What $500 Million And Jay-Z Say About the State Of Streaming In 2015

2014 was a big year for streaming, 2015 will be bigger. Apple entering the fray is the catalyst. Apple enters a market when it is ready for primetime. Apple lets the pioneers establish the market, prove the model and create consumer mindshare before it comes in and most often assumes a leadership role. Apple is certainly leaving it later than normal with subscriptions but it is still the same classic follower model, and the marketplace knows it. Hence Jay-Z’s reported €50 million interest in Norwegian streaming service WiMP and Spotify’s reported pursuit of a further $500 million. The first move is ‘let’s get in a market Apple is about to make huge’ and the second is an Apple war chest

Spotify’s 2014 growth was little short of spectacular, especially its December surge. But it is still not enough to IPO on. Not because 15 million subscribers in itself is not a huge achievement – it is – but because the market place is holding its breath, waiting to see what Apple does. Apple remains the world’s largest digital music company and is on the verge of becoming the world’s leading shipper of smartphones. But most crucially Apple has the iTunes ecosystem and a deep, deep understanding of the world’s most valuable content consumers. If anyone can take subscriptions to the mainstream Apple can. And in the process it will likely take back a chunk of the iTunes Music buyers that Spotify ‘stole’. Which is not to say that Spotify will not be able to continue to grow, but instead that rapid growth will be harder when Apple is snapping at its heels.

Pricing will be key, as will the role of free. If Apple succeeds in bringing the standard price point down to 7.99 (and perhaps a subsidised price point of 4.99) then a whole new swathe of users will be brought into the marketplace. Still not the mainstream, but certainly getting towards the higher end of the mainstream that Netflix competes in. And certainly a bigger marketplace than the current one. If Spotify finds its free tier heavily capped then it will lose much of its customer acquisition strength, which may force it to spend more heavily on traditional acquisition tactics like app marketing and TV ad spots.

In this expanded marketplace a $500 million war chest would give Spotify the ability expand into new territories, double down on churn management and market in core markets. The intent will most likely be to weather the Apple storm and to be in solid enough shape the other end to IPO. As we have seen in the smartphone and tablet business, Apple can be leader but still leave plenty enough space for a vibrant and competitive marketplace. That is the scenario Spotify, Deezer, Rdio, Rhapsody and Jay-Z’s new plaything-to-be WiMP will be hoping for.

What Spotify’s December Growth Tells Us About Pricing

Spotify just announced the addition of 2.5 million paying since mid November to reach 15 million total subscribers. This is unprecedented growth not just for Spotify but for the subscription market as a whole. It also comes at a time when Spotify needs the best possible numbers to keep labels on board during its crucial renegotiations. But what is most interesting is what the growth tells us about pricing.

spotify 15 million

Long term readers will know that I firmly believe there is a watertight case for reducing the price of subscriptions. Only about 10% of music buyers spend $10 or more a month on music (across all recorded music formats) and most of those have already been converted to subscriptions. While there is absolutely a case that some consumers can be ‘educated’ to spend more on music, in just the same way cell phones educated them to spend more on telephony, many simply will not because there are such compelling free alternatives.

Spotify Made 9.99 Feel Close To Free 

There are two short term and two long term drivers of Spotify’s December growth:

  • Long Term 1: Student plans – effective discount: 50%
  • Long Term 2: Family plans- effective discount: 50%
  • Short Term 3: Holiday gifting - effective discount: 100%
  • Short Term 4: Holiday 0.99 promotion – effective discount: 90%

Of all of those the 0.99 for 3 months holiday promotion had the biggest impact. There is an argument that customers acquired this way are effectively monetized trialists and it is highly likely a large share, perhaps even the majority, will not continue to pay after the promotion is ended. But that almost misses the point. What the surge in adoption at lower price points shows us is a purer measure of the demand curve for on demand subscriptions, without the distortion of the 9.99 price point. Of course 0.99 is not a feasible long term price point but 4.99 is, or perhaps more realistically for now, 7.99 is.

Some of those trialists will unsubscribe after 3 months, some will forget to unsubscribe and some will decide that 9.99 is actually pretty good value. The net effect for Spotify will be more subscribers than it would have had without the campaign.

Taylor Swift, Labels and Investors

The stellar growth is also intended to catch the eyes of various other vested interests. For investors ahead of a potential IPO these numbers help show that Spotify may have its best days ahead of it. For labels this, ‘conveniently’, creates the best possible numbers for them to consider during contract negotiations. And for Taylor Swift it shows that for all her windowing antics Spotify grew faster than ever. In fact, the wall-to-wall media coverage of the ‘Swiftify’ debacle actually boosted Spotify’s profile and may even have modestly helped the numbers.

2015 will be a huge year for Spotify with the super heavyweights Apple and Google both playing their subscription hands and with growing label concerns about the freemium model. It would be naïve to suggest Spotify will not feel the pressure of those factors alongside the continued growth of competitors such as Rhpasody, Rdio and Deezer. But starting the year with 2.5 million new holiday season subscribers is about as good a start as Spotify could possibly have hoped for.

Streaming Report Card 2014

2014 was the year streaming broke through to mainstream consciousness, not because of the marketing prowess of Spotify but because Taylor Swift decided to withdraw her content from the Swedish streaming heavyweight and other freemium services. It was a mixed year of momentous achievement and intensifying controversy, which makes it an opportune moment for an end of term report card.

Growth – 8/10

No complaints here. Impressive growth for both paid and free streaming with a likely combined annual growth of about 50% and total subscribers getting to about 35 million. Although there are some signs of slowdown this is to be expected as much of the addressable audience for the 9.99 price point is reached. In fact the growth slowdown was less pronounced than expected in some markets. If it hadn’t been for the fact that download sales for the year will be down about 10% this would have been a 9/10.

Transparency – 2/10

Two years ago I asked the CEOs of 10 leading streaming companies what the coming years would hold. Unfortunately for 5 of them it meant looking for a new job. One thing most were in agreement on however was the need to introduce far greater transparency for artists. Two years on and the issue is every bit as problematic. For the most part the discontent has been voiced by smaller artists or those later in their careers, but not by frontline artists in their prime. Until last week that is, when Ed Sheeran told the BBC that it is ‘fact’ that labels are holding money back from artists. Some time soon, some time very soon, labels are going to have to get on top of this if they want the model to work.

Platform – 5/10

I had high hopes for Spotify’s app platform, it looked like it was heralding the dawn of the ‘music platform’ that the digital market has needed, well, forever. Unfortunately label wrangling ensured that Spotify was not able to get the deals to allow app developers to monetize their apps so the venture was effectively still born, save for the highly credible efforts of some traditional media brands, such as the BBC, Now! And Deutsche Grammophon who didn’t have to worry about making money from the apps. Luckily the streaming companies haven’t given up on the ‘streaming as a platform’ vision and a host of integrations with the likes of Bandpage and PledgeMusic have the potential to help artists transform streaming cents into digital dollars.

Pricing – 3/10

I’ve been banging the pricing drum for so long the stick has broken. Unfortunately there was pitifully little progress in 2014, with label fears of cannibalising 9.99 dominating thoughts. On the plus side there is a huge amount of negotiating activity taking place right now and that should bear fruit in 2015. Expect Apple to try to get to market with the same 7.99 that YouTube’s Music Key is currently in market with (and expect that short term promotion for YouTube to eventually become permanent). And if 7.99 is the new 9.99 then prices will have to cascade. 4.99 will be the new 3.99, 3.99 will become 2.99 and so forth. And there remains the super urgent need for PAYG pricing leveraging in app payments. I predicted pricing innovation in 2012 and 2013 and it didn’t happen. Here’s to third time lucky.

Global expansion – 6/10

Deezer had already set a great precedent for rolling out into a vast number of global territories and Spotify played an admirable game of catch up in 2013 which continued with another five new countries in 2014. Rdio’s acquisition of Indian streaming service Dhingana was another interesting move.  Meaningful revenue is yet to follow in these Rest of World markets though – the US and Europe accounted for more than four fifths of global streaming revenue in 2014.  But the foundations have been laid and that in itself is an important step worthy of credit.

Sustainability – 4/10

The ripple effects of Taylor Swift’s windowing antics will be felt throughout 2015 with countless other big artists and their managers already making it very clear to labels that they want to do the same. The sooner Spotify can agree to having the free tier treated as a distinct window the sooner the streaming space can start rebuilding.   The whole ‘changing download dollars into streaming cents’ issue continues to haunt streaming though. And with streaming services struggling to see a route to operational profitability the perennial issue of sustainability remains a festering wound. The emerging generation of artists such as Avicii and Ed Sheeran who have never known a life of platinum album sales will learn how to prosper in the streaming era. The rest will have to learn to reinvent themselves, fast, really fast.

Overall Streaming gets a 6/10 for a year that saw huge progress but also the persistence of perennial problems that must be fixed for the sector to succeed.

Streaming, Change, And The Right State Of Mind

Disruptive technology and the change it brings can be overwhelming, particularly when it threatens to change forever all that we have known. Streaming clearly fits this bill. But the impact of change is as much in the eye of the beholder as the disruption itself. While it would be bland and disingenuous to say that change is merely a state of mind, a positive outlook that is focused on the opportunities can make the world of difference.

To illustrate the point, here are three examples from the last century of how vested interests have viewed revolutionary new media technology.

1-ebwhiteThis first quote is from the American author and essayist EB White writing in 1933 on the impact of radio. Here new technology is eloquently portrayed with an almost magical profundity.

2-sarnoffThis quote is from David Sarnoff, the Belorussian-American radio and TV pioneer who oversaw the birth of RCA and NBC. Here he is in 1939 talking about the advent of a TV broadcast network against the backdrop of the globe teetering on the brink of world war.

And then fast forward 70 odd years to the emergence of streaming music, and we get this….3-yorkeSomething certainly appears to have happened to the eloquence of observation over the decades. While I’m perhaps being a little unfair to our esteemed Mr Yorke his quote illustrates the stark contrast in how one can view impending change.

There is an inevitability about the shift in consumer behaviour of which streaming is merely a manifestation. We are moving from the distribution era when everything was about linearly programmed channels and selling units of stuff to the consumption era when consumers value access over ownership. Resisting fundamental shifts in consumer behaviour is a futile task. It’s what happened when the labels fought Napster tooth and nail and it took the best part of a decade for the music industry to recover from that mistake.

None of this is to say that the shift to streaming is going to be easy, but it is going to happen anyway. Artists, labels, managers, publishers all need to decide whether to work with streaming now, and have some control over the process, or wait until they have no choice at all.

Google’s Acquisition Of Songza And ‘Fixing Discovery’

Google yesterday confirmed the much rumoured purchase of curated music service Songza for somewhere between $15 and $39 million. While it is not a vast investment for a company with the recent $3.2 billion acquisition of Nest as a benchmark, it is nonetheless a significant one for a company that already has a couple of streaming music services of its own. It is not a Beats sized deal but then if Google had wanted one of those it would have bought Spotify. So just why did Google splash the cash on Songza?

Access to all the music in thee world can be overwhelming, with so much choice that there is effectively no choice at all. This is the Tyranny of Choice. For all the efforts and intent of music services to ‘fix’ discovery no one has yet nailed it. Listen Services like Nokia Mix Radio, O2 Tracks and Pandora present one solution: effectively removing the burden of excessive choice by delivering a curated stream of music that requires little or no effort from the user. But this approach does not translate well to All You Can Eat (AYCE) services like Spotify and Googles’ Play Music All Access. These services are built on the foundations of giving access to everything, the exact opposite of what Listen Services are about. Which is why AYCE services are doubling down on enhancing their internal curation and recommendation capabilities. Spotify moved first with its acquisition of the EchoNest, Rdio followed by acquiring TastemakerX and now this move from Google. Beats Music took a different route entirely, building its service on the foundations of programming rather than superimposing it.

Google should be able to extract great value from Songza but as with all of these technologies it is just part of the solution. Human programming, as resource intensive as it might be, remains a pivotally important part of the equation, and though all the AYCE services have teams of curators, only Beats so far has done it at large scale.

First, Show People How To Find What They Have Already Found

And still the discovery problem is not fixed. Progress has been made in the last few years, but in many respects it is a case running before learning to walk. Recommendations, discovery and programming are just one part of the music consumption journey i.e. discovering new music. Arguably the most important aspect of the journey is the one that is most neglected: navigating the music people have already discovered. As counter intuitive as it may sound, people first of all need to be shown how to find what they have already found…their pre-existing music collections but also the music they have listened to in a service. Creating playlists and tags of songs is an often burdensome task that requires no small amount of discipline. Which means that newly discovered gems can all too quickly disappear back into bottomless pit of 30 million songs, rendering a discovery journey wasted.

Smart of use of data can provide the foundations for the solution, ensuring that people’s streaming ‘collections’ are dynamically created and programmed. But data alone is not enough. What is needed is an entire new paradigm in music navigation. For all the faults of CDs they were visual reference points. A consumer might not remember the name of an artist or an album but would know roughly where the CD was on a shelf or what colour the cover was. (I remember as a DJ often identifying a record I was about to play only by the colour of the label on the centre of the vinyl).

Digital music lacks such visual reference points. iTunes transformed our music collections into featureless spreadsheets, with playlists emerging as simply another means of sorting the data. New visually rich interfaces in music services help enhance the user experience but most often simply try to shoe horn in the old album art approach into a digital context. This new navigation paradigm must start with a blank sheet and think in terms of multimedia, interactive, dynamic experiences. It will need to leverage rich visuals, touch, dynamic context aware programming, sound, voice control and Shazam, to create an immersive whole that gives the consumer clear, immediate results in a way that engages multiple senses. Only once we have fixed this first step of the music consumption journey can we really start thinking about ‘fixing discovery’.

Apple, Beats and Streaming’s Mutual Fear Factor

Although the Apple-Beats deal is about far more than just streaming music, it is nonetheless an important part of the puzzle.  Apple has been going slow with streaming, introducing cloud experiences (iCloud, iTunes Match, iTunes Radio, Video rentals) slowly so as not to alienate its less tech-adventurous mainstream user base.  That strategy remains valid and will continue, but it has failed to protect the defection of its core, high value, early adopters.  This is why Apple has to get serious about streaming fast: it is scared of losing its best customers.  It is also why all other streaming companies, whatever they may admit publically, are getting ready to run scared.  This is streaming music’s mutual fear factor:

  • Velvet handcuffs: Music downloads are monetized CRM for Apple, a means of enhancing the device experience.  Purchased tracks and an iTunes managed library act as velvet handcuffs for Apple device owners.  But for those consumers that use a streaming subscription app, the playlists and music collection can exist on any device.  Suddenly the handcuffs slip off.  This is why Apple has to get streaming right in short order.  It simply cannot afford to lose swathes of its most valuable device customers at the next handset replacement cycle.
  • Chinks in the iTunes armour: Until the launch of the App Store, 3rd party music services had no way of breaking into the iTunes ecosystem and were, in the main, doomed to the role of also rans.  The App Store was the chink in the otherwise impregnable iTunes armour that allowed those 3rd parties to not just launch punitive raids but to set up camp in Apple’s heartlands. It was the price Apple had to pay to enter the next phase of its business, but now it is ready to shore up its defences once more.
  • Eating from Apple’s table: The vast majority of streaming music subscribers were already digital download buyers first, and of those the majority were either current or past iTunes Store customers when they became subscribers.  On a global scale, subscriptions have first and foremost been about transitioning existing spending rather than creating new digital customers. The picture is very different in Nordics, the Netherlands and South Korea but those markets contribute far less to global scale than the markets (US, UK, Australia etc.) where this trend dominates.  Apple has provided the core addressable market for streaming services for the last five years.  Now those companies worry over where will they be able to get new subscribers if Apple start taking subscriptions seriously.
  • Apple will not have to play fair: Although Apple knows it is under the watchful eye of various regulatory authorities following the eBook price fixing episode, there is still plenty it can do to make life hard for 3rd party streaming services.  Just take a look at what Amazon is reportedly getting away with in its book pricing dispute with Hachette: delaying shipments of the publisher’s books to customers, removing buy buttons from pre-ordered books, even pointing Amazon customers to competitive titles when searching for Hachette books.  Fair play or foul, the power of the retailer is huge.  Whether Apple simply ensures Spotify et al don’t appear in search results, or that they are never quite able to integrate seamlessly with iOS anymore for no specific reason that anyone can quite put their finger on….But even without resorting to such behavior, simply by deeply integrating an Apple (or Beats) branded subscription service natively into its devices and ecosystem, Apple will have the upper hand and 3rd parties will find it a whole lot harder to fish in Apple’s waters.

None of this is necessarily bad for the market either.  In fact it could be just what the subscriptions business needs.  To finally focus on green field opportunity beyond the confines of the Apple elite.  Nor should Apple even limit its subscription focus to streaming or to music.  The rise of the Content Connectors points to Apple, Amazon and Google pursuing digital content strategies in the round, that do not get bogged down with super serving any individual content type at the expense of the rest.  Apple’s best mid-term subscription play may yet simply prove to be a monthly allowance of iTunes credit across all content types, bundled into the cost of the device.  Put that on top of iCloud, iTunes Radio, Beats Music and suddenly you have a very compelling multi-content offering.  Something far out of the reaches of the current product roadmaps of any of the stand alone music services.

Can Apple afford to loss lead with music subscriptions to pursue such a strategy?  Well, remember Apple’s entire digital music business has been built on loss leading.  Whatever the final outcome, the mutual fear factor balance looks set to tip in Apple’s favour for a while.

How Streaming Will Impact Music Sales

With 2013 now behind us we are beginning to see the first full year sales numbers come if for 2013 and the long anticipated ability to assess the impact of streaming on the market.  Until the IFPI annual revenue numbers come out we are mainly constrained to volume data which only paints half of the picture.  This is especially true for streaming given the massive difference in revenue per stream for free versus paid, YouTube versus Spotify etc.  But even within these constraints we have enough to start establishing a view, one that indicates the headline story may be more about transition than it is growth.

Nielsen’s numbers for the US show that digital track sales were down 5.7% and that digital albums were down 0.1% while albums as a whole were down 8.4%. In the UK the BPI reported that digital track sales were down 4.2% though digital albums were up 6.8%.  Nielsen also reported a 103% rise in audio streams.  Let’s assume that a significant portion of those increased streams will be coming from free users and that the impact on streaming revenue growth will therefore be around the 65% mark. That would translate into total US music market revenue growth of just under 1%, though if free usage is a bigger part of the picture then growth could be negative.

It is important to understand the appropriate context for the shift to streaming: it is fundamentally a transition of spending.  Just as the download was a transition from the CD so streaming subscriptions are a transition from the download.  This is because the majority of subscribers were already digital music buyers before becoming subscribers and the majority of those were iTunes customers.  50% of subscribers buy album downloads every month and 26% buy CDs every month (see figure).  On the one hand this can be interpreted as the fantastic capacity of streaming to drive discovery and music purchasing.  There is some truth in this, but it is an inherently temporary state of affairs.  If streaming services do their job well enough there should be little or no reason for a subscriber to additionally buy music.  They do so because consumers transition behaviour gradually not suddenly.  The fact that a third of download buyers still buy CDs illustrates the point.

subscriptions download overlap

In this respect streaming services are strongly competitive with music sales in a way that streaming radio services are not. However what is crucially different from the CD transition is that while downloads drove a decrease in ARPU with consumers cherry picking single tracks from albums, subscriptions drive ARPU upwards. So there is more of an opportunity for subscriptions to drive longer term revenue growth than downloads.  The two key questions that arise are:

  1. What download market will be left once/if subscriptions have reached scale?
  2. What will the net impact on digital music spending be?

1 – Impact on downloads: The answer to the first question is probably the most straight forward.  Looking at markets like Sweden and Denmark we have strong evidence that streaming subscriptions grew at the direct expense of downloads, but in doing so they transformed the total music markets.  In the US, where the download sector is much more entrenched, streaming has resulted in a worst of both worlds, with streaming eating into downloads but not having enough headway to transform the market Sweden style.  The outlook for downloads in big markets such as the US, UK, France and Germany will be one of subscriptions absorbing the spending of the most valuable download customers.  Downloads as a global sector though will remain strong because they are the natural transition technology from download and will thus have strong long term opportunity in emerging digital markets of scale such as Turkey, Brazil and Mexico.  Downloads will also remain the best tool for monetizing mid tier digital music consumers who like to buy a few singles and the occasional album but do not spend 9.99 a month on music.

2 – Net impact on music spending: This one is a tougher call to make.  If subscriptions only reach scale by converting the most engaged music consumers then there is a risk of reducing ARPU among some of them, changing their spending patterns from buying a few albums a month to spending the equivalent of just one.  This effect will be felt more strongly as the dual-consumption behavior of subscribing and buying naturally fades.  The net positive opportunity lies in converting large swathes of the ‘upper middle’ tier of music buyers with more competitive pricing and also with bundles. Though this will likely come at the expense of further erosion of downloads.

As the RIAA rightly highlighted, even in the US streaming is becoming a really important part of the music market, and there is no doubt that access based models of shapes and sizes are the future.  The next few years though will see some growing pains as we transition away from the old guard in some of the world’s biggest music markets.

New Report: Building the New Business Case for Bundled Music Services

Today MIDiA Consulting is proud to announce the release of a white paper commissioned by Universal Music entitled “Building the New Business Case for Bundled Music Services”.  The report, written by myself and MIDiA Consulting co-founder Keith Jopling, provides an unprecedented analysis of telco music services, taking a critical look at what has and had not worked to date and a series of models and recommendations for the future.  We interviewed a host of telco music executives to get a deep understanding of what telcos need out of music services to make them a success and combined this insight with data from consumer surveys and music service trials as well as case studies and best practices.  We think it is pretty much the definitive piece of work on the topic (!) and we invite you to download it here: Building the New Business Case for Bundled Music Services – FULL REPORT.  You can also download an executive summary version of the report here: Building the New Business Case for Bundled Music Services – EXECUTIVE SUMMARY.

Here are some of the key findings of the report.

The consumer shift from downloads to streaming is the most important digital music market trend since the advent of the iTunes Music Store.  Before streaming services telcos struggled to find a way in which they could compete in a market dominated by Apple, restricted to selling DRM locked downloads that of course would not play on Apple devices.  Subscription services changed all of that, with the leading streaming services all pursuing robust telco partnership strategies as well as a number of download subscription services.  There are now nearly 50 telco music service partnerships live in six regions across the globe.  With 40% of streaming consumers now paying to stream, generating $1.2 billion in trade revenue in 2012 the opportunity is clear.

Music Bundles Across the Globe

However it is clear that many of the hurdles that telcos faced in the last decade continue to pose challenges.  These include music not being a priority for many telcos, internal business casing getting in the way of building compelling services and the wrong success metrics being used.

The new success stories of telco music services are those that make music a strategic priority.  This is not some sop to the record labels, but a reflection of what it takes to make music strategy a success. If a telco just adds music to a long list of Value Added Services (VAS) it will wither on the vine.  But if a telco puts a music service front and centre and positions around it then success is far more likely.  Success stories that have followed this approach include Telia Sonera’s hard bundle with Spotify in Sweden and Cricket Wireless’ Muve Music in the US.

Streaming by the Numbers

The Role of Promotional Offers

For all the obvious synergies of telco music bundles there is a real danger that hard bundles that make music subscriptions free or feel like free to the end user run the risk of devaluing the proposition.  Yet it is also clear that consumers need to be able to ‘suck it and see’ before subscribing so promotional free trials and limited period bundles present a strong balance of value to the consumer, cost effectiveness to the telco and protecting the integral value of music for artists and labels.  The market data for free trial is compelling: half of one month trialists convert to a paid subscription at the end of the promotional offer period.

Customer Satisfaction, the New Music Service Opportunity

An entirely new aspect to music bundling that we dive into in the report is the role of music subscriptions in driving customer satisfaction across a telco’s wider business.  Even the most edgy, cleverly positioned challenger telco is ultimately a provider of important products but not usually a consumer passion point.  Music though has that brand passion secret sauce and partnering with the right music service can enhance the telco’s own brand and customer sentiment.  Smart integration of music into the customer journey and integration with customer satisfaction measurement tools, particularly Net Promoter Score (NPS) can enable telcos to create a customer satisfaction halo effect.  With music converting satisfied music subscription customers into highly vocal net promoters with satisfaction benefits felt across the full range of a telco’s services.

Bundled music services did not get off to the best of starts, but now their time has come, giving telcos the opportunity to assume centre stage in the digital music marketplace.

For more information on the research please feel free to email us at info AT midiaconsulting DOT COM.

About MIDiA Consulting

Midia ConsultingMIDiA Consulting is a boutique, media industry focused consultancy that delivers practical, results-driven outcomes.  MIDiA stands for Media Insights & Decisions in Action. Our mission is to help media and technology companies develop purposeful strategies quickly through market understanding, clarity of vision, and workable innovation.

We help media and technology companies make sense of the changes that digital market forces are bringing about. And we help them make profits from digital content.

http://www.midiaconsulting.com

info@midiaconsulting.com

The Complexity Coefficient: ‘Listen Services’ and the Tyranny of Choice

Despite commendable progress the digital music market is still way behind where it should be.  It is an easy mistake to view the global music market through the Anglo-American lens but if you strip out the UK and US from the statistics the result is that three quarters of global ‘rest of world’ music sales are physical.  Thus ten years since the launch of the iTunes Store digital is still only a quarter of non-US and UK revenues.  The role of Apple is, as ever, key: Apple knew how to make an elegantly simple user experience that just worked.  Thus where Apple was strongest (US and UK) digital music sales prospered.  But most consumers do not have Apple devices so the music industry needs more music services to be as elegantly simple as iTunes if it is going to push the needle on that 25%.  The problem is that most of the services on which industry hopes are being pinned are anything but.

Innovating for the Elite?

Streaming subscription services are undoubtedly at the leading edge of music technology sophistication and recent innovations from Spotify in particular are setting the bar high for immersive digital music experiences.  But paradoxically this is part of the problem.  At the end of 2012 subscription and ad supported services accounted for just one fifth of global digital music revenues.  Though that number will grow markedly in 2013 – and already over indexes in the digital sophisticate Nordic and Dutch markets – it will not overtake downloads anytime soon.  There are of course many factors, including the key issue of pricing – 9.99 is not a mass market price point, but there is a more fundamental one: streaming subscription services are just too sophisticated for mainstream users.

The reality is that mainstream music consumers are not heavily engaged with music and like programmed, curated music experiences.  For all the music industry turmoil of the last decade radio listening has remained relatively steady, even growing in many markets, and it also remains the number one music discovery source – still far ahead of YouTube.  Radio’s enduring popularity stems from its simplicity.  A common product strategy error is the assumption that more features = better quality product.  But more often than not, less = more.  The extra discovery features in subscription services are fantastic tools for the niche audience of engaged music aficionados that use these services but they also make them less accessible for mainstream users.  This is what I term the Complexity Coefficient. 

The Complexity Coefficient is a simple way of understanding a complex problem and can be calculated as follows:

Feature Benefits – Feature Sophistication = Complexity Coefficient

In short, the more sophisticated the features of a service, the less the benefits will be felt by the user.  When this is applied to less sophisticated users a multiplier needs to be applied: a heavily featured sophisticated music service will already have barriers to use for an aficionado but will be entirely inaccessible for a mainstream user.  The Complexity Coefficient manifests itself in another way also: the more complex a service, the longer the music journey is.  For music aficionados that can be a good thing, but for radio-centric mainstream users it is a barrier rather than a benefit.

The COmplexity Coeffecient

The Tyranny of Choice

When we apply this thinking to the digital music landscape something really interesting emerges (see graphic).  The on demand subscriptions that monetize access – ‘Access Services’ – sit at the top right, highly sophisticated, but therefore also complex, with the longest music journey.  These services provide access to a vast, vast catalogue of music.  A catalogue that is growing rapidly every single day.  Last week 7Digital’s Ben Drury reported that his company now has 27 million tracks in its catalogue and is growing at a rate of 100,000 a week.

Choice is fantastic but too much begets choice paralysis.  There becomes so much choice that there is effectively no choice at all.  This is the Tyranny of Choice. 27 million tracks is an unwieldy vastness of music that would take 205 years to listen to.  What matters about music catalogue is the music that truly matters not the total size.  Of those 27 million perhaps 3 to 6 million are ‘core’ catalogue.  Of those how many really matter to any given listener? Perhaps 10,000 at the most?  Even that would be 2 months of listening for someone who listens 10 hours a week and doesn’t listen to the same song more than once.

With the growth in catalogue each ‘Access Service’ must get 100,000 tracks worth of being better at its discovery job just to stay as good as it was last week.  And despite the vast progress that is being made, few would argue that there is a long way to go yet before we can come close to arguing that the discovery problem has been fixed.  So the odds are against a worsening status quo not an improving one.

The ‘Listen’ Services

But at the opposite end of the Complexity Coefficient scale a very different picture emerges. Here we have services like Pandora, MusicQubed’s O2 Tracks and Nokia’s Mix Radio delivering highly programmed, lean-back music experiences for the mainstream users, where the music journey is shortest.  Whereas Access services give the user access to all the music in the world, Listen service take the user straight to the music that matters.  One leads the user up the garden path, the other just opens the front door.

But there is an overriding monetization issue at the lower end of the Complexity Coefficient: most of these services predominately generate revenue via advertising.  The majority of Nokia Mix Radio’s and Pandora’s users are on free tiers.  O2 Tracks is the exception, with users paying for all tiers of access (other than a free trial).

In many ways the Access services are taking a TV broadcaster approach to discovery: they are trying to encourage users to discover as much new content as possible, to send the user on a rich journey of serendipitous discovery.  The Listen services however are focused squarely on delivering a smaller selection of music the user is most likely to like, and keeping firmly within those parameters. To an aficionado the Listen service approach may feel restrictive and limited, but to a mainstream music consumer it fits their exact needs.  But what is clear is that music services at the lower end of the Complexity Coefficient scale are going to be crucial for pushing digital music towards the mainstream.  Welcome to the age of the ‘Listen’ service?

Assessing the Impact of Streaming on Total Music Revenue Growth

[My summer blogging hiatus is herewith over]

The Dutch music industry trade body the NVPI has announced that recorded music revenues were up by 1.9% in the first half of 2013.  This follows first half rises for Norway (17%), Sweden (12%) and Germany (1.5%) which in turns comes on the heels of full year growth in 2012 for markets such as Brazil, Sweden and Norway (all markets with strong subscriptions and ad supported sectors).  This is undoubtedly positive news and indicative of the proverbial corner being turned. However it is still too early to draw definitive conclusions about the impact of streaming on music revenue (and let’s stop calling it ‘sales’, a tag that hardly fits on-demand subscriptions).

Music revenues have been in decline for so long that sooner or later the bottom has to be reached, else the market would diminish into obscurity.  We are now somewhere close to that bottom but we need to be careful not to read too much into 1st half sales. Music revenue is heavily concentrated into the last quarter of the year due to festive period gifting.  But gifting is becoming increasingly eaten away at by digital for many reasons, not least of which is that gifting an iTunes voucher just isn’t the same as actually giving an album.  So if digital is able to sustain growth across growth markets for a second successive year then we can start talking about the sustained revenue growth potential of streaming.

Even if that growth is sustained though, another speed bump is on its way: the post-CD revenue collapse.  The CD is still by far the world’s biggest music revenue source. If you strip out the US and UK, digital accounted for just one qyarter of global music sales in 2012.  Viewing the music world through the Anglo-American lens can give a distorted view of things.  In Japan, the world’s second biggest music market, physical accounts for 80% of revenue, in Germany, the fourth largest, it is 75%.  Currently the trend in most markets is that many CD buyers are simply falling out of the habit of buying music rather than going digital.  If that trend continues for a sizeable chunk of the music buyers that currently account for three quarters of non-US and UK music spend, then a big dip in revenues should be anticipated.

Streaming's Impact on Music Revenue

The fate of the CD is of course largely out of the hands of streaming services, but is nonetheless highly correlated. Streaming has taken root most quickly in the markets where the CD has already hit rock bottom.  There are clear-cut cases of streaming helping tip these markets into growth but there are also plenty of markets with strong streaming where total market growth has not yet arrived (see figure).  In some instances the scale of the decline of the CD market is just too big for digital to do anything about.

What is clear from this sample of markets though is that there is a large concentration of low streaming / low growth markets and very few low streaming / high growth markets.  Where streaming has a low market share, revenue growth is usually negative.  This does not necessarily indicate cause and effect but the correlation is nonetheless fairly compelling.

So some preliminary conclusions that emerge are:

 

  • In markets where CD growth is slowing (often because the majority of the initial contraction period is over) streaming can tip markets into growth
  • In markets with comparatively strong CD sales and / or download sales, total revenue is less likely to grow
  • As we near the end of this first main phase of CD revenue decline, streaming’s contribution to digital will increasingly be enough to tilt markets back into modest growth

So while it is too early to say that streaming is saving music revenues, we are seeing the first signs that in markets with the right conditions, it can be enough to tip the balance.