Quick Take: Apple Music Comes To Android

I just published a post over on MIDiA on why Apple Music has launched on Android. You can read the post here.

I’m going to continue to blog as usual here, especially the bigger think pieces – there’s one on next-gen labels coming tomorrow, but I’ll be using the MIDiA blog for more of the news-led quick takes.

We’ve launched a weekly MIDiA newsletter too which you can sign up to by adding your email in the box on the right hand side of our blog home page here.  The newsletter comes out each Monday and includes analysis, research and data on music, online video and mobile content.  Newsletter subscribers also get a free 28 page MIDiA report ‘The State Of Digital Music’.

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.

User Centric Licensing: Making Streaming Work For Everyone

Artist income is one of the most pronounced growing pains of the streaming era.  While there are many contributory factors, such as transparency and non-distributable label payments, the most significant element by far is how much artists get paid.  There are many moving parts to the equation, not least of which is how much labels themselves choose to pay artists, but even if labels doubled their payments to artists (which would be a good starting point for artists on 15% deals) the underlying dynamic would remain unchanged.  Namely that consumers are switching from buying music (which generates large upfront payments) to accessing it (which generates smaller payments spread over a longer period that as things stand look like they could still add up to smaller amounts even in the longer run).  If you’re a big super star artist or a major label this doesn’t affect you much as you get such a large chunk of the headline revenue.  But a new approach is needed for the rest.  Enter stage left the case for user centric licensing.

Under the current licensing model artists get paid on an ‘airplay’ basis i.e. what share of the total plays across the entire service the artist accounts for.  This model can skew the revenue balance to the superstars who will get played by a very large share of the user base of a service.  Under a user centric model an artist would get paid based on the share of an individual’s listening.  So if a user spends half their time listening to an underground techno producer, half of the royalties go to that producer.  In the existing model that producer would only get a tiny fraction of the royalties generated by that user.

user centric licensing

Let’s take a look at how this could work (see figure).  If a subscriber listens to Artist B 55% of the time but that artist only accounts for 0.5% of total listening, only 0.5% of the available royalties for that subscriber make it back to the artist.  Whereas Artist A who the user didn’t listen to at all gets 10% of the royalty income.  But in a user centric licensing model the artist would get 55%.  The revenue changes from a paltry $0.004 to a more meaningful $0.49 (assuming a 15% royalty share from the label).  And Artist A gets a fairer zero income for zero listening from that user.

Make no mistake, this model will be very difficult to license and the vested interests would likely resist it.  But until we get to scale with subscriptions, we need to explore all ways of ensuring revenues are distributed on as equitable a basis as possible.  This approach won’t fix all the artist-income ills of streaming but it will help smooth the transition.

I’m not going to pretend to take credit for this concept, it’s been quietly gaining momentum for some time now and the Trichordist has been building the case too.  But now is the time to really start giving this approach some serious consideration.  And if the incumbent streaming services are unable to implement user centric licensing because they are too close to the superpowers, then this is an opportunity for a new streaming service to seize the initiative and start to make some meaningful change.

I’m attaching the excel of this model so please go and stress test it yourself. Let me know your thoughts below.

MIDiA Research – User Centric Licensing Model

Apple Music And The Listener-to-Buyer Ratio

The next 6 to 12 months could prove to be some of the most disruptive record labels have ever experienced, and nowhere will this pain be felt more than among smaller independent record labels with strong digital sales.   At the heart of this disruption will be Apple Music and the wider continued ramping up of streaming. If Apple Music is a success over the coming year it will do one or both of the following:

  1. It will convert / cannibalize non-subscribing download buyers
  2. It will convert / cannibalize existing subscribers

The probability is that it will do a bit of both with an emphasis on #1. The market level net impact of #1 will depend on the degree to which Apple converts lower spending iTunes buyers versus higher spending ones i.e. whether it increases or lowers the average spend.   But even if it is the latter the effect for smaller labels could still be net negative over the coming year. If you are a big label with hundreds of thousands or millions of tracks then you have enough catalogue to quickly feel major revenue uplift from 5 or 10 million new subscribers. If you only have a few hundred or a few thousand tracks though then the picture is less rosy.

The Listener-to-Buyer Ratio

At the core is the listener-to-buyer ratio i.e. how many new listeners you get for each ‘lost’ buyer. Let’s say that for every download sale lost due to an iTunes customer becoming an Apple Music subscriber transforms into 10 listens by 3 people within 12 months. So 30 streams instead of one download. The listener-to-buyer ratio here is 3:1. A generous assumption perhaps but let’s work with it. Against a base of $25,000 of download revenue that would translate into $6,250 less download revenue and $2,365 more streaming revenue. So a net loss of $3,885, a 16% decline.

If we reduce the average plays to 5 per user the revenue decline becomes 20%. In order for the revenue impact to be neutral the total new streams would have to be 80, which with a listener-to-buyer ratio of 3:1 would require each person to stream the track 27 times. Or alternatively a 8:1 listener-to-buyer ratio with 10 plays per user would also deliver no change in revenue. A great track could feasibly have an average of 27 plays per user per year, a good track could have 10. But an average track is going to be below both. So realistically, more than an 8:1 ratio is going to be required.

Scale Looks Different Depending On Where You Are Sat

What quickly becomes apparent is that the most viable route to ensuring Apple Music streaming revenue offsets the impact of lost iTunes sales revenue is as big an installed base of streaming users as possible. The more Apple Music users there are, the more likely more of them will find and listen to your music. This is why the scale argument so is so important for streaming and also why small labels feel the effect less quickly. If you have a vast catalogue you don’t need to worry too much about the listener-to-buyer ratio because you have so many tracks that you are a much bigger target to hit. The laws of probability mean that most users are going to listen to some of your catalogue.

Let’s say you are a big major with 1 million tracks out of the 5 million tracks that get played to any meaningful degree in streaming services. That gives you a 20% market share. But if you are an independent with 50,000 tracks that gives you 1%, 20 times less than the major. Which means that you are 20 times less likely to have your music listened to. And that is without even considering the biases that work in favour of the majors such as dominating charts and playlists, and other key discovery points. So in effect the major record label in this example could be 30 to 40 times more likely to have its music listened to. Which is why the listener-to-buyer ratio is unlikely to keep the major label’s exec up at night but could be the difference between sinking or swimming for the independent.

In all probability Apple Music will make streaming revenue a truly meaningful income stream for all record labels but in the near to mid term big record labels are likely to see a very different picture than the smaller independents.

Why The Next Few Months Of Apple Music Will Throw Up A Few Surprises

Finally Apple is in the streaming game. Other than to say that it looks like Apple has made a big first step towards making streaming ‘ready for primetime’ and to becoming a music platform I’m not going to add to the list of reviews and first impressions, there are plenty of good one’s like Walt Mossberg’s.   Instead I’m going to run through a few of the likely milestones and unintended consequences that we could see over the coming months.

Expect Impressive Numbers Real Soon

As we revealed on our MIDiA Research report on Apple Music back in March 28% of iOS users stated they were likely to pay for the service. Among downloaders the rate is 39% and for existing subscribers that rate rises to 62%. Consumer surveys of course always over-report so we shouldn’t expect those rates of paid adoption but the relative values are interesting nonetheless. Given that 50% of existing subscribers are iOS users the implications are that a big chunk of Spotify et al’s subscribers will at the very least try out Apple’s 3 month trial, which is plenty enough time to get build a comprehensive library of playlists and to get hooked. But there is also going to be a big wave of downloaders that do not currently subscribe that will try it out. Given how the iOS 8.4 update virtually pushes iTunes Music users into starting the trial on updating, expect pretty widespread uptake of the trial.   Apple reached 11 million users for iTunes radio within 5 days of launch, 21 million within 3 months. Apple Music has had a far bigger build up and is much more deeply integrated into iOS so a fairly safe bet is that those numbers will at the very least be matched.

A Mixed Bag Of Royalty Implications

Apple Music will also have a series of aftershocks:

  • Apple royalties will be a mixed bag: As the ever insightful David Touve pointed out with iTunes Radio, Apple has proven adept at striking licensing deals that appear to pay above market rates at a headline level but that in practice can work out lower. A key reason for this is the fact iOS users’ existing music collections are integrated into the service and plays from these will generate much lower per stream rates, more in line with licensed locker services. Add into this the fact that semi-interactive radio and broadcast radio are part of the proposition (both of which also have lower per stream rates than on demand) so the blended per stream rate may disappoint. Expect a stream (pun intended) of irate artist CD Baby statements showing their Apple per stream rates.
  • Download sales will suffer: If a streaming service does its job properly users should have no reason to buy downloads any more. Initially there may be a mini surge, a dead cat bounce as first time streamers discover new music and buy downloads out of habit. If this happens expect Apple to make a song and dance about it. But that will be a temporary phase. iTunes downloads will decline thereafter. Artists may have complained about theoretical lost sales from Spotify, they will be actual lost sales from Apple. What everyone will be hoping for is that enough lower and infrequent spending download customers get transformed into 9.99 a month customers. But that will take more time. So expect three, possibly four key stages to Apple (lower case ‘m’) music revenue: 1 – mini revival; 2 – sharpish decline; 3 – steady recovery; 4 – growth?
  • Spotify per stream rates could go up: If enough existing subscribers take up the Apple Music trial but don’t cancel their subscriptions, the royalty pot for Spotify et al will remain the same but play volumes will decrease. This means that the per stream rates for Spotify and co could actually increase for a while because the revenue will be split across a smaller number of plays. So expect artists to see a very pronounced, albeit temporary, difference between what Spotify pays from (paid) streams versus Apple.

So Apple will be for once upsetting everyone else’s streaming apple cart with its long anticipated entrance but there will be a superficially confusing set of mixed messages and metrics. Which means the time to properly measure Apple Music’s progress will be 6 months or so from now. Until then expect to be simultaneously impressed, concerned and confused.

Taylor Swift, Streaming And The Changing Tide

Taylor Swift made big waves over the weekend with her open letter to Apple protesting it should pay for its 3 month free trial.  Her voice was just one more following protests from across the indie community of which Swift and her label are both members. But it turned out that her voice was the loudest and Apple’s Eddy Cue swiftly announced a u-turn on Apple’s free trial pay outs. This is just one more twist in the much bigger streaming story but it does highlight some interesting dynamics, not least of which is how Swift’s worldview differs from many of her contemporaries.

Taylor Swift’s Sales Outlook Is Surprisingly Old School

As paradoxical as it may sound for such a digitally savvy artist as Taylor Swift, she is in fact from the old school when it comes to recorded music.  Swift started her career so early – she signed her first label deal when she was just 14 years old – that she is effectively further into her recording career than most successful 30 something artists.  So she is an album era artist who, with her label Big Machine, managed to build a long-standing successful music sales career.  Streaming, with all of its substitutive impact on sales, does not fit well with the Swift / Big Machine model.   In many respects Swift’s recorded music worldview has more in common with artists of Coldplay’s generation than it does hers.  The contrast with successful contemporary mainstream pop artists is stark. The take of Ed Sheeran (who is just one year younger than Swift) on the role of recorded music is “I’m in the music industry to play live. That’s why I make records” while Calvin Harris (currently romantically linked with Swift) is famously a co-owner of streaming platform TIDAL.  Both of those artists have been supremely successful on Spotify and neither has a decade of platinum selling albums behind them.  For them, streaming is simply how it is and they are learning how to make that work.

Streaming Is Fundamentally Substitutive

None of this is to belittle the hugely disruptive impact of going from a sales model which guaranteed up front revenue to an access model where revenue is fractionalised over many years.  In the sales era a purchased album generated $10 of gross revenue whether it was listened to once or a thousand times.  In a streaming service an album that is listened to once generates $0.10 and only reaches $10 when listened to a hundred times.  If you are a superstar artist you can probably swallow the near term pain because a) your streaming volumes are in the billions so the pennies add up and b) you make the majority of your money from playing live.  If you are a smaller artist the outlook is bleaker for getting through the transition period i.e. until streaming services are big enough to ensure a high tide rises all boats.

Live Is Where The $$ Are For Superstars

Interestingly for Swift, for all her sales success, live is also where she makes her money.  She ranks as the highest earning artist on Billboard’s top earners list with $39 million but $30 million of that came from live.  She explains in her post that “[I] can support myself, my band, crew, and entire management team by playing live shows” and that she is raising her voice for “the new artist or band that has just released their first single”.  This may well be the case but she is also very much doing this for her label Big Machine Records (which doesn’t get to benefit in any truly meaningful way from Swift’s live revenue).   Swift’s rise to prominence and continued success is intrinsically linked to that of her label Big Machine Records and it is fully understandable why she has been so perfectly aligned with Big Machine’s stance on streaming.  But it is a position nonetheless.

Apple Doesn’t Need Any Commercial Bail Outs To Launch Apple Music

None of this though detracts from the core issue at stake here, namely Apple not paying for a 3 month free trial.  Apple is in the business of selling music in order to sell hardware.  Apple’s primary concern is not what % of iTunes sales become substituted by free trials (near term) and subscriptions (long term) but instead how it helps them gain and retain device buyers. Swift, Big Machine and the rest have very good reason for being very cautious with Apple’s streaming strategy.  Apple is the leading source of digital music sales and accounted for approximately $2.8 billion of music sales revenue in 2014, or 40% of all digital music revenue.  If Spotify messes up a free trial the labels risk slowing the rate of new streaming revenue growth.  If Apple messes it up the money that keeps the lights on is at risk.

Apple doesn’t need any financial assistance in launching Apple Music (it does after all have $178 billion in cash reserves) but it does need careful attention from labels and artists alike to ensure it gets the strategy right. Whatever the outcome though the streaming transition is an inevitability and Taylor Swift is no more able to hold it back than King Canute was able to hold back the tide.

Apple, The Indies And The Rise Of The Digital Monopsony

Much of the independent label community have come out in public opposition to Apple’s request for a 3 month free trial that crucially would not involve any royalty payments to labels. Besides the fact this has revealed inconsistency in major label licensing strategy (some services have to pay royalties for their free trials) it also raises questions about Apple’s growing role as a content platform. In the old model (i.e. selling CDs on the high street and mall) retailers held all the power, charging labels for prime placement, priority shelf space and carving out additional commercial benefits such as breakage (whereby they were given a discount on a set assumption of a % of shipments that would break in transit, even if they didn’t). In the old new model (i.e. where we are now) the power shifted to the labels with music stores and services having to pay advances, minimum guarantees etc. in order to sell the labels’ content. Even breakage got reinvented and turned into a commercial benefit for labels (they get paid for under usage of services). Now a new model is emerging where a few big platforms are beginning to exercise the power they have been quietly building for the last half a decade or so.

Apple, Amazon And Google – The Digital Superpowers

Apple, Amazon and Google are all digital content platforms. They each own the customer, control billing, know everything about him/her, control some or all of the hardware and have a diverse portfolio of content assets. Each has also become super important to media company partners. For music labels Apple has become the dominant source of digital retail revenue, Amazon the dominant source of physical retail revenue and Google the dominant digital discovery platform. Each holds the whip hand in their respective area of dominance. Now they all want more. They may each want slightly different things but none are shy of wielding their respective spheres of influence to get to what they want. This is where the indies’ dispute with Apple comes into play. Apple is in the business of music in order to sell hardware and has known for a number of years that streaming is going to be how it transitions that role in a post-download world. It has thus far taken a very responsible approach to its sales role and has been sensitive to the risk of decimating label revenue if it does not time its streaming transition properly. But the first step on that journey has now been taken and the point of no return is fast approaching. Which is why it is crucial that all rights holders have the right agreements in place and which is why the indies are making the noise they are.

The Power Of The Platform

In an echo of Google’s heavy-handed YouTube Music Key negotiations with indies and DIY artists, one independent artist has claimed that Apple has threatened to remove his music from the iTunes Store if he does not allow his music to be used in the free trial. Whether this is true or not (and it may well not be) is almost not the point. What it highlights is Apple’s power as a platform. Artists and labels alike simply cannot do without iTunes revenue. Whether Apple needs to overtly play the card or not, the implication of the veiled threat is clear. And Apple is not exactly alone. Last year Amazon clashed with book publisher Hachette over eBook pricing and during the dispute employed a number of pressure tactics including: refusing to take pre-orders on Hachette titles, placing a 6 week delay on delivery of them and even pointing users to competitor titles when they searched for an Hachette book. All of these were clear misuse, possibly even abuse, of Amazon’s role as distribution platform but no regulatory body even raised an eyelid. Apple will have watched the development with acute interest.

The Rise Of The Digital Monopsony

Apple, Amazon and Google are all unique cases. They have become de facto monopolies for their respective sectors, exercising control over the entire platform of user, supplier and interaction between them. There isn’t really an economic term that properly explains them but monopsony is the closest: a company that is the only effective buyer and seller of a product and can thus dictate terms at both ends of the equation. These digital monopsonies are growing pains of the digital economy. After all, we are still in the very early stages of the digital economy. If this were the industrial revolution Robert Stephenson wouldn’t have developed the steam locomotive yet. Consider this phase market adolescence. This raises challenges for regulation with regulatory bodies largely unable to deal with companies that exercise effective monopoly power but that do not meet the criteria of a pre-digital era economy monopoly. Of course the indie labels cannot afford to wait for that dynamic to change so in the meantime they must seize the initiative in this issue and others like it.

An Opportunity To Change The Narrative

Right now though the indies have an opportunity to use this case to genuinely move the needle. Apple has pushed them out of their comfort zone. Instead of just digging in their heels they can decided to push Apple out of its comfort zone and request something similarly game changing of Apple in return. In short, turn a defensive move into an offensive one and help set the agenda rather than being stuck in the familiar rut of responding to the one set by the major labels and Apple. Apple Music may have underwhelmed at launch but the company still has the most important music monetization platform on the planet. Most indie labels and majors alike would all but collapse if iTunes revenue disappeared overnight.

Right now Apple still wants to play the role of good partner, albeit one that negotiates hard. So the labels still have a chance to help shape what the next chapter in Apple’s music story can look like. That may not always be the case, especially if Artist Connect has developed into a label like service layer 3 years from now, which I suspect will be the case. Apple is no Google, it still wants first and foremost to sell music rather than give it away. That may not always hold true.   Similarly the power of the digital monopsonies will likely strengthen over the coming half decade or so. So right now the indies are probably in the strongest position they will be in for some time, even if it might not feel like it to them. They need to seize this moment.

Spotify Plays The Big Numbers Game

Hot on the heels of Apple’s less-than-dazzling entrance into the streaming market Spotify made two big announcements: a further $526 million in funding and 20 million paying subscribers with 55 million free users. Not a bad retort.

spotify 20 million

Subscriber Growth Outpaced Free User Growth, Depending On Which Metric You Use

Between December 2014 and June 2015 added an average of 2 million free users a month and 1 million paid users a month. Although this meant Spotify’s free user base added twice as many users (10 million compared to 5 million) paid users grew faster in percentage terms, increasing by 33% compared to 22% for free.   These numbers can, and will, be taken to support both sides of the freemium argument and things are complicated by the fact that Spotify’s free user base is probably higher than 55 million. However the key takeaway is that based on the publically available numbers subscriber growth was faster than free growth in the first half of 2015.

Spotify Is Now Worth More Than Half Of the Entire Global Recorded Music Industry

Spotify was already the most heavily financed music service in history and it has nearly doubled its total investment in one single round, taking the total to more than $1.1 billion with a valuation of $8.5 billion. That translates to $55 of investment per subscriber. Or on a valuation basis $425 per subscriber which would take 3 and half years of continual subscription per subscriber to recoup in headline revenue terms. However as Spotify only gets 30% of revenue it would actually need 12 years of subscription per subscriber to generate $8.5 billion.

Of course VC funded company valuations are more about potential than they are realised value so the comparisons are slightly unfair. But given that $8.5 billion represents 57% of the entire global recorded music industry revenue in 2014 there are some pretty big assumptions being made.

Apple Music Is Still Likely To Prove A Fierce Adversary Even If It Is No Killer App Yet 

Make no mistake, Spotify has established itself as the global leader in its space and has good reason to feel confident. However Apple has so many structural advantages (owning the platform and billing relationships, massive addressable base etc.) that it is still likely to become the global streaming leader 3 years or so from now. (Assuming of course it ups its game from its entry product.) But that does not mean Spotify cannot be a success too.

Apple entered the download market when none of the existing stores had any meaningful customer base. Even with that supreme head start Apple still only managed around a 65% global market share of the download business. Granted most of the competitors were bit part players but in the streaming arena it is entering an established market with proven customer bases. This will not be a winner takes all market and I fully expect Spotify to be closer to Apple than Deezer (the current #2) is now to Spotify.

These are big numbers from Spotify that prior to Apple’s announcement it probably thought it would need even more than proved to be the case. Regardless, both sets of figures show that Spotify is geared up for a fight for supremacy. Game on!

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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