Amazon: Reverse Pricing, And The Rise Of Zero UI

Amazon’s announcement of its AYCE streaming service Amazon Music Unlimited should not come as a surprise to anyone whose been keeping even half an eye on the digital music market. Amazon are the sleeping giant / dark horse (select your preferred descriptive cliché) of digital music. With 60 million Prime Memberships it has a bigger addressable base of subscribers than Spotify, and its 300 million credit card linked customer accounts surpasses most but falls well short of Apple’s 800 million. Nonetheless, Amazon is the last major force to play its streaming hand. However, what the two really interesting things about Amazon Music Unlimited are its ‘reverse pricing’ strategy and the move towards Zero UI music experiences.

Sleeping Or Coma?

Being the sleeping giant of a space can work both ways. It normally implies major resources, a large legacy audience waiting to be tapped, and years of brand equity and trust. Amazon certainly ticks all those boxes, and some. But it can also mean that you’ve left it too late, allowing new entrants steal away your customers with new product offerings. HMV, Tower Records and Fnac were all sleeping giants but they all moved too late and too cautiously to be able to prevent Amazon, and then Apple, and then Spotify from stealing their customers. Things should though, be different for Amazon and streaming. Although streaming is growing fast we are still short of 100 million subscribers globally and in most markets subscriber penetration is below 10%. Even more importantly, the majority of adoption is being driven by music aficionados (those consumers that spend above average time and money with music). The next opportunity is the engaged end of the mainstream. This is where Amazon plays best.

Targeting The Mainstream Music Fan  

Amazon’s streaming strategy to date has revolved around a limited catalogue, curated streaming service bundled into Amazon Prime. Although it has struggled for visibility by being 3^rd in the Prime pecking order (behind free shipping and video) it nonetheless deserves much credit for genuinely trying to do something different in the increasingly homogenous streaming marketplace. It is a lean back, curated experience for the music fan that is neither passive nor aficionado. This group is nearly double the size of the high spender group (see our MIDiA subscriber reports on music segmentation for much more detail). What makes this group even more interesting is that none of the other big streaming services are going after it. Why? Because they spend less than $10 a month.

So on the surface Amazon’s new $7.99 is a smart move, pushing a price point into the market that unlocks the next tier of users. The move is less radical than it first appears though, as this price is only available for Amazon Prime subscribers (all others have to pay $9.99). Also Spotify and Deezer’s aggressive price discounting ($1 for 3 months) have both created effective price deflation. That aside, there is however no doubt that Amazon’s $7.99 price point will have a major impact on consumer perceptions of pricing and will in the longer run help bring the main $9.99 price point down to $7.99 (something Apple tried and failed to do when it launched Apple Music).

Amazon’s Reverse Pricing Strategy

But Amazon’s pricing strategy is way smarter than just that, here’s why. Note the name of the service: Amazon Music Unlimited. Not Amazon Music. It echoes Google’s Google Play Music All Access. Each service’s naming convention ensures that it does not give the impression of being the core music offering for each company. In Amazon’s case this is its music sales business (CDs and downloads) and its pre-existing Prime bundled streaming service. The great thing about having a $7.99 / $9.99 product in the market is that it suddenly creates very clear perceived monetary value for its Prime-bundled service. How could consumers understand the value of something that didn’t have a price point anywhere? Now it is abundantly clear that it is $7.99 / $9.99 worth of value. This is Amazon’s Reverse Pricing Strategy: price a decoy product high to make a core product appeal more valuable. Now, a seasoned music exec might argue, ‘ah, yes, but it’s not unlimited on demand, so it’s not worth that’. But if an Amazon user gets full satisfaction from a curated, limited catalogue streaming service then the AYCE distinction doesn’t matter. It’s like telling some one that unless they eat until they are sick at an all you can eat buffet that they are not getting their money’s worth. Let’s just hope that Amazon’s reverse pricing strategy is not accidental…

Music’s Zero UI Era

Finally, onto Alexa and Amazon Echo. For just $3.99 a month Echo owners can get the full Amazon Music Unlimited service, controlling the entire experience via the Alexa voice controlled assistant. Although initially it will prove challenging to do anything other than the more rudimentary elements of using the service with the Echo, voice control is going to come of age over the next five years. Three of the big four tech companies have a voice play (Apple has Siri, Alphabet has Google Assistant and Amazon has Alexa). Also Microsoft has Cortana. Voice will play an increasingly important role in our digital lives and will help move smartphones towards post-app experiences, with app functionality increasingly built into the OS of devices and called upon via voice.

Amazon has pushed the dial for music and voice, it might even have got a little ahead of itself. But more and more of music consumption will be voice and gesture driven and Amazon is setting the pace for the voice side of the ‘Zero UI’ equation. To be clear, Zero UI does not mean Zero functionality nor Zero UX. In fact, functionality has to be even better in a Zero UI context, as it has to be able to deliver user benefits without visual reference points. But what it does mean, is that there is less friction between the listener and the music. The music becomes the experience.

Regardless of whether this ‘sleeping giant’ has timed its entry into the AYCE market right or not, its lasting legacy could well be making the first truly bold step towards music’s Zero UI era.

Sonos and the Digital Era Music Customer

Sonos recently announced its Play1 wifi speaker, a product that could be a great asset for the music industry if it is utilized properly.  Sonos have been pioneering the multi-room digital audio market for years now and continue to have a fairly clear run at things with neither Apple nor Google showing any truly concerted intent, nor any of the traditional CE companies sufficiently upping their games.  But for all its innovation excellence Sonos has predominately remained the domain of the higher spending tech enthusiast (though significantly below the audiophile segment).  With the Play 1 priced at $199/£169 Sonos is making a play for a much more mainstream flavor of customer and in doing so could help the music industry create a revenue beachhead among a new generation of music customers.

The Digital Era Consumer

We sit on the cusp of what will be a crucial five years, a period that will determine whether consumer music revenues will return to long term growth or instead migrate downwards to create a smaller market concentrated around high spending enthusiasts.  The first wave of digital music revenue growth was all about monetizing the highly engaged early adopters.  Revenues still shrank because, among many other reasons – not least piracy, these consumers were shifting their spending from albums to tracks. But at least it was a clear transition path.  Now streaming subscriptions are doing a solid job of migrating many of those same consumers back up to higher spending.  What they are not doing such a great job of is bringing new buyers into the fold.

Consumer recorded music revenues are facing a demographic pincer movement with older customers falling out of the habit of buying music (and not going digital) while many younger digital natives simply never acquired the habit of buying music.  Subscription services can, and should, be the natural entry point for these consumers but 9.99 remains a key stumbling block.  Now a new opportunity is emerging as these customers age, their lifestyles change and their disposable income increases.  The first cohort of Digital Era Consumers (i.e. those born since the late 1980’s who have had digital experiences since their teens) are now in their mid twenties and beginning to settle down with steady jobs, move in with partners, get their first apartment etc.  All of which most typically corresponds with spending less time out and more time at home.  Enter the opportunity for subscription services and devices like the Play1.

While older consumers have been abandoning the living room hi-fi in favour of spending ever more money on the TV and various boxes below it, Digital Era Consumer have less entrenched relationships with the TV and linear programmed viewing.  Get the timing, product mix and pricing right and there is a fantastic opportunity to persuade these consumers to start investing in next generation home hi-fi.  The sweet spot for music spending is the intersection of two lines: music engagement on average declines with age while spending power increases.  Digital Era Consumers represent that point where the two lines meet.  This is the time to ensure some of that spending is diverted from home TV technology to home music technology, thus establishing the foundations for future music spending.

The Play1 is such a good fit for this strategy because it delivers  a genuinely high quality experience (especially when used in a sensibly positioned stereo pair) for an eminently affordable price.  Bundle that device with 3 or 6 months worth of a free trial of a music subscription and suddenly you have a highly compelling holistic music solution for the home.  Of course this is not just a Sonos opportunity, bundling music subscriptions with affordable digital home audio equipment simply has to be the next step of digital music product strategy.  (And it doesn’t take a rocket scientist to deduce that Beats will most likely bundle their service with headphone sales).

Just Press Play…

The simplicity of user journey will be key though.  Relying on a consumer to buy a device, then go home and register for a subscription and then to hook that service up to the device just won’t cut it.  Retailers will need to be given allocations of subscription accounts that will be auto associated with a device at point of sale, where the consumer will also give their email address.  The subscription service will have to be natively integrated into the controller app (though not necessarily the circuitry of the hardware as Spotify has been doing as this limits future consumer choice). When the consumer gets home and hooks the device up to power and wi-fi the music service starts automatically.  The experience really should be as simple as ‘play’.

For CE retailers this is an opportunity to drive a new era of music hi-fi sales (particularly as the docking station segment seems to be struggling).  For music retailers – those that are left – it is a chance to create a new relationship with consumers.  Take the example of HMV in the UK who are currently locked in a Quixotic battle with Apple.  Trying to compete as a download store is fighting yesterday’s battle.  The traditional retailers lost that fight and reopening hostilities now is only going to serve to expend scarce resources. But a bundled hardware-subscription offering could bring in swathes of new Christmas / Holiday season customers, baked into a long term relationship not a one-off transaction.

It is time for the record labels and music services to invest in retailer partnerships to ensure that devices like Sonos’ Play1 deliver exactly that proposition to Digital Era Consumers: Play. For a device to be able to play unlimited music out of the box is a compelling proposition and a genuine opportunity to drive subscriptions out of the early adopter niche they currently occupy.

Another Nail in the CD Coffin: HMV Call in the Administrators

Perhaps the greater surprise is how long UK high street media retailer HMV has been able to hang on rather than the fact HMV today formally announced it was calling in the administrators.  HMV of course has been on borrowed time, with suppliers having come to its aid a year ago, pumping in cash and taking an equity stake in return. HMV’s group revenues have been in decline since 2009 but its music sales have been tumbling since long before that.   And despite belated revenue diversification strategies such as moving into the live sector, taking a smart strategic investment in 7 Digital, and some other recent smart initiatives, HMV has been unable to halt the inevitable.

Of course HMV’s problems are far from unique.  Retailers across the globe have struggled to come to terms with the transition from the distribution era of selling physical units of stuff to the consumption age in which consumers value access to digital experiences.  Even the most innovative retailers have found it difficult: just look at the travails of France’s Virgin Mega, arguably the single most innovative and ambitious of high street retailers couldn’t make it work.  But for every Virgin Mega who tried to seize the digital bull by the horn there are ten Fnac’s (the other leading French media retailer) who did far too little too late. In fact, somewhat depressingly, one could argue that if the end result is the same, why bother expending all that strategic effort trying to change?

But what brought HMV and other retailers to their collective knees was a fatal combination of irresistible momentum and strategic error.  Piracy, tumbling CD sales, and competition from new competitors (supermarkets, online retailing and Apple) all played their part.  But even collectively they need not have added up to an HMV death sentence in 2013.  Don’t get me wrong, I am not arguing that there is a long-term vibrant role for high street music retailing, but there could be at least a few good years left.

Despite Apple having been in the market for a decade, the CD remains the bedrock of music sales, and a very significant share of music buyers still buy music offline.  For HMV, if it survives in some guise, perhaps half of its 230 odd stores will be able to eke out a solid enough business for another couple of years. The problem though is that those stores will be serving the lowest value part of the music buying population.  HMV used to be the destination of the music aficionado now it is the last refuse of the mass market, tech-wary passive music buyer.  These consumers are numerous but incredibly low value: the bottom 60% of UK music buyers account for just 18% of total UK music spending.  But nonetheless it is a customer base there for someone to serve.

Unable to Kick the High Street CD Habit

Of course, HMV should never have let itself get into the position of relying on bottom feeder revenue.  HMV reacted too slowly to the rise of digital, and in doing so was little different from most other music retailers.  HMV did not recognize the seriousness of the threat of Amazon and Apple until it was too late.  The irony of the piece is that there was a growing strategic awareness of the Apple threat but strategic paralysis prevented HMV from doing anything.   While HMV busied itself rolling out ill fated digital stores and services it was unable to play the ace in its pack: deep integration with CD retailing in the high street.  But because HMV’s digital revenues were a miniscule share of the total business, the digital team never won the argument against the main retail business who would have effectively been signing away their core proven revenues to an unproven internal upstart.  HMV was deeply addicted to high street CD revenue and it was simply unable to kick the habit.

The Missed Digital Opportunity

Back in the mid-2000’s this could have helped transition a very meaningful share of still-physical-but-soon-to-be-digital customers to HMV digital rather than to iTunes. Of course HMV would have needed MP3 catalogue at this stage too, but they were strong enough to get this years before it actually happened, if only they’d been willing to expend political capital getting the licenses from the majors.  MP3 mattered but simply wasn’t a big enough deal for HMV in 2005.

The dominant influence of the high street retail business had another unfortunate effect: just when HMV should have been battening down the hatches against Apple, it instead gave Apple a free pass to steal its customers by stocking iPod accessories and iTunes gift cards in its stores. Of course this all made absolute short-term revenue sense, but it was long-term strategic idiocy.

If HMV had acted early enough – i.e. 1999 /2000 – and used its political weight to get the right deals out of the labels and partnered with a good device manufacturer, then we might have been looking at a digital success story now.  Even if HMV had missed that strategic-visionary boat, and had instead fought a proper rear guard action from the mid-2000’s then it would have a meaningful digital business by now.  Instead HMV’s fortunes remain inextricably tied to the slow, painful demise of the CD.

Regrets, it’s had a few and, unfortunately, it did it its way.

If you are a journalist and would like to talk about this story please email me at mulligan_mark AT hotmail DOT COM

Is the UK Music Industry Sleepwalking into a CD Crisis?

An upfront note: though this post focuses on the UK market, the principles, as you will see, apply across most music markets.

At first glance the UK recorded music market isn’t in too bad shape: album sales declined by a not too worrying 5.6% in 2011 and digital grew solidly, including 26.6% growth in digital albums*.  And of course there was Adele.  So an end of term report card would probably read something like ‘Could do better but good signs of improvement’.  Unfortunately that is a case of papering over the cracks.  Here’s why:

• CD sales are falling at an alarming rate: though digital album unit sales grew by 5.6 million, CD album sales fell by 12.3 million.  So the digital growth was less than half of the physical decline in absolute terms.  A worrying ratio at this stage in the development of the digital market (i.e. when it should be maturing, not just getting started).
• The single continues to drag revenue growth down. Digital singles boomed to 176.6 million, a whopping 56% greater volume than combined physical and digital albums. And yet their value is close to just a fifth of album revenues.   Despite solid digital album growth, unit sales of digital singles increased by about 17 million, three times the units growth rate of digital albums.  And though the spend increment is much greater for albums – and this is of course the lens labels will typically view the trend – the unit growth is the best indication of consumer behaviour.  i.e.  music buyers are still throwing their weight behind digital single purchases at a quicker rate than they are digital albums.
• The CD buyer is withering on the vine.  Most importantly of all, the CD buyer is becoming an increasingly rare breed.  There are fewer shops on the high street, which is where the majority of CD buyers still buy their albums. HMV – the UK’s leading music retailer by some distance – has been suffering well documented struggles.  It is possible that HMV will disappear from the high street entirely in the next couple of years.  Though this won’t be an extinction event for CD buyers, it will however leave a gaping hole in music revenues (possibly a quarter of all album sales).  The majority of these Digital Refusniks who haven’t seen any reason to start buying CDs online – let alone downloads – are unlikely to suddenly switch even if they have to.  More likely they will just drift out of the market entirely.  These are the passive music fans who only buy the occasional album, don’t have an iPod, don’t want to spend £9.99 a month on music and who listen to a lot of radio.  With so much more choice of high-ish quality music on digital radio and TV these consumers won’t even feel that much of a dent in their music behaviour when they no longer buy CDs.
• The CD is disappearing from the living room.  I’ve been beating this drum for years now but still don’t get the sense the risk is being taking seriously.  Living room tech spend has shifted firmly to the TV and music’s weakening foothold is either a docking station for the digital crowd, a streaming player for the really tech savvy or, in the vast majority of cases, a dusty old midi player which sooner or later is going to find itself in the bin or the garage.  When that happens music will have disappeared out of the living room (and before anyone makes the case for music on the TV, that permanently relegates music not so much to poor relation status, as crazy aunt locked away in the attic.  People buy TVs to watch stuff on them, not to have a blank screen while music plays on the poor quality speakers).

The Bottom Line

The music industry is being entrapped by a demographic pincer movement: on the left the emerging Digital Natives lack a product strategy that meets their needs, on the right the traditional CD buyers lack a format succession cycle.  This is why the industry is becoming obsessed with squeezing as much ‘ARPU’ as it can out of the remaining core of 20 somethings and 30 somethings.  But of course that strategy can only go so far.  I’ve written at length about strategies for the Digital Natives, but the case for the Digital Refusniks is even more pressing, if less glamorous.  The following needs to happen, and quickly:

• Digitize the relationship.  Before an analogue customer base can be migrated to digital, the relationship with those customers must be digitized.  In fact most HMV music customers have no relationship with HMV at all, or rather it is a series of brief encounters that start and finish with a cash till transaction.  First HMV – and indeed high street music retailers anywhere – need to start finding a way to establish digital relationships with these customers and then use that as the platform for a digital revenue strategy.  As my astute former colleague James McQuivey is fond of pointing out, Netflix built is success on the platform of digitizing its customer relationships. It is time for high street music retail strategy to follow suit.  (And by the way, simply trying to push consumers to the online stores isn’t the answer).
• A format succession strategy needs putting in place. The Digital Refusniks consumers need their hands holding as they are gently coaxed into the digital realm.   They need convincing that the ephemeral web has tangible benefits comparable to that of the CD. That might mean delivering things like better artwork etc. but to get this right we need to know a lot more about the emotional triggers that CDs press for this consumers.  A proper human needs assessment needs conducting, onto which a human-needs based product strategy can then be mapped.  In all likelihood this will result in a couple of hybrid physical-digital products which will deliver all the benefits of CDs with a steady – but not overwhelming – stream of digital content to allow digital to ‘show some leg’.
• A new beachhead in the living room.  As I proposed 4 years ago, the music industry (principally the label and retailer elements) need a new living room strategy which should take the form of a new piece of highly affordable Hi-Fi equipment.   While its encouraging to hear that Google looks set to build upon the fine work of Sonos with some streaming music kit, the Digital Refusniks specifically need a hybrid device i.e. one that plays CDs too.  Something that looks contemporary enough to warrant replacing the old midi system and is cheap enough to shift millions of units.  You’ve probably guessed by now that this will need to follow an Amazon Fire approach of loss leading on the hardware to establish the Trojan horse for content sales.  But it is an investment that will pay off.

The Digital Refusniks are a challenging and unfashionable demographic and the counter-case for addressing them is that in 10 years or so they’ll have disappeared from the market anyway.  My conservative estimates put the loss in the region of 15% to 20% less total UK recorded music revenue in 2016.  The industry may well be able survive its revenue forecasts being that much smaller, but a) does it want to? and b) HMV can’t.

*All sales numbers are BPI trade values.  You can see the complete BPI release here: 

Where Now for Music Retailing?

UK media retailer has just announced that it will buy 14 retail stores from its struggling competitor Zaavi, which is currently in administration, following the collapse of media distributor EUK, which went into administration following the collapse of its parent company Woolworths which was also a key music retailer. Domino effect anyone? OK, things might not be as bad in many markets as they are in the UK, but a) the UK isn’t the worst hit b) other markets should look to the UK for what may be coming.

The overriding problem of course is that not enough people are buying music anymore and of those that are, many of them are shifting lots of their spending away from the high street retailers to online CD stores and to digital download stores. The harsh fact is that no high street music retailer has become a leading digital download store. Some have done better than others, but measure against the success of Apple’s iTunes Music Store, all have failed. They’re not helped by the fact that most digital download stores are an artifact of iPod sales. So selling in MP3 will help them (i.e. being able to sell to iPod owners), but they’ll still be hindered by their biggest problem: integration. No high street retailer has bitten the bullet and fully integrated their digital offerings with in store retail. The level of integration required should be so complete that it seriously threatens near term in store retail sales. Which is of course why it hasn’t happened yet. But if they don’t pursue such strategies soon, they’ll lose that revenue to other outlets rather than to their digital divisions. Meanwhile Amazon is setting the standard for integration. They could still go further, and they should, but they’re much further along this road than most of their bricks and mortar peers.

CD sales are in terminal decline. It’ll be a long prolonged death, so there’s still plenty of business in it, but succession and transition strategies need to be built around that basic tenet. The fact that music retailers are now media retailers (i.e. they sell DVDs, games, electronics etc) is indicative of the realization of where the future is. But aggressive digital strategies are key to retailers can slowing the music revenue share decline and turn it into channel shift rather than revenue loss.

Even though HMV’s revamped digital strategy isn’t as bold as it should be (yet anyway) another announcement shows their ambition: they’ve launched a joint venture that gives them a portfolio of live music venues. This is HMV trying to safeguard their future in the post-CD music business. Such a move isn’t available nor appropriate for all media retailers, but the basic assumption of ‘diversify or die’ is.

HMV Interim Results and What they Mean for Music Sales

Interim results are out for HMV, always a good litmus test for the state of music and media sales.  I’m not a financial analyst so I’m not going to discuss the financial fundamentals, rather what this means for the music industry.

 

HMV stores sales (i.e. excluding Waterstones) are actually up over period.  But technology and gaming, rather than music, have been key to this growth, increasing their combined share from 18 percent to 23 percent.  HMV knows where its future lies.  HMV is plotting a course that brings it closer to European peers such as Saturn in Germany and Fnac in France and Åhléns in Sweden: it is not just becoming much more than music, it is planning for a future when music will no longer be a core product.  As you can from the chart below, music’s share of total sales is declining sharply and is strongly outweighed by DVD, which itself is now losing share to games and electronics.

 

So where does that leave music sales if Europe’s key high street music retailers are rapidly developing in other directions?  It would be nice to say that this is part of a process towards strong online sales.  But none of Europe’s major high street retailers have managed to steal any serious market share from Apple’s iTunes Music Store.   They should have been able to, as they have the decades of music retailing and programming expertise that Apple is just learning.  Selling in MP3 format is a crucial asset (which HMV now have) but they need to price as aggressively as Amazon is now in the UK and, most importantly, integrate heavily in store. This means that when you’re browsing the shelves in HMV you see most CD titles have offers for download discounts and bundles e.g. buy this album and get the other as a download for half price.

 

This might seem like a no-brainer, but it hasn’t happened because those responsible for in store CD sales are scared of accelerating cannibalization of their dwindling sales by driving people online.  It’s too late for those kinds of concerns.  The shift is already happening.  All that’s left now is an opportunity for HMV to help drive the process rather than continue to be dragged along, losing customers and market share all along the way

 

 

Could the Distribution Crisis in the UK Drive Digital Growth?

Hot on the heels of leading distributor EUK going into administration, Pinnacle follows, supplier of CDs, DVDs and games to the likes of HMV, Amazon and WHSmith. Could this squeeze on physical distribution be a boon for digital sales? The music retailers are certainly covering their bets: Zavvi announced the planned rapid launch of a new download store, HMV just revamped their store and Amazon’s sudden launch of their MP3 store makes more sense in the light of the Pinnacle problems.

But unfortunately much of the Christmas present custom is more likely to shift to other media rather than to digital music. The download stores of the retailers will pick up some slack, but not enough to ‘save the day’. Physical distribution needs fixing, fast. What may benefit though, are Comes With Music handset sales. Mum out shopping for her teenage kids might just be swayed towards a 5310 instead of another handset if she was planning on buying some music as well.

Ok, it’s tenuous. And that’s just the problem. When it comes to gifting consumers are pretty fickle customers: if they can’t find the CD they want they’ll get a book or DVD instead.

So the most likely net result is accelerated overall decline rather than accelerated digital sales.