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 where labels do not license directly and statutory rates are used instead, the ratio is roughly 2:1.
  • 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.

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.

Why Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

BBC Radio One DJ Zane Lowe just announced a shock move to Apple. For the non-Brits and non-Anglophiles Zane Lowe is arguably the most influential radio DJ in the UK and is renowned for being a tastemaker with an eclectic pallet. His left of centre focus and his commitment to supporting and breaking new acts has allowed Radio One the freedom to be unashamedly mainstream in much of its other output. So why does this all matter for Apple? While it is not yet clear what sort of role Lowe will assume at Cupertino it is a move bristling with significance and a clear statement of intent from Apple.

Fixing the Tryanny Of Choice

The Tyranny of Choice remains one of the biggest challenges for streaming services, namely how to make sense of 35 million songs. It has been challenge enough for the Aficionados at the vanguard of the first wave of subscription service adoption. It is a problem of far greater proportions for the next wave of subscribers, the later adopters who do not have the expertise nor intent to invest great effort into discovering new music. It is not as simple as ‘lean forward’ versus ‘lean back’. But instead gradations between the two. Beyond Apple’s inevitable Spotify-subscriber win back efforts, these early followers will be at the core of Apple’s streaming strategy.

The 6th Of March: Man Versus Machine

Spotify showed its own music discovery statement of intent when it acquired the Echo Nest on the 6th of March 2014. Zane Lowe’s final Radio One show will broadcast on the 5th of March 2015, leaving him free to join Apple on the 6th of March 2015, yes, 1 year to the day after the Echo Nest. Coincidence? Perhaps. Either way, the symmetry of Spotify making its bet on algorithmic curation and Apple making its bet on human curation is unavoidable. It is man versus machine, with Apple for once coming down on the side of flesh and blood over technology.

However expensive Lowe’s salary might be, it will be far short of the millions Spotify paid for the Echo Nest, which had burned through $25.6 million of investment to get to that point. Yet there is every chance that Lowe, used properly, could deliver more value to Apple’s music discovery than the Echo Nest can to Spotify. Don’t get me wrong, the Echo Nest is a fantastic outfit with some of the smartest music analytics people going. Along with Pandora’s Music Genome Project the Echo Nest is as good as it gets for music discovery algorithms. In fact when it comes to implementation and cool data driven projects, the Echo Nest leads the way. But there is a limit to how far algorithms can fix the problems posed by the Tyranny of Choice.

Filter Bubbles

As Eli Pariser identified in his excellent Ted Talk ‘Beware Of Filter Bubbles’ there is a risk that recommendation algorithms actually narrow our choice and limit discovery. That by continually refining recommendations based on previous taste and choice they make our world views increasingly narrow and ultimately boring. Music discovery is not simply about finding music that sounds like other music we already like. It is also about serendipitous moments of wonder when something comes at us from the left field and leaves us breathless. That is the antithesis of ‘here are three other bands like this you might like’.

Of course it would be unfair to suggest that the Echo Nest is not sophisticated enough to engineer serendipity and surprise into its discovery system. (And Spotify is beginning to double down on human curation too). But the ability of a stack of code to perform this task versus an expert tastemaker is significantly less. And, another ‘of course’, it is impossible to definitively prove this one way or the other because ultimately the results are subjective and not properly measureable. Because one person’s awesome discovery is another’s sonic tripe. But that is entirely the point of the whole debate.

People Don’t Want Discovery, Well They Don’t Think They Do

There is a fundamental problem with algorithmic discovery: people don’t want it. In numerous consumer surveys I have fielded for numerous clients, respondents show little or no interest in discovery or recommendation features. Yet in the same surveys the vast majority of them state that they regularly listen to music radio, which is of course recommendation and discovery. The big difference is that it doesn’t feel like it. Instead it is an inherent part of the DNA radio. It is not an awkward artificial appendage that most people just don’t get.

Earned Trust

During his Monday – Thursday 2 hour show Lowe will play 20 to 30 or so tracks. Listeners know and understand that these are the tiny tip of the iceberg he has sifted through that week, that these are the songs he has decided are the ones that need to be heard. And when he announces his ‘hottest record in the world’ they know it is probably going to be something pretty special, even if they might not actually like it. His audience appreciates him that way because he earned their trust over weeks, months and years. That is the asset Apple are buying. Even if he has to earn that trust all over again with a new audience, that is the model.

If Lowe was simply to push 20 to 30 songs a day to Apple users (whether that be on a radio show on iTunes Radio, as an iTunes podcast or as an iTunes playlist, or all of the above) the odds are in favour of some or most of those resonating with a large swathe of the target audience. Even if just one track blows away just a quarter of the audience each day, the impact of one fantastic discovery will have more impact than a torrent of ‘sounds a bit like’ recommendations.

30% Not 80%

An Amazon Prime executive recently said that when commissioning shows he didn’t want hits that 80% of his audience quite liked, he wanted shows that 30% of his audience loved. That is what discovery is all about. Not being content most of the time, but being blown away some of the time.   Zane Lowe is not going to solve Apple’s discovery problem all by himself, but the hire shows that Apple is putting its money on moments of human magic being the nitrous oxide in its music discovery engine.

How Rhapsody Became A Top Tier Player Again

Rhapsody today announced reaching 2.5 million total subscribers across their unlimited and UnRadio offerings. While not in the same scale as Spotify’s 15 million, it nonetheless places Rhapsody as the fourth largest subscriber base globally and approximately 10% of the global total.

Rhapsody spent most of the second part of the 2000’s treading water, never really able to break out of a solid niche of between 750,000 and 880,000 subscribers. Rhapsody was doing its best to run a sustainable business but because it wasn’t blowing vast amounts of cash on customer acquisition (either via marketing or having a free tier) it was seeing most of its new user growth cancelled out by churn. But even with this measured approach such is the nature of digital music margins that it still lost money, lots of it.

Enter investment firm Columbus Nova who acquired an undisclosed stake in Rhapsody in September 2013. A reorg and a repositioning process followed paving the way for strong subscriber growth. Rhapsody had 1.5 million subscribers one year ago. If it continues to grow at its present rate it should hit 3 million by July this year. And if it sustains that growth into the start of 2016 it could find itself the second biggest subscription service globally. Current number two Deezer appears to be slowing so 2nd place could be a realistic target for next year. Quite a turn around for a service that looked like it was falling by the wayside 5 years ago.

Rhapsody created the streaming subscription marketplace. I remember back in the early and mid 2000’s when I was a Jupiter analyst, forever trumpeting the subscription model. In fact, along with my fellow Jupiter music analysts David Card and Aram Sinnreich, we took a lot of flak for our forecasts that predicted subscriptions would be the future of digital music. Granted we made our bet the best part of a decade before the market transpired but Rhapsody was there in market doing pretty much what subscription services are doing today. It deserves credit for having created a market and now once again for a newly found relevancy in the contemporary marketplace.

Postscript: Intrigued I decided to look up one of my old Jupiter music forecasts to see how wrong I was and I had a nice surprise. In the 2007 Jupiter European Music Model I had European subscription revenue at €484.2 million by 2012. The actual number was €420.2 million. That sound you can hear is me patting myself on the back.

Why The Music Aficionado Was To Blame For Declining Music Sales In 2014

Music revenues declined by 2.9% in 2014, down from $6.9 billion in 2013 to $6.7 billion across the US, UK, France, Italy, Australian, Sweden and Norway. Much has been made of the fact that revenue fell in the Nordic markets where streaming had previously driven growth. One year’s worth of revenue numbers does not make an industry trend. The one year fall off in strong streaming markets is not proof of a fundamental weakness in the streaming model in just the same way a couple of years of growth was not proof of its strength. We are in the midst of a transition period and there will be further anomalies and blips along the way. They key reason for the volatility is the music industry’s growing dependence on an increasingly small group of consumers: the Music Aficionados. Music Aficionados are consumers that spend above average time and money with music. They represent just 17% of all consumers but a whopping 61% of all recorded music spending. These consumers shape the fortunes of the music business. In the past this did not matter so much because:

  1. So many passive majority music fans were spending strongly
  2. Aficionados were behaving predictably

Now that has all changed. Passives are sating their appetites on YouTube while Aficionados are making major changes to their buying habits. Last year 14% of Aficionados said they were stopping buying CDs while 23% said they were buying fewer albums of any kind and 23% also said they were buying fewer downloads. The 2014 revenue numbers show us just what impact these changes had. aficionado impact If we extrapolate those percentages to Aficionados’ share of spending in those markets in 2014 we see:

  • Aficionados spent $192 million less on CDs, which was 67% of the total $326 million lost CD spend in 2014
  • Aficionados spent $250 million less on downloads, which was 86% of the total $290 million lost CD spend in 2014

In total the Aficionados accounted for 76% of the lost CD and download revenue in 2014. So what’s going on? Why are the super fans jumping ship? Well first of all, they aren’t. This is a transition process. They are shifting their spending towards subscriptions. For some of them this will mean spending less (especially the 23% that stopped buying more than an album a month and are now spending $9.99 instead of $20 or $30). For others it will be an increase in spending. At a macro level though, lost download and CD spending accounted for a $617 million decline while streaming growth accounted for a $351 million gain, which means that there was a net loss of $265 million. Because the music industry has largely stabilized after years of dramatic decline, it only takes relatively minor fluctuations one way or the other to determine whether a market grows or shrinks. This is why both the Aficionado needs more attention now than ever and also why the Passive Massive needs engaging at scale. Aficionados have been taken for granted for too long and are now being migrated away from products without a spend ceiling (albums) to a product with a fixed ARPU cap (9.99 subscriptions). When the Aficionados sneeze the music industry gets a cold. It is time for a cure.

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

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

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

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

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

What Spotify’s December Growth Tells Us About Pricing

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

spotify 15 million

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

Spotify Made 9.99 Feel Close To Free 

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

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

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

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

Taylor Swift, Labels and Investors

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

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

Streaming Report Card 2014

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

Growth – 8/10

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

Transparency – 2/10

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

Platform – 5/10

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

Pricing – 3/10

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

Global expansion – 6/10

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

Sustainability – 4/10

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

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

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.