should be considered as stream rather than a download.)

Joining the dots, the consensus from those right in the mix is that the dynamics of ad supported digital music still need further revision if this second wave of ad supported services isn’t to go the same way of Spiral Frog.

I had a few people come up to me and question why I hadn’t given my panelists a harder time with more probing questions.  They had a point.  On reflection perhaps I’m feeling empathy for them in these difficult times? Either way, that’s no excuse.  I’ll be back to my old probing ways at the next conference. Thanks for putting me back on course!

Oh, and Apple hardly got a mention….even though they account for 75%+ of online digital revenues….times are a changing.

Comes With Music Finally Gets Its Route To Market

Orange today announced they will be ‘exclusively’ providing Comes With Music on the Nokia 5800 in the UK.  Finally Nokia’s Come With Music gets the route to market it needs.

I’ve long been a strong advocate of CWM and that belief remains intact despite reportedly poor sales to date.  Nokia always needed strong channel partner participation to make the service a success. Without the route-to-market, marketing support and – most crucially – subsidy support that the operators provide CWM is left looking like an overpriced, under featured oddity.  But with the support of an operator it comes into its own.

Orange packages start at just 25 pounds a month.  For this consumers not only get a decent number of voice minutes and texts, but they also get the handset for free and unlimited music that they get to own for ever.  That is a compelling proposition and offers genuine value for money. Unsubsidized, the cost in Italy for the same handset and music service, but without a voice and text tariff is just short of 500 Euros.  The comparison is stark and is central to why CWM has under-whelmed thus far.

CWM is an exciting product because, when packaged correctly, looks and feels like free to the consumer.  In this context DRM restrictions and a phone that falls short of iPhone sexiness are entirely tolerable.  But with a premium price point they become non-starters.

CWM, along with the likes of Spotify, We7, Last.FM and imeem, is one of the key weapons that the music industry has in its armoury to fight free with free itself.  CWM may not be free, but packaged like this it ‘feels like free’ and that’s enough to have real potential of pulling young music fans away from illegal downloading on a scale that hasn’t yet been achieved.

The Pirate Bay Ruling: What Does it Actually Mean for the Music Industry?

The problem with mixing lawyers and legislators with business is that the results can be unexpected and inconvenient. With the Pirate Bay case there was always a good chance for the music industry that the ruling would at best be short of definitive.

However the music industry has come out of this with a ruling that is more positive for them than many had been expected. Behind the technicalities of the legal arguments, there were two basic principles underpinning the case:

  • the Pirate Bay actively provides a service to help consumers download content without the express permission of the copyright owners
  • the record labels have internationally recognized ownership of the copyright and the right to exploit it

There are some interesting implications from this ruling, most notably the question of whether Google could now be held responsible for posting links to content that does not have copyright cleared?

Though the music industry have ultimately won (subject probably to an appeal) the ruling is not going to stop file sharing, nor have much long term impact  on file sharing activity.  So why they take on a case that delivered so little and had such a high risk of what would have been very public failure?

The music industry was always stuck between rock and hard place on this one. They couldn’t turn a blind eye because the Pirate Bay were positioning themselves as 21st Century digital Robin Hoods, stealing from the ‘fat cat media companies’ and redistributing the wealth to the ‘poor consumers’. Their provocative message to the record labels was essentially “Come and get us if you think you’re hard enough”.

The history of file sharing is of course littered with the detritus of legal action against the networks and even the users themselves. But in most markets file sharing has grown year upon year. By the time that each major file sharing destination is finally closed down by the music industry the file sharing masses have moved onto the next big thing. Whatever the ruling would have been, file sharing wouldn’t have gone away. In fact the problem is worse than that, the new additional threat of non-network file sharing (via Instant Messenger, email, blogs, newsgroups, iPod ripping) is growing strongly and becoming firmly established. And then there’s also a whole mass of anonymous networks lurking in the wings.

So ten years on from the launch of Napster why is the music industry still suing the file sharing destinations? The simple answer is because they have to be seen to. It’s the same reason that customs officials and police continue to fight illegal trafficking of drugs and other contraband despite doing little more than scratching the surface of the problem. If the music industry isn’t seeing to be taking action then it effectively turns on a green light to the illegal sector.

The good news from the music industry’s perspective (and indeed from the consumers’ one also) is that the industry is well into the process of fighting free not just with the courts, but also with free itself.

There is a poetic symmetry to the fact that Sweden is home to the defining icons of both sides of the free spectrum: the Pirate Bay and Spotify. With services like Spotify the music industry is giving consumers genuine compelling, and crucially free, alternatives to illegal file sharing.

So although the ruling may not be exactly to the music industry’s taste, out of the ashes of the case the parallel free universes of Pirate Bay and Spotify will continue to plot their disparate courses. The music industry can taken comfort from the knowledge that the latter is gaining genuine momentum. Free may just succeed where 10 years in the courts failed.

Spiral Frog R(edd)IP?

IMPORTANT DISCLAIMER: I’ll state up front that I have no privileged information on the current financial situation at Spiral Frog and I’m only going to focus here on the strategic positioning of the music service. This strategic analysis stands, whatever the outcome of Spiral Frog’s current management situation.

There have been press reports concerning Spiral Frog’s difficulties for some time now and it seems that things are finally coming to a head (see this story for more details).


If Spiral Frog is to close its doors, it’ll be a shame but at the same time not a huge surprise: Spiral Frog would be paying the price for first mover advantage. The history of technology is a path littered with the corpses of companies that had good ideas too soon. Most often it is the early followers who are the successes, learning from the mistakes of the pioneers. Apple is the shining example in the digital music space. Apple was far from the first to sell music digitally. Instead Apple watched the likes of OD2 and MP3.com make their respective mistakes and acted, still quickly enough to be in pole position just as the race was really getting started.

Spiral Frog here has played the role of OD2. They had the right idea, but were too early and didn’t execute successfully. It was in August 2006 that Spiral Frog burst onto the scene with a high profile announcement regarding a licensing deal with Universal Music, and I had high hopes for it and Qtrax. (This was incidentally the first high-profile manifestation of the rebirth of UMG as the preeminent digital innovator major).

Spiral Frog, and indeed Qtrax, had the vision to see that the music industry would soon need a digital Plan B. That paid download sales were not going to get anywhere close to keeping pace with the rate of decline of CD sales. They also knew that young file sharers were never going to suddenly switch in their tens of millions to becoming iTunes buyers. So ad supported, free music seemed like a perfect fit. And it is. Unfortunately Spiral Frog asked the right questions but didn’t provide quite the right answers.

Ultimately Spiral Frog’s hop was weighed down with DRM temporary downloads that didn’t work with iPods, difficulties in getting all content owners on board, and license fees that challenged profitability. That’s not to say Spiral Frog didn’t have their successes (they registered 1 million unique visitors in early 2008) and equally it’s possible that there is life in the old frog yet. But any future success will depend upon significant revisions to their business model.

Ad supported is going to be a corner stone of digital music, but the next wave of services that are leveraging this business model are doing so by creating business models that are more financially viable and don’t try to create a watered down version of the iTunes experience, which in itself is a costly thing to do from a licensing perspective. So look to the likes of Last.FM, imeem, Spotify and We7 as the early followers who will reap the benefits of Spiral Frog’s hard learned lessons. In fact We7 have really put those lessons into practice, moving from an ad supported download model to a predominately streaming model, in the process acquiring half a million users in the UK. The added irony for Spiral Frog is that the growth of the mobile Internet is enabling those PC streaming services to get portability without needing downloads.

Spiral Frog played a crucial role in driving the ad supported music sector forward, unfortunately it was too much too soon.

Spotify, Scratching Beneath the Surface of the Numbers

The Financial Times today report that Spotify has 250,000 UK Internet Users have downloaded the streaming music application, and 800,000 worldwide. Not bad for an application which has only recently just stopped being invite-only. I’ve posted before on why Spotify has been so successful, now we have some numbers to measure that success by. First of all let’s assume that 98.5%+ of those 800,000 are free, ad supported customers, so I’ll treat the reported numbers as being largely synonymous with free. I invite Spotify to challenge that assumption, but I think it’s a relatively safe bet.

  • 250,000 is more than 4 times higher than the premium subscribers Napster has managed to accumulate in the in the UK after years of trying. That’s significant because the free Spotify service effectively offers just what Napster’s 9.99 tier does but with much weaker editorial and programming. This is proof positive of why being free has been at the core of Spotify’s success to date. All the ease of use, deep catalogue, smart streaming technology and clever use of pyramid-selling peer promotion would have come to naught if it had just been for the 9.99 tier. And this is why Spotify have to realistically build their business for being an ad supported business not a premium subscription business.
  • 250,000 may be bigger than Napster, but Napster was never anything more than a niche player in the UK. As a share of the total UK paid digital buyer market Spofity is less than 5%, as a share of the total UK digital music audience, less than 2%. So 250,000 is a great first step, but it’s not at ‘taking over the world’ proportions yet.
  • 250,000 means that the UK accounts for nearly a third of the total 800,000, with each of the other 5 markets accounting for an average of 110,000. As much as the Brits do really like Spotify, I’d expect France and Spain to be really strong markets too, especially Spain. Both are big free-music markets. In fact as a label exec I’d be a little concerned that Spotify was doing so well in the UK (the strongest European premium digital music market) and hoping it doesn’t cannibalize iTunes sales.
  • Let’s generously assume that only 95% of the 800,000 are free: compared to those users being 9.99 paid subscribers, that’s a shortfall of just under 100 million euros annual subscription revenue that needs to be made up in advertising. I admit the comparison is a bit disingenuous given the explicit tactic of deploying a free tier to promote the service. But Spotify must be careful not to expect to convert the majority of those to paid subscriptions. They’ve cast their net among free music fans and they’ve reeled in a nice catch of freeloaders who love their music but predominately won’t pay to stream it. Charging for must-have added functionality, such as mobile, might be an avenue, but Last.FM, Pandora, imeem etc have all set the standard of mobile support being free. So charging for mobile would arguably be as damaging to their growth potential as if they’d only launched with a premium offering.
  • Finally the numbers must be caveated with the fact they only refer to downloads, not active usage.

So a solid start for Spotify, but the real test is building a vibrant business around free music and kicking it towards the mainstream. If anyone can do that right now, it’s Spotify. But they need to strike whilst the iron is hot before they start getting bogged down with the every day tedium the rest of the digital music market has e.g. directly competitive services, disgruntled customers, differentiating from file sharing, competing with Apple etc.

UPDATE: Spotify have just announced that they passed the 1 million users mark.