My New Book – Awakening: The Music Industry In the Digital Age

I am very excited to announce the launch of my book ‘Awakening’ which charts the rise of digital music and how it is changing the music industry. ‘Awakening’ is the definitive account of the music industry in the digital era. With exclusive interviews with the people who shaped today’s industry it tells the inside story of how the music business grappled with the emergence of an entirely new digital economy

coverThe music industry is on the brink of an utterly transformative period of change that will result in the creation of an entirely new industry tailor made for the digital era. ‘Awakening’ presents the vision of how and why this change will come, what this future will look like and how the first steps on the journey are already being taken. The book includes interviews with 60 of the music industry’s leading figures, including globally successful artists and more than 20 CEOs (a full list of interviewees can be found at the bottom of the page). Alongside the insight from this unprecedented executive access, ‘Awakening’ uses exclusive consumer data, official market statistics, proprietary models and multiple additional data sources. In doing so it constructs an unparalleled picture of the new global music economy presented across 60 charts and figures.

All good stories start in the beginning. ‘Awakening’ deconstructs the failed state experience of the analogue era music industry with the definitive account of the music industry’s transition from booming $28 billion powerhouse to today’s much humbled $15 billion business. Music fans used to be told what to listen to when, where and how. In the new music industry the balance of power lies with the fans with themselves. The old music industry had the record labels at its centre, the new digital era industry will have the consumer at its core. The change will be generation defining and will transform forever what it means to be an artist and a fan. Livelihoods will be destroyed, others created, millionaires made, culture transformed. The change is already underway. ‘Awakening’ looks at each individual component of the music industry today and looks at each one is dealing with change and preparing for the future. From the superstar artist to the small independent label, from the pirate company CEO to the major label CEO, in the book I explore the incredibly varied picture of confusion and innovation, uncertainty and brilliance, fear and confidence. Most of all it is the story of a rebuilding, an Awakening of the new music industry.

The book has three sections:

  • How We Got Here: A detailed history of the years up until the launch of the iTunes Music Store, exploring how Napster changed the music industry forever and how the industry responded, or rather didn’t
  • The Digital Era: This section has 7 chapters, one for each of the key stakeholders (labels, artists, songwriters, pirates etc) and explores what the current market means to each of them
  • A Vision For The Future: A vision for what the next music industry will look like and what needs to happen to enable this to take place

I was extremely fortunate to interview many of the most important figures in the music industry of the last 15 years, including CEOs of major record labels, CEOs of all the major streaming services and platinum selling artists. I’ve managed to get the inside track on exactly what was happening behind the scenes.  I personally learned a huge amount while writing this book and I am confident virtually every reader will do so too.

In short, once you have read this book you will know practically everything that there is to know about the digital music market and where it is heading!

For anyone interested in the music industry and the lessons it provides for all media and technology businesses in the digital era, this is the only book you will ever need.

The book is available now on Amazon and iTunes and Google Play.

Also 10% of net profits will go to the music therapy charity the Nordoff Robins trust.

If you are a journalist and would like a review copy please email me at mark AT midiaresearch DOT COM

People interviewed for this book

Adam Kidron             Founder and CEO, Beyond Oblivion
Alexander Ljung         Founder and CEO, Soundcloud
Alexander Ross        Partner, Wiggin
Alison Wenham        CEO, AIM
Axel Dauchez           CEO, Deezer
Barney Wragg          SVP Universal Music eLabs / Global Head of Digital, EMI
Ben Drury                 Founder and CEO, 7 Digital
Benji Rogers             Founder and CEO, PledgeMusic
Brian Message          Manager, Radiohead, Nick Cave / Chairman MMF
Cary Sherman          CEO, RIAA
Chris Gorman           Founder and CEO, MusicQubed
Cliff Fluet                   Partner, Lewis Silkin / Director 11
Daniel Ek                   Founder and CEO, Spotify
David Boyle              SVP Insight, EMI
David Byrne              Solo artist / Talking Heads
David Isrealite           CEO, MPAA
David Lowery           Camper van Beethoven / The Trichordist
Edgar Berger            President & CEO International, Sony Music Entertainment
Elio Leoni Sceti         CEO, EMI
Erik Nielsen               Manager, Marillion
Geoff Taylor              CEO, BPI
Gregor Pryor             Partner, Reed Smith
Helienne Lindvall       Award winning songwriter
Ian Hogarth                Founder and CEO, Songkick
Ian Rogers                 CEO, Beats Music / CEO TopSpin
Jack Horner               Founder Frukt
Jay Samit                   SVP, EMI / EVP & GM, Sony Corp America
Jeremy Silver            VP New Media EMI / Chairman musicmetric
Jim Griffin                   CTO Geffen Records / CEO, Cherry Lane Digital
Jon Irwin                    President, Rhapsody
Jonathan Grant          Above and Beyond / Founder, Anjunabeats Records
Justin Morey              Senior Lecturer Music Production, Leeds Beckett University
Keith Harris                Manager, Stevie Wonder / GM, Motown
Keith Thomas            Grammy Award Winning Producer and Songwriter
Ken Park                    Chief Content Officer, Spotify
Larry Miller                 COO, a2b Music / President Reciprocal
Liz Schimel                VP Music, Nokia
Lohan Presencer       CEO of Ministry of Sound Group
Mark Kelly                 Marillion / CEO, FAC
Mark Knight               Founder and Chief Architect, Omnifone
Martin Goldschmidt   Founder and MD, Cooking Vinyl
Martin Mills                Founder and Chairman, Beggars Group
Michael Robertson   Founder and CEO, MP3.com
Nenad Marovac        Partner, DN Capital
Oleg Fomenko          CEO, Bloom.fm
Paul Hitchman          Founder and Director Playlouder/ MD Kobalt
Paul Vidich                EVP, WMG / Director, Reverbnation
Peter Jenner             Manager Pink Floyd, Billy Bragg / MD Sincere
Peter Sunde              Founder, The Pirate Bay
Phil Sant                    Founder and Chief Engineer, Omnifone
Ralph Simon             EVP Capitol & Blue Note / Founder Yourmobile
Robert Ashcroft        SVP Network Services Europe / CEO PRS for Music
Roger Faxon             CEO, EMI
Scott Cohen              Founder, The Orchard
Simon Wheeler         Director of Strategy, Beggars Group
Sumit Bothra             Manager, The Boxer Rebellion, PJ Harvey
Tim Westergren        Founder and Chief Strategy Officer, Pandora
Tom Frederikse        Partner, Clintons
Tony Wadsworth      Chairman & CEO, EMI Music UK & Ireland/Chairman BPI
Wayne Rosso           President, Grokster
Will Page                  Chief Economist, Spotify

Note: positions either refer to current position held by interviewee or key position held during the narrative of this book.

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Jay-Z, Becoming An HBO For Streaming, And Digital Music Bling

Jay-Z just made his much hyped entrance into streaming official with his star studded but awkward signing ceremony for TIDAL. Once having navigated a few objections from minor shareholders, Jay-Z’s first major act after successfully buying the not-very-appropriately-named-for-a-hip-hop-superstar WiMP was to rebrand it to TIDAL, the name that WiMP’s high quality service had been operating under. Jay-Z is unashamedly bringing his superstar power to bear to make as big a splash as possible, but once the tidal wave of hype has subsided will there be enough to transform the market?

On the surface Jay-Z did not get too much for his $56m WiMP TIDAL acquisition: a streaming provider that actually lost 11% of its subscribers last year, of whom 77% are tied up in telco bundles and that has a total global subscriber market share of about 1%. The much vaunted TIDAL part of the company as just 17,000 subscribers.

But of course the deal was never about what WiMP has done to date, it was an instant entry point into the streaming music landscape. It is the streaming equivalent of buying a plot of land that has already been granted planning permission, with the slight convenience of the previous owner already having started building a little edifice in the corner of the plot. Now Jay-Z is clearing the site and laying the foundations for a construction of far greater ambition.

One of the problems with streaming music services to date is that they have generally lacked personality. This is a combination of being technology led, having to be all things to all people and having to keep the big labels happy. Jay-Z is shovelling bucket loads of stardust on TIDAL, leaning on his superstar contacts help get the launch off to a star studded bang and even making them shareholders. But it will require much more than the support of a few music biz a-listers to make TIDAL a success:

  • TIDAL is creating an aspirational, premium streaming brand: In many respects TIDAL is filling the aspirational music brand space that Beats vacated when it was acquired by Apple. High quality audio and video editorial (powered by the RADR division of TIDAL) are a natural fit with this positioning. Most consumers do not actually care that much about high quality audio (only a fifth consider it an important part of a music services) and even can actually tell the difference. But that’s not the point. This is about aspiration. Just in the same way that most Beats customers buy the headphones because they represent quality rather than because of their frequency response ranges. $19.99 is not meant to be a mass market price point. It is streaming bling for those who want people to know they have the best.
  • TIDAL wants to be the HBO of streaming music: One key differentiation point for TIDAL is an exclusive first streaming release window for artists. What they’ll get in return is unclear, and it certainly won’t halt the decline of sales, but it nonetheless creates a clear perception of value to artists and to subscribers. It helps solidify TIDAL’s positioning as a premium brand, the streaming music equivalent of HBO.
  • Even TIDAL can’t fix the underlying problem with royalties: One of the big issues surrounding streaming is the fact artists and songwriters do not feel they are earning enough. Yet with 80% of subscription fees heading back to rights owners there is clearly not much scope for increasing the payouts. Even doubling the subscription price (on the $19.99 tier) only means artists are getting paid (at best) in double cent increments rather than single cents. The underlying dynamics remain the same i.e. you need a lot more people streaming an album to make the same money you would from selling it. In fact, you would require roughly 15 as many people, listening an average of 5 times each.
  • A next generation label: Somewhere down the line TIDAL might follow Netflix’s lead and start creating TIDAL Originals, signing artists directly. Doing this would present a whole set of ways in which TIDAL could start to experiment with generating more value for artists. But it would also put TIDAL in a difficult position. Right now TV broadcasters are starting to reassess their relationship with Netflix because now it is competing directly with them for shows and talent. Netflix has bought itself some time by dint of being such a valuable revenue stream for TV companies, but the more it pushes its own content, the more TV companies want to clip its wings. Expect the same scenario to play out for TIDAL if goes this route.

TIDAL is a welcome addition to the streaming space and brings some much needed star quality. But the path ahead is far from clear. Jay-Z will need all the luck and superstar support he can get to make waves with TIDAL.

The Music Industry’s 6:1 Ratio

One of the many things that the digital revolution has done to the music industry is to create and accentuate a number of imbalances. Imbalances that will either change, become the foundations of the next era of the music business, or both. In fact there are three key areas where, coincidentally, the lesser party is 6 times smaller than the other: 6 to 1

  • Digital music revenue share: A common refrain from songwriters and the bodies that represent them (music publishers, collection societies etc.) is that everything starts with the song. And of course it does. However it is the recorded version of the song that most people interact with most of the time, whether that be on the radio, on a CD, a download, a stream or a music video. This has helped ensure that record labels – usually the owners of the recorded work – hold the whip hand in licensing negotiations with digital music services. Labels have consequently ended up with an average of 68% of total on-demand streaming revenue and publishers / collection societies just 12%. The labels’ share is 6 times bigger. Publishers are now actively trying to rebalance the equation, often referred to as ‘seeking out a fair share’. For semi-interactive radio services like Pandora the ratio is roughly 10:1.
  • Artist income: While music sales declined over the last 10 yeas, live boomed. And although there are signs the live boom may be slowing, a successful artist can now typically expect to earn as little as 9% of their total income from recorded music, compared to 57% from live. Again, a factor of 6:1. There are many complexities to the revenue split, such as the respective deals an artist is on, fixed costs etc. but these splits tend to recur. Ironically just as everything starts with the song for digital music, everything starts with the recorded work (and the song) for the live artist. The majority of an artist’s fan base will spend most of their time interacting with the recorded work of the artist rather than live. The recorded work has become the advert for live. In fact the average concert ticket of a successful frontline artist costs on average 8 times more than buying their entire back catalogue. Thus for fans the ratio is even more pronounced at 8:1.
  • Free music users: The freemium wars are dominating the contemporary music industry debate. Spotify and other services that have on demand free tiers are under intense scrutiny over how these tiers may be cannibalising music sales. However YouTube’s regular free music user base is about 350 million compared to approximately 60 million free freemium service users across all freemium services. Again a ratio of 6:1. Whatever the impact freemium users may be having, it is 6 times less than YouTube.

The music industry has never been a meritocracy nor will it ever be one. So it would be fatuous to suggest equality is suddenly going to break out. However there will be something of a righting process in some areas, especially in the digital music revenue share equation. Most significantly though, these ratios are becoming the foundational dynamics of the new music industry. These are the reference points that artists, rights holders, and all other music industry stakeholders need in order to understand what their future will look like and how they can help shape it.

NOTE: This post was updated to reflect that the songwriter ratio is actually 10:1 for semi-interactive radio.  The 2:1 ratio applies to label revenue versus collection society revenue, which includes revenue for performers who are often but not always also the songwriter.

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.

A Manifesto For The Future Of Free Music

In the thankfully long gone days of DRM downloads it could be fairly said that ‘music was born free yet everywhere it is in chains’. Now it is free of DRM and, for most consumers, of price also. Of course the majority of consumers have always spent most of their time listening to music for free via TV or radio. But the internet transformed free into something that was every bit as good as the paid for product. So yes, most people have always listened to music for free most of the time, but they listened to what broadcasters decided they would listen to. In the old model free music was something that would sate the appetite of the passive fan but was not be enough for the dedicated fan. Free music thus very clearly played a ‘discovery’ role for the core music fans. On demand free though has changed the equation entirely. For many consumers the free stream is the destination not the discovery journey. So 50 million YouTube views is no longer a marketing success but instead x million lost sales or paid streams.

For younger consumers the picture is particularly stark. 56% stream for free, 65% listen to music radio and 76% watch YouTube music videos. Compare and contrast to over 25s where the rates are 35%, 47% and 76%.   In short, free is more likely to be something that drives spending among over 25s because it is predominately programmed while among under 25’s it is less likely to do so because it is on demand.

Free needs recalibrating. Here are a set of objectives to help fix free, a Manifesto for the Future of Free Music:

  • Set the objectives: One of the problems with free is there is too little clarity around what purpose it is meant to serve. And this is because it is simultaneously serving multiple purposes: to monetize the masses (ad supported), to drive sales (discovery), to drive subscriptions (freemium). All three are worthy goals but unchecked each one also competes with the other. A consistent industry vision is needed.
  • Programme more: Free has a massive role to play in digital music, but it needs to better targeted. A super engaged music fan should not be able to sate their on demand appetite on free. In short, free music needs to be less on demand and more programmed. That is not to say YouTube or Soundcloud need to become Pandora, but they do need to explore meeting somewhere midway.
  • Use data to segment: It is not enough to simply say users can choose between different services, they services need to better use their data to determine who gets what experience within them. Someone who watches 20 YouTube music videos a day is clearly a target for a Music Key subscription. That person should not just be marketed Music Key, s/he should also have their free experience progressively dialled down to push them towards it.
  • Fix the models: Pandora is a highly viable ad business that happens to have a radio service built on it. There is a world of difference between Pandora’s ad business and Spotify’s. Spotify’s deals with the rights holders essentially preclude it from making free a viable business, which is fair enough. But it does create the unfortunate vicious circle of there never being a case for Spotify investing enough in ad sales infrastructure to drive up CPMs enough to boost ad supported revenue. Labels and publishers need to think hard about what tweaks may need to be made to business models if they want freemium services to be strong enough financially to drive a vibrant subscription market. Not fixing the models will only skew the market to the companies with ulterior business models who can afford to perpetually lose money on free.
  • Don’t give up on free fans: A generation weaned on free music will grow up craving more free music. Just because free dominates younger consumers’ digital lexicon now does not mean that it will inherently always do so. Don’t give up on the lost generation of music consumers with the default position of free.
  • Strike the right balance: This is simultaneously the most important and most difficult part to get right. YouTube, Soundcloud and Spotify’s free tier are legal alternatives to piracy. Turn back the dial too much on the legal sources and illegal ones will flourish again. However the fact that more than a third of free streamers use stream ripper apps to turn streams into downloads means that the distinction between licensed and pirated has long since blurred. Nonetheless the balance needs to be better struck, probably somewhere equidistant between YouTube and Pandora. Ultimately it will require lots of real time honing and perfecting to get the right mix.

Free music will always be part of the equation and it has become a key part of the music industry’s armoury. But there is a difference between a controlled burn and an out of control forest fire. The freemium wars have already accounted for some high profile scalps and more controversy will follow. Free will remain a crucial part of the landscape but it is time for a reassessment of its role and that must encompass all elements of on demand free, not just Spotify.

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.

Why It Is Time To Make YouTube Look Less Like Spotify And More Like Pandora

2014 has been a dramatic year for the music industry and may prove to be one of its most significant. The brief history of digital music is peppered with milestones such as Napster rising its head in 1999, the launch of the iTunes Music Store in 2003, Spotify in 2008. The 2014 legacy looks set to be more nuanced but equally important: it is the year in which streaming started to truly transform the music industry. The significance though lies in how the music industry is responding. With download sales tumbling, royalty rates still being questioned, and Taylor Swift’s hugely publicised windowing, the music industry is taking a long hard look at what role streaming should play. Spotify and Soundcloud will find themselves in the cross hairs, but there is also a case for redefining YouTube’s remit too.

Don’t Throw Out Freemium With the Windowing Bathwater 

Swift’s windowing move centred around free streaming. If Spotify had been willing to treat the free tier as a separate window from its paid tier, the odds are it would have got ‘1989’. Spotify’s argument that weakening the free tier could affect their ability to convert is logical. But ultimately the purpose of the free tier is to persuade people to pay to stream, not to deliver a fantastic free experience. I first made the case for windowing back in 2009 and I remain convinced it will be crucial to long term success.

By playing an all-or-nothing negotiating game freemium services risk being left with the latter. And it would be a tragedy if freemium got thrown out with the windowing bath water. Windowing will quite simply make free tiers more palatable. Windowing can drive huge success. Look at Netflix: with 50 million subscribes gloably Netflix has the traditional broadcast industry running scared yet is far more heavily windowed than Spotify – how many new movies do you find on Netflix?

One Rule For YouTube Another For The Rest

But the core problem is that Spotify does not exist in a vacuum. While Swift windowed Spotify her videos stayed on YouTube and Vevo. Unless YouTube is treated with a similar approach to other free services then any windowing efforts will simply drive more traffic to YouTube rather than drive more sales or subscriptions. 5 years ago a YouTube stream could be seen as driving sales, now a YouTube stream drives another YouTube stream.

Among the Top 10 fastest growing YouTube channels (in terms of views), half are music. More people are streaming more music on YouTube than ever. The reason YouTube remains untouchable has much to do with the fact labels still see it as a promotional vehicle despite the fact it has become a fully fledge consumption platform. Without doubt YouTube plays the discovery role for youth that radio does for older generations. But it is also the end point for youth.

Time For A New Role For YouTube

So what is the solution? Simple. If YouTube is the radio equivalent for youth, make it look and feel more like radio, not like Spotify premium with video. Instead, make YouTube look like Pandora with video. If YouTube is all about promotion then swap out unlimited on demand mobile plays for DMCA compliant stations. Let any user search and discover a new song but once they have discovered it the next few music videos are automatically selected related videos.

I remember Beggars’ Martin Mills quoting music industry veteran Rob Dickens:

‘If you play what I want when I want I’ll accept it is promotion. If it is what you want when you want it is business.’

That is at the core of what makes a streaming service additive versus substitutive. This is why Pandora stands out as a complement to ‘sales’ revenue and why YouTube no longer can. If YouTube’s core value to the music business is still discovery then this approach is how that role can be protected without damaging the ability of subscription services to proposer.

Do Not Conflate Music Key With YouTube

Now of course, YouTube has its own subscription service too in the form of Music Key, which is great: YouTube is a hugely welcome addition to the subscription market. But this does not mean YouTube music videos should be free on demand to all. Only 3% of UK and US consumers say they would pay for Music Key (and consumer surveys typically over report on intent to purchase).   Instead, YouTube’s free on demand music videos should be only available for users that register for Music Key. This would be Music Key’s freemium base, not the entire installed base of YouTube users.

With on demand free music it is all about the conversion path: how many of those consumers that listen for free are likely to pay. With YouTube’s 1 billion users it is a tiny per cent so there is little business rationale for letting them take the Ferrari out for a test drive when they are only ever going to get the bus.

Is 9.99 too expensive for most free music users? Of course it is. Should PAYG options be added in to the mix? Yes, absolutely. But none of those will work unless the music industry takes a consistent and fair approach to freemium.

Turning YouTube into a video enabled Pandora is clearly a controversial proposal and it will have huge opposition. It may even cause some meaningful disruption in the mid term, but unless equally meaningful change is made the music industry will remain locked on course to a future in which subscription services will never be able to realise their full potential.

How Data And Mobile Apps Shape Spotify’s Quest For Profitability

Spotify’s has announced the 2013 financial results for its global parent company. The headline is a -12% operating loss, down from a -19% loss in 2012. The numbers are in stark contrast to the small operating profits recently reported in Spotify’s UK and France subsidiaries. Both were able to do so because only a portion of Spotify’s costs reside in those businesses. This raises the interesting point of Spotify making efforts to report an operating profit where ever it possibly can to help build an evidence base that its model is sustainable. Which contrasts sharply with Pandora’s prolonged efforts to do what it can to not make a profit in order to help its rate lobby efforts.

Having spent the last few weeks knee deep in a client project exploring the profitability of digital music services I had a stronger than usual sense of ‘told you so’ when Spotify’s numbers came out. The headline of rights costs being the large cash drain on the subscription business model is well known, but there are other accelerating costs that are less well known. Spotify’s research and development costs rose by 92% between 2012 and 2013.

Music services find themselves running to keep up in the mobile world. Mobile apps are how the vast majority of subscribers interact with streaming services yet mobile app development is only an ancillary competence of subscription services. Unlike a King.com, a Supercell or a Mojang, Spotify’s core operating structures are built around cloud distribution, content management and music programming. Spotify and other subscription services are now having to develop mobile as core competence too and the rapid rate of innovation and change in mobile experiences mean that this more resembles an arms race that it does a standard operating cost.

The other big change is data. Streaming services generate vast quantities of usage data and making sense of that data is an ever more important task for streaming services of all kinds, not just music. Netflix spends $150 million on recommendations alone and has 150 staff just for this single data driven task.   Call it ‘big data’ if you will, but managing large data sets effectively is crucial to the success of streaming services for everything from managing churn through to rights holder reporting.

The key takeaway? Scale will definitely help streaming subscription services move closer towards profitability (as Spotify’s narrowing loss attests) but costs are also going to continue to rise for any streaming service that takes competencies such as app development and data intelligence seriously.

Spotify, Apple, YouTube And The Streaming Pincer Movement

The Financial Times yesterday reported that Apple is planning on integrating Beats Music into an iOS update as early as the first quarter of 2015. Which means the entire base of Apple’s 500 odd million iOS devices suddenly become Apple’s acquisition funnel. As I wrote back in May, this was always the strategy Apple was most likely to pursue. Of course being available to 500 iTunes customers is not anything like converting them all. Just ask U2. But it does give Beats Music – if Apple keep the name – a reach like no other subscriptions service on the planet. Especially if Apple is willing to roll out free trials to them all.   Currently just 8% of consumers in the US and UK have experienced a subscription trial, which translates into approximately 30 million people. Even if Apple does not quickly succeed in taking subscriptions to the mainstream it is about to take subscription trials to the mainstream, which is the crucial first step.

streaming pincer

Add this to YouTube’s recently announced Music Key subscription service, which should be aspiring to get 5 million or so subscribers in its first year to be considered a success, and a picture emerges of Spotify squeezed in the middle of a streaming pincer movement (see figure). In the near term Apple will be hoping to win back a lot of its lost high spending iTunes customers from Spotify. Longer term it will be looking to grow the market.

None of this means anything like the end for Spotify. Instead it will force Spotify to up its already high quality game. Competitive markets thrive far more than ones in which one or two key players dominate. It could mean that Spotify’s potential flotation or sale value is tempered for a while, which could push out Spotify’s exit timelines until it has proven its worth in a more competitive marketplace. But Spotify has the distinct advantage of being a) the incumbent and b) a pure play. Spotify, Deezer and Rhapsody are all in this game simply for music. That means each and every one of them has a laser focus on making the best possible music service proposition they can. The same is quite simply not the case for either Apple or YouTube. They will need to leverage that asset in their conversations with rights holders to ensure they are given more flexibility in terms to drive true marketplace innovation and experimentation.

subs numbers 11 14

But Spotify et al would be foolish to underestimate the scale of the challenge they will face. Apple has the largest installed base of digital music buyers on the planet (see figure). As creditable as Spotify’s 12.5 million paying subscribers is, it pales compared to Apple’s 200 million iTunes music buyers. Also Apple has many additional assets at its disposal. Integrating into iOS is just one tactic it can employ. Spotify et al depend on Apple’s platform for much of their survival. But there is no reason Apple has to play truly fair. Amazon set a platform precedent with its treatment of Hachette that Apple will have been watching closely. Don’t expect anything too obvious, but little tricks like tilting app store optimizing in favour of Beats over Spotify can go a long way.

Things are hotting up, no doubt. But Apple’s arrival in the subscription market will take the sector to a whole new level, and a high tide should rise all boats.