Samsung and Meeting The Device Use Orbit Challenge

Two pieces of Samsung related news hit the wires this week:

Samsung might not be one of the big players in digital music but this mixed service portfolio approach indicates a strategic pragmatism that is crucial for anyone trying to compete with Digital Music’s Triple A of Apple, Android and Apple.

But the approach – and 7 Digital’s broader mobile success – is also indicative of an increasingly important strategic imperative for digital music services: namely navigating consumers multiple and interrelated device orbits (see figure).

Ubiquitous connectivity is, to put it mildly, some way off and the stream isn’t going to fully replace the download anytime soon.   And yet, more people are using more devices to listen to music in more places than ever before, and these usage patterns are creating an increasingly complex mesh of usage orbits.  Consumers are becoming more and more adept at developing specific and distinct use cases for their growing number of devices.

Historically, music allowed itself to be pulled across different devices, responding to consumer needs.  This was a perfectly adequate first stage but now music services need to do more than just deliver music to where consumers are.  To prosper in the next stage, music services need to tailor music experiences and value propositions both to specific use cases and be designed for co-existence within multiple, interrelated device orbits.

Coexistence Strategies

Of course some services will hope to simultaneously address every device use orbit (good luck on getting the licenses for that).  But the smart services will design nuanced co-existence strategies that ensure the core use case not only fits alongside a consumer’s wider digital music activity but establishes itself as an indispensible complement to it.  For example getting onto Sonos’ new Play:3 will likely be a more valuable route to the living room than trying to develop integrated hardware from scratch.  Similarly delivering mobile Facebook playlist support and integrating discovery tools like the Hype Machine will prove every bit as important to the consumer experiences as securing the rights to deliver the music itself.

Consumers will continue to have more devices, more content and more music service choices. The challenge that music services and device manufacturers such as Samsung must meet is helping join those digital dots by navigating consumers’ device use orbits.

BBM Music: First Take

Today Blackberry announced their anticipated BBM Music service, which it transpires is powered by white label cloud music stalwart Omnifone (who also power the likes of Sony and Vodafone).

In short the service offers:

  • 50 tracks per month for a £/$ 5.99 fee
  • Is available to Blackberry Messenger (BBM) users
  • Users’ tracks are available for their BBM friends to listen to (so the more friends with the service the more music you have access to)
  • It is launching in Beta in the UK, US and Canada today and will eventually roll out to 18 countries

Blackberry have done something with BBM Music that many other services haven’t: they have targeted a specific defined consumer segment. Which in turn is something that the majors, Universal in particular, are increasingly looking for in music services they license to.

Blackberry has weathered a lot of tough marketplace scrutiny over recent years with many questioning how RIM will deal with the iPhone threat.  Those concerns are valid ones but primarily relate to the email-focused business users and misses the massive importance of the youth segment to Blackberry adoption.  Blackberry’s youth appeal largely stems from BBM presenting a cost-free alternative to texting for text hungry youths.  Blackberry’s ability to successfully simultaneously target these two almost diametrically opposed segments with the same device portfolio has been little short of masterful.   This was well illustrated to me when a friend recently told me about when his teenage daughter saw him checking email on his Blackberry she asked him “what do you need a Blackberry for Dad?  Aren’t you too old for one?”!

So by targeting their youth centric installed base of 45 million BBM users with a cheap, inherently viral and social music service plays to one of Blackberry’s key strengths.  Of course direct comparisons with Rhapsody, MOG, rdio, iTunes, Spotify etc are unlikely to be unfavourable, but that’s simply not what BBM Music is about.  We’ve reached the stage of maturity in digital music where we shouldn’t be talking anymore about ‘an iTunes killer’ or a ‘Spotify killer’.  Instead the music industry needs targeted segmented offerings that grow the market by engaging with un-penetrated consumer segments.  In that context, BBM Music should be a valuable addition to a digital music marketplace that is in real need of new differentiated services.

Finally….the timing of the announcement, off the back of BBM’s new found infamy as the communication method of choice for London’s rioters is unfortunate but does open up some interesting potential marketing slogans, such as ‘download while you loot’ and ‘so cheap it’s a steal’….
And if you missed it, don’t forget to submit an email subscription to this blog to get a freecopy of my latest report: ‘Agile Music: Music Formats and Artist Creativity in the Age of Music Mass Customization’.  See here for more details.

Competing With Digital Music’s Triple A

Over the last two years the digital music stores-and-services-marketplace has consolidated and – with a few notable exceptions – stagnated. And as the likes of Comes With Music, Spiral Frog and imeem added to the ever growing list of failed but innovative start-ups, the queue of new entrants grew ever smaller.  Successive failures – due in no small part to hefty advances and license fees paid to rights holders – have made investors increasingly sceptical of injecting cash into digital music services that require record label licenses.  On the flip side rights owners have seen more and more services failing to deliver on their promises and thus started – major labels in particular – to demand greater financial guarantees to reduce their exposure to risk.

Meet Digital Music’s Triple A

The net result is a dramatic slowdown in the number of new stores and services coming to market, the direct consequence of which is an ever larger reliance on the Digital Music’s Triple A, namely:

Apple
Android
Amazon

The problem though, is that just as this consolidation is kicking in, so is a slowdown in digital growth, and long before it should be happening.  Digital Music’s Plan A isn’t working.  Apple’s shift of attention from music downloads to Apps, Video and Books is a key contributing factor, but the lack of wider marketplace innovation is equally influential.  But it is the Triple A to whom the music industry is increasingly looking to fix the problem.

SPACE (The Five Letters That Buy You A Chair At Digital Music’s Main Table)

The Triple A’s ‘last men standing’ credentials shouldn’t be under estimated – although they’re not the only big consumer brands left in town (as Spotify and Beyond Oblivion among others will attest).  Yet they are the music industry’s three big safe bets because each of them have the same crucial combination of assets.  They all have SPACE.  That is:

  • Scale: rights owners can’t afford Plan B to be a failure.  That’s why they need big players with big audiences, big reach and big everything else.  The logic goes; the bigger the player, the greater chance of success and the greater chance of pulling in previously elusive mass market audiences.
  • Product: each of Digital Music’s Triple A are in the digital music game with ulterior motives. Apple want to sell devices. Android is all about the operating system and what it can deliver to Google.  Even Amazon’s motive for being a major player is an ulterior one.  They need to remain a major player in music retailing to protect the low-price customer entry point on the purchase consideration ladder. i.e. you start off buying music and end up on PCs and fridges.  Not being a major player in digital music retail would risk a major long term dent on high ticket item sales.
  • Ambition: all three have big ambitions in digital music and appropriate commitments to funding that ambition.  Not all of them (that’s you Android and Amazon) might yet be putting that budget in the places the labels would like them to, but the strategic ambition and commitment is there nonetheless.  These guys are all playing a big, long game.
  • Cash: Even if Android and Amazon may have temporarily baulked at paying licenses for locker services, rights owners know they have big budgets to invest in licenses for other accompanying services – hence no law suits (yet) over the licence-free locker services.  The revenue and balances of The Triple A provide the financial security the labels in particular are so keenly seeking.
  • Ecosystem: An ecosystem is arguably the single most important ingredient of a successful digital music service (ask the c.300 European services which don’t have an Ecosystem play and are left fighting over the 30% of market share Apple leaves them to squabble over).  Apple’s device / service ecosystem is best of breed. Android’s, though based on a different ideology of (semi) openness, is an eager challenger.  Amazon’s is a work in progress; the locker service, music buying customer base and collaborative filtering are all ingredients for Amazon, and the forthcoming tablet may prove to be the secret sauce that completes the recipe.



Drop the P

So if you are not one of the Triple A, what can you do to compete, to get your seat at the main table?  For a start you are going to need at least four of their key attributes, namely Scale (or a clearly demonstrable way of achieving it), Ambition, Cash and Ecosystem (even if this is achieved with 3rd party channel partners).  All of which of course skews the market towards heavily funded major players.  Assuming you can deliver on these attributes, you are still going to need to have the extra ‘X factor’ which will give you the differentiation necessary to steal a march on the three incumbents.

And here’s where there is a big chink of light in the darkness. If you are a pure play music service, not constrained by the needs of your core non-music product(s) then you can throw all of your energies into innovating your core music product experience in a way the Triple A have patently failed to do so yet.  How is it possible that all that Amazon – the longest tenure major player in online music – has so far only launched an MP3 store and a locker service? Similarly, how is it possible that Android haven’t yet launched the world’s most technologically innovative music service?  And how can Apple still not have moved out of their a la carte store beachhead? (Their locker player is not exactly a bold thrust into new territory, however well executed).

Music fans need a new generation of innovative, ground breaking digital music experiences.  The Triple A’s inherent bias of their core non-music products looks set to continue to hinder their ability to deliver.  Here’s hoping that this set of circumstances creates a window of opportunity for (well-funded) disruptive innovations rather than a blueprint for continued stagnation.

Why Digital’s Next Steps Can’t Be Baby Steps

What follows are highlights from my speech at the Westminster Forum on the UK Music Industry 2011 and Beyond

I want to spend the next few minutes building the case that digital music is in a period of transition, a stage that presents us with a unique and ever narrowing window of opportunity to drive truly transformational change within the music industry.  The fact that this panel focuses on both retailing and licensing is emblematic of the convergence, nay collision, of product models and business models.  Collisions that help explain the current turmoil the music industry faces and in which the foundations for future growth lie.

So what exactly has gone wrong?

Firstly, digital retailing is looking increasingly unfit for purpose. It has failed in its key objectives, included in which is a failure to generate a format succession cycle.  With the cases of the cassette and the CD, these formats were firmly in the ascendency by the time their predecessors were in terminal decline, and they then went on to drive periods of unprecedented prosperity.   The same though patently does not apply to the paid download.  However if you swapped out paid downloads for MP3s then the line would be off the chart.  Consumer demand is not the problem.  Current digital retailing formats failing to meet consumer demand is.  And of course Apple’s closed iTunes ecosystem plays a massive role here too.

And if you look at the licensing side of the equation we have problems there too.  Rights owners and artists both feel they don’t get enough from Freemium cloud services, and yet the services themselves feel that they pay too much to those very same parties to be financially sustainable.  With cracks appearing right across the value chain it is looking increasingly like there are too few levers left to pull to fix the model.

Now as concerning as all this may be it doesn’t mean the end of the music industry, nothing like that in fact.  Instead it is simply the end of the beginning: the end of the first chapter in the digital music business.

What we have now are transition products that did a great job of starting us on the path out of the analogue era but their usefulness is drawing to a close.  The paid download is a sustaining innovation.  For those of you not familiar with Clayton Christensen’s ‘Innovator’s Dilemma’ this refers to the principle that companies essentially have two ways to innovate their products.  The first is that they can play the safe game where they tweak features and pricing to defend market share and revenue growth.  These are sustaining innovations.  Or they can take a gamble with disruptive innovations that have huge potential but also massive risk and can even shatter their existing business models.

Unsurprisingly most incumbent companies opt for the safe bet.  But the safe bet is often anything but safe, as it leaves an innovation vacuum which is swiftly filled by the competition, or in the case of music, by the illegal sector.  File sharing was the disruptive and transformational innovation of digital music, not the paid download. Added to this, innovation has been too heavily focused on business models and not enough on user experience. Now the music industry needs to create its own transformational innovation, putting user experience to the fore, before the informal sector does so….again.

So how do we get out of this situation?

Here’s my uber edited solution: two segments and three monetization models.  Forget for a moment the complex multi variant segmentation schemes you’ve painstakingly constructed. Think instead of consumers as those who will pay and those who won’t.  On the free side we have those consumers who are falling out of the habit of buying CDs and either haven’t discovered digital alternatives yet, or if they have they are perfectly happy with free services such as Pandora, Spotify, We7 and of course their killer app: YouTube.  Here also are all those pesky freeloading pirates – they’re not lost customers, but they’re probably not about to start paying 9.99 a month for Spotify Premium either.  And on the other side we have the highly engaged music aficionados.  This used to just be the ‘50 quid bloke‘ but sites like Pledge Music are creating a new generation of younger music fans who will pay good money for recorded music when they establish a direct relationship with artists.

The way to monetize these three groups is threefold: at the bottom of the hierarchy are ad supported free services for the passive majority and the freeloaders, where the contagion of free is legion; at the top there are premium services for the much smaller numbers of engaged aficionados (but they need an entire new generation of music products that are interactive, social and connected, a true successor to the CD – if all they have to chose from is 9.99 a month streaming rentals then this segment will dwindle to the few percentage points of consumers who actually pay those services); and in the middle we have the best balance of scale and ARPU, with subsidized services where third parties such as telcos and car manufacturers pick up some or all of the wholesale cost to make music feel-like-free or close-to-free for end users.  This is the monetization model which will pull in many of those who won’t pay and also those who are in danger of falling out of the habit of paying.

So there you have it: 2 segments + 3 monetization models = the foundation for a prosperous music industry in 2012 and beyond.

Spotify’s US Launch: First Take

Spotify finally today announced their excessively anticipated US launch. Protracted negotiations with the US labels turned this into one of digital music’s longest running sagas.  And although the $100 million of extra funding for label guarantees and advances seems to have successfully assuaged concerns, the labels weren’t just digging in their heels for the sake of it:  the US digital music market has a lot at risk in the face of Spotify’s arrrival and of course there are growing doubts about the Freemium model.

The label negotiations resulted in the last year in  limits being put on the free element of Spotify so that the full unlimited free offering that got Spotify off to such a great start in Europe will only be available to an initial swathe of invited users in the US.  Once the invite-user phase is over, free users will get 20 hours a month for 6 months, falling to 10 hours thereafter, along with a 5 plays-per-track limit.

When Unlimited Isn’t Actually Unlimited

The 10 hours / 5 plays mix is clearly intended to make people use Spotify as a complement to other services, not as a replacement.  Many listeners simply won’t bump into those restrictions.  Those that do though will be the more engaged music aficionados who will either have the will and means to pay for the unlimited premium offering, or will be young kids and those who can’t pay 9.99 a month and they will look elsewhere i.e. to YouTube and to illegal alternatives.

There is evidence to suggest that both might have happened in Europe: in March Spotify announced it had 1 million paying subscribers (something that no other premium services has yet achieved).  But they also announced that only 6.7 million of their total 10 million subscribers are active.  So a third of Spotify’s users either a) just got tired of the novelty of the service b) don’t use it much c) got fed up of the new restrictions and voted with their feet.  The likelihood is all three play a role.

This all matters because ‘just how free’ Spotify actually is will play a major role in deciding how similar an impact it will have in the US compared to Europe.

Spotify Will Be Net-Positive for the US Digital Music Market

My take is that Spotify will be successful and will also be disruptive but on balance will be net positive for the US digital music market (see figure).

Spotify has that priceless commodity: momentum.  More than that, they have mastered the art of maintaining momentum.  Most other services would have seen their momentum fizzle out in the face of a yearlong delay to a US launch.  Not Spotify. Instead they actually managed to use it to sustain momentum.  How?  Because of another of Spotify’s core strengths: scarcity.  Nothing drives demand like scarcity of supply.  Spotify built its European growth upon a perception of scarcity through its invite-only launch. It is set to do the same in the US, but with additional boon of massive pent up demand from US digital music fans who have had to deal with absolute scarcity this last year.

Can Spotify Afford to Be Successful in the US?

Until Spotify ramps up its US ad sales business every free user will be proportionately more costly than free European users.  But Spotify has learned a lot from its European experience.  It has learned which levers to pull to manage growth.  I expect Spotify to plan and manage US growth on a ratio-target basis, with free users never being allowed to exceed a certain share of total users.  E.g. the 50 million users target touted by an over-zealous Spotify ad sales exec would require 5 million paying subscribers to have signed up.  Spotify can’t afford to screw this up.  Getting the economics right will be crucial to a successful exit, which has surely got to be the next move.

What Do US Music Services Have to Lose?

If Spotify can be successful, to what extent will their gains come at the expense of the incumbent services?

  • Rhapsody, Napster, MOG, Rdio et al: the incumbent premium subscription services are right to be nervous: some of them have had years to make the model work yet haven’t managed to reach the 1 million subscriber mark.  Rhapsody has announced that it just hit 800,000 paying subscribers, but despite being 150,000 up from the last tally it is only 25,000 more than Q4 2008 which equates to a net gain of just 833 new subscribers a month. Rhapsody’s position is reflective of the overall stagnant nature of the premium subscription sector in the US.  Prior to Spotify the European subscription market didn’t even get out of the starting blocks, let alone have the chance to become stagnant.  So the US subscription services have good reason to fear Spotify as a premium player.  With the restrictions on free plays I don’t anticipate them losing many subscribers to Spotify Free though.
  • Pandora: whatever Pandora’s Tim Westergren says, Pandora will see some of its users defect to Spotify.  Yes it is a different value proposition and yes there are many users for whom Spotify will be no alternative.  But there will be those who simply tolerate not being able to listen to exactly what they want rather than perceiving it as part of the value proposition.  Those users, for whom free is the key driver, will be at risk.  Once again though, the limits on Spotify’s free tier should contain this threat to some degree.
  • Apple, Amazon and Goole: none of the big three really have much to fear given their different positioning and products but will watch for new Spotify product features cautiously.  They may even feel the need to accelerate launch of free on-demand streaming in their locker services (i.e. not just of users’ existing music collections)

So it becomes clear that the record labels have a done a decent job of engineering Spotify’s licenses in such a way that the incumbent US services face minimum competitive risk.   One hopes that this doesn’t also mean that Spotify’s wings have been clipped so far that it won’t be able to truly shine in the US.  Because Spotify has done a huge amount in Europe: bringing digital music to the mainstream and freeing it from the chains of the iPod.

I actually hope that Pandora and Rhapsody et al do feel some serious competitive pressure, so that they can focus on what they need to do better and then lean on the labels to give them the licenses to do so.  Because the best way the labels can drive the market is by using licensing to empower services with more functionality rather than using it to restrict disruptive threats.

Making Freemium Pay: An Artist’s Perspective

With the much anticipated US launch of Spotify and the successful IPO of Pandora there’s a very palpable sense of momentum in streaming music.  And that’s great news, the future of music revenues will depend upon a successful transition from distribution based models (downloads, CDs etc) to consumption-era models (on-demand streaming etc.).  Yet, there’s a growing sense that the current Freemium business model just isn’t fit for purpose.

I’ve written before about the challenges of squaring the consumption circle (see my post here for more).  There is a direct tension arising from record labels feeling they don’t get enough from ad-supported music, and from the services themselves feeling that they actually pay too.  To complicate matters even further, it is becoming increasingly apparent that artists aren’t getting enough out of ad-supported music either.

Slicing the Digital Income Pie

Singer / songwriter Benji Rogers of Marwood (and who also happens to be the founder of the great direct-to-fan funding music site Pledge Music) generously offered to share his digital revenue data to illustrate how his income spreads between different music services.

Looking at Benji’s digital music revenue for March and April (see figure 1) the glaring disparity between download stores and streaming services is immediately apparent.  In terms of units of activity (i.e. a stream or a paid download) streaming services are way out in front, with 92% of total units for the period, yet in revenue terms the relationship is reversed, with them accounting for just 3% of total income.  (You can read more about Benji’s digital music income here).

Now of course streaming based services are always going to generate a significantly lower unit of income than a download, but the inverse income-to-unit relationship here is misaligned to the extreme.

What Happens If / When Downloads Go Away?

The other side of this equation is the vastly important role that downloads play in artists’ recorded music income. The download revenue is effectively bringing the income dynamics of the old CD model into the digital equation.

But there is also massive risk with the download dependency.  Download sales growth is slowing and there is little evidence that the 99 cents download model translates well outside of the iTunes ecosystem.  Worse still, the current momentum in digital music business models and behaviour is in streaming not downloads.  Take a look around: Amazon, Google and of course Apple have all jumped on the locker bandwagon.  And as Benji’s data illustrates painfully well, streaming is where consumers are going too.  While downloads may not disappear entirely, their role is set to lessen markedly in the midterm future and most of the alternatives in play from the big three players generate much lower income for artists.

Premium, Ad Supported, Freemium…Streaming Just Isn’t Adding Up for Artists

And to be clear, this isn’t just a problem with Freemium.  Streaming services as a whole just aren’t delivering enough income for artists.  Spotify is much maligned for the raw deal it is perceived to give artists, yet when you look at the average-pay-per stream Spotify actually pays out more than that darling of premium services Rhapsody (see figure 2) despite the majority of Spotify’s streams being ad supported rather than premium (something feels broken there).

The simple fact is that the disparity between paid downloads and streaming is unsustainable.   It just isn’t tenable that 3 paid downloads from Amazon can still deliver 50% more revenue than all the streaming services combined over the same period and yet have less than 1% the activity level of those services.

Is Freemium No Longer Fit for Purpose?

No one in the Freemium value chain thinks that they’re getting enough income: not labels, not publishers, not artists, not the services themselves. It looks increasingly like the Freemium model itself is fundamentally flawed, that any fix will do little more than paper over the cracks.  And the new wave of locker services are only marginally better.  They share the same fundamental revenue share dynamics when compared to download income (for all parties).

So what is the answer?   As I said in my June Midem post (click here to read more), first and foremost business models and products must be innovated.  There simply aren’t enough levers left to pull in the ad supported streaming business models to fix the problem.  That doesn’t mean that services such as Spotify, Pandora and We7 don’t have a future, they absolutely do, but their future lies in successfully bringing in business partners to subsidize  premium tiers of their businesses to make music feel-like-free or close-to-free for  mainstream customers (see my previous post on Digital Music’s Third Way for more on this).  Spotify’s US launch will bring a great new music experience to US music fans, but Spotify will need partnerships like it has struck with Virgin Media, 3 and Telia Sonera in Europe if it is going to be sustainable.

But most importantly we need a new generation of music products that leverage social, user participation, access models, multimedia and device connectivity to the full.

Ad supported streaming can evolve, it doesn’t need to be the Neanderthal of digital music’s evolutionary chain, but unless evolution happens quickly there is a very real risk that many artists will start seeing their recorded music careers face extinction. 

Spotify and Virgin Media Take The Third Way

UK cable broadband and TV provider Virgin Media and Spotify today announced the partnership deal they’ve been working on for some time.  The deal will ensure that Spotify is delivered across the web, mobile and TV to Virgin customers.

On the surface this might not seem like such a big deal, but don’t be fooled, it is potentially huge…just so long as it is executed upon properly….

A Marriage of Supreme Convenience

This is a marriage of supreme convenience: Virgin Media and Spotify really need each other right now.  Virgin Media has been pushing hard at delivering a truly differentiated music service for some time now.  Just over two years ago they announced the holy grail of digital music: an unlimited MP3 subscription service in partnership with Universal Music (you can see my post about the announcement here).  Unfortunately this was too big a step taken too soon for the rest of the majors, and Virgin and Universal were forced to back down. (For the record, the arrival of unlimited MP3 is a matter of ‘when’, not ‘if’, whatever some label execs might think.)

So now Virgin have turned to Spotify for plan B, and Spotify need Virgin just as much as they need Spotify.  Spotify’s struggle to make the economics of free add up are well documented and their struggle towards profitability has raised some difficult questions about the Freemium model.  Having  Virgin deliver paying customers to Spotify’s door will be a major boost for the Swedish streaming service.

Digital Music’s Third Way

For years now I have been advocating a Third Way for monetizing digital music and Spotify and Virgin look like they’re about to take this very route.

Right now digital music has two options: Paid (iTunes, Rhapsody etc) and Free (YouTube, Pandora etc).  Paid generates high average spend but only appeals to a minority of customers.  Free appeals to the mass market but doesn’t generate enough income for rights owners nor enough profit for services.

Like it or loathe it, the Internet has made most people expect music to be free, whether that be from YouTube or BitTorrent etc.  Free is of course the only way to truly fight free, but if free doesn’t pay the solution is to make music ‘feel like free’ by getting a third party to subsidize some or all of the cost.  This is the Third Way of Digital Music (see graphic).

Go Big Or Go Home

Spotify have already experimented with this approach with mobile operator 3 and ISP Telia Sonera.  This is potentially Spotify’s most important deal yet. But for this deal to realize its potential, Spotify and Virgin will have to hit upon heavily subsidized prices, ideally with the cost to consumer hidden entirely in some bundles.  Simply offering a couple of £ discount won’t fly.

Spotify and Virgin Media have the opportunity here to set the gold standard for subsidized subscription models.  Here’s hoping they seize that opportunity with both hands and kick start digital music’s most viable route to the mass market.

Can The Music Industry Afford Pandora to be the Shape of the Future?

The music industry has been following Pandora’s IPO with baited breath and has largely been encouraged by the degree to which the financial markets value one of the few true gems of the digital music space. But it doesn’t all smell of roses. Indeed Pandora’s Tim Westergren has made no secret of his concern over how large a share of his revenues are accounted for by royalty payments: they are by far the largest single cost and following a (very) brief spike into profitability Pandora remains unprofitable, despite massive consumer adoption.

The debate about royalty payments and music service profitability is well documented – profitability remains a wishful daydream for Spotify and even Apple only just break even on iTunes. But a quote from Pandora’s CTO Tom Conrad opens up an intriguing new angle:

“The figure that surprises most folks is that about 80 percent of music consumed each week comes from music radio. Only 20 percent comes from owned music. We’re really focused on defining the future of radio. That’s the mainstream opportunity.”

If streaming is the future of music consumption it raises some big questions because there are inherent tensions and contradictions in the current situation:

1. Digital music is a low margin, often loss-making business for services
2. Streaming services (including iCloud etc.) are helping driving a paradigm shift from ownership to access
3. Yet those often ad-supported streaming services (especially semi-on-demand services like Pandora) don’t generate enough income for the music industry.

The irony is that the more successful they become in terms of listening hours and user adoption the more rights owners feel concerned about them cannibalizing higher value ownership based transactions such as downloads and CDs. And in turn the more tempted they may be to hike royalty fees.

Radio has always played a dual role for the music industry: it has been the best discovery service out there but also the single largest competitor to music sales. The paradox is that many music fans wouldn’t buy as much music if they didn’t have radio and yet also many radio listeners would buy more music if they didn’t have radio.

The future of music consumption is going to become increasingly access-based. There’s simply no escaping the fact. And yet the current digital music value chain is not prepared for it. Something needs to change, and soon. More common ground needs to be found between rights holder and services but also new types of services are required that throw the out-dated distinctions between ownership and listening out of the window.

The future of music will be access based, but access has to mean much more than streaming alone.

iTunes in the Cloud: A Great Start, But Just That

So Apple finally launched their much anticipated cloud music service, and they didn’t disappoint. At least by cloud-locker standards they didn’t. But I wanted more, a lot more.

Here’s my quick take on what Apple launched and where I think they should go next:

Automatic Downloads

What is it? Enables iTunes buyers to transfer music purchases to any iTunes supported device of songs that you have bought from iTunes.

How much of a big deal is it? This is a welcome move, but one that really should have happened long ago, and it’s entirely not Apple’s fault it took so long. The music industry still thinks of digital music on a per-device basis. But restricting the devices people can take their purchased music on only weakens legal services when compared to illegal ones, which of course have no such qualms. Thinking of music consumption on a device basis rather than a person basis is simply the wrong worldview and it needs to change, fast. Automatic Downloads are nice move towards a new way of thinking, but of course within the tightly controlled confines of the iTunes ecosystem.

iTunes Match

What is it? Matches your music collection against Apple’s cloud catalogue and upgrades your music to 256 kbps AAC, all for $24.99 a year.

How much of a big deal is it? This is the sort of locker service Amazon and Google *should* have launched. Instead of having to painfully upload your entire music collection you simply need to scan and match, a process which should take a matter of minutes. It makes a cloud collection a seamless extension of your local collection.

Mulligan’s Take: With these simple but elegantly executed features Apple has created a best-of-breed cloud / music store combination that makes much of the competition pale by comparison. Apple has done what Apple does best: it has let the competition move first, learned from their mistakes and launched a better product. And yet it is it enough? Apple have done more than enough in terms of the current cloud-storage debate, and this is a clear shot across the bows of Google and Amazon’s burgeoning digital music ambitions. Also, make no mistake, Apple will have worked hard to get what they have from the rights holders to get this service to market. But it doesn’t do half as much as it could do, to move the digital music conversation on beyond the ‘distraction’ of locker services.

Locker services – in iTunes Match form – should be part of every digital music service, just like there should be a play button on every MP3 player. But they are just that: a feature not a service. If the music industry is going to take big strides forward over the coming years it needs more than locker services, much more. It needs rich, interactive and social music services that make people fall in love with the power of digital music again. In the context of iCloud that would mean:

• On-demand streaming of music you *don’t* own
• Monthly iTunes purchase credits which (unless you specify otherwise) automatically convert into purchased downloads of the songs you played most last month but didn’t own
• Subscription costs bundled into the cost of Apple devices at point of purchase
• Ping!, Genius, Twitter and Facebook deeply integrated to create a truly social music consumption and discovery experience
• Limited Garageband and iMovie functionality integrated to enable mash-ups

That is of course a lengthy wish-list and one that won’t be fulfilled anytime soon. But nonetheless that is the sort of thing the record labels need to encourage Apple, Google and Amazon to build over the next few years if they are going to get digital music out of its current impasse.

How Mark Zuckerberg Hopes Music Will Prevent Facebook ‘Doing a MySpace’

Facebook Music

Facebook is rumoured to be on the verge of integrating a number of music services including Spotify into its platform.  The ‘when will Facebook take on iTunes’ question is one which refuses to go away, but it’s the wrong question to ask.  Mark Zuckerberg doesn’t want to take on iTunes, in fact he wants to co-exist.  Facebook, as the early-follower of social networking allowed first movers like MySpace to make the mistakes from which it could learn invaluable lessons.  MySpace’s much vaunted but ultimately unsuccessful music service is one such lesson.

Zuckerberg’s music strategy is simple:

Make Facebook an integral part of the music experience without ever getting bogged down in paying to license the music from record labels.

Partnering with Spotify et al fits perfectly into this smart strategy.  Music has always been social but until the advent of social networks we had to rely on our friends and family for recommendations.  In the social age we have a much wider group of taste makers to tap in to.  Similarly we can identify ourselves and our peers by our music on a much larger scale than ever before.

Social media enriches music consumption in a way that was not previously possible.  Zuckerberg gets this and he wants to ensure the process goes further, much further.  He wants social to become the glue that holds the music consumption and discovery experiences together, to such an extent that music companies simply can’t survive without it.  And he wants to do the same for TV, movies and other media too.  Why?  It is the safeguard against Facebook ‘doing a MySpace’.

In its heyday it was hard to imagine that MySpace would ever be anything other than the world’s dominant social network.  Its rapid decline is a sobering reminder that not only is nothing permanent, but also that in the digital world it can tumble with terrifying rapidity.  MySpace failed because it was dispensable.  Thus when the new kid in town arrived the crowds flocked away in their droves.

Facebook is neither invincible nor immortal. Though it is much more deeply embedded than MySpace ever was, all that it needs is something new to do what Facebook does better and more. So in this context making Facebook a core component of 21st century media consumption is a bid at future-proofing it against a world in which mainstream social networking goes elsewhere.

Ironically if the strategy works the music industry may save Facebook but Facebook may do little to save the music industry.  That will only happen if (and hopefully when) the industry starts to truly embrace social music as the foundation stone of a new generation of music products and services.