MIDiA Exclusive: 7digital Acquires Leading Competitor 24-7

UK music services provider 7digital today announced they are currently considering the acquisition of longstanding competitor 24-7 from German retail giant MediaMarktSaturn (MMS).  24-7 is one of the longest standing companies in the entire digital music space, founded in 2000 (MMS took a majority holding in 2009). In a marketplace where the average life span of a digital music start up is 5.5 years, 24-7 is a veritable veteran and powers one of the very first telco music services: TDC’s Play. 7digital takes full ownership of 24-7’s business and its existing music service customers, including Play and Saturn’s Media Markt.

Market Consolidation

2016 was a year of consolidation in the white label services space, with Omnifone going into administration and Medianet getting bought by SOCAN. 7digital’s acquisition of 24-7 further concentrates the market. With the growing brand strength of streaming services like Spotify and Tidal, telcos have been increasingly looking to partner with those brands rather than build their own. Which was one of the key drivers of market consolidation. Those companies that have weathered the storm, of which 7digital is clearly one, have done so by diversifying away from telcos. For example, in 2016 7digital powered French retailer Cdiscount’s streaming service Cstream.

Sleeping Giant Retailers

That is not to say that opportunity does not still exist in the telco sector, it does, but a successful white label services provider now has to have a much more diversified client and product portfolio. Retailers will be a big part of that mix going forward. Especially so in markets where CD sales still account for a large portion of music sales. Germany, just and so happens to be the world’s 4^th largest recorded music market with 59% of its sales physical in 2015. So powering the music service of the country’s largest CD retailer has clear potential. Add into the mix the fact Media Markt is also the leading consumer electronics retailer with a very large base of online user accounts and the tantalizing prospect of an Amazon Prime / Echo type proposition emerges, should they ever decide to go down that route.

Powering The Next Generation Of Spotifys

Another real area for growth for companies like 7digital is giving pure play services a head start in the streaming race. Bringing a streaming music service to market is no easy task and many a start up finds itself 2 years into its journey wishing it had realised just how complex a business multi-territory music licensing actually is. By bringing licensing, tech knowhow and infrastructure to the table, companies like 7digital should be well placed when a post-Spotify IPO / sale generation of streaming services look to come to market.

7digital is not quite last man standing in the white label services marketplace (there is already a new crop of competitors emerging such as Cylo and General Harmonics) but it is now in the clear position of being the leading player with more than a decade of track record behind it. Do not under estimate the importance of that latter attribute to rights holders and potential partners, both of whom want to have the security of working with a trusted company that is still going to be around next week.

With Spotify, Apple and Amazon all set to follow up their strong 2016 with an ever stronger 2017, there is no doubt that the streaming market is heating up. It will be down to new entrants to ensure that the market does not become too concentrated around too few players. The newly expanded 7digital will be hoping to be a key part of that puzzle.

Here’s Why The Music Industry Needs To Dump Non-Discretionary Pricing

Spotify’s 2015 UK accounts painted a vibrant picture with both profits and above average Average Revenue Per User (ARPU). However, a little caution is required before assuming all the answers to the streaming market’s woes can be found here. Firstly, only a portion of Spotify’s costs are based in the UK. For example, much of the (more highly paid) exec team is in the US and much of the development team is based in Sweden. Such are the vagaries of financial reporting for multi-territory companies. More importantly though, is Spotify’s higher UK subscriber ARPU (€6.47 per month compared to €5.20 per month globally according to the ever insightful Music Business Worldwide). On the surface this is clear success (and indeed the UK may well have a higher paid-to-free ratio). However, the main reason for the ARPU difference is the music industry’s fixation with non-discretionary pricing. 9.99 is 9.99 in the US, the UK and the Euro zone, even though each of those currencies have very different values. Especially now post-Brexit referendum.

At current exchange rates, the Euro Zone €9.99 is equivalent $10.86 and the UK £9.99 price point is equivalent to $12.18. Thus Euro Zone subscribers are paying 9% more than US subscribers while UK subscribers are paying 22% more. What makes matters even worse is that US per capita GDP (a measure of relative wealth of the population) is 55% higher in the US than in the EU and 27% higher than in the UK. So in effect that means a combined pricing ‘swing’ of 63% for the US compared to the Euro Zone and 49% compared to the UK.

In short, European subscribers are getting doubly hit by the music industry’s insistence on non-discretionary pricing for music subscriptions. While there are a host of commercial factors that can be cited in favour of the approach (e.g. it helps mitigate against currency fluctuations) there is zero customer value, unless of course you happen to be a US resident consumer.

Regular readers will know I am a long term advocate of a more sophisticated approach to subscription pricing (e.g. mid tier products and super-premium options) but before we get there, a first step should be to ensure that European music fans get a fair deal compared to their US peers. Or of course, we could try the alternative: increasing US subscriptions by 63% which would mean a $16.32 price point. Sounds crazy right? Exactly…

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

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

1 – Streaming Growth Accompanied A Download Collapse

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

2 – The Transition Follows A Clear Defined Path

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

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

3 – Thanks Are Due To Adele, Again

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

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

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

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

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. 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.

How Downloads Will Determine the Future of Streaming

There is no doubt that streaming subscriptions will play a major role in the future of digital music, but their impact is going to be far from immediate. There also needs to be great caution applied to interpreting the encouraging early signs of the advanced streaming markets and the potential impact on total music sales.

Norway and Sweden both experienced an upturn in music sales in the first half of 2013 thanks largely to the impact of streaming subscriptions, while most of the rest of the global music market continued in its struggle to return to growth after more than a decade of decline.  The easy conclusion to draw is that when streaming subscriptions take hold across the globe, music revenue grow.  While there is some truth in the argument, it is too simplistic.

An analysis of the leading streaming markets (Sweden, Norway, France, Netherlands) and the leading download markets (US, UK, Germany, Japan) – see figure one – reveals that streaming took hold in markets where downloads had not.  The markets where downloads represented the lowest share of total music sales in 2010 (before streaming really kicked off) are those that in 2013 had the rates of streaming as a share of digital music revenue.  In markets where downloads were making the biggest contribution to total music income (not just digital) streaming did not get much of a look in in 2013.  In the US and UK streaming subscriptions were in market long before Spotify and Deezer, but most digital music consumers opted for downloads and have been unwilling to switch allegiances since.  It will happen over time, but right now downloads have a firm grip and that is largely because of Apple.

When we look at the same countries plotted by streaming share against Apple device penetration we see an even more pronounced trend – see figure two.  Here the relationship is clear: streaming has taken hold where Apple has not.  In short, there was no established mainstream digital music service and streaming subscriptions filled the void.  But of greatest significance is the impact on total music revenue.  These strong streaming markets contribute just 10% to global digital revenue, even though France and the Netherlands are two of the world’s top 10 music markets.  Meanwhile the UK and US alone count for 54%.  If you factor in Japan and Germany too you have 71% of all digital music income, and within these four countries (the four biggest music markets) streaming accounted for just 10% of digital revenue.

On the other side of the equation, streaming has brought unparalleled growth in its core markets: across Sweden, Norway and the Netherlands digital revenue grew by an average of 213% between 2010 and 2013, compared to an average of just 40% across the big four markets (though Japan’s declining digital sector pulls that average down).  And of course the Swedish and Norwegian music markets both grew in 2012 and 2013 while the rest did not.

While there is not a clear cut ‘answer’ to streaming’s likely long term impact we can however draw a few important conclusions:

• Streaming will grow more slowly in markets where Apple and the download market are strong (which helps explain why growth of Spotify et al appears to have slowed in markets like the US and UK).
• Streaming can make a digital market grow more quickly than downloads can (though it does so normally at the direct expense of downloads – download sales shrank in both Sweden and Norway in 2012 and 2013)
• ‘Home turf’ counts.  Most of the big streaming markets have their own local heroes (Sweden – Spotify, Norway – WiMP, France – Deezer) – all of whom also benefited from hard bundles and marketing support from their incumbent telcos. Meanwhile Apple of course prospers on its home turf and that of the English speaking UK.
• Consumer behavior and technology are all edging towards a more access based world and it is inevitable that the download will become less important.  So although these brakes on streaming adoption exist in many markets, they will slow rather than halt the transition. Streaming will near 50% of global digital revenues by 2018.

Streaming remains bedeviled by countless issues – not least artist payments – but what is clear is that it has the ability to transform the shape of the digital music market.  And while that change may be slower to come than the Swedish and Norwegian experiences might suggest, come it will.

 

 

Q1 UK Music Sales and the Role of the Post-Holiday Surge

Today UK music industry trade body the BPI announced the milestone of digital music revenues exceeding physical music revenues for the first time. At first glance the numbers are impressive but there is important context.  Although it might appear that the UK is closing the gap on US digital music ‘channel shift’ there still remains clear blue water.

Digital revenues surpassed 50% of total recorded music sales in the US last year, but almost reached that point in 2010, level pegging physical sales on 49% at year end (performing rights made up the rest according the IFPI).  By comparison full year digital revenues in the UK in 2011 made up 35.4% of total trade revenues according to the BPI’s (invaluable) 2012 Yearbook.

The BPI’s announcement today refers to 1^st quarter data alone.  In Q1 2012 digital accounted for 55% of income at £86.5 million, up from £70 million in Q1 2011 when it accounted for 46.1% of income.  The eagle eyed of you will have noticed that even in 2011 digital’s Q1 share was markedly above the annual total of 35.4%.  Underlying this disparity is the emergence of a new wave of seasonal purchase behaviour, what I call the Post-Holiday Surge.

Christmas / holiday period sales have always been by far the most important for record labels (highlighting why it is so important that someone somewhere gets digital gifting fixed – and iTunes vouchers are not the answer).  The advent of digital has created a second wave of festive spending: after the Christmas / holiday period we now see a surge in digital sales as people fill up their brand new MP3 players, tablets and smartphones with new music.  Although because Apple accounts for c.75% of digital download sales it is probably more accurate to restate that as ‘we now see a surge in digital sales as Apple customers fill up their brand new iPods, iPads and iPhones with new music from the iTunes Music Store’. (Other digital channels such as Spotify of course play a major role in digital revenue, but less so in the post-holiday boom).

This is why Q1 increasingly over reports for digital sales.  That is not to take anything away from the numbers reported by the BPI (it is a key milestone worthy of celebration) but it shouldn’t distract us from the fact that the UK remains somewhere between 1.5 and 2 years behind the US in terms of the shift to digital.  If trends continue at their current rate the end of year digital revenue share in the UK should hit somewhere in the region of 46% to 48% i.e. pretty much where the US was in 2010.

Digital sales are growing, but still not quickly enough across the entire year.  Full year 2011 UK trade data shows that physical income declined by £84.2 million while digital grew by £55.8 million (a net loss of £28.4 million).  In Q1 2012 a very different picture appears: year-on-year digital increased by £16.5 million while physical declined by £12.3 million, a net gain of £4.2 million.

The Post-Holiday Surge phenomenon illustrates where digital needs to be performing at now and for the whole year, namely growing more quickly than CD sales contract across 12 months of sales. In the UK, Q1 is digital’s quarter, now it needs to take ownership of the entire year just like it did in the US.