Why Tesco Just Bought We7

Today UK headquartered supermarket chain Tesco announced the acquisition of a 91% stake in UK streaming music service We7. It hasn’t been the easiest of journeys for We7, with the plucky English start-up simultaneously fighting off incursions onto its home turf from the Nordics (Spotify) and the French (Deezer). Which is an uncanny rerun of the last English King Harold I’s annus horibilis 1066 when he fought off the Vikings and before finally losing to the France based (though Viking origin) Normans at the Battle of Hastings. But whereas Harold ended up with an arrow in his eye this isn’t the end of the story for We7.

Tesco might at first sight seem something of an unusual bedfellow for We7, but Tesco has very big digital content aspirations. The We7 purchase follows the acquisition of streaming video service BlinkBox and is another building block in Tesco’s bid to build a paid content offering that appeals to its mass market, mainstream customer base. ‘Mass market paid content’ may be an oxymoron right now but if anyone is going to take paid content mainstream it will most likely be a mass market brand. And yet it will be far from plain sailing for Tesco.

Tesco’s paid content strategy is both aggressive and defensive.

Tesco has been aggressively – and in the main, successfully – pursuing non-grocery revenues for a number of years now. (Though a recent dip in overall revenues has seen a commitment to a renewed focus on core grocery products). Paid content is a product line which would clearly be new revenue opportunity for Tesco and music would be the obvious lowest common denominator hook for pulling consumers into a blended paid content offering. It is a strategy that has worked well for Apple and to some extent Amazon.

The role of Amazon brings us to the defensive play for Tesco. Tesco hasn’t always had the smoothest of relationships with the music industry, particularly the retailing element of it. Like supermarket chains in many other markets Tesco has pursued a strategy of loss leading with a relatively limited selection of front line and classic catalogue CD titles. Its aggressive pricing strategy has helped bring CD prices tumbling down (great for consumers, less good for record label margins) and it has sometimes tried to bend the rules to get stock cheaply (such as sourcing from Eastern Europe). Tesco does all of this because it helps footfall in store and because it helps migrate its customer base up the product ladder from baked beans, to CDs, to computers and so on. All of which is remarkably similar to Amazon’s strategy, the difference being that Amazon use CDs (and books and DVDs) as the entry point on the product ladder. As CD sales decline though the ability to use CDs as a customer acquisition hook diminishes. Amazon knows this all too well, hence its aggressive – but thus far only modestly successful – pursuit of an MP3 store strategy.Now Tesco can see the writing on the wall too.

Selling paid content from the supermarket aisle

The task is more robust for Tesco than it is for Amazon. All of Amazon’s customer relationships are digitized because it is an online retailer. Tesco though, despite being a global leader – at one time the global leader – in online retailing does not have a digital relationship with the majority of its customers transactions. As Amazon will attest, it is already challenging enough trying to persuade customers in an online environment to opt for digital versions of products even when they are positioned alongside physical versions and more cheaply. The task is nigh on impossible in a supermarket aisle. Which is where I think We7 will come in. It is a much more straightforward – though still not easy – task to get customers to visit a free online content destination, such as a streaming music offering, than it is to get them to dive straight into buying digital content.

A smart move for Tesco would be to use We7 to power a free music offering that is available only to holders of its Tesco Clubcard loyalty scheme. This would give customers another reason to opt into the Clubcard scheme if they haven’t yet, and for those that have it would give them reason to start engaging with it online. Once it has customers engaged with free streaming music Tesco then has a much easier task of migrating portions of those consumers to paid digital music, whether downloads or subscription. Tesco has a number of incredibly valuable assets at its disposal to promote usage in both a broad and targeted manner. For example users of the free streaming music offering could be given a free download with every £50 spent at the till. In store integration and promotion would be more challenging but various compelling options exist ranging from voucher cards to digital content bundled with CDs.

In short We7 could and should become the foundation stone of Tesco’s walled-freemium music strategy. Tesco have talked a decent digital music game for years now without notable success. A £10 million investment in We7 could well prove to be a very cheap pass to the big time.

Is the UK Music Industry Sleepwalking into a CD Crisis?

An upfront note: though this post focuses on the UK market, the principles, as you will see, apply across most music markets.

At first glance the UK recorded music market isn’t in too bad shape: album sales declined by a not too worrying 5.6% in 2011 and digital grew solidly, including 26.6% growth in digital albums*.  And of course there was Adele.  So an end of term report card would probably read something like ‘Could do better but good signs of improvement’.  Unfortunately that is a case of papering over the cracks.  Here’s why:

• CD sales are falling at an alarming rate: though digital album unit sales grew by 5.6 million, CD album sales fell by 12.3 million.  So the digital growth was less than half of the physical decline in absolute terms.  A worrying ratio at this stage in the development of the digital market (i.e. when it should be maturing, not just getting started).
• The single continues to drag revenue growth down. Digital singles boomed to 176.6 million, a whopping 56% greater volume than combined physical and digital albums. And yet their value is close to just a fifth of album revenues.   Despite solid digital album growth, unit sales of digital singles increased by about 17 million, three times the units growth rate of digital albums.  And though the spend increment is much greater for albums – and this is of course the lens labels will typically view the trend – the unit growth is the best indication of consumer behaviour.  i.e.  music buyers are still throwing their weight behind digital single purchases at a quicker rate than they are digital albums.
• The CD buyer is withering on the vine.  Most importantly of all, the CD buyer is becoming an increasingly rare breed.  There are fewer shops on the high street, which is where the majority of CD buyers still buy their albums. HMV – the UK’s leading music retailer by some distance – has been suffering well documented struggles.  It is possible that HMV will disappear from the high street entirely in the next couple of years.  Though this won’t be an extinction event for CD buyers, it will however leave a gaping hole in music revenues (possibly a quarter of all album sales).  The majority of these Digital Refusniks who haven’t seen any reason to start buying CDs online – let alone downloads – are unlikely to suddenly switch even if they have to.  More likely they will just drift out of the market entirely.  These are the passive music fans who only buy the occasional album, don’t have an iPod, don’t want to spend £9.99 a month on music and who listen to a lot of radio.  With so much more choice of high-ish quality music on digital radio and TV these consumers won’t even feel that much of a dent in their music behaviour when they no longer buy CDs.
• The CD is disappearing from the living room.  I’ve been beating this drum for years now but still don’t get the sense the risk is being taking seriously.  Living room tech spend has shifted firmly to the TV and music’s weakening foothold is either a docking station for the digital crowd, a streaming player for the really tech savvy or, in the vast majority of cases, a dusty old midi player which sooner or later is going to find itself in the bin or the garage.  When that happens music will have disappeared out of the living room (and before anyone makes the case for music on the TV, that permanently relegates music not so much to poor relation status, as crazy aunt locked away in the attic.  People buy TVs to watch stuff on them, not to have a blank screen while music plays on the poor quality speakers).

The Bottom Line

The music industry is being entrapped by a demographic pincer movement: on the left the emerging Digital Natives lack a product strategy that meets their needs, on the right the traditional CD buyers lack a format succession cycle.  This is why the industry is becoming obsessed with squeezing as much ‘ARPU’ as it can out of the remaining core of 20 somethings and 30 somethings.  But of course that strategy can only go so far.  I’ve written at length about strategies for the Digital Natives, but the case for the Digital Refusniks is even more pressing, if less glamorous.  The following needs to happen, and quickly:

• Digitize the relationship.  Before an analogue customer base can be migrated to digital, the relationship with those customers must be digitized.  In fact most HMV music customers have no relationship with HMV at all, or rather it is a series of brief encounters that start and finish with a cash till transaction.  First HMV – and indeed high street music retailers anywhere – need to start finding a way to establish digital relationships with these customers and then use that as the platform for a digital revenue strategy.  As my astute former colleague James McQuivey is fond of pointing out, Netflix built is success on the platform of digitizing its customer relationships. It is time for high street music retail strategy to follow suit.  (And by the way, simply trying to push consumers to the online stores isn’t the answer).
• A format succession strategy needs putting in place. The Digital Refusniks consumers need their hands holding as they are gently coaxed into the digital realm.   They need convincing that the ephemeral web has tangible benefits comparable to that of the CD. That might mean delivering things like better artwork etc. but to get this right we need to know a lot more about the emotional triggers that CDs press for this consumers.  A proper human needs assessment needs conducting, onto which a human-needs based product strategy can then be mapped.  In all likelihood this will result in a couple of hybrid physical-digital products which will deliver all the benefits of CDs with a steady – but not overwhelming – stream of digital content to allow digital to ‘show some leg’.
• A new beachhead in the living room.  As I proposed 4 years ago, the music industry (principally the label and retailer elements) need a new living room strategy which should take the form of a new piece of highly affordable Hi-Fi equipment.   While its encouraging to hear that Google looks set to build upon the fine work of Sonos with some streaming music kit, the Digital Refusniks specifically need a hybrid device i.e. one that plays CDs too.  Something that looks contemporary enough to warrant replacing the old midi system and is cheap enough to shift millions of units.  You’ve probably guessed by now that this will need to follow an Amazon Fire approach of loss leading on the hardware to establish the Trojan horse for content sales.  But it is an investment that will pay off.

The Digital Refusniks are a challenging and unfashionable demographic and the counter-case for addressing them is that in 10 years or so they’ll have disappeared from the market anyway.  My conservative estimates put the loss in the region of 15% to 20% less total UK recorded music revenue in 2016.  The industry may well be able survive its revenue forecasts being that much smaller, but a) does it want to? and b) HMV can’t.

*All sales numbers are BPI trade values.  You can see the complete BPI release here: 

The Music Format Bill of Rights

Today I have published the latest Music Industry Blog report:  ‘The Music Format Bill Of Rights: A Manifesto for the Next Generation of Music Products’.  The report is currently available free of charge to Music Industry Blog subscribers.  To subscribe to this blog and to receive a copy of the report simply add your email address to the ‘EMAIL SUBSCRIPTION’ box to left.

Here are a few highlights of the report:

Synopsis

The music industry is in dire need of a genuine successor to the CD, and the download is not it. The current debates over access versus ownership and of streaming services hurting download sales ring true because a stream is a decent like-for-like replacement for a download.  The premium product needs to be much more than a mere download.  It needs dramatically reinventing for the digital age, built around four fundamental and inalienable principles of being Dynamic, Interactive, Social and Curated (D.I.S.C.).  This is nothing less than an entire new music format that will enable the next generation of music products.  Products that will be radically different from their predecessors and that will crucially be artist-specific, not store or service specific.  Rights owners will have to overcome some major licensing and commercial issues, but the stakes are high enough to warrant the effort.  At risk is the entire future of premium music products.

D.I.S.C.: The Music Format Bill Of Rights

The opportunity for the next generation of music format is of the highest order but to fulfil that potential , lessons from the current digital music market must be learned and acted upon to ensure mistakes are not repeated.  The next generation of music format needs to be dictated by the objective of meeting consumer needs, not rights owner business affairs teams’ T&Cs.  It must be defined by consumer experiences not by business models.  This next generation of music format will in fact both increase rights owner revenue (at an unprecedented rate in the digital arena) and will fuel profitable businesses.  But to do so effectively, ‘the cart’ of commercial terms, rights complexities and stakeholder concerns must follow the ‘horse’ of user experience, not lead it. This coming wave of music format must also be grounded in a number of fundamental and inalienable principles.  And so, with no further ado, welcome to the Music Format Bill of Rights (see figure):

• Dynamic. In the physical era music formats had to be static, it was an inherent characteristic of the model.  But in the digital age in which consumers are perpetually online across a plethora of connected devices there is no such excuse for music format stasis.  The next generation of music format must leverage connectivity to the full, to ensure that relevant new content is dynamically pushed to the consumer, to make the product a living, breathing entity rather than the music experience dead-end that the download currently represents.
• Interactive. Similarly the uni-directional nature of physical music formats and radio was an unavoidable by-product of the broadcast and physical retail paradigms.  Consumers consumed. In the digital age they participate too.  Not only that, they make content experiences richer because of that participation, whether that be by helping drive recommendations and discovery or by creating cool mash-ups. Music products must place interactivity at their core, empowering the user to fully customize their experience.  We are in the age of Media Mass Customization, the lean-back paradigm of the analogue era has been superseded by the lean-forward mode of the digital age.  If music formats don’t embrace this basic principle they will find that no one embraces them.
• Social. Music has always been social, from the Neolithic campfire to the mixtape.  In the digital context music becomes massively social.  Spotify and Facebook’s partnering builds on the important foundations laid by the likes of Last.FM and MySpace.  Music services are learning to integrate social functionality, music products must have it in their core DNA.
• Curated. One of the costs of the digital age is clutter and confusion: there is so much choice that there is effectively no choice at all.  Consumers need guiding through the bewildering array of content, services and features.  High quality, convenient, curated and context aware experiences will be the secret sauce of the next generation of music formats. These quasi-ethereal elements provide the unique value that will differentiate paid from free, premium from ad supported, legal from illegal.  Digital piracy means that all content is available somewhere for free.  That fight is lost, we are inarguably in the post-content scarcity age.  But a music product that creates a uniquely programmed sequence of content, in a uniquely constructed framework of events and contexts will create a uniquely valuable experience that cannot be replicated simply by putting together the free pieces from illegal sources.  The sum will be much greater than its parts.

Table of Contents for the full 20 page report:

Setting The Scene

• Digital’s Failure To Drive a Format Replacement Cycle

Analysis

• Setting the Scene
• (Apparently) The Revolution Will Not Be Digitized
• The Music Consumption Landscape is Dangerously Out of Balance
• Tapping the Ownership Opportunity
• The Music Format Bill Of Rights
• Applying the Laws of Ecosystems to Music Formats
• Building the Future of Premium Music Products
• D.I.S.C. Products Will Be the Top Tier of Mainstream Music Products
• The Importance of a Multi-Channel Retail Strategy
• Learning Lessons from the Past and Present
• We Are In the Per-Person Age, Not the Per-Device Age

Next Steps

Conclusion

Why The Access Versus Ownership Debate Isn’t Going to Resolve Itself Anytime Soon

Earlier this week I was at 7 Digital’s Annual Media and Partners Meeting.  At the start of the year 7 Digital hit their 7 Year mark, which in Internet Years is probably equivalent middle age.  7 Digital now have 3 million registered paying customers (of which 30% are active) but what is most interesting is the impact of mobile downloads on their business.    Since launching direct-to-mobile paid downloads the segment has become 7 Digital’s most dynamic growth area: in November 2010 mobile device sales accounted for just 1% of total sales, 1 year on and that share has rocketed to 44%.   (Online sales also grew, so this is a case of strong growth in both relative and absolute terms).

Ownership isn’t dead

7 Digital’s CEO Ben Drury used the data shows that ownership isn’t dead.  He has a point.  In these days of cloud and streaming dominated debates it is easy to be led to believe that ownership is an outdated legacy of the analogue era.  Of course in many ways it is, but the unavoidable fact is that we are in a transition phase in which both ownership and access matter and it is a stage which has many years to yet to run.

In simplistic terms there are two key dynamics which determine the pace of the shift from ownership to access:

• Technology-led change
• Generational-led change

Generational-led change

The generational changes are slowest moving, almost glacial in pace.  Yet they give the impression of being quicker than they actually are, because such a small subset of the total population is currently active in digital music.  These 10-20% of consumers (of which I and probably you are part) are not representative of the total consumer base.  But even among us there are discreet groups.  I am of the age group that grew up with CDs.  I am part of the transition generation that has enthusiastically adopted digital but still understands the value of physical media and ownership. The Digital Natives however (i.e. those consumers who have grown up in the digital age without ever having learned the habit of buying physical media) have entirely different concepts of ownership.  These are the true vanguard of the shift towards access based models.  But they are young, so time rich as they might be they are also currently cash poor.  Thus they are opting for free alternatives, such as YouTube, Pandora, Spotify Free.  Only when they start to acquire increased spending power will they start to be the dynamic force in adoption of paid access based services.

Meanwhile, the digital hold outs – i.e. the majority of the total population – are being left behind as the digital music bandwagon rolls on.  Out of habit some of them still buy CDs (some of them even buy a lot of CDs) but most are just falling out of the habit of buying music.  Their sense of ownership however remains unchanged.  In their world view you either buy music and own it, or you listen to it on the radio or TV.  Their worldview remains wholly un-muddied by cloud and streaming services.

Technology-led change

If Generational-led Change is the slow moving backdrop to the access / ownership debate, then Technology-led Change is the fast moving current, the rip tide.  It is technological change which underpins Spotify’s conversion of 2.5 million paying customers (Napster and Rhapsody both offered portable rentals years earlier, but not cached streams).  It is technological change which Pandora has to thank for its 100 million users (adoption only truly lifted off with the launch of the Pandora iPhone App).  Better technology and better connectivity are making the constraints of access based services less visible.

Yet almost paradoxically Technology (in both its advances and limitations) is simultaneously building the case of access and extending the life span of ownership (see figure):

• Pay once. Whether subscription fees are hidden or premium, users know that access to content ends when the subscription does.  Paying individually for a la carte downloads and CDs might be intrusive and clunky, but the fact remains that consumers know they then have guaranteed lifetime of product ownership.  Consumers still ‘get’ ownership and paying (or indeed downloading for free) once and owning for ever is an exceptionally easy concept to communicate. Score: Ownership 1, Access 0
• Play on anything. Subscription services have made great strides in device ubiquity, primarily via smartphone apps, but non-smartphone users are left out in the cold, as are non-paying streaming users. MP3 is the common currency of digital music.  MP3 files play on virtually every connected device consumers have.  Ownership gives the greatest chance of device ubiquity.  Score: Ownership 2, Access 0
• Play anywhere.  Consumers can take their MP3 playing devices with them most places and not have to worry about network connectivity.  However memory size restraints often mean they can only take a portion of their music with them.  Smart use of local device stream caching is freeing subscription services of the chain of the PC but network connectivity remains core to their value proposition and we are far away yet from the ephemeral promise of ubiquitous connectivity.  Score: Ownership 3, Access 0
• Play everything.  Download stores and CD stores have great catalogue, but access is as metered as it gets.  To fill your iPod with paid downloads costs tens of thousands of dollars.  To fill it with subscription music costs less than $10 a month.  It is in the context of unlimited access to vast catalogues of music that streaming services come alive, leaving ownership casting covetous glances from afar. Score: Ownership 3, Access 1
• Share with everyone.  Music has always been an inherently social experience (from the earliest prehistoric musicians playing around the fire through to mix tapes).  But in the digital age music is massively social.  Or at least it is for streaming services.  Sharing owned music means making or lending individual copies.  For streaming services, playlists, APIs and Facebook  place social connectivity at the core of the streaming experience.    Score: Ownership 3, Access 2

So it looks like a narrow victory for ownership, but I’d argue that a tie is a more accurate assessment, because ‘Play everything’ and ‘Share with everyone’ are so important that they carry extra weight.  These factors are core to what makes music different in the digital age.  They are foundations stones for building new pillars of value around music in the post-physical era.

Ownership and Access will co-exist for years to come

And so we have a situation where the case for Access is building all the time, driven by advances in technology (especially mobile), but those same advances also bring limits which extend the case for Ownership.  Mobile is becoming core to the digital music experience, and will only become more so over the coming years.  Right now it is simultaneously encouraging people to buy downloads to guarantee portable access to their music as well as allowing subscription users to take their streaming experience with them on the go.

There is no doubt that Access based models are the future of music, but there are many, many years yet in which Ownership based models will continue to play a pivotal role.  Ownership and Access better learn to get along together, because they are going to be roommates for a long time yet.

iTunes Pass: First Take

So Apple finally gets into the music subscription business….well sort of. Today Apple announced the first of its iTunes Pass offerings, in partnership with EMI and 80’s electronic music pioneers Depeche Mode. In return for $18.99 a month buyers get

 

“…new and exclusive singles, remixes, video and other content from their favorite artists over a set period of time, delivered to their libraries as soon as they’re available. [They] will also receive the new album on its street date plus great music and video exclusives before and after the album’s release over the next fifteen weeks.”

 

Make no mistake, this is a big deal, but there are also holes in it.

 

The big deal part first:

• Apple has held off getting into the subscription business for years, with Steve Jobs casting disparaging ‘music rentals’ jibes at Napster et al every time they raised their head above the parapet. Apple were never going to get into the temporary download business, but there was no ideological or business reason why ultimately they wouldn’t get into the subscriptions business, as long as it was on their terms and didn’t detract from the core value proposition of iTunes.
• The ‘rental’ subscription business isn’t exactly in vibrant form. Rhapsody posted solid enough growth but that is against a back drop of persistent declines at Napster and Yahoo jumping out of the game. And even Rhapsody has failed to push music subscriptions out of a niche of tech savvy music aficionados. The iTunes Pass has mainstream appeal because a) it is targeted at specific fan groups b) it is cheaper c) it delivers permanent content
• Q4 was another record sales quarter, but replacement sales were a big chunk. The growth in new iPod customers is slowing so Apple needs to look at ways of leveraging more ARPU out of its existing customers.
• But the most significant part of all this is not what it means to Apple, but what it means to the music industry. This is a glimpse into the future. As we shift from the distribution paradigm to the consumption era the straight jacket of the album format and release schedule can be cast aside. We’d been saying for years at Jupiter (and now Forrester) that the record labels should start delivering a constant stream of content to fans, not just waiting for landmark release dates. In short, build an engaged, ongoing relationship with fans based on content not just artist pages on MySpace etc. This is a brave first step in that direction. Yes there have been similar efforts direct to fans via artist sites etc. but that misses the mass market opportunity and misses the point: this is the future of music retailing, not just some fan boy offer. Great work to EMI for driving this forward. Mark my words, much more will follow.

 

And now the gaps:

 

• Subscribers get exclusive content but no exclusivity on the album. Even if the main release date was delayed by a week or two this would have given much more value to this offer. I can understand the reasoning, principally attempting to mitigate against lots of copies leaking onto file sharing networks ahead of release. But this logic is flawed as a) it only takes one copy to get up there and the recent U2 experience shows that there are always leaks, however tightly you police across the value chain b) most of those who would download from P2P networks are lost customers anyway. Those customers who pay nearly $20 in advance for content they’ve not even heard yet are the ones you should be worrying about. Everything should be focused around making them feel special, not some Quixote-esque tilting at Bittorrent.
• My other minor quibble, no disrespect to Depeche Mode, but wasn’t there some bigger, more current act this could have been launched with?

 

Those caveats aside, this is a really exciting initiative. Welcome to the future of music retailing.

Where Now for Music Retailing?

UK media retailer has just announced that it will buy 14 retail stores from its struggling competitor Zaavi, which is currently in administration, following the collapse of media distributor EUK, which went into administration following the collapse of its parent company Woolworths which was also a key music retailer. Domino effect anyone? OK, things might not be as bad in many markets as they are in the UK, but a) the UK isn’t the worst hit b) other markets should look to the UK for what may be coming.

The overriding problem of course is that not enough people are buying music anymore and of those that are, many of them are shifting lots of their spending away from the high street retailers to online CD stores and to digital download stores. The harsh fact is that no high street music retailer has become a leading digital download store. Some have done better than others, but measure against the success of Apple’s iTunes Music Store, all have failed. They’re not helped by the fact that most digital download stores are an artifact of iPod sales. So selling in MP3 will help them (i.e. being able to sell to iPod owners), but they’ll still be hindered by their biggest problem: integration. No high street retailer has bitten the bullet and fully integrated their digital offerings with in store retail. The level of integration required should be so complete that it seriously threatens near term in store retail sales. Which is of course why it hasn’t happened yet. But if they don’t pursue such strategies soon, they’ll lose that revenue to other outlets rather than to their digital divisions. Meanwhile Amazon is setting the standard for integration. They could still go further, and they should, but they’re much further along this road than most of their bricks and mortar peers.

CD sales are in terminal decline. It’ll be a long prolonged death, so there’s still plenty of business in it, but succession and transition strategies need to be built around that basic tenet. The fact that music retailers are now media retailers (i.e. they sell DVDs, games, electronics etc) is indicative of the realization of where the future is. But aggressive digital strategies are key to retailers can slowing the music revenue share decline and turn it into channel shift rather than revenue loss.

Even though HMV’s revamped digital strategy isn’t as bold as it should be (yet anyway) another announcement shows their ambition: they’ve launched a joint venture that gives them a portfolio of live music venues. This is HMV trying to safeguard their future in the post-CD music business. Such a move isn’t available nor appropriate for all media retailers, but the basic assumption of ‘diversify or die’ is.

Mamma Mia: How Universal Are Using Music from the 70’s to Build a 21st Century Business

Universal Picture’s ‘Mamma Mia! The Movie’ has just become the most successful film musical of all time with 2.25 million first day US sales and previously 1.6 million first day UK sales (which in per capita terms means that British sales were three and half times more successful.)  UK 1^st week sales peaked at 3.5 million, over a third higher than that blockbuster Titanic.  Mamma Mia has also been seen by over 32 million people world wide and there are eight different theatre productions currently globally.

Why am I spending so much time spouting stats from a Universal press release?  Because this is one of the success stories of how the music industry is building a diversified future.  Universal Music has leveraged the asset of one of it catalogue artists across stage, screen and TV.  This is a best practice example not just for multi-platform syndication but also for leveraging the multiple distribution assets of a corporate media powerhouse.   EMI is the only major not to have the benefit of movie and home video entertainment arms to lean on.  But even without that support, EMI can look to the hugely successful Queen inspired We Will Rock You musical.

Being a music company might be getting increasingly difficult but the success of ‘Mamma Mia!’ is evidence that the music industry is already coming up with new ways to be successful in the 21^st century, even if it is with music from the 1970’s.

As a postscript, Universal’s press release includes links to various YouTube ‘sing along’ clips. How times have changed since Doug Morris arguing that YouTube should be sued.

HMV Interim Results and What they Mean for Music Sales

Interim results are out for HMV, always a good litmus test for the state of music and media sales.  I’m not a financial analyst so I’m not going to discuss the financial fundamentals, rather what this means for the music industry.

 

HMV stores sales (i.e. excluding Waterstones) are actually up over period.  But technology and gaming, rather than music, have been key to this growth, increasing their combined share from 18 percent to 23 percent.  HMV knows where its future lies.  HMV is plotting a course that brings it closer to European peers such as Saturn in Germany and Fnac in France and Åhléns in Sweden: it is not just becoming much more than music, it is planning for a future when music will no longer be a core product.  As you can from the chart below, music’s share of total sales is declining sharply and is strongly outweighed by DVD, which itself is now losing share to games and electronics.

 

So where does that leave music sales if Europe’s key high street music retailers are rapidly developing in other directions?  It would be nice to say that this is part of a process towards strong online sales.  But none of Europe’s major high street retailers have managed to steal any serious market share from Apple’s iTunes Music Store.   They should have been able to, as they have the decades of music retailing and programming expertise that Apple is just learning.  Selling in MP3 format is a crucial asset (which HMV now have) but they need to price as aggressively as Amazon is now in the UK and, most importantly, integrate heavily in store. This means that when you’re browsing the shelves in HMV you see most CD titles have offers for download discounts and bundles e.g. buy this album and get the other as a download for half price.

 

This might seem like a no-brainer, but it hasn’t happened because those responsible for in store CD sales are scared of accelerating cannibalization of their dwindling sales by driving people online.  It’s too late for those kinds of concerns.  The shift is already happening.  All that’s left now is an opportunity for HMV to help drive the process rather than continue to be dragged along, losing customers and market share all along the way

 

 

Could the Distribution Crisis in the UK Drive Digital Growth?

Hot on the heels of leading distributor EUK going into administration, Pinnacle follows, supplier of CDs, DVDs and games to the likes of HMV, Amazon and WHSmith. Could this squeeze on physical distribution be a boon for digital sales? The music retailers are certainly covering their bets: Zavvi announced the planned rapid launch of a new download store, HMV just revamped their store and Amazon’s sudden launch of their MP3 store makes more sense in the light of the Pinnacle problems.

But unfortunately much of the Christmas present custom is more likely to shift to other media rather than to digital music. The download stores of the retailers will pick up some slack, but not enough to ‘save the day’. Physical distribution needs fixing, fast. What may benefit though, are Comes With Music handset sales. Mum out shopping for her teenage kids might just be swayed towards a 5310 instead of another handset if she was planning on buying some music as well.

Ok, it’s tenuous. And that’s just the problem. When it comes to gifting consumers are pretty fickle customers: if they can’t find the CD they want they’ll get a book or DVD instead.

So the most likely net result is accelerated overall decline rather than accelerated digital sales.

Amazon Launches MP3 Store in the UK. First Take.

Amazon just sneaked up on the UK music market with it’s stealthy launch of the UK version of its MP3 store.  Why the quiet launch?  Amazon promised back in Midem that they’d launch in Europe before year end.  It seems to have to taken them longer than expected to make this happen and the quiet, late launch feels like Amazon might not have been able to get all of the pieces in place for launch that they’d wanted.

 

It is, of course, live in time for the crucial Christmas rush though, and unerringly coincidental with the temporary closure of Zavvi’s online store.

 

Will Amazon change the UK digital music market?  No.  Will it become a serious player?  Yes. 

 

If anyone can make digital download stores work outside of the iTunes / iPod eco-system, it is Amazon. They have the programming expertise, the packaging expertise, the audience (more European iPod owners buy CDs online than they do downloads).  But they need to create a reason for iPod owners to buy from them and not iTunes Music Store.  They can’t really differentiate on content.  Differentiating on MP3 is not a massive differentiator for iPod owners as they don’t experience any restrictions with their devices with iTMS downloads.  

 

So the key avenue for them is pricing.  And this seems to be the core positioning piece with the store currently, with very cheap album and single pricing listed at the top left of the page (songs under 60p and albums under 2 pounds).  Either they’re loss leading as an aggressive market entry strategy or they’ve got some good deals from the labels.  If it’s the former, they’ll have to revert to standard pricing at some stage.  If it’s the former the labels will need to wise up and give similar deals to Apple if they want to avoid cutting their nose to spite their face.

 

So, assuming pricing will normalize towards iTMS for one reason or another, the differentiation issue will remain.  Amazon has the best chance of gaining significant market share form Apple but they won’t unseat Apple from its market leading position.  Also, the whole momentum of digital music is shifting away from paid downloads to new offerings like Comes With Music and Datz Music Lounge.  Thus Amazon will be competing for distant second place in what will increasingly become a mere subset of the digital music market.