The Case For A Freemium Reset

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

Free Isn’t The Problem, On Demand Free Is

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

P2P Is In A Natural Decline, Regardless Of Freemium

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

Freemium Isn’t Killing Piracy, It Is Coexisting

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

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

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

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

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

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.