The Case For A Freemium Reset

Ministry Of Sound’s Lohan Presencer stirred up a hornets’ nest with his impassioned critique of the freemium model at a recent MWC panel. This is one of those rare panel discussions that is worth watching all the way through but the fireworks really start about 16 minutes in. For a good synopsis of the panel see MusicBusiness Worldwide’s write up, for the full transcript see MusicAlly. I’m going to focus on one key element: free competing with free.

Free Isn’t The Problem, On Demand Free Is

Free music is a crucial part of the music market and always has been thanks to radio. The big difference is that radio is not on demand. Even the Pandora model, which quite simply IS the future of radio, is not on demand. The on demand part is crucial. Although labels have a conflicted view about radio there is near universal agreement that the model works because it is a promotional vehicle, it helps drive core revenues. But turn free into an on-demand model and the business foundations collapse. The discovery journey becomes the consumption destination. To paraphrase an old quote from a label exec ‘if you are playing what I want you to play that is promotion, if you are playing what you want to play that is business’.

P2P Is In A Natural Decline, Regardless Of Freemium

The argument most widely used by streaming services in favour of the freemium model is that it reduces piracy. There is some truth in this but the case is over stated. P2P was the piracy technology of the download era. Its relevance is decreasing rapidly for music in the streaming era. In fact mobile music piracy apps (free music downloaders, stream rippers etc.) are now more than twice as widespread as P2P. So the decline in P2P can only partially be attributed to streaming music services as it is in a trajectory of natural decline as a music piracy platform.

Freemium Isn’t Killing Piracy, It Is Coexisting

But even more importantly free streamers are using those new, next-generation piracy apps to turn their freemium experiences into the effective equivalent of paid ones, by creating local device caches for ad free on demand play back. In fact free streamers are 65% more likely to use a stream ripper app than other consumers. They are also 64% more likely to use P2P and 57% more likely to use free music downloader apps. While it is always challenging to accurately separate cause and effect what we can say with confidence is that whatever impact freemium may have had on piracy, freemium users are still c.60% more likely to be music pirates also. (If you are a MIDiA Research subscriber and would like to see the full dataset these data points are taken from email info AT midiaresearch DOT COM)

Monetizing The Revenue No-Man’s Land Between Free and 9.99

So more needs to ensure the path from free to paid is a well travelled one. It might be that the accelerating shift to mobile consumption of streaming music may help recalibrate the equation. Mobile versions of free streaming tiers in principle may not be fully on demand but they often stretch definitions to the limit and some are simply too good to be free. Being able to create a playlist from a single album and then listening to it all in shuffle mode simply is on-demand in all but name. If we can get mobile versions of free tiers to look more like Pandora and less like Spotify premium, or YouTube for that matter, then we have a useful tool in the kitbag. And if users want more but aren’t ready to pay a full 9.99 yet, let them unlock playlists, or day passes for small in app payments. Lohan made the case for PAYG pricing to monetize the user that sits somewhere between free and 9.99 and it is an argument I have advocated for a long time now.

Freemium Is Not Broken, But It Does Need Re-Tuning

Freemium absolutely can work as a model and it has achieved a huge amount already, but it needs recalibrating to ensure it delivers the next stage of market growth in a way that minimizes the risk to the rest of the business. None of this though can happen until YouTube is compelled to play by the same rules as everyone else. Otherwise all that we end up doing is hindering all music services except YouTube and Apple (which won’t have a free tier). Google and Apple are not exactly in need of an unfair market advantage. So a joined-up market level strategy is required, and right now.

The Tale of Emily White, Scarcity and the Future of Music Products

Unless you spent the first half of this week on the digital music equivalent of planet Mars, you will have noticed the Emily White furore. The long and short of which was NPR (US public radio) Intern Emily White blogging that she owned 11,000 songs of which just 15 were albums that she had purchased and pining for a universally available universal database of music.  The post was swiftly followed by reasoned critiques against, for, against, and for, and also by vacuous foul mouthed grandstanding. What surprised me wasn’t the strength of feeling on the topic, but a view by some that this was somehow a watershed moment, a changing in collective perspective.  It wasn’t.  For anyone who has followed this space closely for more than a few years this debate will be seen as another chapter in a long-running discourse.  An important chapter, but just a chapter nonetheless.  Long time readers of my blog will remember a series of posts on ‘why music can’t just be free’ and the heated debate that surrounded them.  For those who didn’t, some of the posts are here and here.  (And for an insight into how ‘free’ impacts an artist take a look at this evergreen artists’ post.)

But the point of this post isn’t just to pour another layer of opinion into the simmering cauldron.  Instead I want to try to move the debate on from diagnosing the symptoms onto identifying a potential cure, or at the very least some palliative care.

For argument’s sake let’s assume the following:

• A large share of consumers have fallen out of the habit of buying music and a larger share of younger consumers have simply never learned the habit
• Fewer people place a monetary value on music than used to and yet more people listen to more music than ever before
• High spending music consumers do exist though, and across all age groups, albeit in declining numbers

Understanding the Role of Scarcity

The key reason fewer people buy music is because they don’t have to.  In the analogue age there was a monopoly on supply of music: if you wanted to get new music you had to buy it in high street shops when record labels decided you could, paying the price they and retailers decided you should. The alternative was making a poor quality cassette copy from the radio or friends.  People who liked music had little choice but to associate a very specific monetary value to music.  Napster threw that scarcity model out the window.  With paying for music now a life style choice the monetary value of music has been subjected to hyper deflation.  The ‘price it and they will come’ logic now only applies to a small subset of music fans, a subset that is at risk of becoming an endangered species.

This doesn’t mean people don’t value music anymore, but instead that a majority no longer value it monetarily.  This dynamic is beautifully encapsulated in a response from a 12 year old file sharer that Feargal Sharky was fond of quoting

“I love music and if I could download my Nike I would pay for my music”.

Nike still has scarcity, that’s why so many kids pay for their trainers but not their music.  Like it or loathe it, as far as music products are concerned,  we are in the post-scarcity age.

What, if Anything, Can Be Monetized in the Post-Scarcity Age?

So if scarcity has gone – and it is gone for good – how can recorded music revenues ever be rebuilt?  Indeed should they?  Some argue that charging for music is an outdated model, but you will find that 99.999% of those people also believe that they should still be able to get that exact same music which they don’t think should be paid for i.e. they value the product, just not the price.  Their world view is shaped by the last decade of experience but lacks grounding in basic economics.  The music needs making and that costs money.  Whether that is the money the label invests when it takes a punt on an artist or the cost of an artist getting by on an often very modest income.

Arguing that artists should make their real money in ‘ancillary services’ misses the bigger picture.  Only a tiny subset of music fans pay for merchandize and only about half of music buyers go to concerts.  And the number 1 music consumption channel?  It’s still radio.  So those ancillary revenues are a much smaller addressable market.  They are also largely irrelevant if you are a songwriter rather than a performer.

Recorded music is still the core product. 95% of us listen to music most days.  The vast majority of music consumption (by all people) is recorded music.  Why shouldn’t it also be the core revenue stream?  Scarcity has been disrupted, not market demand.  None of us would reasonably expect a plumber to fix our washing machine for free and then go out into the street and make his money by selling overalls and tools.  Also let’s not forget that most artists make music because they love making music, not T-Shirts.

Why the Flat-Rate Isn’t the Answer

Don’t get me wrong: of course artists have to learn how to make money across a much wider range of income streams than ever before, but there is no inherent reason that they should have to accept that their core creative asset is no longer monetize-able.  The channel, product and pricing strategies may be broken, but the creative heartbeat of music is not.  Simply applying a ‘flat rate’ fee on all the music in the world might seem like an elegant and ‘convenient’ solution.  But it will only exacerbate the problem.  It will formalize and legitimize the concept that music has little value.  It will also accelerate the demise of those music fans who still like to support their favourite artists by buying their music. ‘Flat Rate’ is a pricing strategy for the low end of the music market, not all of it. Even if music has to end up like water, there should still be a market for bottled mineral water.

Of course unlimited access to music in the cloud will play a really important part of the future of music, it will probably be how most people consume music.  But that is a service which should have clear monetary value.  Everyone accepts that premium Cable and Satellite TV packages are paid for commodities.  In fact consumers pay more to have some of that content provided on-demand.  The reason it is different for music (and indeed news) is of course scarcity.

The New Wave of Scarcity

Scarcity still exists for music, predominately in the form of live, and consumers pay premiums accordingly.  If recorded music spending is ever going to rebound, scarcity must be reintroduced to music product strategy.   Not, however, scarcity in the sense of building walls around content (it will always leak out) but instead by creating scarcity of experience. The success stories of paid content to date (iTunes, Kindle, xBox, PlayStation etc) may be walled gardens but their success is derived from the quality of experience that is delivered within them and cannot be experienced externally.  Music products must learn how to create uniquely valuable experiences around music, fully leveraging the interactivity, connectivity and sociality of the contemporary digital world.  Current digital music products do not do so.  As I outlined in my Music Format Bill of Rights report (which you can download for free here) music products must be:

• Dynamic
• Interactive
• Social
• Connected

The future of music products will be app like experiences that deliver unique, interactive and curated music experiences where the whole will be far greater than the sum of the parts (see figure).  Pirating the individual components will lack the context rich, curated and programmed environments in which the music experiences will occur, and will consequently have massively diminished value.  Scarcity will have returned to music products.

Waiting for an iPad Moment

Monetizing convenience only accelerates a race to the bottom.  Convenience should be an inherent part of the value of music products, but only one part.  Just because current music products don’t deliver enough tangible extra value to persuade the likes of Emily White to pay for music does not mean that it must always be thus.  Until 26 months ago the market between smartphones and laptops was that of netbooks.  At that stage most consumers not only did not own a netbook, they would have reported that they never intended to buy one either.  Then along came the iPad and suddenly we have a product revolution on our hands.  An apparently dead market segment transformed virtually overnight into gold-rush prosperity.

The music industry needs an iPad moment.  When it does come (and it will) even the likes of Emily White may finally start to see the value in paying for music again.

2008: The Year of Free

This time last year I predicted that 2008 would be ‘The Year of Free’. (Targeted legal free that is, not the ‘let’s give it all away and hope for the best’ flavour of free I’ve been posting about here recently.) Though all music can’t ‘just be free’, free services are a crucial element of blended digital music strategies. As the year draws to a close we can see just how fundamentally the digital music market changed in 2008. (See the list of developments at the bottom of this post).

2008 was the year in which the music industry accepted the fact that the only way to fight free is with free. That the only way to engage young digital consumers that have grown up with file sharing is to offer them something genuinely comparable in experience and price (i.e. free). Back in 2005 I wrote in a Jupiter report that if the industry didn’t start offering these young consumers free music they would become a demographic time bomb for future music revenues. Now finally we’re seeing these strategies starting to happen.

Today’s announcement from TeliaSonera illustrates just how far digital music strategies have come since I wrote that report, but also how there is still much distance to go. TeliaSonera’s Telia Musik service will offer unlimited free music to all of its mobile and PC broadband customers across 6 markets for 3 months. Telia can expect robust take-up and to bring many new consumers into the digital music fold. But as soon as they start trying to charge for the service they can expect the vast majority of these new customer to go.

To paraphrase, Free is not just for Christmas, Free is for life. You can’t just use it as a loss leading customer acquisition tool. That both falls short of its potential but is also damaging. Free services are invaluable when targeted at specific target groups who are unlikely to spend anything. Target it at all consumers and it weakens overall perceptions of the value of music as a paid commodity.

Free should be a crucial element of multi-tiered digital music strategies, based upon sophisticated segmentation of the consumer marketplace, working on the underlying assumption that one size does not fit all. But equally sophisticated consumer life-cycle management is equally important to ensure valuable customers are migrated to premium offerings.

Here’s my Top Ten of the ‘the Year of Free’ (i.e. services that launched or had a key event in 2008 ) Let me know who you think I’ve missed but should have included.

2008: The Year of Free Top 10

1. Comes With Music (UK launch)
2. TDC Play (Danish launch)
3. MySpace Music (US launch)
4. Pandora (2 million iPhone downloads)
5. Last.FM (downloads launch)
6. Spotify (ad supported tier)
7. We7 (Repositioning & relaunch)
8. Telia Musik (Nordic & Baltics launch)
9. Blip.FM (surge in adoption mid 08 )
10. Qtrax (US label deals signed)