Music Subscriptions Passed 100 Million In December. Has The World Changed?

In streaming’s earlier years, when doubts prevailed across the artist, songwriter and label communities, one of the arguments put forward by enthusiasts was that when streaming reached scale everything would make sense. When asked what ‘scale’ meant, the common reply was ‘100 million subscribers’. In December, the streaming market finally hit and passed that milestone, notching up 100.4 million subscribers by the stroke of midnight on the 31^st December. It was an impressive end to an impressive year for streaming, but does it mark a change in the music industry, a fundamental change in the way in which streaming works for the music industry’s numerous stakeholders?

Streaming Has Piqued Investors’ Interest

The streaming market was always going to hit the 100 million subscriber mark sometime around now, but by closing out the year with the milestone it was ahead of schedule. This was not however entirely surprising as the previous 12 months had witnessed a succession of achievements and new records. Not least of which was the major labels registering a 10% growth in overall revenue in Q2, driven by a 52% increase in streaming revenue. This, coupled with Spotify and Apple’s continual out doing of each other with subscriber growth figures, Spotify’s impending IPO and Vevo’s $500 million financing round, have triggered a level of interest in the music business from financial institutions not seen in well over a decade. The recorded music business looks like it might finally be starting the long, slow recovery from its generation-long recession.

Spotify Continues To Set The Pace

Spotify has consistently led the streaming charge and despite a continually changing competitive marketplace it has held determinedly onto pole position since it first acquired it. Even more impressively, it has also maintained market share. According to data from MIDiA’s Music Streamer Tracker, in Q2 2015 Spotify’s share of global music subscribers was 42%, H2 15 41%, H1 16 44%, H2 16 43%. Not bad for a service facing its fiercest competitor yet in Apple, a resurgent Deezer and an increasingly significant Amazon. Spotify closed out the year with around 43 million subscribers, Apple with around 21 million and Deezer with nearly 7 million. 2^nd place is thus less than half the scale of 1^st, while 3^rd is a third of 2^nd place. Meanwhile Apple and Spotify account for 64% of the entire subscriber base. It is a market with many players but only 2 standout global winners. Amazon could change that in 2017, largely because it is prioritising a different, more mainstream market (as long as it doesn’t get too distracted by Echo-driven Music Unlimited success). Meanwhile YouTube has seen its music streaming market share decline, which means more higher paying audio streams, which means more income for rights holders and creators.

A Brave New World?

So far so good. But does 100 million represent a brave new world? In truth, there was never going to be a sudden step change but instead a steady but clear evolution. That much has indeed transpired. The music market now is a dramatically different one than that which existed 12 months ago when there were 67.5 million subscribers. Revenues are growing, artist and songwriter discontent is on the wane and label business models are changing. But 100 million subscribers does not by any means signify that the model is now fixed and set. Smaller and mid tier artists are still struggling to make streaming cents add up to their lost sales dollars, download sales are in freefall, many smaller indie labels are set to have a streaming-driven cash flow crisis, and subscriber growth, while very strong, is not exceptional. In fact, the global streaming subscriber base has been growing by the same amount for 18 months now: (16.5 million in H2 2016, 16.5 million in H1 2016 and 16.4 million in H2 2016). Also, for some context, video subscriptions passed the 100 million mark in the US alone in Q3 2016. And streaming music had a head start on that market.

At some stage, perhaps in 2017, we will see streaming in many markets hit the glass ceiling of demand that exists for the 9.99 price point. Additionally the streaming-driven download collapse and the impending CD collapses in Germany and Japan all mean that it would be unwise to expect recorded music revenues to register uninterrupted growth over the next 3 to 5 years. But growth will be the dominant narrative and streaming will be the leading voice. 100 million subscribers might not mean the world changes in an instant, but it does reflect a changing world.

Experience Should Be Everything In 2017

 

2017 is going to be a big year for streaming. Spotify will likely IPO, paid subscribers will pass the 100 million mark in Q1, playlists will boom. 2017 will build upon an upbeat 2016 in which the major labels saw streaming drive total revenue growth. This stirred the interest of big financial institutions, companies that had previously avoided the music industry like the plague. These institutions are now seriously assessing whether the market is finally ready to pay attention to. The implication of all of this is that if Spotify’s IPO is successful, expect a flow of investment into a new wave of streaming services. But if these new services are to have any chance of success they will need to rewrite the rules by putting context and experience at the centre of everything they do.

Why User Experience Often Ends Up On The Back Seat

Putting experience first might sound like truism. Of course, everyone puts user experience first right? Wrong. You may be hard pushed to find many companies that do not say that they put user experience first, but finding companies that genuinely walk the talk is a far harder task. Just in the same way that every tech company worth its salt will say they are innovation companies, only a minority do genuine, dial-moving, innovation. Prioritising user experience is one of those semi-ethereal concepts that may be hard to argue against in principle, but that is much more difficult to actually build a company around. Why? Because the real world gets in the way. In the case of music services ‘the real world’ translates into (in no specific order): catering to rights holders’ requirements, investing in rolling out to new territories, paying out 81% of revenue to rights holders on a cash flow basis, spending on marketing etc.

The distinct advantage that the next generation of streaming services will have is that they will sit on the shoulders of the streaming incumbents’ innovation. Instead of having to learn how to fix stream buffering, drive compelling curation, make streaming on mobile work and define rights holder licenses for freemium, they can take the current state of play as the starting point. They are starting the race half way through and with completely fresh legs. They come into the market without the same tech priorities of the incumbents and also without any of their institutional baggage (baggage that, whether they like it or not, shapes world views and competitive vision).

Streaming Music Is Not Keeping Digital Pace

During the last 5 years, users’ digital experiences have transformed, driven by apps like Snapchat, Instagram and Musical.ly. Video has been at the heart of most of the successful apps, as has interactivity. Music services though have struggled, not only with how to make video work, but also with how to give their offerings a less 2 dimensional feel. They have lagged behind in the bigger race. For all of the undoubted innovation in discovery, recommendation, personalization and programming, the underlying streaming experience has changed remarkably little. We are still fundamentally stuck in the music-collection-as-excel-spreadsheet paradigm. Underneath it all is the same static audio file that resided on the CD and the download. Granted, there have been some major improvements in design (such as high resolution artist images, full screen layouts and strong use of white space). Now though, is the time to apply these design ethics to streaming User Interface (UI) and User Experience (UX).

Successful (non-music) apps are multidimensional, highly visual and often massively social. These are the UX and UI bars against which streaming services should benchmark themselves, not how other streaming services are doing. Of course, a key challenge is that music in not inherently a lean forward, visual experience. Most people want much of their listening time to be lean back, without interruptions. Nonetheless, Vevo and YouTube have shown us that there is massive appetite, at truly global scale, for lean forward, highly social, visual music experiences.

Fixing A Plane Mid-Flight

The streaming incumbents could all do this, but they will be at distinct disadvantage compared to potentially well-funded new entrants. It is no easy task to refit a plane mid-flight. Also, Spotify, Deezer and Napster are built on tech stacks with origins more than a decade old. All have made massive changes to those original tech stacks (Spotify in particular, shifting from a monolithic structure to a modular one) but in essence, all these companies were first built as desktop software providers in an era when Microsoft and Nokia were still technology leaders. They have adapted to become app companies but that change did not come naturally and took a huge amount of organizational discipline and resource. This next market phase will require exactly the same sort of discipline, but more effort and at a time when competition is fiercer and costs are higher.

Streaming Services Need To Know Who They Are Really Competing With

The streaming services might think that they are competing with each other but in reality they are competing in the digital economy as a whole. Their competitors are Snapchat, Instagram and Buzz Feed. Right now, music listening accounts for 36% of consumers’ digital media time but that share is under real threat. Over the course of the millennium, music has relied increasingly on growth in lean back environments and contexts. The rise of listening on the go via MP3 players and then smartphones created more time slots that music could fill, while media multitasking has been another major driver of listening. All of this works well when whatever else is going on does not require the listener to be using their ears. The rise of video is, paradoxically, creating more competition for the user’s ear. Even though we are seeing the 2^nd coming of silent cinema with social video captioning, there are many more calls to action for our eyes and ears. Even a Facebook feed 24 months ago would have been something that could in the large be safely viewed in silence. Now it is full of auto playing videos, willing the user to unmute. As soon as s/he does so the music has to stop. On video-native platforms like Snapchat the view is even starker for music. Killing time in the Starbucks queue is now as likely to involve watching a viral video as it is listening to a song.

Thus streaming music has to create a user experience renaissance, not just to keep up with contemporary digital experiences but in order to ensure it does not lose any more share of digital consumers’ consumption time. This is the new problem to fix. The Spotify generation fixed buffering and mobile streaming, the Apple Music generation fixed discovery, the next generation will fix UX. Just as Apple Music and Google Play Music All Access were able to skip the first lap of the race, launching with what Spotify and co took years to develop, so the next generation of streaming services, when they come, will take all of the recent innovation playlists, curation and user data analysis as the blank canvas. Which in turn will force the incumbents to up their game fast. Until then, the streaming incumbents have an opportunity to get ahead else get left behind.

10 Thoughts On YouTube Music Key

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

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

Google’s Acquisition Of Songza And ‘Fixing Discovery’

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

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

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

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

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

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

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

How The iPad May Help Soften The Decline Of The Download

In this previous post I outlined how the rise in mobile app spending is directly cannibalising iTunes music spending.  That decline was only a few percentage points in 2013 because of a confluence of factors, not least the fact that the US download market (Apple’s biggest) only fell by 3% in 2013 while the UK (another key Apple market) grew by 3% and growth also came in other major music markets and a bunch of emerging markets with scale. Throughout the course of 2014 downloads however will probably decline more sharply due to both app competition and also to the fact many of the highest spending download buyers are now subscription service customers.  But there is a slither of light for the download market….the iPad.

Apple’s customer base has changed a lot over the years.  Once being an Apple customer meant being at the bleeding edge of innovation in consumer technology.  Now it is a much more mainstream user base that in turn compels Apple to innovate at a pace appropriate for their more timid tastes.  The evolution of the iPad customer base followed a similar path: once the device of the true Apple aficionado the iPad quickly developed a distinctly populist appeal, especially the iPad Mini.

The iPad Is An iTunes Beachhead Among Android Users

But what is most interesting about iPad owners from a music industry perspective is that so many of them are Android phone users, 32% of them to be precise (see figure).  The iPad is acting as an iTunes beachhead among Android phone users.  It is a less surprising trend than might at first appear because Tablets and smartphones have highly distinct purchase consideration cycles and retail chain dynamics.  A smartphone is most often intimately tied to a mobile carrier relationship and the sales process will have as much to do with what device a carrier is pushing as it will with consumer preference.  A tablet though is, most often, not tied to a carrier and the purchase consideration cycle is instead much more about aspiration and desirability.  Other tablets might beat the iPad in terms of price and specs, but the iPad is the aspirational tablet.

The iPad Mini Effect

The trend is even more pronounced among iPad Mini owners: 48% of them are Android smartphone users, highlighting the success of this SKU to reach new consumer segments.  Meanwhile a whopping 68% of iPad Intenders – i.e. consumers that plan to buy an iPad – are Android smartphone users.  Although this figure has to be discounted to account for aspiration rather than likely intent, the directional trend is clear: Android smartphone users are a major share of iPad owners and iPad Intenders.  With all the perpetual talk of who will win the smartphone wars the iPad’s ability to grow Apple’s customer footprint almost goes unnoticed.  The fact 57% of iPad Mini customers are female indicates just how good a job the device does of reaching beyond the male dominated early adopter niche.

Because an iPad customer is also inherently an iTunes user significant opportunity exists for content providers.  For all Google Play’s valiant efforts – and extensive marketing spend – no one else manages to get people to buy music downloads the way Apple does.  More Android customers becoming iTunes users via the iPad presents the opportunity to grow the installed base of music download buyers.  And there are encouraging indicators: only 26% of iPad customers do not buy music, compared to 49% of all consumers and 47% of overall Android smartphone users.

iPad Owners Want Apps Too

But before we get too carried away with how a new wave of iPad owners are going to save the music download sector we also need to consider why consumers are buying these devices and what use cases they best serve. The fact they have a tablet indicates they are at the more sophisticated end of the Android phone user base so they probably already use their Android phone for listening to music on.  An iPad is a device purpose built for web surfing, video viewing and mobile app usage.  So it is to be expected that the lion’s share of content spending from these new iTunes converts will be on apps.  Music spending will however be a part of the mix and thus we can expect the influx of new-to-Apple iPad owners driving new music download spending that while it may not be enough to counteract the bigger decline it will help slow it.

Google Hits Play On Subscriptions

As expected Google just announced their music subscription service: Google Play Music All Access.  To cut a not-so-long story even shorter, it’s another $9.99 streaming subscription service.  To be fair it looks like a solid offering with clean, mobile optimized flat design aesthetics and some nice features, including:

• ‘radio without rules’: fully editable auto-programmed radio based on tracks your listening to
• blended algorithmic and curated programming
• 30 days free trial
• seamless integration with the cloud locker service

The locker service integration is a great move and transforms a relatively isolated product concept into a natural extension of the music experience.  Of course locker services are a transition product aimed at helping consumers migrate from the ownership mindset to remote access, so the life cycle of the product is inherently limited.

The ‘uniquely Google’ recommendations and discovery are designed to ‘know exactly what you want’.  The proof of the pudding will be in the eating, but there is a risk of creating an ever shrinking filter bubble where the range of recommendations narrows the more the service learns about you.

A Great v1.0 But….

Make no mistake, it looks like a great version 1.0, streets ahead of where its peers were at 1.0.  But is it enough?  There are many things that Google could have done to stand out, including innovative pricing, Google+ and YouTube integration, a Motorola device bundle etc.  But of course Google never needed to push the envelope on this one.

The streaming market is only just getting going with 20 million global paying subscribers in 2012 paling compared to Apple’s half a billion iTunes accounts.  Streaming and subscription accounted for just 20% of global digital revenues in 2012 and only 8% of US digital revenues.  So Google’s view, correctly, is that this is a market waiting to happen, so focus on refining the model rather than reinventing the wheel.  That’s exactly what Apple did in 2003 when it launched the iTunes Music Store.  The market was pretty crowded with download stores back then, but how many people remember any of them now?

But that’s not to say though that Google is going to do for streaming what Apple did for downloads.  In fact it faces a number of key challenges:

• Don’t pay won’t pay? Google’s consumer base is predominately built around ad-funded free access and associate Google with free. Even though it will not be offering a free tier, Google still face the freemium challenge of convincing swathes of free users that they should pay for something.  By contrast Apple has the largest single addressable audience of paid content consumers in the globe.
• Paid subscriptions don’t drive ad revenue: for all of Google’s desire to diversify its business and revenue streams, advertising pays the bills. Whereas initiatives like Android, Google+ and YouTube all help drive advertising, premium subscriptions do not. And given that premium subscriptions are a low margin business, the profit rate Google earns from subscription services will be less than it gets from ad supported consumers, even if total ARPU is higher.  So there seems little reason for All Access to become a strategic priority for Google.
• $9.99 is not a mass market price point: Google’s biggest asset for the labels is its unrivalled scale and reach, the potential to take digital music to the mainstream. But 9.99 is not a mainstream proposition, it is in fact what the top 10% of music buyers spend in the UK.  Spotify et al have done a great job of engaging the higher spending music aficionados, but there is a finite pool of them, especially in the increasingly crowded US market.  Unless Google plans on stealing everyone else’s subscribers it is going to find mid term growth potential limited (though expect some near term surge from pent-up demand among Google aficionados).
• Balkanized organizational siloes: on paper Google has the most fantastic combination of music service assets (Play, YouTube, Google+, Motorola, Android etc.).  Tie all of those assets together into a 360 degree music service and you have a world beater on your hands.  But Google can’t. It can’t because these business units operate so autonomously and because each one has business conflicts and commercial constraints that prevent them from being fully unified.  For example, ‘doing an Apple’ with Motorola and turning it into a closed Google Play ecosystem would alienate Android partners.  While YouTube’s music licenses are wholly different and distinct from Google Play licenses. 

 What’s In A Name?

Let’s assume that Google has got an ambitious roadmap for All Access that will include innovation on price, product and channel, perhaps even rolling version 2.0 within 6 to 9 months.  Even then, all of the above still apply, and it is the organizational challenge that clips Google’s wings the most.  Even the elongated name hints at the organizational quagmire: Google Play Music All Access. Doesn’t roll off the tongue in the way Spotify, Deezer, Rhapsody or Rdio do does it?  ‘All Access’ is the service, ‘Music’ is the division and ‘Play’ is the strategic overlay and of course ‘Google’ is the company.  Just to get to where it has, All Access has had to coalesce numerous internal Google fiefdoms.

Google is Becoming Microsoft

Google is beginning to look for music what Microsoft did 10 years ago.  Up to and beyond the launch of the iTunes Store everyone expected Microsoft to be the dominant player.  It held most of the cards in the deck, including the industry standard media player and DRM system.  Then along came Apple with the aces.  Try as Microsoft might to compete, it simply couldn’t get over itself.  It couldn’t pull together the disparate business units that needed to cooperate and it was scared of harming other revenue streams and relationships. Microsoft feared that if it pushed too hard with its own service it would alienate the business partners that relied on WDRM for their music services.  All this begat strategic paralysis.  Much the same is happening to Google.  Fear of alienating Android partners precludes them from doing-an-Apple with Motorola (which I suggested they should do).  Also, pulling together YouTube, Google+ and Android into the All Access mix appears to be a step too far.

Google is at a similar stage of its corporate evolution as Microsoft was ten years ago.  It is a big company that is still learning how to actually be a big company.  Before Google can fulfill its vast digital music potential it needs to learn how to get the best out of its organizational structure first.

Here’s looking forward to version 2.0.

The Challenges of Becoming a Subscription Business

Subscriptions are still only a small share of the music market but their time is coming. That time is long over due (I and my former Jupiter colleagues David Card and Aram Sinnreich first started making the case for subscriptions back in 2000) and a slew of big players are getting ready to play ball now that subscription look ready for primetime.  But they will find it far from plain sailing.

Spotify, Deezer, Rhapsody, Muve, Rdio, WiMP etc. have done much get the market moving and although there are still major challenges ahead (e.g. 9.99 not being a mass market price point) a host of new entrants are poised to make their moves.  The much mooted / touted (delete as appropriate) Daisy is one of the more eagerly anticipated ones (see my take here) but focus has recently turned to potential moves from big players like Amazon and Google, while Apple’s arrival in the subscription market is becoming Godot-esque.

All of these companies bring fantastic assets to the subscription market –scale being the most important – but they will all find the subscription transition difficult.  However good their technology assets, however big their marketing spend, however big their customer base, none of these companies have subscriptions running through the DNA of their products nor, most importantly, their customers.  Here are the key challenges each will face:

• Apple: Apple was the music industry’s digital beachhead but now Apple has a problem.  Downloads were a transition strategy with one foot in the digital future and one foot in the analogue past.  Apple has built a paid content customer base founded on ownership, a la carte transactions and downloads.  Meanwhile it tiers its hardware pricing by hard-drive capacity.  In some ways this latter point matters most: in the streaming era consumers download less which means there is less need for higher capacity devices, which in turn means that demand for the higher priced, higher capacity devices tails off.  Apple can use subscriptions to address this issue by creating bundles e.g. iPad Gold, a $200 price premium with device-lifetime access to an iTunes music, video and Apps subscription.   This sort of tactic will be crucial for Apple because the concept of digital content subscriptions is alien to the vast majority of its 400 million iTunes customers.  If anyone can make subscriptions work, it is Apple – and I believe they will – but currently its customer base, hardware pricing and content offerings (iMatch and movie rentals excepted) are simply not the right foundations for building a subscription service on.  A lot needs to change before Apple and its customers are ready for subscriptions.
• Amazon: Amazon’s content-device strategy is the mirror opposite of Apple’s: Amazon is selling devices to help sell content. Amazon needs to be a key player in the music and video business because these low price point items are the bottom rung on the purchase ladder that Amazon hooks new customers in with.  Subscriptions though, are high consideration items.  Amazon is hoping it can nudge customers up to monthly subscriptions in the same way it can nudge customers from a CD to a laptop.  But it isn’t the same transition.  Most Amazon customers have a lot of one-night stands with the retailer rather than a relationship: it is where they go to get stuff, not to immerse themselves in experiences.  Of course Amazon is trying to change that – particularly with video – but it requires a fundamental change in the relationship with its customers.  As with Apple, a device / subscription bundle strategy will deliver best near-term results.
• Google: Google has the most diverse set of assets at its disposal. In YouTube it has the most successful streaming music service on the planet and in Google Play it has, well, not the most successful digital content store on the planet.  Launching a subscription service on YouTube is an obvious option and the sheer scale of YouTube means that even with highly modest conversion rate it can easily become a major player very quickly.  But the fact that YouTube is free is core to why it is so popular, so the vast majority of its users have little interest in paying fees.  Thus Google will have to ‘think different’ to make subscriptions work on YouTube.  But where Google could really make the subscription play work is, well, on Play.  Not Play by itself though but instead as a tightly integrated subscription – device ecosystem with Motorola.  A while ago I wrote that Google ‘needs to do an Apple with Motorola’. It still does, but it should do so in a manner fit for the cloud era by hard bundling a Play subscription service into Motorola handsets. (You should be spotting the theme by now).
• Samsung / HTC / Nokia et al. By this stage any readers from a non-Apple and non-Motorola handset business might be beginning to wonder how on earth their companies are going able to squeeze themselves into the subscription equation.  It is a very good question.  Most mobile handset companies are at a crucial juncture, they now face the same problem as ISPs did in the mid-2000’s: unless something changes mobile handset companies are going to become ‘dumb devices’ just as ISPs ‘became dumb pipes’.  Nokia recognized this earlier than most but got the solution wrong – or at least the implementation – with Ovi and is slowly clawing its way back.  But all of them have a huge task ahead them if they are to avoid becoming helpless observers as other companies build robust digital businesses on the back of their hardware. If they can harness the carrier billing relationship then they have a truly unique asset for building a music subscription market, but that is much, much easier said then done (remember Comes With Music?).

All of these business have the potential to be successful subscription businesses but none of them will find it an easy transition and none of them are guaranteed success.  Not only will they have to transform their products, pricing and customer bases, but they will also have to develop entirely new business practices.  To some degree or another, all of these companies have to make the transition from being retail businesses to being subscription businesses.  Being in the subscription business is all about managing churn.  It doesn’t matter how good a job you do of acquiring customers if you can’t keep hold of them.  These are the skillsets that Rhapsody has been quietly perfecting for years and that Spotify is quickly learning.  A successful subscription business can appear like a duck, slow moving above the water line, but feet moving furiously fast below.

The Churn Killer: Device Subscription Bundles

Any business that is new to subscriptions – whatever they may say to the contrary and whatever talent they might hire in – is going to be learning the ropes.  Which is another reason why hard-bundling subscriptions with hardware makes so much sense for these new entrants. Besides the consumer benefits of turning an ethereal subscription into a tangible product, they allow the providers to plan for 12 to 24 months worth of customer life time value rather than worrying about subscribers churning out after just a month or two.

Even though downloads and CDs will still dominate global music revenues by the end of 2013, it is going to be a big year for subscriptions. Whether the new entrants can help turn that into a big decade remains to be seen.

Why Google are Really Downgrading Pirate Sites

On Friday Google announced that it would start to downgrade the search results of sites which have “high numbers” of copyright takedown notices.  Make no mistake, this is a major step forward and is something record labels have been pushing for.  Over the last year labels and their trade bodies including the RIAA, IFPI and BPI, have shifted some of the emphasis of their anti-piracy efforts from pursuing the symptoms of piracy (e.g. suing file sharers themselves) to tackling piracy at source (e.g. blocking domains and search results).  Though there are ‘freedom-of-Internet-speech’ issues surrounding this approach, it makes sound strategic sense, with a much higher potential degree of effectiveness, and without the PR own-goal of taking your own consumers to court.

But just as domain blocking faces numerous technical challenges such as VPNs and proxy servers (see my previous post for more details) so Google’s search de-prioritization move has chink-filled armour:

• Google’s takedown process is imperfect.   Google has made major strides in working with copyright owners during the last year, with many labels reporting marked improvements in the takedown process.  But the process still has flaws, such as arbitrary limits on the number of claims.  Also the process is resources intensive, both for Google and rights owners.  So takedown efforts and the resulting list of key infringers is going to lean towards the short head rather than the long tail.  Which means the most popular destinations will be hit most while the new up-and-comers will have an opportunity to become established before they feel the effects of downgrading.
• Downgrading will impact individual site audiences relatively slowly. Search result downgrading will also be slow to impact the popular piracy sites whose established user bases will typically go direct to sites via bookmarks or use alternative discovery methods such as torrent trackers.  Downgrading will impact their new user acquisition but existing audiences will dwindle more slowly.
• Why downgrade when you can block? If Google genuinely believes that the target sites warrant downgrading because of copyright infringement, then why only go as far as downgrading?  Why not just all out block?  Just how effective will downgrading be?  Will the results drop down the page? Disappear off the front page?  Or disappear beyond page 20?  (I do not think, though, that there is a case for Google to proactively increase the performance of licensed services as some are pushing for.  Firstly these services should invest more heavily in SEO and SEM like everyone else has to.  Secondly prioritizing results would fly in the face of Google’s entire search business proposition.  And if music sites get a boost then why shouldn’t everyone else? There is strong precedent for Google downgrading – such as the recent link-farm downgrade – but not boosting).
• Some serial infringers are more equal than others. Veteran search guru Danny Sullivan, in typical fashion, managed to uncover a really interesting angle to the story: that Google-owned YouTube will not find itself on the downgrade ‘hitlist’ despite having more takedowns than probably any other site.  Though this certainly smacks of double standards –and raises issues about separation of church and state – there is a pretty compelling case for ensuring YouTube remains readily accessible: namely that it is the #1 digital music app in the world.  (Granted it may cannibalize many more valuable services, but that’s a separate issue that the industry and Google need to fix).

Of course, the entire takedown and downgrading strategy cannot be viewed in isolation.  Google are a reluctant copyright enforcement force, as they make clear by ensuring that every DMCA-complaint blocked search result links through to http://www.chillingeffects.org/  (an Electronic Frontier Federation backed site that helps sites who have had DMCA takedown notices strike back at content owners.)  Google are going down this path of ceding more ground to content owners not because of a strategic change of heart, but because they want something back. Whereas Apple has made paid content a success in the iTunes ecosystem, Google has thus far failed to achieve much in the Android ecosystem.  (Or to put it more accurately, in the various Android ecosystems – which is of course one of the core problems for Google).

You Scratch My Back…

Google Play is Google’s big content play (no pun intended) and they want more in it from content owners, and they want to take it to more territories.  Taking the action that they have done so is designed to make those prickly licensing conversations with rights owners that bit smoother.  And Google may well get a lot of what they want. They’ve pretty much played hard ball so far, taking the position that they can bring more scale to the music industry than any other partner and so should be given preferential terms.  And they back this position up with a pretty good poker face too, as illustrated by their refusal to meet label license fee demands for a point-and-play locker service and instead following Amazon’s lead in launching a DMCA compliant upload-and-play locker service.  Now they can come back to the table with the ‘we’ve done what you asked us to do’ card in their hand.

Music industry, over to you, raise or fold?