Digging Into Spotify's Numbers

Spotify’s recently published accounts for 2009 show that the service lost over £16 million during the course of the year. But do these numbers actually tell us anything new? Not really.

Spotify has proven that free music products are hugely popular and are the route to mass-market music customers. But Spotify’s experience has also shown us that you can’t make free music pay. The ad revenues just don’t cover the rights owners’ license fees.

And bear in mind that 2009 was Spotify’s first full year open for business. Total free users averaged 780,000 in 2009. The average for 2010 (up to September) is over 8 million. So the costs will be much higher. On the other side of the equation, paying subscribers averaged 140,000 in 2009 but grew to an average of 430,000 in 2010.

Though the premium numbers are much smaller, they have a disproportionately large impact on Spotify’s bottom line. Based on the 2009 costs of £27.7 million and the 780,000 average user number, each free customer cost Spotify in the region of £30 (or £20 based solely on cost of sales). But a premium subscriber, subscribing for an entire year, brings in £120. Even if they just subscribe for six months, a premium customer still brings in £60. (And yes, for the purposes of this blog post, I have heavily simplified the maths!)

Which all brings me back to my starting premise: these numbers don’t tell us anything new. They confirm that the economics of free don’t add up, but that free music in the context of a freemium model can work: that as a driver of premium revenue, free music services don’t need to convert anything close to a majority of their free customers to paying in order to push towards a profitable business model.

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Disruptive Renewal

This morning I had the privilege of keynoting Forrester’s EMEA Marketing and Strategy Forum.

My keynote introduced a new stream of research we’re developing in the Consumer Product Strategy role: Disruptive Renewal.  We also today published our first report on the topic, which Forrester clients can download here.

The basic principle of Disruptive Renewal is that connected device adoption and the broader digitization process are permanently and irrevocably changing the way in which customers interact with products and services. Media industries were on the bleeding edge of these trends, causing what we have called the Media Meltdown, a painful transition that put audiences in control and permanently disrupted media company business models and products.

It is now clear that the same digitization process will eventually transform all industries, that companies lose control of their customers when new technology enables them to interact with products on their own terms.  Revenues are threatened. Either these companies harness the technology to build new products and services or they fail. 

We call this process Disruptive Renewal, and though it often happens swiftly, it doesn’t happen at once.  Instead it falls into three key stages (see graphic below):

Disruptive Empowerment: when new technology enables customers to make choices about how they interact with products.  Think, the rise of the Internet, of home broadband, of smartphones, of the iPad.

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Why The Beatles On iTunes Really Isn't A Big Deal

[Disclaimer: I’m going to spend as many (i.e., few) words writing about this development as it deserves.]

So finally Apple gets the Beatles catalogue Steve Jobs has been pining for.

Thank goodness that is out of the way; now we can focus on important developments.

The fact that securing the content of a band old enough to be most young music fans’ grandfathers (and some) is a sad reflection of the state of the digital music market.

Yes, it will be a success. Yes, we’ll have numerous Beatle #1’s (probably including at Christmas).  But that’s just further depressing evidence of the old geezer skew of digital music buyers.

The digital music market (and the young music fans that record labels desperately need to get engaged) needs new music products, not yesteryear’s hits repackaged.

So, congratulations Steve on finally getting your Beatles catalogue; now can you please turn your attention to innovating your digital music services.

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For those of you who have come here to defend the fab four's musical legacy I am reposting my comment from deep in the midst of the comment torrent...

 

To be clear...

...my blog post is not about the Beatles, it is about the digital music market. (Some of you did pick up on this).

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We7 And TDC: Two More Steps On The Path To Transformational Innovation

It’s becoming clear the music industry’s product strategy needs an overhaul.  CD sales are continuing to tank, download sales are slowing, and subscriptions remain stuck in a niche.  The problem is worsened by the fact that the investor and start-up communities are wising up to the fact it is increasingly just not worth the effort to launch a store or service that requires costly – often crippling – rights licenses. 

Perhaps the greatest fault with the music industry’s product strategy was its failure to harness the disruption of free quickly enough.  By the time it did begin to, far too many customers had already been lost.  Regular readers will know that I firmly believe the record labels’ best hope is a radical and ambitious strategy of transformational product innovation which embraces the disruption.  That disruption takes three key forms: free, social and interactivity.

Against this backdrop, I was intrigued to see two developments which come at the problem from different directions.

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Aha! Alan Partridge Heralds A New Era Of Branded Online Content

I was delighted to see that Alan Partridge, one of my favourite comedy creations, is back. Steve Coogan’s cringeworthy Norfolk-based DJ hasn’t been on TV for eight years but will be starring in a series of Web-only shows sponsored by Fosters. They look like being the flagship content for a comedy-themed branded online channel, www.fostersfunny.co.uk. Aficionados will be interested to know that Alan is now plying his trade as a mid-morning DJ on “North Norfolk Digital.”

Webisodes were all the rage a couple of years back when the social network Bebo, among others, commissioned series such as Kate Modern, with funding from sponsors like Ford and P&G. But even though budgets were a fraction of TV budgets, the sums didn’t add up, and the nascent trend was all but killed off by the economic downturn. So, it’s intriguing to see that major talents such as Coogan (who recently co-starred opposite Will Ferrell in The Other Guys) and co-creator Armando Iannucci (a BAFTA winner for the fabulous The Thick Of It) have turned to the Web to revive perhaps their best-loved creation for 12 11-minute episodes. Presumably, there was a decent — if entirely justified — financial incentive to do so. Set against the cost of TV airtime, though, Fosters may have nabbed itself a bargain.

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