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.

How TIDAL Can Deliver On Its Promises

The continued media feeding frenzy around Jay-Z’s TIDAL demonstrates just how valuable star power is for cutting through the clutter.  What has helped sustain interest is Jay-Z’s vision for delivering better value to artists and better experiences for music fans.  It is a tall order given that TIDAL has to operate under the same basic licensing framework as all other streaming services, the nub of which is paying c. 70% of all revenues to rights holders and having no control over how much of that gets paid back to artists and songwriters.  Working within the constraints of the standard subscription model TIDAL will quite simply not be able to deliver on its aspirations.  But if TIDAL is willing to create a new model to layer on top of it, then it can do something truly transformational.  Here’s how.

The Problem With Streaming

First we need to look at the issue TIDAL has to fix.  The problem with streaming services is that they inadvertently weaken music fans relationships with musical works.  In the pre-streaming, music sales model consumers paid for an album or single and matched their cash investment with an investment of time in listening to it.  The alternative was to listen to their older music collection or the radio.  So even duff albums not only got money spent on them, they got listened to a few times by their buyers.  And even if they didn’t get listened to even once the artist still got paid.   So a portion of music sales revenue had no relationship to the quality of the music.  Streaming changed that, effectively making the music itself more accountable to its audience.

With streaming, music fans don’t need to waste time listening to music they don’t like upon first listen.  They can bypass the duff.  They also tend to listen less to any single piece of music in general because they have so much other music to choose from at no additional cost.  Artists earning a 150th per stream of what they earn from a download is thus only part of the problem.  Most of the time their mainstream fans (and by that I mean not their top 10% of super fans) aren’t listening to them enough.

Scale Will Come, But It Will Take Time

The theory is that this will be fixed by scale, that a massive installed base of users will result in bigger listening volumes.  But it’s not that easy.  To illustrated, let’s assume people listen to albums an average of 5 times each then you need 30 times as many people to listen to generate the same income as a sale.  So until we get much bigger scale from streaming (e.g. 150m+ subscribers globally) we need to look at how to encourage music fans to concentrate their listening more on the artists they really like.  This is where TIDAL can come into play:

• Artist channels: Earlier this year I laid out a vision for artist subscriptions.  In this model subscribers pay an additional fee (say $1 or $2) to their standard streaming subscription to get access exclusive programming, content and other experiences from an artist. Subscribers choose from a selection of artist channels and subscribe individually or pay for a bundle.  Think of it like adding sports or movies to your Pay TV subscription.
• Additional content: Because subscriptions already give you access to all the music in the world (well most of it) subscribers will not be paying their extra $1 or $2 to get to the artist’s music. (Taking the music out of the core subscription and locking it into premium channels is a bad idea and doesn’t fix the artist income issue as we’ll see in a moment).  Instead fans will be paying for a mixture of additional content (live streams, interviews, acoustic sessions, photos, videos, games, curated playlists, mobile content, handwritten lyrics etc.) that will be delivered as a curated, programmed whole.  These channels will need to ascribe to the D.I.S.C. principles i.e. they music be Dynamic, Interactive, Social, Curated.  Sure each of the individual components could probably be found somewhere on the web but the real value is the entirety of the experience.
• Artist revenue share: Where this model gets really interesting is how artists get paid. If all the additional content that is delivered is outside of the standard label catalogue then TIDAL could, after some basic costs are accounted for, split the entire additional $1 or $2 subscription fee 50/50 with the artist.  Or if TIDAL is that serious about making things better for artists, they could give all of the net profits to the artist. (Label 360 deals might complicate things a bit for some artists but they will not account for large percentages). Just how songwriters would benefit is a bit more complex as many artists have multiple songwriters etc. but TIDAL could set aside a songwriter pot to be distributed based on plays of the artist’s core music.

Right now TIDAL is a music service pretty much like the others but with bold ambitions.  This is one way that TIDAL can turn worthy words into meaningful actions. There aren’t too many other ways it can do so.  And of course any of the other streaming incumbents could do this too.  The difference is that that they have had a lot of time to do it and have not done so, yet at least.

So TIDAL, come show us how it is done.  Over to you Jay-Z.

What The Music Industry Can Learn From The Beer Industry

Over the next few weeks I will be writing a series of posts that illustrate what lessons the music business can heed from other industries. This is the first of these posts. Beer sales have been in steady decline for many years with the big brewers coming to terms with changing consumption habits of consumers and the impact of disruptive new models. Sound familiar? The dynamics of the beer industry bear remarkable similarity to the recorded music business and there are some lessons that can be learned. Beer sales have been declining since 2008 with the core baby boomer consumer base changing consumption habits and drinking more hard liquor and wine. In the UK the amount of beer drunk has fallen by 20% over the last 10 years while US beer sales have been falling since 2008. The number of new breweries went into decline and after years of acquisitions and mergers the bigger-than-ever brewers started to feel the pinch. Again the parallels are clear.

The Rise Of Craft Beers

Against this doom laden backdrop there has been a standout good news story: craft brewing and micro breweries. Predominately small independent brewers this market segment has been growing strongly, albeit from a small base, in the last few years. Craft beer sales in the US grew by 10% in 2012, 17% in 2013 and 18% in 2014. In fact 2014 was the year that craft beers broke through to double digit market share (11%) for the first ever time. Craft beers are catering for a market of discerning drinkers, whether they be hipsters or real ale purists, who are willing to pay more for quality and uniqueness. Craft beer is like the music industry’s indie sector and vinyl sales rolled into one.

Big Brewers Get In On The Act

What gets interesting is that the big brewers are realising that if you can’t beat them then you need to join them. So the craft beer growth is not just down to plucky little cottage industries but also the big brewers opening their own micro breweries and creating their own craft ales. In fact some mid sized brewers have gone one step further and stopped producing their own mainstream beer brands, instead having them brewed on license by the big brewers, allowing them to focus on craft ales. The margins on an increasingly commoditised market simply don’t add up unless you can bring vast scale to bear. So the similarities are clear. But there are differences in all this too. I was careful to emphasise that craft beer is like an amalgamation of vinyl and indie. It is both a product strategy pivot and a business culture pivot. What the beer industry is realising is that while there remains a mainstream majority that will continue to drink mainstream beers, the economics of that sector are challenged which means that it is hard to bear the effect of even modest negative trends. The beer industry hasn’t gone out and started finding its equivalent of playing live and selling t-shirts, instead it has looked at how to reinvent its core product to make it relevant to the new generation of its most valuable customers.    And the effects are beginning to be felt at a market level. Beer consumption actually grew by 1% in 2014 in the UK and US sales were up 0.5%.

Reinvent The Product Not Just The Sales Channel

This is what needs to happen with recorded music, not just reinventing the sales and acquisition channel (which is fundamentally what the entire history of digital music sales has been about). The beer aficionado and the music aficionado are more important to their respective industries now than they have ever been and this will only increase. The beer industry is dragging itself out of recession by super serving its super fans. Artists have been doing the same for years with the likes of PledgeMusic, BandPage and now Paetron. Now it is time for the labels and music services to do the same by working together to create a new generation of music products, such as that I laid out the vision for here.  But this must also be part of a cultural shift, from treating the artist as employee to that of an agency – client relationship, a model that many label services and indie labels are already pursuing. Of course the recorded music industry has to grapple with other extenuating factors such as the contagion of free and competition for spend from live. But even with these considerations, it is clear that music industry now needs to find its craft beer.

Digital Ascendency: The Future Music Forum Keynote

I recently keynoted the annual Future Music Forum in Barcelona.  These are some highlights of the keynote.  If you would like the full slide deck please email me at mark AT midia research DOT COM.

Streaming is turning years of music business accepted wisdom on its head but did not arrive unannounced, it is just one chapter in the evolution of digital music. Each of the four phases of digital music have been shaped by technologies that solved problems. Now we are entering the fourth phase, bringing meaning to the 30 million tracks Spotify et al gave us access to. This might look like a simple honing of the model but it is every bit as important as the previous three stages. 30 million tracks is a meaningless quantity of music. It would take three lifetimes to listen to every track once. There is so much choice that there is effectively no choice at all. This is the Tyranny of Choice.

But the for all the evolution, today’s digital music marketplace is an unbalanced one. We have more than 500 music services across the globe but too many of them are chasing after the same customers with weakly differentiated offerings. This wouldn’t matter so much is if the competition was focused on where the consumer scale is, but this is anything but the case. The majority of paid music services are targeting the engaged, high spending Music Aficionados who represent just 17% of all consumers.

The consequences of the imbalance in digital music strategy are also easy to see in total revenues. The last decade has been one of persistent decline in recorded music revenue and by 2018 the most likely scenario is one of stabilization rather than growth. This is because of a) the CD and b) the download.

No one has taken the demise of the CD seriously enough. It still accounts for more than half of global revenue and more than three quarters of revenue in two of the world’s biggest music markets. Yet far too many CD buyers are being left to simply stop buying entirely because they see no natural entry point into the digital services market. No one appears to be putting up a serious fight for them. Meanwhile the streaming services that have been chasing those same aficionados that Apple engaged are now busy turning that download spending into streaming spending, which ends up being, at best, revenue transition rather than growth. Consequently CDs and downloads will end up declining at almost the same rate over the next five years.

Nonetheless the imbalance remains. Part of the reason we got into this state of affairs is the music industry’s obsession with revenue metrics: chart positions, market share and ARPU. Compare and contrast with the TV industry’s focus on audiences. It is time for the music industry to start thinking in audience terms too.

When we do so we see a very different picture. Here we have the US digital music market plotted by revenue and by audience size. Subscriptions pack a big revenue punch but reach only a tiny segment of the market while YouTube has vast reach but delivers remarkably little in terms of direct revenue. Meanwhile downloads, for all their doomed future, are still by far the best combination of scale and revenue.

The issue of free services stealing the oxygen from paid ones is a perennial one and is effectively a digital rerun of the never-to-be-resolved radio driving or reducing music sales debate. But it has far more impact in digital. With services like YouTube and Pandora the discovery journey is indistinguishable from the consumption destination. When they don’t lead to sales can they really be called discovery anymore?

Free is of course the language of the web. The contagion of free is legion. And free is where the audience growth is. This is the circle the music industry must square.

For 15+ years the music industry has been running to catch up, never quite able to get ahead of the game, an unavoidable feature of the process of digital disruption.   But although the consumer behaviour shift is inevitable the future direction of the music business is not and it will be shaped most by three key factors:

1. The continued evolution of consumer behaviour
2. Technology company strategy
3. Income distribution

Consumer behaviour. The most important consumer behaviour trends are not the steady transition of the Aficionados or even the Forgotten Fans but of the next generation of music consumers, the Digital Natives. Free and mobile are the two defining elements of their music behaviour. Of course younger people always have less disposable income, but there is a very real chance that we are beginning to see demographic trends locking in as cohort trends that will stay with these consumers as they age. For a generation weaned on free, the more free you give them, the more they will crave it. Whatever course is plotted, success will depend upon deeply understanding the needs of Digital Natives and not simply trying to shoe horn them into the products we have now that are built for the older transition generation.

Technology companies: Apple, Amazon and Google each in their own ways dominate digital music. But most importantly they all want very different things from it. For each of them music is a means to an end. All are willing to some degree to loss lead on music to achieve ulterior business objectives. All of which is great for labels and publishers as they get their royalties, advances and equity stakes. But for the pure play start up it means competing on an uneven footing with giant companies who don’t even need music to generate a revenue return for them.

 

Revenue distribution: Artists and songwriters found their voices in recent years. Partly because of the rise in social media but also because so many are now paying much more attention to the business side of their careers. The fact they are watching download dollars being replaced by streaming cents only intensifies matters, as does the fact that the top 1% of creators get a disproportionately large share of revenue. It has always been thus but the signs are that the disparity is becoming even more pronounced in the streaming age, with the effects felt all the more keenly because unless you have vast scale streaming can too easily look like chicken feed to an artist compared to download income.

But artist and songwriter discontent alone is not going to change the world. Their voices are just not powerful enough, nor do most fans care enough. Also labels and publishers remain the most viable route to market for most artists. Matters aren’t helped by the fact that artists who demand an audit of their accounts to work out where their streaming revenue has gone swiftly accept their label’s hefty silence payment and the accompanying NDA. Artist discontent while not decisive in impact is beginning to apply important pressure to the supply end of the music business.

So those are the three big challenges, now here are three sets of solutions. And I should warn you in advance that I am going to use the P word. Yes, ‘Product’.

I get why product sounds like an ugly word. It’s a term you use for baked beans, for fridges for phones. Not a cultural creation like music right? True enough, when we’re talking about the song itself, or the performance of it, product is irrelevant. But as soon as we’re talking about trying to make money out of it as a CD, download, stream or however, then we’re firmly in the territory of product. It is both naïve and archaic to think otherwise. When artists got megabucks advances and never had to worry about the sustainability of their careers and everything revolved around the simplicity of CD sales you could perhaps be forgiven for turning a blind eye. But now there is no excuse.

So with that little diatribe out of the way, on to the first solution.

Music product: The harsh reality is that music as a product has hardly evolved in the digital realm. A lot has been done around retailer and business model innovation, but the underlying product is the same static audio file that we found in the CD. Meanwhile the devices we are spending every growing shares of our media consumption have high definition touch screens, graphics accelerators, accelerometers…audio hardly scratches the surface of what tablets and smartphones do.

Music is always going to be about the song, but it is also about the artist and their story. That’s what a quarter of consumers think, and 45% of aficionados and a third of digital natives. Video, lyrics, photos, reviews, interviews, acoustic sets, art, these are all ways in which the artist can tell their story and they all need to be part of the product. Most of this stuff is already created by labels, artists and managers but it is labelled marketing. Putting this together into a curated, context aware whole is what will constitute a 21^st century music product.

Fans: Artists and fans are closer than ever but this journey is only getting going and artists need to get smarter about how to monetize their fan bases. Artists need to find their popcorn. What do I mean by this? Well when the cinema industry started out it was a loss making business. To try to fix this cinemas started by experimenting with the product, putting on double bills but that wasn’t enough. Then came innovation in the format by adding sound. Then the experience itself by co-opting the new technology of air conditioning from the meat packing industry. Still no profit. Finally cinemas found the solution: popcorn. With a 97% operating margin, popcorn along with soda and sweets quickly became how cinemas become profitable entities. Artists need to find their popcorn. To find out what other value they can deliver their fans to subsidize releasing music. It’s what newspapers are doing with wine clubs and travel clubs, and in some instances even with Spotify bundles!

Labels: Finally we have agencies or what you might call labels, but I’m going to call them agencies, because that is what they need to become. The label model is already going under dramatic transformation with the advent of label services companies like Kobalt and Essential and of fan funding platforms like Pledge and Kick Starter. All of these are parts of the story of the 21^st century label, where the relationship between label and artist is progressively transformed from contracted employee to that of an agency-client model.   Labels that follow this model will be the success stories. And these labels will also have to stop thinking within the old world constraints of what constitutes the work of a label versus a publisher versus a creative agency versus a dev company. In the multimedia digital era a 21^st century labels needs to do all of this and be able to work in partnership with the creator to exploit all those rights by having them together under one roof.

And finally, the grand unifying concept to pull all this together: experience. Experience is the product. The internet did away with content scarcity. Now the challenge that must be met is to create scarce, sought after experiences that give people reasons to spend money on the artists and music they love.

The Hybrid Album: A Music Product Strategy Proposal

We are in the midst of a transition from ownership to access models but it is a shift that will take a generation to complete.  The intervening years will all be about managing the transition, both in terms of educating consumers but also with regards to ensuring that the revenue shift is as smooth as possible.  The download and the stream will co-exist for many years – especially in many emerging markets – and Apple’s iTunes Radio is a key example of how the two technologies can live side by side.  But more still needs to be done.  To that end what follows is a product strategy proposal that puts streaming into the very heart of download experiences while simultaneously driving download spending.

The Hybrid Album is a very simple and straightforward proposition:

• Entire album download: when ever a download store customer purchases more than one individual track from an album the entire album and album art will download to the purchaser’s device.  The two track threshold is important as this proposition is not intended to swim against the tide and clutter the path for consumers that only ever want to buy single tracks.  Buying more than one track from an album though indicates a little more than passing interest in that album and represents an opportunity to engage the buyer with the entire release.
• Two free streams per track: the purchased tracks will behave as normal downloads, the remainder of the album though will be presented with a stream icon that informs the purchaser that all the other songs on the album can be streamed free of charge, twice each.  Once any track has been streamed twice the icon will change to a click to buy icon.  Also when any single track has been streamed twice a ‘complete this album’ call to action will appear with a ‘save x% if you buy within the next 24 hours’ or ‘get an extra exclusive track free if you buy within the next 24 hours’.

And that is it.  Very simple but with the potential to be highly effective.  It gives download customers a taste of the on-demand streaming experience but directly drives spending.  The licensing that would underpin the Hybrid Album will be more complex than the consumer proposition but it is not exactly an insurmountable challenge, with plenty of analogous precedents to leverage.

It is a proposition that is comparatively simple to implement and with low risk.  Let’s get it done!

PledgeMusic, Janet Devlin and Reinventing Scarcity in the Post-Scarcity Age

The analogue-era music business traded on scarcity.  It was the record labels and retailers’ absolute control of supply that created scarcity of music product.  If you wanted a high quality version of a song or album you had to buy it, when, where and for how much the labels and retailers decided.  In June 1999 Shawn Fanning launched Napster and in an instant scarcity was not only thrown out of the window, the window was instantaneously bricked up behind it.  The contagion of free has now reached epidemic proportions (due to both licensed and unlicensed sources).  Consequently we are now in the post-scarcity age, which has made music buying a lifestyle choice.  It has changed music buying from opt-out to opt-in.

If there is to be a mainstream future for music products, it will come from creating new scarcity that people want to pay for.  Of course it is no longer possible to ensure the music itself remains scarce, but it is possible to build scarce experiences around music and additional assets.  This is exactly what the guys at PledgeMusic have done in conjunction with former X Factor contestant Janet Devlin.

I’ve been a long term admirer of PledgeMusic’s model and approach, but I am particularly impressed with this release.  Firstly, fans get the option to select music from a typical Pledge menu of products ranging from the standard CD, through to highly personalized products like a Skype chat with the artist, a personally dedicated video performance and even appearing on the album.  Though the unit prices go high (£500 to appear on the album) these are scarce experiences that simply cannot be got on a torrent.  Of course many of these options don’t scale too well, but some of the intermediate products like exclusive concerts and signed albums most certainly do.  Also, all pledgers also get the download of the album before it is released anywhere else, a semi-scarce commodity, but nonetheless a great way to communicate value and exclusivity to fans.

What I like most about this release though, is the clever use of the pre-release cycle as an artist subscription. Anyone who pledges will get a steady stream of content from Devlin as she progresses on her work with the album.  She will release exclusive (i.e. scarce) content such as video, audio and photo blogs to these pledgers, giving them a window into the creative process, deepening their engagement with her and most importantly, building up interest and demand for the release of the album.  In many respects Devlin is taking a leaf out of the X Factor’s book, recognizing the immeasurable value of creating a community of fans and building their interest and engagement with exclusive content right up to a final release.

One of the reasons I like this release so much is of course because it ticks so many of the boxes of my Music Format Bill of Rights report (which you can download for free here).  But make no mistake, creating scarce experiences and seeding fan communities with scarce content is going to be at the centre of future music products.  Not everything here is entirely new or unique of course, but the unifying vision is most certainly that of the future. Janet Devlin and PledgeMusic are assuming the role of pioneers here and their peers will do well to pay heed.

Spotify Artist Apps and the Road to Relevance

Spotify yesterday announced the launch of Artist apps for four artists, namely Quincy Jones, Tiësto, Rancid and Disturbed.  This is another important step in Spotify’s music strategy, and one that is more important than may first appear.

Spotify’s App and API strategy (of which I have gone on record as being something of a fan of) may not have had anywhere near as much momentum as hoped, but it is making solid progress and the artist apps will give it a much needed boost.  The artist apps though are part of a bigger bid for relevance and mass market appeal.

When there is So Much Choice that there is No Choice At All

One major problem with streaming music services lies in the fact they provide unlimited access to all the music in the world: there is so much choice that there is no choice at all.  Though Spotify has started work on improving its discovery story – much of it through 3^rd party apps – discovery remains problematic.  Another problem in streaming services the artist’s brand is inherently subjugated to the service’s brand: consumers pay for access to all the music, not for an artist or two.  In the analogue era the artist brand dominated with singles and artist albums.  In the age of the playlist, a la carte cherry picking and unlimited on-demand access, the artist brand often struggles for voice in a sea of discovery noise and clutter. Artist apps though kill the two proverbial birds with the same stone: simultaneously enhancing the artist brand and music discovery.

The Need for the Tangible

A key dynamic of the ownership-to-access transition has been the difficulty of communicating a sense of permanence and tangibility in music service experiences. Playlists may be one of the early defining characteristics of the consumption-era and may deliver great user benefits, but the very fact that they are so easy to create and to delete contributes both to a sense of transience and of having little monetary value.  Thus playlists do not effectively communicate enough tangible value over the CD, which is an illustration of why the majority of digital consumers still buy CDs.  For streaming services – and indeed digital as a whole – to come of age and to appeal to the mass market, they need to develop features that go beyond the excel spreadsheet-music-service approach.  This doesn’t mean a need to deliver ownership but instead to meet some of the fundamental consumer needs and tangibility that physical music experiences deliver.

Artist Apps are a Solid First Step

Spotify artist apps are a step in this direction, delivering an audio visual and curated artist experience.  It is fair to say that the current iteration of artist apps are far from the finished article, the first step on the journey, but at least that journey has been started.  The digital music marketplace more broadly needs to rise to the challenge of ensuring that artist specific experiences like these become a standard feature of digital music experiences.  Spotify artist apps , when set alongside the theoretical music product prototype I sketched out in my ‘Music Format Bill of Rights’ report (see figure) and viewed in the context of the longer term music product and format evolution, are a glimpse into the future.  Spotify needs to kick on from here with full integration of multimedia assets such as video and games, and of course it needs many many more artists, long before which it will also need to have hit upon an elegant means of filing and navigating the apps.  But for now, Spotify artist apps are welcome early step on the road to mass market relevance and digital music product tangibility.

Finally Someone Builds a Digital Music Service the Way It’s Meant to be Built!

Regular readers will know that I’ve been a long-term and vocal advocate of radical music product innovation.  There have been modest encouraging steps from a diverse mix of places, such as iTunes Pass, Topspin, Open EMI, Björk’s ‘Biophilia’ app, Swedish House Mafia’s ‘One’ app, Pledge Music etc.  All have edged forward disparate aspects of music product strategy but they have also all lacked a unifying framework to pull them together.  Today comes the first stab at a music service that pulls together many of those parts.  But it doesn’t come from one of digital music’s big players, nor from a major record label, but instead New York dance label Fools’ Gold Records with their Fools Gold: The Goldmine subscription service.

[EDIT: The Goldmine is powered by Drip.FM]

Subscribers get new and old music, curated content, remixes, DJ sets, extras, merchandize discounts, priority access to events and more.    This is almost exactly the list of product features that I laid out for the Music Product Manifesto back in 2009 so it should come as no surprise as quite how enthusiastic I am about the offering.

The reason I listed those attributes three years ago was that this broad selection of multimedia assets truly reflect what an artist is in the 21^st century, so much more so than a CD or a download does.  They are also the assets which labels (majors in particular with their 360 deals) are increasingly becoming active in.  It is little short of a travesty that more has not been done until now.  Hopefully Fools Gold’s innovation bravery will help nudge the industry wide needle forward.

Of course it is much easier for a small label like Fools Gold to pull together the disparate artist assets necessary to create the holistic offering, but as I argued in my presentation to Midem in 2011, “the scale of the potential rewards is more than big enough to justify the sizeable effort: what is at stake is the entire future of premium music products.”

The Goldmine also ticks most of the boxes of my DISC principles that I laid out in my Music Format Bill of Rights (see figure):

Dynamic:  One of the things I like most about the service is its guarantee to deliver every new release on the label automatically to the user.  This is what music products need to do in the digital age, pushing relevant content to the consumer rather than relying on them to pull.

Interactive.  The service includes accapellas and remix stems for users to step out of passive listening into active creation.  This of course works perfectly for the dance music audience where a large share of the audience are aspiring DJs and producers.  A great next step would be some in built functionality that allows even the most novice user to play around with stems, perhaps  in the context of a social gaming environment.

Social. This seems to be the only key DISC element not catered for by the Goldmine, but they certainly have the building blocks to deliver on this, most notably the membership base.

Curated.  Fools Gold curate tracks from the archive as part of the service and in addition deliver exclusive content and extra content.

The Goldmine isn’t the full package, nor does it signify a turning point in music product strategy (because that requires major record labels to jump on board), but it does represent the bravest innovation step yet taken.

Fools Gold just set the standard for the rest to follow.

Music Start-Up Strategy 2.0

The music industry needs innovation more than most industries and yet the last two years has seen a slowdown in the number of new licensed music services coming to market and greater consolidation around the Triple A of Apple, Android and Amazon.  In this brave new world music start-ups need an entirely new modus operandi.

There are many reasons for the slowdown in new licensed music services, but a key one is the establishment of the license-advance business model in which record labels issue licenses only upon payment of sizeable, non-repayable advances in anticipation of forecasted income.  Depending on the scale of the risk to the labels presented by the licensed service these payments can range from relatively modest to downright gargantuan (Beyond Oblivion went to the wall owing $100m to Sony and Warner Music even though not a single consumer ever saw the service).  With so few services managing to make a dent on Apple’s market share investors have grown wary of investing in music start-ups that require licenses, some have effectively stopped investing in them all together.  The labels’ focus on partners with scale (and effectively using advances as means of sorting the financially robust wheat from the chaff) may deliver near-term security for the labels but it increases their long term risk by slowing music service innovation.  Hungry young start-ups are often more likely to create transformational innovation than heavily resourced R&D divisions of billion dollar companies.  Thinking ‘out of the box’ is always a lot easier when you’re not actually in the box in the first place.

Music Start-Up Strategy 2.0 Requires A New Set of Relationships

The status quo is a lose-lose for all parties, each of whom find themselves stuck in a Catch 22: labels need new services but also the safety net of advances, services need licenses but can’t pay for the advances and investors want to invest in music services but won’t do so when advances are required.  It is time to change the model, for this cycle of insufficient innovation and market contraction to be broken.

So just how can this circle be squared? The starting point is accepting the position of each of the three constituencies and then building from there:

• Labels want market innovation but with their market contracting they need to mitigate risk
• Services want to innovate but can’t afford to have advances as their core early stage expense
• Investors want to invest in music innovation but want to put as much as possible of that investment in technology and people

Music start-up strategy 2.0 requires each party to think and behave differently, to accept the fundamentals of the new digital music economy.  And this requires a willingness to both embrace some new ideas and to help forge a few others:

Record labels – become investment partners: Record labels – majors and independents alike – deserve great credit for transforming their business in the last few years, but they cannot change the market alone.  Labels need to harness open innovation, leveraging the developer ecosystem.  OpenEMI is an early model of best practice but to fulfil its massive potential the approach needs underpinning with a more equitable alignment of label-developer relationships.  Start-ups are going to help solve record labels’ problem and labels need to not just tap that expertise but accelerate it.  To do that record labels need to apply A&R rules to technology start-ups. On the artist front labels already behave like Venture Capital firms, now they need to translate this appetite for risk to their commercial strategy.  To take the same sort of risks on start-ups as they do on artists. This of course means that labels will routinely require equity stakes – and sizeable ones, but instead of just being a licensing requirement, these will be in return for a new relationship in which labels establish nurturing partnerships with young start-ups, just like those they have with artists.

When a start-up is at pre-launch stage it is probably going to be more appropriate to take a good chunk of equity for licenses than it is an advance that the start-up can ill afford.  Of course it will still be appropriate for advances to be part of the mix in some circumstances – sometimes even the majority of the mix – but the balance of the relationship should be investing to become a business partner.  This means becoming active stakeholders, sitting on boards, working with the entrepreneurs to help make them successes.  In short, the relationship should change from licensee-licensor to investment partners with shared vision and motives for success.

Start-ups – understand what labels need: Though record labels are becoming increasingly confident of their own innovation capabilities, no media company is an innovation agency while technology start-ups have innovation imperatives at their core.  Unfortunately they often get the conversations with labels wrong.  Instead of going to labels with the “we’re going to save your industry” pitch, start-ups should better understand what label priorities are and then propose working with them to help them achieve those objectives, as partners. (This is something that Spotify did incredibly well right from the start).  Just as it is best practice to engage with an investor long before they actually need money, start-ups should apply the same approach to record labels.

However this change of relationship is probably going to take some time to realize, so in the more immediate term start-ups should look at ways to deliver their experiences without licenses.  No I’m not advocating the Groove Shark approach, but instead leveraging the content licenses of digital music services that are pursuing ambitious API strategies.  Music start-ups should think hard about whether they really need to own music licenses themselves to deliver a great user experience, or at least whether they need to right away.  Building, for example, a product within the Spotify ecosystem is a great way to deliver a real-world proof-of-concept, test consumer receptivity and have immediate access to millions of potential customers.  License conversations are a lot easier with proven consumer demand on the table.  (Though start-ups need to be careful with music API strategy, indeed they should treat music service APIs like mobile OS.  Don’t put all of your eggs in one API basket.)

Investors – work with labels as partners and embrace the API economy. Investors might have some reservations about working with record labels at start-up board level but they shouldn’t fear losing influence.  The odds are investors will still make the same scale of Seed and Series A investments, it is just that their money will be working smarter, helping build great technology and hiring better people at those crucial early stages of a company’s life.  Investors and labels often find themselves on opposite sides of the argument.  There is no inherent reason the relationship should be adversarial.

Investors should also think about how well their investment strategy harnesses the capabilities of the API Economy. Of course it is always preferable to invest in a business that owns all of the fuel that powers its engine.  But in the era of integrated music API’s it is no longer crucial for a music service to have its own licenses.  An investor wouldn’t expect a mobile app developer to own Android, iOS or Windows Mobile so they need not expect a music service to own music licenses.

Laying the Groundwork for Transformational Innovation

Some of these changes are already beginning to happen, others are a long way off from being realized.  But this change is needed to enable to next wave of transformational innovation that the music industry so desperately needs.  Freeing up precious and scarce early stage resources leaves start-ups able to focus on developing great, innovative technology.  Which in turn will mean better products, better user experiences and more revenue for everyone.

I first discussed some of the themes covered in this blog post in the Giga Om Pro report ‘Monetizing Music in the Post-Scarcity Age’ which can be found here.