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.
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:
- The continued evolution of consumer behaviour
- Technology company strategy
- 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 21st 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 21st 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 21st 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.
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!
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 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 3rd 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.
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 21st 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.
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.
Earlier this year I raised the question of whether the music industry was going the way of the newspaper industry, whether its core audience was aging, stuck on its physical format while the younger generation feasted on free content. It is becoming increasingly clear to me that this dynamic is arguably the most sizeable challenge facing the recorded music industry. Product innovation (my hobby horse) is of course crucial, but its remit will be drastically reduced unless the ‘CD Problem’ is fixed in tandem. Indeed, the two are intertwined.
The CD is polarizing the music buying marketplace
The importance of the CD is at serious risk of becoming a hindrance to innovation, particularly as its core customer base becomes more entrenched:
- The CD as fossil fuel. I have often argued that the CD is the record labels’ heroin, a habit which they simply cannot kick and which is hindering their ability to move on in life. The analogy is probably a little unfair, as it implies the relationship is a purely destructive one. A fairer metaphor is the world’s dependency on fossil fuels: we all know that they should run out some time in the not so distant future. But we also know that we have been hearing about their imminent depletion for decades and yet they are still here, thus far at least.
- Digital is creating a fault line across the music buyer landscape. With all of focus on digital strategy it is sometimes easy to forget that the CD is still the beating heart of music revenues and the most widespread music purchasing behavior, even in the US, that most digital of western music markets (see figure one). What is of concern is that a very large proportion of those CD buyers only buy CDs and what is more, they buy them offline in high street shops, malls and supermarkets. The industry used to view these consumers as the next wave of digital customers, the buyers who would naturally transition to digital. Unfortunately it is becoming increasingly clear that many of these consumers are better viewed as ‘Digital Refusniks’, consumers who have either actively chosen not to go digital (e.g. vinyl junkies) or see no appeal (mass market middle America, Mr Main Street, Mondeo Man etc). But these consumers are getting older (see figure one) and unless a transition strategy is implemented they will just carry on getting older until they are with us no longer, just as is happening with newspaper readers.
- CDs work fine while we all still have CD players. The problem with CDs is that you need somewhere to play them. That might not feel like a problem now but it is going to become one. Technology expenditure in the living room has shifted from audio to video. Our TVs have got bigger, as has the size of the piles of boxes underneath them (which for some reason are still called ‘set-top’ boxes even though most TVs don’t actually have ‘tops’ anymore). Meanwhile the Hi-Fi has become the second class citizen of the living room. People used to change their Hi-Fi’s simply because manufacturers changed the colour they made them in, now the average living room either has a dusty old midi system or an iPod docking station. For the Digital Refusniks – most of whom of course don’t have docking stations – there will come a time, not so far from now, when that dusty old Hi-Fi looks just too old and will be put away in storage. At which point the CD will have disappeared out of the living room and there will be little reason for buying CDs anymore, which will actually mean just not buying music anymore for these consumers. The TV, radio and the CD player in the car –as long as there still is one – will sate their music appetites instead.
A physical-to-digital transition strategy must start with a keener understanding of what makes CD buyers tick
The Digital Refusniks need bringing into the digital realm with hybrid physical-digital products before they simply fall out of the music buying population. The case for a physical-to-digital transition product strategy is clear, but it needs basing upon a clear understanding of why people value CDs. Across the music industry, consumer research projects must create a detailed and nuanced picture of CD buyers’ wants and needs.
To this end, but in an entirely non-scientific, not statistically significant and largely subjective manner, I yesterday canvassed my Twitter followers with this question: Do you still buy CDs, and if so why? The results, as long as they are considered in a purely directional and illustrative sense, present some interesting trends (see figure two):
- 77% of my tech-savvy music aficionado skewed base of Twitter followers still buy CDs
- A fifth of those CD buyers also buy vinyl
- Ownership, supporting favourite artists and artwork are the top three reasons for buying CDs
- Just over a fifth only buy CDs for ‘special’ albums and just under a fifth only buy CDs rarely
- 14% said they had either stopped buying CDs altogether or were buying fewer because of streaming music (in most cases they were paying for 9.99 subscriptions)
- 12% buy CDs because they are scared of their PC and / or cloud services crashing and losing all their music
Say hello to a new music buyer segment: the Charitable Collector
The broad picture is one of the CD as a hybrid of a collector’s item and an honesty box: people buying CDs to support their favourite artists and to own something tangiable and visual. Perhaps the best label for describing this very specific group of conscientious CD Buyers is Charitable Collectors. Of course the music industry cannot afford for the CD to become relegated to a role as the picture disc of the 21st century. Also artists should be working out ways to deliver much greater value to their dedicated fans than just a plastic disc which they often don’t even see much income from. But challenges aside, there is a rich seam of value for music product strategy to tap and to test.
It is important to consider that my Twitter followers skew towards tech-savvy music aficionados so this is more of an insight into the minds of digital music fans who also still value CDs rather than the Digital Refusniks. Nonetheless there are some key learnings here which translate across both groups and which, if nothing else, provide some solid foundations for exploring just what the industry should be asking about to truly understand the diverse priorities of CD buyers.
Without fixing the CD problem revenues will decline in the long run
Finally, the revenue case for a physical-to-digital transition product strategy is simple: unless it happens music revenues will decline. Figure three shows a scenario forecast for global music sales that assumes that things stay the same as they are now i.e. that digital growth remains around the 7 to 8 percent mark and that CD revenue decline slows, as sales consolidate around the hardcore of Digital Refusniks and Charitable Collectors. In this scenario we will most likely see some modest growth by 2012 and 2013 but after that the market will enter steady decline despite continued digital growth. The reason for this is twofold:
- Digital needs a new generation of music formats to drive stronger growth (see my D.I.S.C. post for more on this)
- CD revenues will start to decline at a steady CAGR of 5% or so due to natural wastage among the remaining CD buyers due to all the various reasons highlighted above
The CD remains one of the music industry’s most valuable assets, second only to those consumers who are still its loyal buyers. Now those consumers need a new generation of music products that meet their needs in a way that downloads and streams clearly do not.
Innovation is a much overused and often misused term, yet when considered in its truest sense it is arguably the single most important issue that the music industry must address if it is ever going to rediscover long term, sustainable revenue growth.
Of course the modern day music industry is a complex and diverse collection of entities with equally disparate innovation trends, not however starting from a base of zero, despite what some may think.
Indeed, we all do innovation. Even the least innovative of companies do some form of innovation, at some level, at some pace.
The three metrics which determine whether a company is in balance innovative or not are:
- Degree of innovation pursued
- Culture of innovation supported
- Rate of innovation achieved
Performing strongly on all three of these Innovation Performance Indicators (IPI) IPIs will not guarantee a company success (external factors such as consumer demand, marketing, finance will all help determine that). But excelling at all three IPI’s will ensure that a company has the frameworks for creating product strategies that have the agility and adaptability necessary for success.
The major record labels have been much maligned for not having performed strongly enough across all three IPIs but in recent years they have upped their respective games markedly. However innovation comes less naturally to some companies than others. Record labels are like most media businesses in that they have traditionally relied upon channel partners to drive transformational innovation. The compact cassette, the DVD, BluRay, HDTV, PVRs, Ring Tones, Games Consoles etc. all transformed media business models for ever, but they were shaped by technology companies not media companies.
Apple’s sub-par rate of music service innovation
And this is where the elephant in the room raises its hand.er…trunk: Apple’s sub-par rate of music service innovation is probably the single most important reason why digital music growth has slowed in the last couple of years. Before you begin thinking I’m losing my mind, let’s be clear, I am not questioning Apple’s innovation credentials, indeed they are the marketplace exemplar, instead, and specifically, their music service innovation performance. In fact it is exactly the exceptionally high bar set by Apple’s rate of device innovation which throws their rate of music service innovation into stark contrast (see figure).
In this chart each product innovation (or set of product innovations) has been given a score using the scale described in the key. What is abundantly clear is that Apple’s rate of device innovation has consistently far outpaced its rate of music service innovation, which in turn has also significantly lagged the total market rate of music service innovation. Apple’s overall rate of innovation has accelerated in recent years driven by the launch of the iPhone and iPad, but interestingly, also by a upturn in music service innovation with new products such as Genius and Ping.
Because Apple is the majority of the online digital music market, the impacts of its rate of music service innovation are felt market, and indeed industry, wide. When Apple shifted its attentions from music to video and apps – which better demonstrate the capabilities of their devices than audio files – digital music growth began its now established slowdown. Apple didn’t fall into this position accidentally, it was a series of orchestrated strategic decisions.
Dominant as it may be, market share is not the measure of success for Apple’s music innovation
As I explained in a previous post, Apple is in the business of selling hardware, not music. The ROI of music service innovation for Apple is not measured in digital music ARPU, but instead in sales of i-devices. Dominant market share is a nice-to-have symptom of success, not the measure of it. So Apple innovates music experiences only as much as it needs to, namely as much as is required to help sell its core innovations. Apple’s recent mini-flurry of music service innovation happened only because its music innovation rate had fallen so far below the market average that the Apple i-device music experience was beginning to look sub-par. i.e. there was a risk that i-device sales might suffer without music service innovation.
The music industry needs Apple to start taking music service innovation seriously again because Apple has as its customers the majority of the digital music market’s most valuable customers. The music industry needs iCloud to be one of a series of near-term music service innovations that are transformational in collective impact, rather than it being a solitary sustaining-innovation that does just enough to keep the i-device music experience sufficiently strong to continue to help drive sales. And the rest of the market also needs Apple to start playing a more active role because Apple’s innovations drive entire markets, dragging the competition along by the scruff of the neck. As they say, a high tide rises all boats.
Innovation must engage the untapped market not just re-engage the aficionados
And speaking of competition, the music industry also needs the other two members of Digital Music’s Triple A - i.e. Amazon and Android (Apple makes the third) – to up the innovation ante and play their role – as part of the uber-financed-trinity – to start pulling new customers into the digital market rather than competing for the same early adopter aficionados.
The rate of consumer device innovation is outpacing that of music services, and that will always be the case but that gap needs narrowing, fast. That quickness depends upon Apple narrowing the gap between its respective rates of innovation, and the record labels are going to need to give Apple incentive to do so. They have not always been the most accommodating of innovation partners for Apple (remember when they licensed MP3 downloads to anyone who wasn’t called Apple?) but unless that approach changes they cannot expect Apple’s rate of music service innovation to change either.