What’s Going On With Free Streaming?

Earlier this week Soundcloud’s financials revealed that the company was haemorrhaging cash (even before it had to start worrying about content license fees). Now news comes that Pandora is working with Morgan Stanley to meet with potential buyers. Back in Q4 2014 free streaming got a stay of execution when the majors decided to put their weight behind freemium after a period of many executives seriously considering canning the model. In 2015 free streaming was the growth story, with YouTube out performing everyone. Now though free streaming looks to be in seriously troubled waters. So what gives?

Pandora’s Problem Is Wall Street

Probably the biggest problem of all that Pandora has is the story it tells Wall Street. Every year Pandora accounts for a little bit more of total US radio listening, builds ad revenue and steadily strengthens its business. But that’s not the sort of story Wall Street expects from a streaming media company. Investors expect dynamic growth. But Pandora is, along with Rhapsody, the granddaddy of streaming and had 10 million users before Spotify was even launched in Sweden, let alone the US. Pandora long since passed its dynamic growth stage in the US and is now a mature business that is going about sensibly building a sustainable business.

The standard thing to do at this stage for streaming companies is to roll out internationally and find new markets where you can start a new dynamic growth story. This is exactly what Netflix is doing now that US subscriber growth has slowed. The approach has also served Spotify well. But the unique compulsory licensing structure in the US the underpins Pandora’s business model does not exist elsewhere. There is no global landscape of SoundExchanges for Pandora to plug into. With the exception of Australia and New Zealand Pandora has not been able to negotiate rates that it launch internationally with.

Actually, Slowing Growth Is A Problem Too 

All of which explains why Pandora has gone down the acquisition route, buying Next Big Sound, Ticket Fly and Rdio in a bid to become a full stack music company. The problem is that Wall Street either does not buy it, or simply does not get it. In fact, Wall Street does not really make much of a distinction between semi-interactive radio or on-demand streaming. The pervasive view among the investor community is that Pandora is being out competed by Spotify, regardless of the fact that there is only partial competitive overlap in terms of value proposition, target audience and business model. The net result is that Pandora’s market capitalization has fallen from $7bn to $1.8bn and to make matters worse it had to raise $500 million in debt, with revenue growth slowing.

Pandora Needs A New Wall Street Narrative

In just the same way Apple needs a new Wall Street narrative, so does Pandora. Even if just to maintain some market value while it finds a buyer. The full stack music strategy should be central to that narrative, even though the real story is that Pandora is the future of radio. Unfortunately that story will take a decade or more to play out and most investors do not have that kind of patience. (Spotify, these are the sorts of problems you’ll be having to worry about this time next year). And, to be precise, it is the Pandora model that is the future of radio, not necessarily Pandora itself.  Though the odds are still on Pandora playing that role, in the US at least.

If Pandora really does not have the stomach for seeing out the long game it should not find it too difficult to find a buyer, if the price is right. Exactly because Pandora is the future of radio, some of those big radio incumbents are likely buyer. Hello iHeart Media.

 

Warner’s Streaming Equity Pay Out Is Commendable But Not Enough

During his latest investor conference call Warner Music’s CEO Stephen Cooper announced that the label will pay artists a portion of any income it earns from equity stakes in services such as Spotify and Soundcloud. With Spotify potentially announcing its IPO next quarter the announcement is more than a token gesture. It is a bold move by Warner and follows on from Sony and Universal both announcing last year that they will pay artists a portion of streaming breakage revenue (the difference between what services pay labels in guarantees and how much royalty revenue they actually generate – WMG has been doing this since 2009). The big labels are waking up to the fact that transparency is key if they are going to keep artists on side. Streaming is where consumer behaviour is going, but currently YouTube is growing quicker than everyone else. The labels need premium and freemium services to make up ground fast. Which is why they cannot afford the Black Keys-Taylor Swift-Adele-Coldplay trickle to turn into a torrent. They need artists to be as vested as they are.

Streaming Hostilities May Have Thawed But Underlying Issues Remain

With the exception of the songwriter class action suits that closed out the year, 2015 was actually a pretty good year for streaming service – artist relations. Artists became a little more accustomed to streaming and many started to see a meaningful in their streaming income. But there is still much distance to go. The crucial issue for the majority of mid ranking and lower artists is how to deal with sizeable up front payments being replaced by a long term flow of micro payments. If you are a sizable label or a big artist you won’t feel the pain too much, but for the rest it normally means a very serious tightening of the belt.

The True Value Of Streaming Doesn’t Lie In Equity Stakes After All

There has, wrongly, long been a suspicion among many that streaming services are some sort of elaborate money making scam for labels, with the real value hidden in the money they will earn from their equity stakes. But as the ever excellent Tim Ingham explains, Warner is likely to only make around $200 million from a successful Spotify floatation. Of course $200 million is no small amount of money, and would represent more than half of Warner’s quarterly digital income. But it represents just 16% of the money Warner has earned from streaming since 2010 and just 2% of all global streaming revenue in 2015 (at retail values). Thus the label equity stakes in Spotify & co. are meaningful but they are far from where the real label value exists. Indeed as Cooper stated: “the main form of compensation we receive from streaming services is revenue based on actual streams”.

So If Artist Equity Income Isn’t Going To Fix Streaming, What Will?

All of which then raises the awkward question: if artists getting a Spotify IPO pay out isn’t going to ‘fix’ the model for artists, then what is? There is not really much scope for streaming services to pay out more to rights holders (80% of revenue doesn’t leave much scope for operating profit). While there is certainly scope for increasing ARPU among the super fan subscribers, there is little opportunity to raise prices for the majority of users ($9.99 is already more than most are willing to spend). So the only part of the equation left is how much labels pay artists.

Streaming Is Neither A License Nor A Sale And Its Time Artist Deals Recognise It

Right now the entire recorded music business is trying to figure out whether streaming is replacing radio or sales. The likelihood is that it is doing both and by doing so creating something new in between. That means that labels need to rethink how they pay artists, because currently they typically pay them on either one or the other of those models, and most often on the basis of a stream being a sale. A stream being the equivalent of a sale is completely counterintuitive because streaming is all about consumption not transaction. So why are labels most commonly treating streams as sales? Because the % they have to pay artists is so much lower, often in the 10% to 15% range rather than around 50% for a license. Of course there is as strong an argument to be made for streams not to be considered as a pure license as there is a sale, but there is an even stronger one for a hybrid rate that sits in the middle. Doing so would double the amount of money most artists make from streaming, instantaneously transforming its revenue impact for many. There is some precedent too. In 2012 Universal was successfully sued by FTB Productions over its treatment of Eminem downloads as sales rather than licenses, for which Eminem would have been paid a 50% rate instead of the much smaller sales rate.

Warner Music deserve credit for their commitment to paying artists a portion of equity related income (though no mention of how much of course) but it is just one step on a bigger journey. A wholesale reassessment of artist streaming compensation is required. Increasing artist streaming rates will dent label margins but ultimately the labels need to decide whether they want to build a business that is as sustainable for artists as it is for them.

Postscript: One interesting quote stood out from Cooper: “Although none of these equity stakes have been monetized since we implemented our breakage policy…there are some services from which we receive additional forms of compensation”. Translation(?): Sony used to get paid by the big streaming services on some sort of stock dividend basis and probably still does from some others.

The Labels Still Don’t Get YouTube And It’s Costing Them

This is the fifth post in my YouTube economy series. You can read the other posts here, here,here and here

2015 was the year that streaming came of age across global markets (it had already got there in the Nordics and South Korea of course). In the UK and the US stream volumes grew by 85% and 93% respectively in 2015. These markets matter because they are the 1st and 4th largest recorded music markets and between them account for 40% of global revenue. But as strong as a validation of the music streaming model as those numbers might be, the real success story here isn’t Spotify, Deezer or Apple Music…it’s YouTube. In both the US and UK YouTube outgrew audio streaming services. With YouTube delivering so much less back per stream to rights holders than freemium audio services and the whole issue of safe harbour and un-monetized tracks (however good Content ID has gotten) it is little wonder that the record labels are having an identity crisis over YouTube. Indeed, as I wrote last year, the YouTube discovery journey has become the consumption destination. The advert has become the product. But there’s even more to it than this. Not only is YouTube outperforming the audio pure plays, music is being outperformed on YouTube by its growing body of native creators, the new generation of YouTubers.

youtube economy

YouTube started out as a place simply to watch (and upload) videos but has evolved into a sophisticated entertainment platform that supports a multitude of diverse use cases, both in terms of content and audience. Nowhere is this more pronounced than in channel subscriptions. In many respects ‘channel’ isn’t the most appropriate term as they are in effect talent feeds rather than channels in a traditional video / TV sense. Nonetheless, or perhaps because of this, they have become the lifeblood of native YouTube creators as diverse as Michelle Phan, PewDiePie, Zoella, SMOSH, stampylongnose and IISuperwomanII.

These are creators who often do everything from writing, filming, production through to front-of-camera. DIY superstars if you like. And they are fast becoming the lifeblood of YouTube. Of the 330 million subscriptions in the top 50 YouTube channels, YouTubers account for 34%. Compare and contrast with the measly 15% music artist and label channels have. And despite all the excitement around the increased subscribers Adele and Justin Bieber have racked up these last few months – they gained 8 million subscribers between them, making them the two fastest gainers across all of YouTube – music artists as a whole lost ground, accounting for just 31% of the top 50 gains during the last 90 days compared to 53% for YouTubers.

Music Is Losing Ground To Native YouTubers

Music does fare better in terms of views with 36% of the 41 billion top 50 views in the last 90 days. However it still plays second fiddle to YouTubers who account for 45%. But it is the direction of travel that reveals the most telling trend. Over the last 90 days 42% of the 50 top 50 growing channel views compared to 39% for music. In itself that may sound like a modest difference, but this is just the latest 90 day chapter in a much longer story. Music used to be the clear focal point of YouTube but that is changing. In terms of all time views music actually outpaces YouTubers with 42% compared to 41%. But at current rates that lead will be wiped out in the next 90 days. And here’s the paradox: music’s hold on YouTube is slipping even though YouTube is outperforming music services.

Part of driving force is out of the hands of the labels: video is eating the world, with more than 5 trillion short form views in 2015 alone. Music is always the first mover in digital content consumption, the trailblazer for other media. Once distribution, bandwidth and consumer sophistication all improve, video moves in.

Time To Stop Using YouTube Like School Kids Use Instragram

But record labels and artists can seize some control of their destiny, by taking a more sophisticated view of YouTube and exploring how to build strategies that work for YouTube in 2016 not for YouTube in 2010.  Right now record labels are using YouTube like school kids use Instagram, obsessing with vanity metrics such as views rather than thinking more deeply about how to build lasting relationships with YouTube audiences. A new generation of music artists is emerging that have created and nurtured audiences on YouTube, often with little or no help from labels. Artist like Dave Days, Tyler Ward, Boyce Avenue and Hannah Trigwell have built their fanbases on YouTube, often starting with covers but also crucially often non-music content such as parodies and vlogs. Raised in YouTube these artists are entirely native to the platform. They understand what audiences want because that’s where they come from.

If the big traditional artists and labels want to start making up some ground on the YouTuber revolution they could do worse than take a few hints from this new breed of YouTube artist.

The Three Things You Need To Know About The UK Music Sales Figures

As most people expected, the UK recorded music industry returned to growth in 2015. The UK now follows an increasingly familiar European narrative of strong streaming growth helping bring total markets back to growth. Sales revenue increased 3.5% to reach £1.1 billion while total streams increased by 85% to reach 53.7 billion, with audio stream representing 49.9% of that total. There is no doubt that these are welcome figures for the UK music industry but as is always the case, a little digging beneath the surface of the numbers reveals a more complex and nuanced story. Here are the three things you need to know about UK music sales in 2015.

1 – Streaming Growth Accompanied A Download Collapse

Long term readers will know that I’ve long argued the ‘Replacement Theory’, that streaming growth directly reduces download sales. It is a simple and inevitable artefact of the transition process. Indeed a quarter of subscribers state they used to but no longer buy more than one album a month since they started paying for streaming. There have been plenty of opponents to this argument, normally from parties with vested interests. But the market data is now becoming unequivocal. While streams increased by 257% between 2013 and 2015 download sales decreased by 23%. And of course the vast majority of that streaming volume came from free streams, not paid.

bpi 1

2 – The Transition Follows A Clear Defined Path

The download to streaming transition is an inevitability, whatever business models are wrapped around it. It is part of the fundamental shift from ownership to access of which streaming music is but single component. It comprises consumers progressively replacing one behaviour with another. In fact, the evolution is so deliberate and predictable that it manifests in a clear numerical relationship: the Transition Triangle.

The UK music industry trade body the BPI has created a number of additional classifications for music sales and consumption. These include Stream Equivalent Albums (1,000 streams = 1 album) and Track Equivalent Sales (10 track sales = 1 album). Using these classifications and adding in actual album download sales we see a very clear relationship between the growth of streaming and the decline of downloads. The difference in volumes between downloads and streams each year is almost exactly the same as the amount by which downloads decreased the previous year. At this point even the most ardent replacement theory sceptic might start suspecting there’s at least some degree of causality at play.

BPI 2

3 – Thanks Are Due To Adele, Again

Back when Adele’s ‘21’ was setting sales records, music markets across the globe owed her a debt of gratitude for helping slow the incessant decline in sales. Global revenue decline fell to less than 1% and US revenue actually grew by 2.9% (falling back down the following year). Now she’s done it again with ’25’, giving album sales enough of a boost to ensure that the growth in streaming revenue lifted the entire market. For although album sales actually declined in 2015 and streaming volumes had grown more strongly in 2014, it was the combined impact of slowed album decline and streaming growth in 2015 that enabled the total market to grow so strongly.

Adele generated around £25 million of retail sales revenue in 2015, which was equivalent to 70% of the £36 million by which UK music sales revenue increased that year. While of course a portion of that £25 million would have been spent on other repertoire if ‘25’ had not been released, the majority would not. With ‘21’ and now with ‘25’ Adele has been able to pull casual music consumers out of the woodwork and persuade them to buy one of the only albums they’ll buy all year, often the only one.

Without that £25 million UK music sales would have increased by just 1%.  So in effect streaming services have Adele to thank for ensuring their growth lifted the whole market even though she famously held ‘25’ back from each and every one of them. Sweet irony indeed.

BPI 3

As a final postscript, the role of YouTube, while underplayed in the official figures, is crucial. While audio streams grew by an impressive 81% in 2015, video streams grew by 88%. So however good a job the streaming services might be doing of growing their market, YouTube is doing an even better one.

The Beatles, Streaming And The End Of The Record Label Business Model

So the Beatles are finally coming to streaming…well much of the Beatles’ catalogue is at least.  Is it a big deal?  Kind of. The Beatles were late to iTunes and they’re now late to streaming.  Fashionably late though. No so soon as to be left standing awkwardly waiting for something to happen and not too late to miss the real action.

The Beatles are unique enough, and important enough to dictate their own terms and set their own timetable. For streaming services the Beatles catalogue is strategically important in the way it was for iTunes in that it helps communicate the value proposition of all the music in the world…well most of it. For the Beatles it represents the opportunity to reach younger audiences that sales are currently missing (which in large part explains why the catalogue is being made available on free tiers too).

It’s All About Targeting

20 years ago everyone pretty much bought the same product, the CD. Now though the music consumer landscape is fragmented and siloed. The fact that Adele’s ‘Hello’ simultaneously delivered stellar performance across audio streaming, video streaming, download sales and radio illustrates that there are many highly distinct groups of consumers that do one but not the other. This what Universal will be banking on with bringing the Beatles to streaming: they’ll be hoping that most of the future prospective buyers of Beatles albums are not streaming. For as long as this elongated transition phase continues, this sort of approach can work.

What Happens When The Bottom Falls Out Of the Catalogue Business?

The business model of record labels has long depended on revenue from back catalogue propping up the loss-leading new artists, on whom labels have to spend heavily to break. That model works as long as back catalogue sales are vibrant. But cracks are now showing in that model. Labels, especially the big ones, are increasingly spending even more heavily on a smaller number of big bets. For major labels many of these are either manufactured or laser targeted pop acts that grow big fast but like genetically modified crops, soak the nutrients out of their fan-base soil and are less likely to have long term careers. This means breaking artists are costing more to break and have less long term revenue potential.

That double whammy in itself would be bad enough, but there is an even more important structural factor at play. Catalogue sales depend on people buying classic albums, reissues and retrospectives. The secret is in the term ‘sales’. The model does not translate the same way to sales. Getting someone to spend $10 on an album for old times’ sake that they might listen to a handful of times but value having in their collection is very different from earning $0.20 or so from the same number of listens. But that is the way the world is heading. Older music buyers (i.e. from late 30’s onwards) are the lifeblood of catalogue sales.

That model works for older consumers that grew up buying music and thus have the habit. But what happens what happens when the first millennials enter their late 30s? Which is exactly what is going to start happening from 2016 onwards. As each new cohort of aging millennials passes 35 a smaller percentage of them will have ever regularly bought music. Thus from 2016 onwards every year will mean an ever smaller number of catalogue buyers coming into the top of the funnel.

The long term implications are clear. While this will not be anything like an instant collapse, the impact will be progressively more painful as each year passes. The old label model of developing a vast bank of copyrights will become less and less relevant.

So Beatles, welcome to streaming, this will be your last new format hurrah.

Pandora’s Rate Ruling Reveals The Cracks In Streaming Economics

The much anticipated outcome of yesterday’s Copyright Tribunal decision was a 20% increase of Pandora’s ad supported stream rate from $0.0014 per non-interactive stream to $0.0017. The result was roughly equidistant between the two parties’ preferred rate: Pandora wanted $0.0011, SoundExchange (the body that collects the royalties on behalf of the labels) wanted $0.0025. As with any good compromise neither party will be truly happy, though on balance Pandora probably came out slightly better. Both the rate and the whole rate setting process shine a bright light on the economics of streaming, especially when contrasted against on-demand services.

pandora dec 15 - 1

Pandora’s semi-interactive radio service operates under statutory rates in the US that are set by the Copyright Royalty Board for a few years at a time, with inflation baked in. This means a continual rise in rates (see figure). It also gives Pandora a degree of certainty over its mid term future but prevents record labels from negotiating for better rates (publishers however are able to strike direct deals with Pandora). Spotify, and other on-demand streaming services, negotiates deals directly with multiple record labels, publishers and rights bodies. Deals typically come up for renewal every couple of years, involve large upfront payments and Minimum Revenue Guarantees (MRGs). They also run the risk of core product features being threatened in renegotiations – as we saw with the labels’ dalliance with killing off freemium this time last year.

The most significant difference between the models is how the per stream rate works. For on-demand services a royalty pot as a % of revenue is determined. This is then divided between rights holders based on plays in a given period and allocated on a per stream rate basis. Thus royalty payments remain a comparatively constant share of revenue, assuming of course that the service hits the MRG targets – if it doesn’t the share increases, often above 100% of revenue. This model also implies a clear ceiling to the potential profit an on-demand service can earn. By contrast Pandora pays out on a (largely) pure per stream basis. The direct consequence of this is that Pandora is able to increase it revenue per play faster than its rights cost per play which in turn creates the potential to grow margin (see next figure).

pandora dec 15 - 2

Between 2009 and 2014 Pandora’s content acquisition costs per listener hour increased by 27% from $17.52 to $22.29. This reflects both the CRB set rate as well as deals with rights bodies and publishers. But over the same period Pandora’s revenue per listener hour increased by 114% from $21.48 to $45.97. Now clearly, an increase in revenue per hour does not inherently mean increased profitability, or even profitability at all. Indeed, Pandora’s continued losses have been a perennial bugbear for investors. But Pandora has chosen to invest its increased revenue to grow its business, building out regional ad sales teams and making acquisitions such as Next Big Sound, Ticket Fly and Rdio. In short, Pandora could have been profitable for some time now if it had so chosen. Instead it is chasing a bigger prize, namely to become the single biggest revenue driver in US radio. To get big it needs to spend big.

Pandora’s Core Strength Is Being Able Increase Profitability Per User

The underlying principle is clear: while on-demand services have little meaningful way of increasing revenue per user with the current model, Pandora has more than doubled revenue per user in 6 years while rights costs have declined in relative terms. Content acquisition costs fell from a high of 82% of revenue in 2009 to 48% in 2014. That rate will increase in 2015 due to direct deals struck with publishers and the $90 million pay out for the pre-1972 works ruling. But it still remains well south of Spotify’s 70%+.

On Demand Services Have Similar Fixed Costs But Tighter Margins Because Of Royalties

While there is a clear case for semi-interactive radio rates being markedly lower than on-demand rates many of the fixed costs of both types of streaming business are the same.  Both have to commit similar amounts to product development and tech, bandwidth, data analysis, reporting marketing, customer care, management. This puts on-demand services at an operational disadvantage compared to webradio services.

If paid-for streaming services are going to become commercially sustainable there is going to need to be pricing and product innovation to both reach more mainstream users (cheaper tiers) and to drive more revenue from high value users (more expensive tiers and bolt ons). Right now there is relatively little commercial incentive for on-demand services to innovate upwards as profitability will remain largely the same. There is an opportunity for labels to offer Spotify and co a Pandora-style pure per-play license structure for all products launched above and beyond the standard 9.99 tier. This would give the services the ability to follow Pandora’s path of growing revenue per user faster than rights costs per user, thus improving commercial sustainability and allowing them to invest more in product innovation.

Rights Frameworks Need To Engender Commercial Sustainability

Pandora is one of the few stand out, independent success stories of the entire history of digital music. It has become one of the world’s biggest music services despite being largely constrained to the US, it has built a commercially viable model and it has delivered a big return for investors via its IPO. Only Last.FM, Beatport and Beats Music can genuinely lay claim to having delivered big returns for their investors. There are many mitigating factors, but the unique licensing structure Pandora operates under is the single most important one. Do songwriters and labels feel that they’re getting short changed? Absolutely. But it is in the interest of every music industry stakeholder that the economics of digital music are structured in a way that enables standalone companies like Pandora, Spotify and Deezer to thrive. Otherwise there can be no complaints when the only options left on the table are companies like Apple, Amazon, Facebook and Google whose interest in music all stems from trying to sell something else. That’s when artists and songwriters are really at risk.

Pandora Buys Rdio To Become A Global Streaming Powerhouse

 

pandora rdioPandora today announced that it was acquiring the assets of now failed subscription service Rdio.  While the whispers about Rdio’s future had been building for some time, the deal is more interesting for what it says about Pandora’s plans than what it says about the state of the subscription business.

 

Rdio Battled Bravely And Set Innovation Standards But Fell Short

For what Rdio lacked in subscriber numbers it made up for in innovation.  It continually set product and feature precedents that Spotify and others subsequently aped, and its $75 million dollar ad inventory deal with US radio giant Cumulus sets a business model blueprint that other streaming services will follow. But for all its efforts and extensive marketing efforts Rdio was simply not able to get to the same sort of level as Spotify’s 2nd tier competitors, let alone to seriously challenge Spotify itself.  The music subscription business is not a winner-takes-all market.  But it is one in which some degree of meaningful scale is required to trigger the telco partnerships and brand advertiser deals that are necessary to achieve sustainability.  Eventually a company transitions from ‘bright new hope with potential’ to an ‘also ran that isn’t ever going to make it’.  Once that imperceptible line of market perception has been crossed it is only a matter of time before the end comes.

Pandora Will Use Rdio’s Assets To Go Global

Crucially Pandora is not acquiring Rdio as a going concern but only its assets, which won’t include licenses (as they have to be renegotiated when a music service changes corporate hands).  What those assets represent, or at least the bits that matter to Pandora, are teams, product and tech, licensing know how and an international footprint.  That last bit is particularly pertinent.  Rdio’s 100 markets contrasts sharply with Pandora’s 3 (US, Australia and New Zealand).  Indeed Pandora CEO Brian McAndrews stated “We seek to be the definitive music source for music discovery and enjoyment globally”.  While 100 markets is probably a step too far for Pandora, expect a healthy selection of top tier and emerging markets to feature in Pandora’s roadmap.  And if you’re eager to identify which ones, just take a look at the bigger radio markets globally (Japan possibly excepted).

Pandora’s Success Is Built On Lean Back Not Lean Forward

Pandora’s success is firmly rooted in delivering a high quality, lean back experiences to largely mainstream audiences.  That’s how it reaches 78 million monthly listeners, more than a quarter of US adults.  That positioning has served Pandora well and made it one of the few success stories of digital music.  In fact, other than Beatport and Last.FM, it is one of the very few music start ups that had an exist that considered to be a true financial success. Crucial to that success has been the fact Pandora has operated under statutory licenses for semi-interactive radio, which leaves it with dramatically higher (potential) operating margins than on demand services.  Which begs the question, just why is Pandora getting into the subscription business?

This Is The Latest Part Of A Major Strategic Pivot

The answer is that it forms part of a much bigger, much bolder plan.  Pandora has spent the last couple of years quietly amassing the assets that will transform it into a music platform super power.  In 2015 it acquired music data company Next Big Sound (c.$50 million), then came ticketing company Ticketfly in October ($450 million) and now Rdio ($75 million).  The combined $0.6 billion is a truly sizeable investment in a streaming-centred business model by anyone’s standards.  It also accompanies a concerted and costly investment in Pandora’s regional ad sales teams across the US to compete on a level footing with traditional radio’s sales teams.  Couple all that with November announcements to become the exclusive streaming outlet for popular podcast series ‘Serial’ and the landmark direct deal with Sony/ATV Publishing and a picture of something truly ambitious starts to emerge.

Pandora was fortunate to be able to IPO at a time when public offerings were still a highly viable option for digital start ups.  Spotify and Deezer (which just cancelled its IPO) will look on with no little jealousy at the power that a market capitalisation of nearly $3 billion gives you.  Now it is using this financial firepower to take the next step on its streaming journey.  Whatever that will prove to be, expect it to be a platform in its truest sense, rather than simply a streaming service with a few loosely attached ‘alternative revenue’ models, which is a mistake some of the subscription incumbents have made thus far.

Discovery Doesn’t Lead Anywhere Anymore, At Least Not To Sales

Pandora may aspire to be the definitive source of ‘music discovery’ but streaming discovery is becoming streaming consumption.  i.e. it is increasingly not leading to sales.  Live music sales is one alternative way to make money from ‘discovery’ but if ‘free music to sell tickets’ is Pandora’s end game then some difficult conversations with songwriters (who of course often don’t play live) will need to be had.

Pandora has just thrown its hat into the ring as a top tier player in the global streaming business.  By some measures you could say it is poised to become the biggest.  McAndrews left no room for doubt by stating “We plan to substantially broaden our subscription business.”  But in doing so Pandora will have to look itself in the mirror and ask itself “what am I now?”.

 

 

 

Why Streaming Doesn’t Really Matter For Adele

The outstanding success of Adele’s single ‘Hello’ has stoked up the already eager debate around whether Adele’s forthcoming ‘25’ album is going to be a success.  Indeed some are asking whether it is going to ‘save the industry’. One of the aspects that is getting a lot of attention is whether the album is going to be held back from some or all of the streaming services.  The parallels with Taylor Swift’s ‘1989’ are clear, especially because both Swift and Adele are strong album artists, which is an increasingly rare commodity these days. But the similarities do not go much further.  In fact the two artists have dramatically different audience profiles which is why streaming plays a very different role for Adele than it does for Swift.

Lapsed Music Buyers Were Key To the Success Of ‘21’

Adele’s ’21’ was a stand out success, selling 30 million copies globally.  Core to ‘21’s commercial success was that the album touched so many people and in doing so pulled lapsed and infrequent music buyers out of the woodwork.  The question is whether the feat can be repeated? In many respects it looks a tall ask.  We’re 4 years on since the launch of ‘21’ and the music world has changed.  Music sales revenue (downloads and CDs) have fallen by a quarter while streaming revenues have tripled.  And the problem with pulling lapsed and infrequent buyers out of the woodwork is that they have receded even further 4 years on.  In fact a chunk of them are gone for good as buyers.

buyer streamer overlap

But beneath the headline numbers the picture is more nuanced (see graphic).  Looking at mid-year 2015 consumer data from the US we can see that music buyers (i.e. CD buyers and download buyers) are still a largely distinct group from free streamers (excluding YouTube).  While this may seem counter intuitive it is in fact evidence of the twin speed music consumer landscape that is emerging.  This is why ‘Hello’ was both a streaming success (the 2nd fastest Vevo video to reach 100m views) and a sales success (the first ever song to sell a million downloads in one week in the US).  These are two largely distinct groups of consumers.

Streaming A Non-Issue?

As a reader of this blog you probably live much or most of your music life digitally, but for vast swathes of the population, including many music buyers, this is simply not the case.  Given that the mainstream audience was so key to ‘21’s success we can make a sensible assumption that many of these will also fall into the 27% of consumers that buy music but do not stream.  The implication is thus that being on streaming really is not that big of a deal for ‘25’ one way or the other.  Whereas Taylor Swift’s audience is young and streams avidly, Adele’s is not.  That is not to say there aren’t young Adele fans, of course there are, but they are a far smaller portion of Adele’s fan base than Swift’s.

60% of 16-24 year olds stream while just 20% buy CDs.  Compare that to 40-50 year olds where 34% stream and 43% buy CDs.  These are dramatically different audiences which require dramatically different strategies.  Audio streaming is unlikely to be a major factor either way for Adele, neither in terms of lost sales nor revenue.  Unless of course she ‘does a Jazy-Z‘ or ‘does a U2’ and takes a big fat cheque from Apple to appear exclusively on Apple Music.  But I’d like to think she’d like to think she’d have the confidence of earning sales the real way.

The Importance Of The Digitally Engaged Super Fan

What unites Swift and Adele is that they are both mass market album artists and as such are something of a historical anomaly.  Swift bucked the trend by making an album targeted at Digital Natives shift more than 8 million units.  Adele will likely also buck the trend.  But paradoxically, considering the above data, in some ways it will be a harder task for Adele.  Swift has a very tightly defined, super engaged fan base that identifies itself with her.  Adele’s fanbase is more amorphous and pragmatic.  You don’t get ‘Adelle-ettes’.  Swift was able to mobilise her fanbase into music buying action like a presidential candidate with a passionate grassroots following and big donors.  The importance of digitally engaged super fans is the secret sauce of success for digital era creators.  It is the exact same dynamic that ensured UK YouTuber Joe Sugg was able to leverage his fanbase to give his debut book ‘Codename Evie’ the biggest 1st week sales for graphic novel EVER in the UK this year.

If Adele and her team do pull off a sales success with ‘25’ they will owe a debt of gratitude to that 27% of consumers.  While the odds are against it being quite as big as ‘21’ (simply because the market is smaller) it still has every chance of being a milestone event that will out perform everything else.  But do not mistake that for this being ‘Adele saves the music industry’.  Album sales are declining.  Success from Taylor Swift and Adele are (welcome) throwbacks and they are most certainly not a glimpse into the future.

Apple Music By The Numbers

Back in August when Apple announced it had hit 11 million subscribers I predicted that would result in around 6 million paying subscribers.  Yesterday Tim Cook announced that Apple Music now has 6.5 million paying subscribers, which translates into a 59% conversion rate.  Or at least 59% of trialists paid for at least one month.  As I wrote back in August, Apple will lose a share of those subscribers who will cancel after one payment (i.e. the ones who’d forgotten to cancel their payment details).  Somewhere north of 1.5 million of those subscribers will likely not make it through to a second month’s payment.  Which would leave around 5 million of those as long term subscribers.

The Acquisition Funnel Needs Widening

Cook also stated that the total number of users is 15 million which means that there are 8.5 million active trialists. Given that all the 11 million trialists reported 6 weeks after launch are now either gone or are subscribers that means all of those are additional trialists which gives us a monthly trialist rate of under 3 million or a little under 100,000 a day. Which is way below the 315,000 a day Apple had during the first 6 weeks (which is to be expected) but also below the 175,000 rate I had conservatively predicted back in August.  So Apple’s funnel is not yet performing as strongly as expected.  Given that most of Apple’s advertising for Apple Music is branding focused at the moment, we could expect that rate to augment steadily over the coming year as that brand message beds in.  And it could lift significantly if Apple shifts focus to product centric marketing i.e. what it normally does. (The Apple Music ad campaign is rare for Apple in that it doesn’t involve any product imagery).

apple music infographic

10 Million Cumulative Subscribers By Year End

If Apple continues at the current rate it should get to around 10 million subscribers by year end, of which 6 million or so will be active (i.e. not churned).  Which is again below my August prediction of 8.7 million because the acquisition funnel isn’t delivering as anticipated.  In revenue terms that would deliver cumulative subscriber revenue of $220 million by the end of the year.  Apple has earned around $140 million in total so far, of which $100 has gone to rights owners.

And we shouldn’t understate the scale of Apple’s success so far, narrow funnel or not.  It took Spotify 4 and a half years to get to 6.5 million subscribers.  Granted, it was a very different world back then and much of that growth had come without the US and of course without the benefit of Apple’s integrated ecosystem.  But even those considerations accounted for, Apple has gone from zero to hero in a flash.  In August I stated ‘Apple is on track to be the number 2 streaming subscriptions provider after little more than 6 months in the game’ and that is exactly where they are now.

To Restate Or Not To Restate

Music Business Worldwide cites an insider source that Spotify is on the verge of announcing its own new numbers. It will be interesting to see the fine print of how those numbers are reported.  Spotify has seen an uptick in subscriber growth at the same time it introduced its $1 a month for 3 months promotion, which is effectively a paid extended trial.  Here’s the conundrum.  If those numbers are reported as subscribers then expect terrible churn (for subscriber numbers) but if they are reported as trialists then conversion rates will be great but total subscriber numbers will not.  Common sense would dictate Spotify reporting those numbers as subscribers (they are paying after all) but that means at some stage Spotify is going to have to restate its numbers or provide some additional guidance.  Which incidentally Apple will also eventually have to do if it reports it cumulative 10 million subscribers at year end / early 2016 rather than the active subscriber number of around 6 million.

Apple and Spotify are now locked in a metrics arms race.  Both will use every trick in their respective arsenals to make those numbers look as good as they possibly can.  Whatever the outcome of that particular little spat, today’s numbers show us that even below its best, Apple just ran the first lap of a 5,000 metre race as if it was a 100 metre sprint. Let’s see if Apple can run an entire Mo Farah race at the speed of an Usain Bolt sprint.

Ad Supported Is 56% Of US Streaming Revenue

Late 2014 a minor crisis emerged in the music industry, with major record labels at one stage looking like they were going to kill off freemium.  The outcome of the Freemium Wars was actually less dramatic, resulting instead in an effective continuation of the status quo.  The labels had however made it very clear to Spotify who held the whip hand.  Though their tones have softened, major label execs retain an at best sceptical view of free streaming.  The net result is that freemium has almost become the inconvenient streaming truth that no one really talks about.  However free is too big to ignore.  In fact free is much bigger than some would like to admit.

freemium what freemium

According to the IFPI ad supported streaming accounted for just 19% of all US streaming revenues in 2014, down from a high of 30% in 2011.  Which points to the success of subscriptions.  Except that those numbers ignore a major part of the equation: Pandora (and other semi-interactive radio services).  The IFPI has Pandora hidden away with cloud locker services, SiriusXM and a mixture of other revenues in ‘Other Digital’.  Extracting the semi-interactive radio revenues that count as label trade revenues wasn’t the most straight forward of tasks but it was worth the effort.  Once Pandora is added into the mix it emerges that 56% of US streaming revenues are from free, ad supported services.  While that share is down from a high of 66% in 2012 it remained flat in 2013 and 2014.  Which means that however fast subscriptions grew Pandora, Slacker, Rhapsody UnRadio and co grew even faster in order to offset the decline in on demand ad supported income.

us subscriber growth and pandora

Semi-interactive radio revenues grew by 40% in 2014 compared to 35% for subscriptions.  Subscriptions had grown much faster in 2013 (76% compared to 25%) but Pandora and co found their mojo again in 2014.  None of this is to suggest that subscriptions aren’t making great progress but it does show us that free is more than an inconvenient truth, it is both the most widely adopted behaviour and the largest revenue source in the US (which accounts for 48% of global digital revenues).

The music industry is beginning to get its head around the fact that the role of streaming as a retail channel (i.e. subscriptions) is always going to be smaller (in reach terms at least) than its role as a radio channel (i.e. free streaming).  This more accurate view of the US streaming market shows us that free is even more important than many thought.

Free streaming also has much bigger growth potential. The percentage of consumers that have the inclination to pay 9.99 a month for music is inherently limited, thus constraining subscriptions to a niche addressable audience.  Music radio listening by contrast has near ubiquitous reach.  Most significantly Pandora currently only represents about 10% of all US radio listening time.  The addressable market is much bigger and the vast majority of it remains untapped.