Universal And Spotify’s Deal Is An Even Bigger Deal Than It Looks

 

Universal Music and Spotify have finally agreed on terms for the streaming service’s new licensing deal which reportedly includes better rates tied to growth targets and premium windowing. Check out Tim Ingham’s piece for detail on the deal. Although the big focus across the industry so far is, understandably, on what this means for Spotify, it is also part of a bigger story, namely that of the maturation of the streaming market and its associated business models.

What It Means For Spotify And UMG

Firstly, what it means for Spotify. As I have written previously, Spotify needs to create a strong narrative for Wall Street if it is going to IPO successfully. Within that narrative it needs to demonstrate that it is embarking on a journey of change even if the destination is some way off yet. Its relationship with the labels is central to that. Paying out more than 80% of revenue for ‘royalty distribution and other costs’ on a cash flow basis is not something potential investors exactly look upon with unbound enthusiasm. In pure commercial terms Spotify actually pays out round about the same amount (c70%) of revenues to rights holders as Netflix does, but because Netflix owns so much of its own rights it can amortize the costs of them to help generate a net profit while Spotify cannot.

The 2 ways of fixing that are 1) owning copyrights, 2) reducing rates to rights holders (which really means labels as publishers are pushing for higher rates). It is probably too early to flick the switch on the ‘Spotify as a label’ strategy as that would antagonize labels at exactly the wrong time. So reducing rates is the main lever left to pull.

However, the labels feel the rates are fair value, in fact many think the rates undervalue their content assets. So Spotify was never going to achieve a dramatic change in rates at this stage. Also, labels are wary of granting better terms to Spotify because Apple and co will immediately demand the same. Hence UMG has tied Spotify’s lower rates to growth targets, which you can rest assured will be ambitious. Why? Firstly the labels need continued big growth. The global music business grew by around 1 billion dollars last year, with streaming growing by 2 billion dollars. Thus without streaming’s growth the music business would have declined by 1 billion dollars instead of growing by that much. The labels cannot afford for streaming growth to be smaller than the amount by which legacy formats decline.

Secondly, Spotify needs better deals more than many of its competitors, so is more willing to agree to ambitious growth targets. Apple and Amazon (who both make their money elsewhere and aren’t prepping for an IPO) are less concerned about better rates and are less likely to be willing to be tied to strong growth targets. So UMG has a win win here. It gets Spotify tied into ambitious growth without a major risk of having to also give lower rates to Apple and Amazon.

What It Means For The Wider Market

With $5.8 billion in revenue in 2016, streaming has more than come of age, it is the beating heart of the recorded music business. But just as young companies have to transition from scrappy start ups to mature companies, this is the stage at which the streaming market as a whole needs to move from a cool emerging technology to a more nuanced and complex marketplace. It needs to develop the sort of sophistication that $5.8 billion market merits. Adding the ability to window new release albums is part of this process. And to be clear, the windowing does not mean that UMG’s new music is suddenly going to disappear off Spotify’s free tier. Instead UMG has the ability to choose to put selected albums behind the pay wall for 2 weeks as Daniel Ek’s press release quote makes clear:

“[This is a] new flexible release policy. Starting today, Universal artists can choose to release new albums on premium only for two weeks, offering subscribers an earlier chance to explore the complete creative work.”

While there is a risk that windowing may give piracy a little boost, those consumers that choose to Torrent rather than upgrade or simply wait 2 weeks were never realistic targets for the 9.99 tier anyway. What we may well see is a spike in uptake of free trials and the ‘$1 for 3 months’ super trials.

Getting The Right Kind Of Growth

The UMG – Spotify deal is more than just an agreement between 2 parties. It is the start of the next chapter in relationships between streaming services and labels. A deepening and strengthening of links. It is of course a unique product of its time (ie Spotify needing to get its house in order ahead of the IPO) but market defining precedents are often born out of such circumstances. Such as the time when AOL Time Warner wanted to ‘get smart with music’ following its recent merger and promptly sent off Warner Music’s CEO Roger Ames with Paul Vidich to carve out the iTunes deal with Steve Jobs.

Back then Apple was focused on trying to jump start iPod sales. Now though the labels need Spotify to start building a sustainable business. It is not enough for Spotify to simply clear the IPO hurdle, it needs to land on its feet and maintain speed. So while it’s great to see that UMG and Spotify have hit upon a framework for delivering better rates in return for better growth, Spotify must be careful to ensure that it grows sustainably and not pursue growth at any cost.

2016 was inarguably a great year for both streaming and the labels. This deal has the potential to lay the foundations for an even better 2017 and beyond.

Why Netflix Can Turn A Profit But Spotify Cannot (Yet)

Having just celebrated its 10th (streaming) birthday, Netflix followed up with a strong earnings release, announcing 5.8 million net new paid subscribers in Q4, sending its share price up by 9%. This wraps up a stellar year for Netflix, one in which it doubled down on original programming and delivered acclaimed hits such as Stranger Things and The OA, shows that don’t fit the traditional TV mould. In fact, Stranger Things was turned down by 15 TV networks before finding a home at Netflix and The OA’s oscillating episode lengths (from 1 hour 11 mins to 31 mins) would have played havoc with a linear TV schedule (not even considering its mind bending plot).

netflix-spotify-midia-figure-1

Netflix closed 2016 with 89.1 million subscribers and the temptation to benchmark against Spotify’s equally strong year is too strong to resist. Spotify (which celebrated its decade in June 2016) closed the year with around 43 million subscribers, 48% the size of Netflix. But a closer look at the numbers tells another growth story.

Read the full post on the MIDiA blog by clicking here.

MIDiA Research Predictions 2017: The Year Of The Platform

MRP1611-coverFollowing an 84% success rate for our 2016 Predictions report, we today launch our 2017 predictions report: ‘MIDiA Research Predictions 2017: The Year Of The Platform’. The report is immediately available to all MIDiA subscription clients and can also be purchased for individual download from our report store here.

Here are some highlights:

2016 was the year that video ate the world. 2017 will be the year of the platform, the year in which the tech majors will fight for pre-eminence in the digital economy, competing for consumer attention through formatting and distribution wars. Companies that are already using mobile Operating Systems to achieve global reach will take the next step, creating Mobile Life Ecosystems that both break out of the app silo walls and straddle them. Facebook, Amazon, Tencent, Microsoft, Apple and Google/Alphabet will be the main players. 2015 was about parking tanks on each other’s front lawns, in 2016 shots were fired, 2017 will be all-out war. Artificial Intelligence (AI) and voice assistance will be key battlegrounds and indeed will form the glue of Mobile Life Ecosystems.

Some of MIDiA’s other key predictions for 2017 are:

  • Services are the new black: Maturing ‘phone and tablet markets mean that hardware companies will place a greater focus on digital content and services in 2017. Services are an opportunity to drive strong growth that will compensate for slowing device sales
  • Ad market growing pains: Digital advertising inventory supply will exceed demand in 2017. Audience engagement will grow more quickly than advertisers’ appetite. Consequently, ad rates will decline with the bloating of the market by content farms accentuating the problem. Facebook will not be alone in seeing slowing ad revenues in 2017.
  • A tech major will be hit with the first stage of an anti-trust suit: The incoming US Presidency has made its anti-trust inclinations clear. A likely early target will be the AT&T/Time Warner merger. The global-scale tech companies may be mature companies but their respective sectors are not. Regulation is one of the inevitable growing pains of maturing business sectors. Digital is next.
  • Snapchat’s IPO will be digital’s canary in the mine: App store era unicorns and their attendant Initial Public Offerings (IPOs) will redefine the media and tech landscape. Not only will the success, or failure, of Snapchat’s IPO affect those of Uber and Spotify, poor showings could deflate the VC bubble andput an end to the grow-at-all-costs For the music industry, the stakes are even higher, as an under-achieving Spotify IPO would create a crisis in confidence in the entire streaming market.

Among our music predictions for 2017 are Spotify’s IPO and the subsequent start of a new generation of experiential streaming services, Tidal selling (probably to Apple) while Spotify closes out the year with around 55 million subscribers to Apple Music’s 30 million.

What Frank Ocean’s Bombastic Blond Moment Tells Us About The Future Of Artists And Labels

When frank-ocean-blond-compressed-0933daea-f052-40e5-85a4-35e07dac73dfFrank Ocean’s latest album ‘Blond’ dropped, it did so like a nuclear bomb, sending shockwaves throughout the music industry. In one of the audacious release strategies of recent years Ocean and his team at 360 fulfilled the final album contractual commitment to Universal Music by ushering his breaking-the-mold visual album ‘Endless’ onto Apple Music.  Featuring collaborations from the likes of Sampha and James Blake and set as a loose soundtrack to art house visuals, ‘Endless’ looked like the sort of digitally native, creative masterstroke that would win plaudits and awards in equal measure. But no sooner had Universal executives started daydreaming about Grammys then along came what turned out to be the ‘actual’ album ‘Blonde’, self released by Ocean (Universal contractual commitments now of course conveniently fulfilled) and, for now at least, exclusively available on Apple Music. You can just imagine seeing the blood drain from (Universal CEO) Lucian Grainge’s face as the full magnitude of what had just happened came into focus. In truth ‘audacious’ doesn’t even come close to explaining what Ocean pulled off, but where it gets really interesting is what this means for the future of artist careers.

Artist-Label Relationships Are Changing

Quickly sensing the potential implications, Grainge swiftly sent out a memo to Universal staff outlawing streaming exclusives…though voices from within Universal suggest that this diktat had been in the works for some time . A cynic might even argue that it was politically useful for Universal to be seen to be taking a strong stand ahead of the impending Vivendi earnings call. As the ever excellent Tim Ingham points out, in practice Universal could put a streaming exclusives moratorium in place and still have a good number of its front line artists put out streaming exclusives. This is because many of the deals these artists have are not traditional label deals where Universal owns all the rights. And that itself is as telling as Ocean’s bombastic blond moment. Not so much that Universal is probably the major with the highest amount of its revenue accounted for by licensed and distributed works, but that any label’s roster is now a complex and diverse mix of deal types. Artists are more empowered than ever before, and thanks to the innovation of label services companies and next generation music companies like Kobalt, labels have been forced to steal the disruptors’ clothing in order to remain competitive.

Streaming Exclusives Represent Another Option For Artists

Just as labels had started to successfully co-opt the label services marketplace by launching their own – e.g. Universal’s Caroline – or by buying up the competition – e.g. Sony’s acquisition of Essential Music & Marketing – along come streaming services giving artists another non-label route to market. In truth, the threat has remained largely unrealised. Exclusives on Tidal have most often proved to be laced with caveats and get out clauses (e.g. Beyonce’s ‘Lemonade’ arriving on iTunes 24 hours after landing ‘exclusively’ on Tidal). Chance The Rapper’s (in name only) mixtape ‘Colouring Book’ and Ocean’s ‘Blond’ are exceptions rather than the rule. So all that’s about to change now right? Not necessarily…

Album Releases Require More Time Than Apple Probably Has

As anyone who works in a label will tell you, releasing an album is typically a long, carefully planned process with many moving parts. It’s not something you do in a couple of weeks (Ocean started building the hype and expectation for his latest opus a year ago). If, for example, Apple was going to start doing exclusives routinely, even if it just did 20, that’s still a new exclusive to push every 2 weeks. That might work, at a stretch, for music service retailing promotional pushes but is far short of a fully fledged album release cycle. Which means that even for just 20 exclusives Apple would have an intricate mesh of overlapping release campaigns. This is something that labels do with their eyes closed but would it require new organizational disciplines for Apple. Not impossible, but not wholly likely either.

In practice, exclusives are likely to be limited to being the crown jewels of streaming services, their most valuable players, creative playmakers if you like. Even for Netflix, that pioneering exemplar of the streaming originals strategy, only spends 15% of its $3 billion content budget on originals and probably won’t break 20% even by 2020. What Apple and Netflix have in common is that they are using exclusives as a customer acquisition strategy, achieving their aims by making a big noise about each one. But if you’re releasing exclusives every week or two the shine soon wears off. And suddenly the return on investment diminishes.

Streaming Exclusives Are Unlikely To Turn Into A Flood

None of this means that we won’t see more artists striking streaming exclusives. We will, regardless of what labels may actually want to happen. And most of those will probably be on Apple – the service with bottomless pits masquerading as pockets. But the trickle will not turn into a flood, a fast flowing stream perhaps (see what I did there) but not a torrent.

Although they might not realise it yet, Kobalt might find themselves hurting more than the majors from this latest twist in the Exclusives Wars. Kobalt has probably done more than any single other music company to drive change in the traditional music industry in the last 5 years, showing artists and songwriters that there is another way of doing things. But Frank Ocean has just shown that there is now new another option for established artists looking for options at the end of a label deal.

Most importantly of all though, is that streaming exclusives (and indeed label services deals) work best when an artist has already established a brand and an audience. Most often that means after an artist has had a record label recording career. Apple cannot be relied upon to build anything more than a handful of artist brands. One of the founding myths of the web was that it was going to do away with labels and other traditional ‘gatekeepers’. Now, decades later, labels still account for the vast, vast, vast majority of music listening. Make no mistake, a momentous value chain shift is taking place, with more power and autonomy shifting to the creators, but that is a long journey and ‘Blond’ is but one part of this much bigger shift.

How Apple Music And Tidal Transformed Streaming (And Why Apple May Be Buying Tidal)

 

It is 15 months since the launch of Tidal (which was 2 months after Jay-Z’s Project Panther Bidco bought Aspiro) and it is 12 months since the launch of Apple Music (which was a year after Apple bought Beats Music). The streaming world has changed a lot in that time and both those companies have had a disproportionately large amount on influence on the market’s direction of travel. Their arrivals defined Spotify’s role as incumbent while simultaneously casting Apple and Beats as challengers. They have performed their roles of disruptive entrants well, reshaping the competitive marketplace with a strong focus on brand and artist exclusives. Now reports emerge that Apple is in talks to buy Tidal. First victory in the exclusives war or overspending for market share?

When Is An Exclusive And Exclusive?

In the streaming video world an exclusive means exactly that. If you want to watch ‘House Of Cards’ you need Netflix, if you want to watch ‘Man In The High Castle’ you need Amazon Prime. But in music the rules are far more flexible.

exclusives

Looking at the flagpole exclusives across Apple Music, Tidal and Spotify, most of these are available on other platforms as downloads, while many are available to stream. For example, Beyoncé’s ‘Lemonade’ is only available to stream via Tidal but was available to download on iTunes within 24 hours of release. Understandably, the exclusive albums of each company’s respective godfather are genuinely exclusive. But Rihanna’s ‘Anti’ was given away by Samsung while Spotify’s rock legends exclusives are streaming only.

Apple is beginning to push the envelope though, pitching creative solutions to labels and artists, resulting in output like videos for The Weekend and Drake. At the same time it is beginning to look suspiciously like a record label with the release of Chance The Rapper’s ‘Colouring Book’ mixtape. The net result of all this clamouring to be seen as the ‘home’ of an artist is resounding confusion and frustration for music fans. An avid TV fan may well accept the need to have both a Netflix and Amazon subscription because no video service claims to have all the TV shows and movies on the planet. However, the central proposition of streaming music services is exactly that…or at least it was until Tidal and Apple Music upset the the apple cart (ahem). The irony is that in scoring a quick win against Spotify, Tidal and Apple may have fundamentally undermined the long term positioning of the entire streaming music product.

Exclusives Cannot Recreate The 1990s

Apple Music’s head of original content Larry Jackson has said he wants to make Apple Music to emulate the success of MTV in the 80’s and the 90’s, creating the sense that artists ‘live there’. It is an admirable goal but the music world of the 2010’s is a dramatically different one. In those days there was scarcity (you had to buy music to listen on demand) and there was a finite amount of radio and TV. It was possible to control both the message and the audience. Now we are in the Era of Distributed Audiences where people are simultaneously in multiple digital places, with artists and labels racing after them in all those places. No amount of exclusive windowing is going to change that. The genie is well and truly out of the bottle.

The Economics Of Exclusives

Where the streaming video and streaming music markets match up is that content budgets are currently being used to drive user acquisition. While streaming services have a long way to go before they reach Netflix’s $6 billion annual content budget, both types of streaming service will overspend to get market share and will reel budgets back in later. So it should be no surprise that the amounts being spent on artists don’t really add up.

For example, Apple is reported to have spent $19 million on Drake and was rumoured to have bid up to $25 million for Harry Styles. If Styles had signed, even if he had racked up the same number of streams as Drake on Spotify in 2015 (1.8 billion, the highest number of any artist) he would still only have generated gross revenue of $18 million and net revenue of revenue of around $14 million, leaving something like an $8 million loss for Apple when Apple Music’s additional retailer margin is factored in. Apple would however have been able to make up the remainder on album sales, but Styles would have needed to have shifted a good number of albums. (Adele’s ‘25’, the biggest selling download album in the US in 2015 drove around $15 million in label revenue.) So for now, it takes selling albums to make the economics of streaming exclusives add up.

apple vs tidal

Jay-Z paid $56 million for Aspiro’s 512,000 subscribers, $110 per subscriber. Assuming he’d want a similar per subscriber price, that would put Tidal’s price tag at around $440 million. That’s no small amount of money for around 5% of the global subscriber market. Or to put it another way, Apple could another 23 Drake exclusives for that money which most likely would have a bigger impact on subscriber growth. Indeed, on all growth measures Apple Music has outperformed Tidal over the last 12 months, adding 12.5 million new subscribers to Tidal’s 3.1 million, growing by an average of 1.4 million subscribers a month compared to 0.3 million for Tidal. Apple even has the edge in % growth terms (352% compared to 328%).

So why is Apple in the market for Tidal (albeit reportedly)? Probably more than anything it is about taking an irritatingly threatening competitor out of the market. Tidal has been stealing Beat’s core customer base from right under its nose. It’s no coincidence that Apple Music’s exclusives strategy has had a strong urban bias. Apple wants its Beats customers back, just like it wants its iTunes customers back from Spotify.

Even if Apple does buy Tidal, don’t expect the exclusives wars to go away. Indeed, Spotify just acquired its own exclusives supremo in the shape of Troy Carter, and Apple clearly has its mind set on continuing to spend heavily. So the next few years of streaming will be  defined by streaming services getting closer to artists (with Connect becoming much more important for Apple) which in turn will see the distinctions between what constitutes a streaming service and a record label blur all the more.

As science fiction write William Gibson wrote: the future is already here, it’s just not evenly distributed yet…

 

Why Niche Is The Next Streaming Frontier

If 2014 was the year of fear, uncertainty and doubt for streaming then 2015 is shaping up to be the year in which streaming starts to deliver.  In fact so far streaming has helped drive revenue growth in the first half of 2015 for markets as diverse as Italy, Spain and Japan as well as of course in the streaming Nordic heartlands of Sweden, Denmark and Norway.  All this despite an accompanying average decline in download revenue of 7%.  But as I have long said, there is only so far that 9.99 AYCE (All You Can Eat) subscriptions can go.  This value proposition and price point combination constrains appeal to the aficionados and the upper end of the mainstream.  Pricing will be key to unlocking new users (as Spotify’s focus on the $1 a month for 3 months promo shows). However some highly influential elements within major labels are more resistant to pricing innovation now than they were this time last year.  So don’t hold your breath for the long overdue pricing overhaul.  The other side of the 9.99 AYCE equation though is just as important, namely choice, or rather, less choice. In fact, done right, cut down, niche music offerings should be able to fix the pricing conundrum too.

Too Much Content Is No Value At All
catalogue anatomy

Most people are not interested in all the music in the world and most people are not interested in spending $9.99 (or the local market equivalent) a month for music.   All the music in the world is a compelling proposition for super fans, but it is both a daunting prospect and more than is required for casual fans.  In fact the supposed benefit becomes a problem, the excess of choice begets the Tyranny Of Choice.  Indeed, just 5% of streaming catalogues is regularly frequented.  Most of the rest is irrelevant for most consumers.

Cord Nevers Are A Music Industry Problem Too

Most music fans like one or more kinds of music most.  While super fans are happy to pay for the ability to get everything, mainstreamers are not.  This is exactly the dynamic we are seeing in the video space, with consumers increasingly turning to smaller, cheaper services such as Netflix and Amazon rather than paying through the nose for an excess of cable channels.   The TV industry calls these consumers cord cutters (i.e. those that cancelled their TV subscriptions) and cord nevers (i.e. those that never paid for cable).  Now the music industry is facing its own cord never challenge: consumers who have never taken up a music subscription and have no intention of doing so.  In the past they would have spent some money on downloads, now they’re just watching more music videos YouTube.  The music industry quite simply does not have a Netflix for its cord nevers to go to instead of the full priced subscription option.

The Case For Niche Playlist Services

But give those more casual music fans a music app just built around their tastes and for a fraction of the price and the equation changes from zero sum.  Imagine genre specific playlist apps for $3 or $4 month.  A dozen curated playlists, a handful of featured albums and a couple of radio stations, all just of your favourite style of music and all streamed into a dedicated app.  Not only does this proposition deliver clear value, it also gives the industry an opportunity to open up new users that have thus far not been swayed by the broader utility play of AYCE services.

Imagine a Country app, a Classic Rock app, a Hip-Hop app, a Metal app, an EDM app, a Jazz app…. Each of these would create clear appeal within the mainstream elements of genre fan bases.  And while there is some risk of cannibalizing $9.99 services, this should be small if they are 100% curated (i.e. no on demand element) because they would be unlikely to appeal to aficionados and the super-mainstream.  These niche music apps could be delivered by standalone curated playlist service providers like MusicQubed, white label providers like Medianet and Omnifone, or even by AYCE services like Spotify ‘doing-a-Facebook’ by spinning out standalone apps.

The Marketplace Needs Niche Services Right Now

Niche services are not however a nice-to-have, an optional extra for the industry.  They will be crucial to unlocking the scale end of the subscription market and they will be needed sooner rather than later. Organic subscription growth (i.e. not including the temporary adrenaline shot of Spotify’s limited time price promotions) is not growing fast enough.  Apple Music looks set to add a significant amount of new users before year-end but many of those will come at the direct expense of the incumbents.  All the while YouTube is leaving everyone else for dust: the amount of net new video streams (i.e. free YouTube views) in H1 2015 was more than double that of net new audio streams.

The 9.99 AYCE model still has a lot of life in it yet, but just as the mobile phone market has far more choice than high end devices, so the subscription market desperately needs the diversity that niche services would bring.

The Streaming Maturation Effect

What do Netflix and music subscriptions have in common?  They both experienced slowing growth in 2014 in the US.  Subscriptions are the monetization focal point of streaming but there have long been signs that the market opportunity is far short of the mainstream. Reports suggest that Spotify may (finally) be about to launch video, as a means of differentiating in an increasingly competitive marketplace that is about to get a whole lot more competitive on the 9th of June (i.e. when Apple announces its long mooted arrival into the space).  Spotify needs a differentiation point.  It may be the runaway market leader but it doesn’t have the feature badge of identity that many of its competitors do (e.g. Rdio is the social discovery service. TIDAL is the high def service. Beats is the curation service etc.).  However, even with a feature differentiation point, Spotify and all of its subscription peers face a more substantial challenge than competing with each other: they are collectively in danger of banging their heads on the ceiling of demand for music subscriptions.

Behaviours Will Change, But Slowly

The world is unequivocally moving from ownership to access and streaming will be a central component of this new consumption and distribution paradigm.  9.99 subscriptions however have no such mainstream inevitability.  They are too expensive for most consumers but most crucially they require consumers to pay for music every month when most people instead spend when one of their favourite artists is in cycle with a new album, single or tour.  Over time (a half generation or so) some consumers will have their behaviours modified, but the majority will not.  In some sophisticated markets (such as South Korea, the Nordics and, to some degree, the Netherlands) subscriptions are showing some sign of edging towards a wider audience (though still far short of mainstream).  In most major music markets though, they remain firmly locked in single digital percentage adoption ranges. They are niche services for the high spending aficionados.

maturation effect

But this isn’t solely a music subscription problem.  It is a dynamic of digital subscriptions more broadly.  Take a look at the US. In 2014 net new subscribers (i.e. the amount of subscribers by which the market grew) fell to 1.5 million, down from 2.8 million in 2013 – which translated to a 46% decline in net adds.  And that was in one of the highest profile years yet for subscriptions.  Over the same time period, Netflix’s net new US subscriber growth fell from 6.4 million to 5.7 million, which was a more modest 11% decline in net adds.

This is not to say either business model has run its course – far from it, and of course both sectors still gee in 2014 – but instead that premium subscriptions are not mass market value propositions. And once you have mopped up your early adopters and early followers growth inherently slows.  The music industry may be locked in an identity crisis over how it deals with freemium services, but it needs to have a realistic understanding of just how far subscription services can go without lower price tiers and more ability for users to easily dip in and out and, ideally, pay as they go rather than being tied to monthly commitments.

The incessant success of YouTube and Soundcloud show us that mainstream consumers want on-demand music experiences but the slow down of subscriber growth in the US shows us that the incumbent model only has a certain amount of potential. Sure, Apple will doubtlessly unlock a further tier of early followers to meaningfully grow the market, but it will only be a matter of time before it hits the same speed bumps.

Access based models are the mainstream future, subscriptions can be too, premium subscriptions though are not.

The Problem With Streaming Exclusives

Jay-Z’s ambitions for TIDAL has triggered a lot of discussion about how streaming models can evolve.  One focus has been exclusives with a number of references to TIDAL ‘doing a Netflix’ by commissioning exclusives.  Netflix can attribute much of its growth over the last couple of years to its flagship ‘Netflix Originals’ such as ‘House Of Cards’ and ‘Orange Is the New Black’.  It is an appealing model but the Netflix Originals approach cannot so easily be transferred to music.

There are three main types of exclusives:

1.    Service Window: album is released exclusively to a single music service for a fixed period of time e.g. only on TIDAL for 1 month

2.    Tier Window: album is released across one type of music service tier before others e.g. only on paid subscription tiers for 3 months

3.    Service Exclusive: music service acquires exclusive rights to an album so that it will never appear anywhere else unless the service decides to let it

The first two will become increasingly common components of the streaming landscape over the next couple of years.  Daniel Ek and Spotify fought a brave rear guard action against Taylor Swift and Big Machine to ensure the Tier Window model did not carve out a beachhead with ‘1989’ but it is an inevitability.  If free tiers are to have a long term role alongside paid tiers they have to be more clearly differentiated.

TIDAL and Apple look set to become the heavyweight players in the Service Window, duking it out for the biggest releases.  TIDAL will argue it pays out more to rights holders (75% compared to 70%) while Apple will argue that it can directly drive download sales (which is where everyone still makes their real sales revenue).  Apple will have to play that card carefully though as it stands just as much chance of accelerating download cannibalization as it does driving new sales.

When Is A Label A Label?

The really interesting, and potentially most disruptive, exclusive is the Service Exclusive.  This model would start blurring the distinction between what constitutes a music service and what defines a record label.  If, for example, TIDAL was to buy out the rights of the next Beyonce album or sign a deal for the next two Calvin Harris albums TIDAL would effectively become the record label for those releases.

The irony is that this ‘ownership of the masters model’ by streaming services is emerging just as the next generation labels are distancing themselves from it.  A new breed of ‘labels’ such as Kobalt’s AWAL and Cooking Vinyl’s Essential Music are focussing on providing label services without taking ownership of the masters and in turn putting the label and artist relationship on a more equitable agency / client basis.  But there are far more impactful challenges to the Service Exclusive model for music than simply being out of step with where the label model is heading:

  • Scarcity: ‘House Of Cards’ is only available on Netflix (and some download to own stores such as iTunes). It is a scarce asset, which is not something that can be said about any piece of recorded music.  As TIDAL found with the near instantaneous Beyonce YouTube leak, music scarcity is ephemeral in the YouTube age.  As long as YouTube is allowed to hide behind its perverse interpretation of ‘Fair Use’ and ‘Safe Harbour’ there will be no music scarcity.  (Of course true scarcity is gone for good, but if that can be made to only mean P2P then the problem is manageable, as it is for TV content).
  • Consumer expectations: Consumers have learned to expect their video experiences to be fragmented across different platforms and services, to not find everything in one place.  For music consumers however the understanding is that catalogues are either near-complete or useless.  So if all music services suddenly started having high profile gaps then subscribers would be more likely to unsubscribe entirely than they would be to take up multiple subscriptions.  Ironically the net result could be a return to download sales at the expense of subscriptions.  Talk about going full circle….
  • Industry relationships: Netflix started out as a pure licensee, paying TV companies for their shows.  Now it competes with them directly when commissioning new shows.  It has become a frenemy for TV companies and is finding many of its relationships less favourable than before.  And this is in an industry that is built up the frenemy hybrid licensee-licensor model.  The music industry does not behave this way, so any service that took up the Service Exclusive model could reasonably expect itself to find itself developing tense relations with labels.  Which could manifest in those labels giving competitor services preferential treatment for their own exclusives.  Labels have long feared the disintermediation threat posed by the web.  It is unlikely to materialize any time soon but they are not exactly going to encourage retail partners to kick-start the process.
  • Appetite for risk: Buying up the rights to the latest release of an established superstar is the easy part, and we already have some precedents though neither were exactly run away successes (Jay-Z’s ‘Magna Carta Holy Grail’ with Samsung and U2’s ‘Songs Of Innocence’ with Apple).  But being a label, at least a good one, isn’t simply about signing proven quantities, it is about taking risks on new emerging talent.  And that doesn’t simply mean having a DIY platform on a streaming service – though that can act as a great talent identification tool.  If streaming services want to start playing at the label game they need to also start nurturing and marketing talent.
  • Limited horizons: Stream is still only a small fraction of recorded music revenue.  There are few non-Nordic artists that rely on streaming for the majority of their sales income.  That will change but not for a few years yet.  So a release that only exists on streaming, let along a single streaming service, is only going to deliver on a fraction of its potential.  TIDAL and Apple especially could easily choose to loss-lead and pay over the odds for Service Exclusives to ensure artists aren’t left out of pocket.  But that only fixes part of the problem.  An artist locked into one single streaming service will see his or her brand diminish.  ‘House Of Cards’ may be one of Kevin Spacey’s most assured performances yet only a few tens of millions of people globally have ever seen it.  If it had been on network TV the audience would have been hundreds of millions.  With touring becoming the main way many artists make money the album is the marketing vehicle and if that album is locked behind the pay wall of one single music service the marketing potential is neutered.

Streaming music services will find themselves locked in total war over the coming years and while Apple’s cash reserves will likely make that warfare appear asymmetrical at times, exclusives of some kind or another will be utilised by most of the services.  Just don’t expect them to deliver them Netflix-like success because that’s not going to happen.

It Is Time To Think Beyond The Monthly Subscription

Apple’s entry into the subscription market later this year will fire a broadside across the freemium model.  But there are not many companies that can do what Apple can.  Every product and service needs to acquire customers and usually that entails advertising and marketing.  If what you are selling is a relatively nuanced proposition, and music subscriptions are exactly that, then you are going to need to spend a lot of time and money building the awareness and understanding of the product.  That typically either means a big ad budget or having a captive audience to talk to directly without the marketing middleman. For freemium services that is the free tier.  For Apple that is the installed base of device owners.  It is all well and good for Apple to crusade against free in its entirety because that also happens to make it increasingly difficult for anyone else to make the subscription model work.  As I argued in my previous post there is a need for a rethink of free, to ensure that it acts as an acquisition funnel for subscriptions not as a replacement for them.  But there is another part of the puzzle that needs solving too: the subscription model itself. If freemium is on borrowed time, a solution is needed that the entire market can work with, not just Apple.  Pay As You Go (PAYG) is part of the answer.

Music Subscriptions Cap ARPU

Currently the music industry is trying to migrate all of its paying customers to subscriptions.  The theory is that this should increase the Average Spend Per User (ARPU) to 9.99 but as MIDiA’s research revealed, thus far it appears to be doing a better job of reducing the ARPU of the most valuable. Thus we have a worst of both worlds scenario in which the ARPU of the most valuable customers is capped (something no other media industry does) and the lower value customers aren’t offered enough options to get on the spending ladder.

When I wrote back in October that it was time for a pricing reset I pointed to three things that need to happen:

  1. More price tier differentiation
  2. Reduce the main $9.99 price point to $7.99
  3. Introduce PAYG / Top Ups

The good news is that we’re beginning to see some movement on all three counts, including Apple poised to tick off the second item later this year when it launches its subscription offering.

The Return Of The Day Pass

Last week Pandora announced that it was introducing a $0.99 day pass to its ad free subscription offering.  The idea isn’t new, Spotify had a day pass in its earlier days, but the timing is now right for a reassessment of the tactic.   Most people are not in the habit of paying for music on a monthly basis and most do not spend anything close to 9.99 a month.  Little surprise then that only 10% of consumers are interested in a 9.99 subscription.  But PAYG pricing interest, while still relatively modest, is the clearly the pricing that has strongest appeal (see figure).  PAYG pricing allows consumers to ‘suck it and see’ to try out.  It is what the mobile phone business needed to kick start cellular subscriptions and it is what the music industry needs too.  And done right PAYG can even uncap ARPU by allowing customers to spend more than they would on a monthly plan, something that happens frequently among pre-pay mobile phone customers.

payg pricing

Currently there is only a handful of companies pioneering this approach, including the MusicQubed powered MTV Trax’s ‘Play As You Go’ model and Psonar’s ‘Pay Per Play’ offering.  It should only be a matter of time before the big streaming services start experimenting with a la carte pricing but they will have to tread carefully to ensure they do not cannibalize the spending of their 9.99 customers.  At an industry level though the case is clear and it is one that other media industries are already heeding.  In the TV industry services like Netflix are empowering cable and satellite TV subscribers to cancel or reduce their subscriptions.  Consequently TV companies are busy experimenting with unbundling their subscription offerings to meet the needs of their newly empowered customers.  The most interesting example for the music industry is Sky’s Now TV in the UK which offers its core programming with no monthly contract and enables users to simply add on extra content such as and ‘entertainment pass’ or a ‘sports pass’ as one off payments.

The future of music consumption is clearly going to be on demand but 9.99 subscriptions are just one part of the mix. PAYG pricing will be crucial to ensuring that streaming can break out of its early adopter beachhead.

Why It’s Time For A Streaming Pricing Reset

There is a growing realization that that streaming revenue is not growing quickly enough to offset the impact of declining download sales. It is an eerily familiar echo of the recurring narrative of the noughties that download sales were not growing quickly enough to offset the impact of declining CD sales. The situation is very different now in that the industry licenses the disruptive force. Back in the noughties the combined impact of changing consumer behavior patterns, growing piracy adoption and the loss of content scarcity were factors the industry had little control over. Yet this present shift is more fundamental and will have much bigger long term impact. This is the shift to the consumption era. Streaming happens to be the tool of the moment for harnessing that shift but with current pricing strategy the industry’s toolset is woefully unable to fully harness the massive potential that exists.

Zero to 9.99 Is Too Big A Leap

The single biggest issue is the binary nature of streaming pricing: 9.99 or free. (Sure there are desktop versions for less but the desktop is yesterday’s consumption platform and is no longer a useful differentiator for price.) The leap from zero to 9.99 is simply too big. Even a 30 day trial still leaves the consumer with the same zero to 9.99 leap at the end.

streaming pricing

Streaming pricing strategy is simply not aligned with consumer music spending (see figure):

  • Super fan aficionados tend to spend between $10 and $30 a month but many are now shifting down to $9.99 a month
  • Mainstream music fans spend less frequently and at best average less than $10 a month, most typically just a few $. $9.99 is just too much for them as is regular spending, so they end up streaming for free
  • Passive fans used to spend occasionally now typically spend nothing and are core users of free streaming, YouTube especially

So streaming is bringing down the spending of the super fans and missing the spending of the mainstream fans.

Most music fans (i.e. not the super fan aficionados who by definition most of the people reading this blog are) engage with music in a very event driven manner. They have their favourite artists and they engage with them when they are in cycle with a new single, album, tour etc. That used to mean buying an album or some tracks, and it still means buying concert tickets. But these days for the digitally engaged mainstream fans it most often does not include buying anything. Instead they stream for free from YouTube, Soundcloud, Pandora.

Just to make things worse, the super fan aficionados are now spending less because of streaming. 23% of them used to buy more than an album a month, now they spend 9.99 a month and that spending is spread across a far greater quantity of music, meaning a smaller pie is being divided into even smaller slices.

Three Ways To Fix Streaming Pricing

It wasn’t meant to be this way. A high tide was meant to rise all boats. Mass market music fans were meant to increase their spending to 9.99. The aspiration is reasonable enough, these same consumers have been persuaded to pay for mobile phone subscriptions over the last decade, and many have adopted Netflix and Amazon Prime too. But it will take some time to get them there and they need a helping hand in the meantime.

There are a number of tactics that will set up streaming to capitalize on the mainstream music fan opportunity:

  1. More price tier differentiation: this means cheaper tiers ($2, $3, $5) to capture spending across a broad a range of consumers as possible
  2. Reduce the main $9.99 price point to $7.99: to capture the upper band of mainstream fans, while adding a $12.99 tier for super fan aficionados who want extras like high quality audio, bios, photos, exclusives etc.
  3. Introduce PAYG / Top Ups: the mobile phone business needed PAYG to take phone subscriptions to the mainstream – they were an unfamiliar concept consumers needed to experience to understand the value of. The same applies to music. But also it gives tentative consumers the benefit of the long term relationship without the commitment

Universal’s Lucian Grainge stated at the WSJD conference this week that revenue from subscription services is simply not enough to stem the decline of downloads and CDs. As things stand he is absolutely right. But fill the chasm between free and paid with a diverse range of pricing options and that will change. Virtually every consumer market, whether it is phones, supermarkets or cars has a segmented pricing strategy, now it is time for streaming to benefit from the same approach. The alternative is leaving most of the potential spend on the table.