Bifurcation theory | How today’s music business will become two

One of things we pride ourselves on at MIDiA is helping the marketplace peer over the horizon with disruptive, forward-looking ideas and vision. We have a long track record of doing this (you can find a list of report links at the bottom of this post). While many of these ideas were difficult to swallow, or a little ‘out there’ at the time of writing, they became (or are still becoming) a good reflection of where markets ended up heading. Well, it is now time for another of those big market shaping ideas: bifurcation theory.

Today, MIDiA publishes its major new report: ‘Bifurcation theory | How today’s music business will become two’. The full report is available to MIDiA clients here and a free synopsis of the report for non-clients is on our bifurcation theory page here. So, check those out to find more, but in the meantime, here is an overview of just what bifurcation theory is, and why it is going to affect everyone in the music business, whatever role you play in it. 

The old maxim that change is the only constant feels tailor-made for the 21st century music business. Piracy, downloads, streaming, and social all triggered music industry paradigm shifts. Now, all the indicators on the disruption dashboard are flashing red once more. AI is, of course, standing centre stage, but it is not the cause of the coming change. It is simply a change enabler.The causal factors this time round are all direct byproducts of today’s music business, unintended consequences of a streaming market that has cantered along its natural path of least resistance. Everyone across the music industry’s value chain has played their role, often unwittingly. Whether that be shortening

songs, increasing social efforts, changing royalty systems or following viral trends, each of these micro actions has contributed to a macro effect.

The fracture points of today’s music business are simultaneously the catalysts for tomorrow’s. For example, the commodification of consumption is resulting in a raft of apps and industry initiatives that try to serve superfans; the rise of the creator economy’s long tail is resulting in both traditional rightsholders raising the streaming drawbridge (long tail royalty thresholds) and a fast-growing body of creators opting to invest less time in streaming.

Streaming was once the future but now it is the establishment, the cornerstone of the traditional music business. It has rocketed from a lean forward, niche proposition for superfans into a lean back, mass market product for the mainstream. Music consumers have always fallen into two buckets:

1.    Fans

2.    Consumers

The former used to buy music, the latter used to listen to radio. Streaming put them both into the same place, pulling up the average spend but pulling down fandom into consumption. Streaming is the modern day music business’ radio, just much better monetised than the analogue predecessor. Now though, everyone across the music industry’s complex mesh of interconnected value chains is realising there needs to be something more, built alongside, not instead of, streaming. This is the dynamic behind bifurcation theory. This report explores how today’s music business challenges are becoming the causal factors of a new business defined by two parallel consumer worlds.

The music business is bifurcating – splitting into two – with streaming emerging as the place for mainstream music and lean back consumption, and social as the spiritual home of fandom and the creator economy. We identify these two segments as:

1.    LISTEN (user-led): streaming services, monetising consumption at scale

2.    PLAY (creator-led): highly social destinations where fans lean in to create, connect and express identity

Of course, this process has already started, but social is still largely seen as a driver for streaming. Many artists who try to get their fans to participate on social do so primarily in the hope of driving streams rather than for the inherent value of fans participating in their creativity. However, many next-generation creators are realising they will simply never reach the scale needed to earn meaningful income from streaming.They are therefore shifting focus to building fan relationships on social media and monetising them elsewhere, be it via merchandise or brand sponsorships. Meanwhile, a new generation of fans are creating as a form of consumption, whether that means using songs in their TikTok videos or modifying the audio of their favourite song. While copyright legislation and remuneration have lagged behind these developments, they will be an important part of the future of PLAY. Over time, PLAY will evolve as a self-contained set of ecosystems, built around the artist-fan relationship. It will not be an easy transition. Mainstream streaming will become even more lean back, and social and new apps will exert what will increasingly look like a stranglehold on fandom and the creator economy.

Social apps are plagued with challenges (royalty payments not the least of them) but they will emerge as a parallel alternative to streaming, rather than simply a feeder for it. To this end, the full bifurcation theory report not only describes the lay of the future land, but also presents bold visions of how we think both sides of the music business equation should evolve. We present detailed frameworks for what PLAY services will look like and how LISTEN services can evolve, focusing on core competences to continue to appeal to the mainstream but also deepen appeal to – and better monetise – superfans.

AI will play a key role in the future of both sides of the bifurcated music business, but rather than being tomorrow’s business, it will act as an accelerant for the underlying dynamics of bifurcation theory.

Bifurcation is such a big concept with so many layers and nuances, we have only been able to skim through some of the highest level trends here. We encourage you to check out the full report and report synopsis to learn more.

We’ve spent a long time gestating this concept, so we’d love to hear your thoughts. We’re not expecting bifurcation theory to be to everyone’s taste, but if nothing else, hopefully it will spark some creative thinking and debate.

Don’t forget to check out our bifurcation page for a video discussion of bifurcation theory and a free pdf report synopsis.

As mentioned above, here are some of MIDiA’s most impactful future vision reports, in (roughly) chronological order:

Agile Music (Free report)

Music Format Bill of Rights (Free report)

Rising Power of UGC (Free report)

Independent Artists (Free report)

Music Rights Disruption

Insurgents and Incumbents

Creator Culture

Rebalancing the Song Economy (Free report)

New Top of Funnel

Slicing the Funnel

Music’s Instagram Moment

Scenes – a New Lens for Music Marketing

Attention Recession

Creator Rights (Free report)

Creator Hubs

Music Product Strategy

Fan Powered Royalties (Free report)

Addressable Creator Markets

Misaligned Incentives

Artist Subscriptions

Field of All Levels

Kill the Campaign

Rise of a Counterculture Industry

Streaming’s problems will not be fixed by royalties alone

UMG and Deezer’s artist-centric royalty proposal got the amount of attention both parties probably wanted, if not necessarily the type of attention they were after. However, the intent was to kick start an industry debate, and that objective was clearly achieved. Yet, while the discussion has understandably focused on royalties (as, after all, it is a royalty system), these are more symptom than cause. Streaming royalties are not adding up because streaming is not adding up. Fixing royalties is only part of the solution.

In the early days of streaming, DSPs provided platforms for listening to music. Over time they have become places for consuming audio. As streaming mainstreamed, its role as successor to retail became subsumed by its role as music radio’s replacement. Passive playlists, lean-back listening, functional music and ‘noise’ are a series of inevitable second-order consequences, as streaming chases the needs of consumers, following the behavioural data. All in stark contrast to when radio programmers and digital store managers chose what consumers got. In those days, it was a case of the public wants what the public gets, now the public gets what the public wants. The problem is that what the public wants creates a system that neither creators nor rightsholders want. Consumers have, at least in part, chosen this path.

Perhaps, as Steve Jobs was fond of saying, “it’s not the customer’s job to know what they want” or as Henry Ford (may or may not have) said “if I had asked my customers what they wanted they would have said a faster horse”. But whether you believe consumer choice should shape product strategy or not, consumer-led innovation is the defining characteristic of today’s digital world. This means that any innovation that looks to push against prevailing behaviour risks can alienate the very customer base that the system depends upon. So how do we square the proverbial circle?

Solutions must understand the audience’s needs

Many years ago, my former employer, Forrester Research, devised the fantastic POST framework for defining product strategy:

People: First, understand your customers and their needs

Objectives: Next, identify what you want to achieve

Strategy: Then, shape your strategy

Technology: Finally, decide what technology fits the bill

Too often, this framework is done in reverse. Just think of the endless succession of ‘new tech’ start-ups that try to superimpose ill-fitting use cases onto their products. Technology desperately searching for a use case is one of the main reasons new tech, like the metaverse, VR and NFTs, follow the boom-bust-rebuild arc of the hype cycle. The risk with trying to superimpose new royalty structures on today’s streaming world (whether that be user centric, fan centric, artist centric, or whatever else) is that they look to solve supply-side needs (i.e., those of creators and rightsholders) first and demand-side (i.e., consumer) issues either last or not at all. Art may fuel the streaming machine, but consumers drive it (even if that means they benefit from self-driving much of the time).

At its heart, the streaming economy is shaped by diverse and often competing needs. Any successful system with diverse stakeholder needs operates by striking a pragmatic balance of meeting those needs. But a truly good compromise means that neither party is truly happy. This is the challenge that streaming faces today.

A brutal assessment of streaming would be that no one is happy. Every stakeholder, except perhaps, the consumer, has beef with how streaming operates. All of which means that any fixes (at least those that will succeed) will need to deliver some form of benefit to all stakeholders, big and small. And that means tackling the underlying behavioural dynamics of streaming, from which today’s royalty issues come.

Streaming has two main problems

A common refrain is that there is simply too much music. But the issue is dealing with quantity, rather than quantity itself being the problem. No one complains that there are too many search results on Google. The reasons quantity is seen as streaming’s problem are twofold:

1. With so many releases, it is hard to cut through
2. In a zero sum royalty system, more (content) means less (royalties) per stakeholder

Factors like ‘noise’, functional music, and generative AI are not problems in themselves, they are problems because they accentuate both of these issues.

Introducing the algorithm multiplier

Adopting a two-tier royalty system will not solve either problem in itself. The long tail will still be there. Listening will still be fragmented. Royalties are a supply-side issue, not a demand-side one. And it is the demand side that is causing the ‘problem’ by spending time listening to an ever more diverse volume of music. If you want to change behaviour, you need to pull the behaviour levers, not the remuneration levers. One way this could be done is by implementing an algorithm multiplier that applies a higher weight to successful artists. Thus ensuring success breeds success. But (and this part is crucial), this algorithm multiplier should be geared for all tiers of success. So, just as a superstar artist’s hit would get amplified, so would a <1,000-stream artist’s song that is doing exceptionally well when measured against other <1,000-stream artists. How does Google deal with a vast volume of search results? It prioritises the good ones. The algorithm multiplier would surface the best of every tier of artist. Quantity stops being a problem, because quality will be pushed to the surface, regardless of scale. 

The consumer wins (better music), the DSPs win (better user satisfaction), creators and rightsholders win (quality cuts through the clutter and gets a larger share of royalties).

The algorithm multiplier would fix much of today’s problems, but it would not be enough on its own. More needs to be put into the system to give all stakeholders more income and consumers more chances to be fans. MIDiA believes that $2 artist subscription streaming bolt-ons is one such way of achieving this, putting more value (both monetary and experience) into the system. Segmenting artist development and marketing across the platform landscape is another.

Streaming royalties clearly need an overhaul, but they must be done in concert with a reboot of the underlying behavioural architecture. Unless this happens, the artist and fan economies may end up decoupling from the streaming economy. Perhaps that will be a good thing. Perhaps not. But what it will not be is a predictable, low-risk future.

The Music Industry’s Next Five Growth Drivers

The risk with trying to imagine what the future might look like is to simply think it is going to be a brighter, shinier version of today. At this precise moment in time, this has perhaps never been truer.

The COVID-19 lockdowns were a seismic shock to the economy, one which will take months, possibly years to recover from. Entertainment consumption patterns have been transformed, with some need states becoming void states in an instant, while new ones have filled their place.

Whether COVID-19 goes for good in the coming months or whether it is with us for years to come, some behaviour patterns have changed for good, creating new opportunities, many of which (e.g. virtual events) have yet to be properly monetised. So at a time when it seems that the whole world is creating music forecasts, it is now the time to think about what comes next rather than just predicting how big the long established revenue streams will get.

With streaming growth slowing and creators feeling short changed, it is time to think about what plan B is, for the sakes of both the industry and the creator community.

At MIDiA we are currently compiling our music industry forecasts with a lot of detailed work being put into estimating how COVID-19 and the coming recession will impact a revenue growth. We’re modelling everything from ARPU, churn, net adds, and disposable income patterns through to store closures. We’re confident that this new methodology will make our already reliable forecasts even better (for the record our 2019 subscription forecasts with within 4.5% of the actual figures).

We’re also going to push ourselves out of our comfort zone and over the course of the year forecast some new revenue streams for which a comprehensive set of historical data does not exist. This means our chances of making incorrect calls is higher, but we’re doing it because we think it is crucial to start trying to frame what the future landscape will look like.

Here are the five emerging revenue sectors that we think could collectively be the music industry’s next growth driver

1. Contextual experiences: Two big lockdown winners have been mindfulness / meditation apps and online fitness training. With it looking likely that consumers will be spending more time at home and away from public places for some time to come, the opportunity for these categories is twofold: 1) build audience now, 2) establish behaviour patterns that will outlive lockdown.

   Music is often a core part of these but it is not always licensed. The example of artists and rightsholders making music available to fitness trainer Joe Wicks illustrates the point. To date, streaming services have provided the soundtrack to such activities with contextual playlists (chill, study, workout). But it is of course far better for the context itself to deliver the music. We expect the next few years to see categories like online wellness and fitness to eat into the time that people were previously using streaming for the soundtrack. Instead of bring your own music, the trend will be the context will bring it. UMG’s Lego partnership is a case in point.

2. Creator tools: There is an increasingly diverse mix of tools for music creators, including production, collaboration, sounds, reporting, mastering and marketing. The vast majority of the millions of independent artists will spend much more on creator tools than they will ever earn from their music. The revenue opportunity is clear, but there is more to it than that.

   Artist distribution platforms built a role as top of funnel tools, helping labels find the next big hit. But the music creation itself, enabled through online SAAS tools is in the fact the real top of funnel. Anyone who can establish relationships there does so before they release music. Right now, Spotify looks better placed to capitalise on this opportunity than labels. But labels should be paying close heed. Just in the way that distribution platforms came out of nowhere to become an established part of the label toolkit, so will artist tools. Simply put, creator tools will become part of what it is to be a music company.

3. Virtual events: As we wrote about earlier this week, there is a huge opportunity to make virtual events (live streaming, listening sessions, avatar performances) a major income stream. The sector is in desperate need of commercial structure and product tiering, but it can happen. A freemium model with free, pay to stay, premium and super-premium tiers will enable this fast-growing sector to be more than a lockdown stop gap.
4. Fandom: Regular readers will know that MIDiA has long argued that phase one of streaming was monetising consumption and that phase two will be about monetising fandom. Tencent Music Entertainment already does a fantastic job of this with live streams, virtual gifts and virtual currencies. So do K-Pop artists and Japanese Idol artists. Now is the time for western social and streaming platforms to wake up to the opportunity. Virtual merch, artist badges, premium chat, artist avatars—there are so many opportunities here waiting to be tapped.
5. Social music: As an extension of fandom, the fact that the vast amount of music-centred social activity on Instagram, Facebook, Snapchat and TikTok has not yet been properly monetised is a gaping hole of opportunity. TikTok will be crucial. As my colleague Tim Mulligan wrote, TikTok is having its ‘Snapchat moment’, trying to identify what commercial route it will take. I’d go even further and frame it as a YouTube or Facebook moment. Both those platforms went on to massively expand their remit and build diversified business models.

   TikTok clearly has momentum that far exceeds that of previous similar apps. It can either choose to just carry on being good at one thing or instead become the next big social platform, growing as its audience ages. Just like Facebook did. TikTok now is where YouTube was back in the late 2000s. If rights holders can establish an entirely new monetisation framework then TikTok could become the biggest single driver of future revenue.

As with any future gazing, the odds are that not all of these opportunities will transpire, but what is clear is that the current dominant format is not enough on its own. Rights holders and creators alike need new future revenue streams to offset the impact of slowing revenue growth and royalty crises.

The last time the music industry had one dominant format and no successor was the CD and we all know what happened then. The music industry is not about to enter a decade of freefall this time, but it is at risk of stagnating, especially as its leading music service is now so eager to diversify away from music that it offers a podcaster more money in one deal than most artists will ever earn in their lifetime from it. Let’s make this next chapter of the industry’s growth about innovation, growth, new opportunities and fresh thinking.

Have We Reached Peak Tech?

In last week’s Take Five I highlighted a Vox story which reported that over the last year the number of companies using terms like ‘tech’ or technology’ in their documents is down 12%. This is an early indicator of a much more fundamental concept – we may have already reached peak in the tech sector, the business sector that has driven the fourth industrial revolution. While some may quibble whether the internet-era transformation was the predecessor to a new industrial revolution built around AI, big data and automation, the underlying factor is that tech – for better or for worse – has shaped the modern world. More in the developed world than the majority world perhaps, but it has shaped it nonetheless. Now, however, with tech so deeply ingrained in our lives and the services and enterprises that facilitate them, has tech become so ubiquitous as to render it meaningless as a way of defining business?

Tech is the modern world

When Tim Berners Lee invented the World Wide Web in 1989 he could have had little inkling of the successive wave of global tech superpowers that it would incubate. As we near the end of the second decade of the 21^stcentury it is hard to imagine daily life without it. The pervasive reach of the web and the Internet more broadly is perfectly illustrated by Amazon’s recent launch of twelve new devices, including a connected oven, a smart ring (yes a ring) with two mics and a connected night light for kids. All of which follows Facebook’s connected screen Portal, which for a company that trades on user data, raises the question: ‘Is this your portal to the world, or Facebook’s portal to your world?’ However, regardless of why the world’s biggest tech companies want us to put their hardware into our homes, this is simply the latest new frontier for consumer tech. Now that we carry powerful personal computers with us everywhere we go, we remain instantly connected to our personal collections of connected apps and services. Tech is the modern world.

The rise of tech-washing

With tech now powering so much of what we do, it raises the question whether tech is any longer that useful a term for actually distinguishing or delineating anything. If everything is tech, then what is tech? It is a question that the world’s biggest investors are starting to ask themselves, too. In fact, we have now reached a stage where a) tech is a meaningless concept – everything is tech, and b) there is the realisation that many companies are ‘tech washing’, using the term ‘tech’ to hide the fact that they are in fact anything but tech companies which happen to use technology platforms to manage their operations. In the era when everything is tech enabled, you would be hard pushed to bring a new business to market that does nothave tech at its core. Companies like Uber, WeWork and just-listedPeleton have managed to raise money against billion-dollar-plus valuations in large part because they have positioned themselves as tech companies. In actual fact when the tech veneer is removed, they are respectively a logistics company, a commercial rental business and an exercise equipment company. If they had come to market simply with those tag lines, they would undoubtedly have secured far smaller valuations and many of their tech-focused investors would not have backed them. Investors are beginning to see through the ‘tech-washing’, as evidenced by the instant fall in Peleton’s stock price, WeWork’s crisis mode sell-off and Uber’s continuing struggles.

Pseudo-tech

Calling yourself a tech company has become a get out of jail free card for new companies, an ability to raise funds at inflated valuations, and a means to persuade investors to focus on ‘the story’ and downplay costs and profit in favour of growth, innovation and of course, that hallowed tech company term: disruption. I have been a media and tech analyst since the latter days of the original dot-com boom, and the mantra of the companies of that era was that ‘old world metrics’ such as profitability didn’t apply to them. Of course, as soon as the investment dried up, the ‘old world metrics’ killed most of them off. Today’s ready access to capital, enabled in part by low interest rates, has enabled a whole new generation of companies to spin the same yarn. But whether it is the onset of a global recession or growing investor scepticism, a similar fate will likely face today’s crop of ‘disruptors’. The dot-com crash separated the wheat from the chaff, wiping out the likes of Pets.com but seeing companies like eBay and Amazon survive to thrive.It also took a bunch of promising companies with it too. The imperative now is to strip away pseudo-tech companies from the tech sector so that investors can better segment the market and know who they should really be backing through what will likely be a tumultuous economic cycle. As SoftBank is finding to its cost, building a portfolio around pseudo-tech becomes high risk when the tech-veneer can no longer hide the structural challenges that the underlying businesses face.

Tech is central to the modern global economy and will only increase in importance – at least until the world starts building a post-climate-crisis economy. It is imperative for genuine tech companies and investors alike to start taking a more critical view of what actually constitutes tech. The alternative is that the tech sector will get dragged down by the failings of logistics companies and gym equipment manufacturers.

Medianet, SOCAN, YouTube And The Kobalt Effect

Since the demise of the long-running-but-never-launched Global Repertoire Database (GRD) there has been a lot of debate over what comes next for digital rights reporting. The songwriter class action suits in the US against Spotify are the natural outcome of more than one and a half decades of failing to deal with the forsaken mess that is compositional rights in the digital era. The music industry needs a solution and now just like busses that never come, two arrive at once: Google’s Open Source Validation Tool for DDEX Standard (doesn’t sound too sexy I know, but bear with me on this one) and Canadian PRO (Performing Rights Organization) SOCAN has acquired Medianet essentially as a digital rights reporting play. So just what is going on in the world of digital rights reporting?

Transparency, Transparency, Transparency

Artist concerns about transparency in streaming services are well founded but it is an eminently fixable problem because virtually all of the necessary data is in place. When a record label or distributor licenses music to a service it literally provides a data file of its music which is then ingested (uploaded) by the service. But when service licenses from a music publisher or PRO there is no such data file, because the recorded works are owned by the labels. Publishers do not even provide a comprehensive list of what works their license covers. So music services instead do a ‘best efforts’ licensing effort, licensing all the key publishers and PROs. This model is though far, far from perfect, because:

• Songs often have multiple writers, some of whom may be signed to bigger publishers, others not. So a single song could be covered by licenses acquired from three or four publishers and still not be fully licensed
• Songwriters change publishers and most often publishers do not notify services, so a licensed song can suddenly become an unlicensed song without the service knowing it
• Many songwriters are only small publishers not licensed to music services

But perhaps the biggest problem of all is the lack of a single database of compositional works against which music services can cross reference their catalogues, even better would be one that matches all compositional works against recorded works. Without them we end up with large swathes of songwriter royalties not being matched against and paid to the songwriter. Depending on who you talk to this can range between 20% and 40% of digital royalty income. Little wonder then that we end up with class action suits from disgruntled songwriters.

The problem is that until there is a market level solution that sort of action won’t go away. This means any music service operating in the US, where there is a statutory damages system, cannot operate with certainty that it will not face another legal suit with potentially vast damages awarded. The nightmare scenario is that streaming services start pulling out of the US, or restricting their catalogue to identified works (which largely means major publishers only) rather than face potentially fatal legal challenges.

SOCAN Wants To Be The Leader In Rights Reporting And Administration

And this is the world into which today’s two announcements are born. Medianet is almost one of the founding fathers of digital music, tracing its origins back to the very early 2000’s when, as MusicNet, it was set up by half of the major labels (the other other half formed press play) as a D2C music service. Both efforts failed miserably but Medianet emerged out the ashes as a white label music services company. It spent the years since quietly building a solid business powering a host of interesting music services including Beats Music and Cur. While powering and licensing services such as these Medianet developed a unique set of technology and rights assets and handled everything from ingestion, through rights reporting and administration and even payments. In short it was an end to end rights tech company. Which is what makes Medianet such an important asset for SOCAN. PROs have become increasingly marginalized in recent years with publishers withdrawing rights and a whole host of disruptive new competitors ranging from Kobalt’s acquisition of AMRA, through Irvin Azoff’s Global Media Rights, to existing alternatives such as Music Reports Inc and Fintage House pivoting into digital rights reporting and administration. These are challenging times as a PRO and the likelihood is that it will result in a fair degree of consolidation with smaller PROs outsourcing more of their work to larger ones. SOCAN has seized the initiative with the Medianet acquisition, setting out its stall as a rights society that puts tech innovation, effective reporting and accountability at the centre of what it does for its members. It has also positioned itself as a contender for global successor the the GRD. Consider this the first major repercussion of the innovation and transparency agenda that Kobalt set in motion.

YouTube Is Building Something Much Bigger

Alongside this, with what one assumes is coincidental timing, comes YouTube’s implementation of Digital Sales Report Flat File Standard (DSRF). Digital supply chain innovation is not always the most dynamic of sectors and this announcement could be mistaken for appearing to be the poor relation of the two today. The opposite is probably true. The digital supply chain is going to become ever more important and companies like Consolidated Independent continue to move the space forward in order to help ensure rights holders get distributed, reported and paid as effectively as possible. YouTube’s DSRF implementation is built upon the DDEX framework of standards and enables reporting of both audio and audio-visual content. DSRF aims to deliver faster, more accurate royalty reporting and distribution. You see now the link with the Medianet acquisition. Both are part of a broader movement across the music industry to bring rights reporting and administration into a state that is fit for streaming’s purpose.

The reason why YouTube’s move could have the bigger long term implications is that this is part of a much bolder and far reaching strategy by Google, one that has the music industry’s analogue inefficiencies firmly in its sights. But more on that next week….

The Kobalt Effect

Walk into any publisher or PRO right now and the odds are Kobalt will feature in the conversation sooner or late, whether in fulsome praise or through gritted teeth. Kobalt has done what all good disruptors do, it has set the agenda and in doing so is having market impact far beyond its actual, and still relatively small, revenue base. Today’s two announcements are part of the wave of digital rights disruption and innovation that Kobalt has helped accelerate. But the story doesn’t stop here, in fact, this is just the start.

What Other Technology Sector Thinks That It Has Arrived At Its Destination?

The internet, smartphones, app stores, open source software, all have accelerated innovation at a rate that makes Moore’s law look positively pedestrian. What defines digital technology markets is disruptive innovation, the constant challenging of accepted wisdoms and of established practices. Nothing stays still long enough to give stakeholders the luxury of feeling complacent and to fall back on slower moving sustaining innovations. These are the the realities of consumer technology, unless you happen to be in the digital music business, in which case the prevailing attitude is ‘we have reached our destination’, we have identified the model that is our future and we’re sticking with it. That approach worked fine in the old days of innovation, when Consumer Electronics (CE) companies used to spend years hashing out market standards and then competing in a gentlemanly fashion on implementation. That approach brought us VHS, CDs, DVDs Compact Cassettes etc. Everyone got a bite of the cherry and technologies stuck around for decades. Now they stick around for years, at best. So why is the music industry trying to insist on the $9.99 subscription being the new CD, a 20th century approach to standards in the dramatically different 21st century? And more crucially, why is it able to?

Consumers Are Predictable Creatures

Consumers adopt technology in highly predictable ways. First come the early adopters, the tech aficionados who are always the first to try out new apps, services and devices, next come the early followers who supercharge growth, then the mainstream who bring scale of adoption and finally the laggards who adopt at a more measured pace and slow growth. The result is an ‘S-Curve’ of adoption, with slow growth followed by fast growth, followed by slow growth again at the top of the curve. Music services are no exception, usually starting slowly before accelerating and then slowing again when they have saturated their addressable audience. Exactly where growth peaks varies by service and is determined by the type of service, but the same shape of adoption curve plays out nonetheless, most of the time.

Spotify’s 30 Million Might Just Be The Start Of Maturation

Spotify yesterday announced it had it 30 million paying subscribers. A true digital music landmark. But in the context of its long term growth curve it looks like it might be the start of the end of rapid growth. (It is worth noting that the accelerated growth of the last 16 months has been supercharged by the $1-for-3-months promos so the maturation point may have otherwise been reached earlier or it may have happened at the same time but with a lower number). This isn’t however, some failing of Spotify, rather an illustration that the $9.99 stand alone subscription model is nearing maturity. And this is where the scarcity of innovation comes into play. The major record labels, some more than others, have become increasingly unwilling to threaten the $9.99 status quo. Services that don’t fit the mould either find it impossible to get licenses for new models or they are forced to adhere to the $9.99 cookie cutter subscription model (Soundcloud anyone?).

Video Sets The Standard For Streaming Innovation

Compare and contrast with the streaming video subscription market. Alongside the mainstream Netlfix, Amazon and Hulu Plus services (the Spotify and Deezer equivalents) there is a growing body of targeted niche services with diverse pricing. These include: Hayu (a reality TV, $5.99), MUBI (cult movies, $4.99), Disney Life (Disney shows and movies, £9.99), Twitch (live streamed gaming, $4.99), YouTube Red (YouTuber originals, $10), Vessel (short form originals, $3) Comic-Con HQ (Comic Con content, pricing tbd).

Of course music is drastically different from TV and it is far easier to have a video service with just one slice of all available content than it is for music. Nonetheless, in the video sector there is no prevailing attitude of not wanting to disrupt the dominant $7.99 broad catalogue model. TV and video industry stakeholders are not only willing to tolerate disruptive innovation (online at least!), they understand it is crucial to drive the market forwards. So why don’t labels take a similar view? A key reason is rights concentration. Because three labels account for the majority of music rights, each has de facto veto power. Most companies that are dominant in their markets pursue smaller, sustaining innovations that improve the product but that do not threaten their businesses. So it is fully understandable that major labels have not empowered disruptive innovations that could risk turning their digital businesses upside down. It would be like turkeys voting for Christmas. And yet the growth trajectory of most leading music services shows that by sticking with sustaining innovations they are unwittingly curtailing the scale of their future growth.

Again, compare and contrast with TV where rights are far more fragmented and are becoming even more so. No single TV network or studio has the ability to stop a service in its tracks. The result is a far greater rate of innovation.

Music Subscription Services Are Compelled To Behave Like CE Companies

Thus music subscription services are forced to behave like the old CE companies, competing on the implementation of fundamentally the same product. TIDAL do exclusives and high definition, Spotify do playlist innovation and video, Apple does curation and exclusives. But when it comes down to it they are selling the same $9.99, 30 million tracks, on demand, mobile caching product to largely the same group of consumers.

Postscript: The Unusual Case Of Apple

The keen eyed among you will have noted that Apple Music’s growth curve does not fit the S-Curve model, or at least not what we can see of it yet. It certainly appears that Apple is set for a very different adoption path. There are mitigating factors. The streaming market is far more mature now than when Spotify and Deezer launched. Additionally, Apple has a unique platform and ecosystem advantage that enables it to short cut adoption rates. It can sell straight to its user base of Apple-super-fans. Selling additional products and services to its installed base of 850 million iTunes customers will be key to the next stage of Apple’s story and music will play its role in that. (Amazon is potentially another exceptional case given its ability to sell directly into its customer ecosystem and also with its focus on a more mainstream audience.)

But even Apple will eventually reach the saturation for the $9.99 product within its user base. In fact, one reading of Apple’s adoption curve is that it skipped the first stage of slow growth, has had a brief period of mid period strong growth and is now settling down for a long gradual arc of adoption that looks like an amalgamation of the final 2 stages of the S-Curve model. Whatever the path, let’s just hope that long before Apple Music hits maturity, the record labels will have woken up to the need to support an unprecedented phase of experimentation and innovation to identify all the other opportunities for premium music that exist outside of the super fan beachhead. Remember its 2016 not 1986.

What I Want To See Next From Apple

With Apple Music barely a few hours old it might seem a little perverse to focus on what Apple needs to do next but Apple’s potential remains more latent than realized. Apple has an opportunity to launch the sort of music platform the industry has been waiting for during the entire digital era but has not yet seen. It hasn’t done it yet but it now has the right materials with which to build it.

If Apple is going to make a meaningful long term impact on the streaming market it will need to play the innovation card.  Apple music products have been something of the poor relation in innovation terms over the last half decade or so, looking on wistfully from their music downloads backwater while Apple’s devices undergo an innovation and design revolution.

If Apple can seamlessly integrate all its assets (radio, podcasts, downloads, on demand streaming, apps etc.) then it could create the most comprehensive and engaging music experience in the marketplace. Imagine listening to a Zane Lowe show on demand, but tracks are played in sequence.  You like one of the tracks so you click ‘more by this artist’ and start listening to the latest album.  After a few tracks you pull back into the show, listen a bit more and then see a link to an Artist Connect video of an interview by Zane with the last artist you listened to. You jump to listen to that then jump back into the show, decide you want to hear the first couple of tracks and what Zane had to say about them again and jump back to there.

In that scenario the user has jumped from semi-interactive radio, into on demand, back into semi interactive radio, non-music content, back into semi-interactive radio, then into fully interactive radio. Of course there are multiple business models at play with multiple rights frameworks but if a user was able to top up on Apple Music credit to use across the entire platform then s/he need never know when boundaries are crossed and the credit would simply get auto deducted from the balance.

Implementation wouldn’t be simple (especially form a licensing perspective) but that is the sort of innovation bar that Apple should now be aspiring to. Apple has a unique opportunity to become a true music platform. The first step has been taken (and some of the Artist Connect functionality may prove to be super cool) but now it is time for the real innovation fun to begin.

Streaming, Change, And The Right State Of Mind

Disruptive technology and the change it brings can be overwhelming, particularly when it threatens to change forever all that we have known. Streaming clearly fits this bill. But the impact of change is as much in the eye of the beholder as the disruption itself. While it would be bland and disingenuous to say that change is merely a state of mind, a positive outlook that is focused on the opportunities can make the world of difference.

To illustrate the point, here are three examples from the last century of how vested interests have viewed revolutionary new media technology.

This first quote is from the American author and essayist EB White writing in 1933 on the impact of radio. Here new technology is eloquently portrayed with an almost magical profundity.

This quote is from David Sarnoff, the Belorussian-American radio and TV pioneer who oversaw the birth of RCA and NBC. Here he is in 1939 talking about the advent of a TV broadcast network against the backdrop of the globe teetering on the brink of world war.

And then fast forward 70 odd years to the emergence of streaming music, and we get this….Something certainly appears to have happened to the eloquence of observation over the decades. While I’m perhaps being a little unfair to our esteemed Mr Yorke his quote illustrates the stark contrast in how one can view impending change.

There is an inevitability about the shift in consumer behaviour of which streaming is merely a manifestation. We are moving from the distribution era when everything was about linearly programmed channels and selling units of stuff to the consumption era when consumers value access over ownership. Resisting fundamental shifts in consumer behaviour is a futile task. It’s what happened when the labels fought Napster tooth and nail and it took the best part of a decade for the music industry to recover from that mistake.

None of this is to say that the shift to streaming is going to be easy, but it is going to happen anyway. Artists, labels, managers, publishers all need to decide whether to work with streaming now, and have some control over the process, or wait until they have no choice at all.

The Smartphone Innovator’s Dilemma

The recent rumours concerning Amazon’s possible flirtation with launching a smartphone, whether baseless or not, on the eve of Apple’s new product launch, shine an interesting light on a challenge that faces all smartphone manufacturers: where to innovate next?

In the mid 2000’s I oversaw the launch of JupiterResearch’s European mobile research practice and also at Jupiter led countless mobile data and research projects as well as working closely with the leading handset manufacturers.  Throughout that time I saw the early days of the emergence of the smartphone sector up close, and the rate of innovation was both often startling and manifested itself in highly tangible ways. Screen sizes got bigger, handsets got smaller, camera megapixel counts grew, and a whole host of new features arrived including video, email and calendar synching, true tones, 3.5mm headphone sockets, MP3 sideloading, PC-synching etc.

Then in June 2007 Apple came along with the iPhone and transformed the mobile phone market forever.  Apple had characteristically waited until the smartphone market was ready for primetime before launching the iPhone and then pursuing an equally characteristically disruptive strategy.  The last few years of the 2000’s saw successive innovation step changes, with meaningful new marquee features for each new generation of devices. Now though, on the eve of Apple’s next smartphone announcement we are at an unusual place.  There is not that much more that a smartphone can really deliver at its core.  Smartphones were all about disruptive innovation, now they have become sustaining innovation. Thus the new features that are used to distinguish one product from the next are either evolutionary improvements (e.g. better screen resolution, better camera, better battery life), or bleeding edge gimmicks that are not yet ready for primetime (e.g. Siri, Eye Tracking).  The smartphone has hit upon its optimum product construct and thus product changes from here-on-in will predominately be iterative, sustaining innovations rather than disruptive ones.

That in itself is not an inherently bad thing.  Indeed it is typical of a mature market, but it also makes the market right for disruption, and if there is less scope for that disruption to be product focused, it is more likely to be strategy focused.  Hence we have started to see the emergence of strategies such as Mozilla’s Firefox OS devices aimed at driving open web standards and the rumoured Amazon phone strategy aimed at driving e-commerce and digital content revenues. So the established incumbent players face an innovation dilemma for their flagship devices: do they continue to focus their efforts on packaging sustaining innovations with occasional product gimmick, do they try something dramatically different, or do they try the third way of a disruptive strategy instead?

For a company like Samsung with a plethora of product SKUs it is possible to experiment with bleeding edge innovation on niche devices but it is the flagship devices where marketplace impact is measured.   Go too fast on a flagship device and you will alienate your mainstream customers, go too slow and you will be positioned as an innovation laggard.  The irony of course being that it is the less-headline-grabbing sustaining innovations that generally deliver the most discernable user benefits.

A perhaps even greater irony is that it is the software that really delivers the differentiation to most consumers.  With standard smartphone hardware functionality (cameras excepted) being broadly comparable in the eyes and ears of most mainstream consumers, it is what the software enables that people truly notice.  The apps, the content, the features.  Thus iOS 7 will transform how iPhones behave yet Apple will still need a marquee feature to sell the next iPhone, even if that is a bleeding edge gimmick. Against this backdrop the third way of disruptive strategy becomes ever more appealing for smartphone companies.  Hence Apple’s rumoured intensified push towards lower price segment consumers with a scaled down version of the iPhone.

The likelihood is that whatever phone product Apple launches tomorrow it will probably leave many observers disappointed because it will not be seen to be a dramatic innovation step change.  Apple might surprise us and pull a rabbit out of the hat but it is more likely not to because the simple fact is that it is harder than ever to dramatically innovate smartphone products. Though we may not yet have seen the end of the age of disruptive innovation in smartphones, we are certainly in a lull cycle.  Which is why Samsung, and quite possibly Apple, are looking to adjacent markets such as smart watches, as opportunities to innovate aggressively in wild west technology frontiers in order to re-earn their innovation stripes.

Kim Dotcom’s Just Getting Started

Self-styled digital Robin Hood Kim Dotcom’s highly effective PR machine successfully secured him vast media coverage this week for the launch of his new locker service Mega, which as the Register’s Andrew Orlowski correctly points out, isn’t actually anything particularly new or innovative.  But in some ways that doesn’t even matter. Kim Dotcom matters most to media companies now because he is a focal point of anti-media-establishment sentiment.  He’s the plucky start up taking on the fat cats of the media industry.  Except of course that he’s done a pretty impressive job of establishing himself as an fat cat too as this and this reveal. Ironically Kim Dotcom has made his money using the same assets as the media fat cats: i.e. music, movies and TV shows.  The difference being that Kim Dotcom doesn’t finance the creation of the content. But Dotcom’s supporters are willing to turn a blind eye to his play boy ways because it is all done while sticking a proverbial finger up at the old guard

But all this is old news and obscures why the media industries should actually be afraid of Kim Dotcom, very afraid.  Dotcom has the vision for a differentiated consumer experience that no other ‘piracy’ innovator has yet had.  Prior to his much publicized FBI raid and the closure of Megaupload.com, Dotcom was on the verge of launching a new, interactive, multimedia content service called Megabox.  It didn’t happen, but – judicial wrangles permitting – it will, and will likely be built upon the foundations of the newly launched Mega.

Piracy Cold War

To date file sharing (by which I mean all forms of unlicensed content downloading and uploading, not just P2P) has been in a secrecy arms race with the media industries.  Every time the media industries have caught up with file sharing, the networks and services have devised new means of evading policing and enforcement.  Although media companies have always inherently been trapped in reactive mode, unable to set the terms of engagement, this strategy has nonetheless been highly effective at keeping file sharing services on the back foot.  As with the cold war two super powers have expended vast resources staying still, investing heavily in being armed to the teeth.  The net result is that piracy has continued to grow but hasn’t been through any transformational innovation in years.  Also the sites and services have become progressively more complex and sophisticated to use and navigate. Pushing them slightly further away from the mainstream.

But what happens when someone finally decides to innovate the file sharing user experience?  When someone scales down the combat zone investment and focuses instead of delivering a great user experience in the way that licensed services do.  That is when media companies need to start worrying.  As I wrote back in February last year:

The nightmare scenario for media companies is that the pirates turn their attentions to developing great user experiences rather than just secure means of acquiring content.  What if, for example, a series of open source APIs were built on top of some of the more popular file sharing protocols so that developers can create highly interactive, massively social, rich media apps which transform the purely utilitarian practice of file sharing into something fun and engaging?  If you though the paid content market was struggling now imagine how it would fare in the face of that sort of competition.

Kim Dotcom has the requisite combination of vision and balls to take piracy through a user experience revolution.  If he does then piracy will become a vastly more worrying adversary for media companies than it currently is.