US personalized online radio provider Slacker has thrown its hat into the on-demand music ring by launching a $9.99 a month on-demand streaming music service with offline playlists. Yes, that is indeed akin to launching Spotify in the US before Spotify does. You can just imagine the grin on some of the faces on both sides of the negotiating table when Slacker tied up this deal with rights owners . . .
So, would-be US music subscription customers are now spoilt for choice, with the top-tier options including stalwarts Rhapsody and Napster, newcomers MOG and rdio, and now Slacker. The only problem is that US consumers are lukewarm about subscriptions. No US service has broken the 1 million paying subscribers mark, despite years of trying, and others have simply given up completely, including the heavily funded Yahoo Music service.
Slacker will rightly argue that it is entering the market with a differentiated mix of complementary tiers: its free, ad-supported Pandora-esque personalized radio tier is a genuine complement to a premium on-demand tier in the way that a free, ad-supported, on-demand tier a-la-Spotify is not. The former helps drive discovery and meets different usage needs, while the latter is just a watered-down version of the premium tier.
But that still won’t be enough. The premium subscription market hasn’t failed to break through to the mainstream for all these years through a lack of availability or the quality of services (Rhapsody still makes a pretty good claim for being the best programmed music service out there). The reason consumers have held back is simple:
$9.99 subscription rentals are not a mass-market value proposition.
One of the themes that we write about a lot here in the Consumer Product Strategy team is disruption. Time and time again, incumbent traditional companies fail to respond effectively to the disruptive threat of innovative competitors and/or technology and as a result find themselves either utterly destroyed or dramatically reduced. Think Nokia’s response to the iPhone, think the record labels’ response to Napster et al. The thing about the labels, though, is that they have a monopoly of control of supply, so instead of being usurped by new entrants, disruption has whittled away the best part of half of their business over the last decade or so.
Which brings us onto Google Music, which looks set to launch today with no more than a locker service. More to the point, an upload-your-music-collection locker service (with limits) rather than a point-and-match service. Which means sitting down and painfully uploading all your songs to the cloud. Sort of like the first time you ripped your CDs, except slower and more painful. Upload locker services – arguably – don’t require rights owner licenses; point-and-match services do. Licenses that service providers such as Google argue are too expensive. Thus Google has followed Amazon’s lead, bypassing label licenses in favour of a – supposedly – DMCA and Fair Use compliant service.
So with all the expectation surrounding Google’s move into music, why is this all it has come to market with? Google lays the blame firmly at the feet of the labels.
Spotify has today anounced a series of new features which the Swedish streaming service hope will position it in direct competition with iTunes. New features include a download store selling discounted playlists, playlist synching with iPods and iPhones, and turning the Spotify client into a music management tool. Have no doubt, these really do add up to competing with Apple head-on, something that few succeed at.
Apple dominates the paid digital music business, and it does so because of its device-service ecosystem. To badly misquote Bill Clinton: "It’s the iPod, stupid." The majority of iPod owners don’t even buy music regularly, but those that do still make Apple way out-perform pure-play download stores. iTunes Music Store downloads are effectively monetized CRM.
Apple has innovated its music offering so little (thus far) because:
a) What it's got has been doing a good-enough job -- up to now -- of enriching the device value proposition (the coming cloud strategy reflects a recognition that downloads alone soon won’t be enough).
b) Nobody (not even price-slashing Amazon.com) has seriously eaten into Apple’s market share.
Without the device ecosystem, third parties have failed to break Apple’s digital hegemony. So why on earth is Spotify trying to do so now? Why compete directly with Apple when it's done so well at competing around Apple?
Spotify’s CEO Daniel Ek today announced via his company’s blog that free access to Spotify is being cut back, with total free listening limited to 10 hours a month and any song being limited to just 5 plays a month. The comments on the blog post are interestingly polarized between those who claim they’ll start pirating again and those who are vociferously in favour of the move.
For Spotify, this is a sound business move. It will buy the firm breathing space and will tilt its operating margins closer to sustainability. It will even make it easier to position a scaled-back US offering as not being a Spotify-lite in comparison to Europe.
But as much as it makes strong business sense for Spotify, it is a shame that the legal music market has lost its second most popular unlimited free on-demand service (after YouTube). As things currently stand, the economics of free simply do not add up: The amount of money that streaming music services can generate from advertising falls short of what they need to pay rights holders. Until that changes, we won’t see mass-market free on-demand music services here for the duration. And this is nothing new; I made the same comments years ago about those ad-supported free music trailblazers Spiral Frog and Qtrax (view my MusicIndustryBlog post here).
Amazon has just beaten Apple and Google to market with a cloud-based music locker service. As with the anticipated Apple and Google services, the Amazon cloud music product enables users to upload and stream their music on multiple devices (in this instance, on PCs, Macs, and Android phones and tablets – though not iPhones nor iPads). All US Amazon customers start with 5GB free and can then upgrade for $20 a year to 20GB, but buying an MP3 album at Amazon will automatically give the extra 20GB for free.
There are, of course, rights controversies around locker services. Digital music stalwart Michael Robertson is currently locked in legal combat with EMI over his cloud locker service MP3Tunes. The important factor with this service is that Amazon requires customers to upload their music file by file and store them rather than matching them against a cloud-based central repository of music, much in the same way that Carphone Warehouse currently does in the UK with its Catch Media-powered cloud locker service. (Which can be a pretty painful process for users. Remember the first time you ripped all of your CD collection? Now imagine doing that over the Internet . . .)
The rights issues, though of course important, aren’t the really interesting points here. What is interesting is why Amazon has done this, and what this means for the wider digital music marketplace.
I’ve been covering the digital music space for over a decade now, and when I first started doing so, EMI were one of, if not the, most innovative of the major record labels. They soon relinquished that mantle though, with Universal Music rushing to an apparently unassailable lead in the innovation stakes. And of course in more recent years EMI have had other more pressing distractions. But I’ve always had something of a soft spot for EMI, and it’s nice to finally be able to write about some truly innovative and "ahead of the curve" news coming out of Wrights Lane.
EMI have just announced a new iPad app version of Swedish house producer supergroup Swedish House Mafia’s "Until One." The product is actually an app version of the trio’s book and album combined with additional features layered on top (see screen shots below). Features include:
Spotify have announced their 1 millionth premium subscriber. No doubt about it, 1 million paying subscribers is a big deal. No one else has done it in Europe or the US despite years of trying (that’s including stalwarts Rhapsody and Napster and new boys MOG and rDio). But the true significance of the milestone will be defined by what comes next.
1 million subscribers is an achievement worthy of celebration, but it is not (yet) evidence that premium subscriptions are a mass-market value proposition. Indeed when you take an impassioned view of Spotify’s premium offering, it’s actually not a lot different from what’s been in the market for years in the shape of Napster’s and Rhapsody’s portable subscription products. Sure, it is implemented in a superior manner (offline playlists, etc.) but the fundamentals remain the same: pay a monthly fee for music you never own.
The simple fact is that rented music for a monthly 9.99 fee is not a mass-market value proposition. Spotify’s 1 million represents 10% of their total installed base (though closer to 15% of their active users). So it is clear that the free Spotify product is many many times more popular than the paid-for product.
To break through to the mass market, Spotify will need to more aggressively pursue their subsidized partnerships (e.g., 3 and TeliaSonera) where the end user pays little or nothing for the service with it bundled with another product. That third way, navigating between the mass-market free consumers and the niche premium customers is the long-term route to mainstream premium customers for Spotify (and all other subscription services).
Earlier today I received emails from 2 music subscription services arguing that Apple's 30% levy on content subscriptions would force them out of the iTunes ecosystem. Digital music is a low-margin business. Rights costs typically account for over 70% of revenues and payments, technology and marketing taking most of the rest. So Apple's 30% levy has the potential to instantly turn premium music subscriptions from a low-margin to a negative-margin businesses. Apple's role in premium music subscriptions is key. Subscriptions have spent half a decade failing to break out of a niche. Portability delivered by iPhone apps and the like have given them a new life. So the levy hits subscriptions where it will hurt them most. So if subscription services opt to take their transactions out of Apple's ecosystem, the net result will be less "internal" competition for Apple's music offerings . . . just in time for a new iTunes subscription launch? And all done in an FCC-friendly manner. But perhaps most importantly, this could be an effective pre-emptive strike against an Android music service beachhead on iTunes? So the 30% levy won't kill off music subscriptions, but it will be a major speed bump with the added benefit for Apple of moving some pesky competitor tenants off its front lawn.
Last night I attended Universal Music UK’s ‘Digital Open Day’. The event was aimed at trying to get UMG’s vision across, to help them become part of the debate rather than sitting quiet whilst, as they see it, the marketplace conversation portrays them as prehistoric fat cats.
I don’t normally blog about these sorts of events, but I think it highlights a few interesting dynamics. The record labels are still hung up about how people view them. I think this is something of a red herring. People don’t download music for free because they don’t like labels. They do it because they just don’t think content should be paid for. Any label-directed vitriol by freeloaders is just after-the-fact pseudo justification. The big issue is not winning hearts and minds; it is undoing 10 years+ of music being thought of as free.
If any message needs delivering, it is that of the artists. Not the big established artists who’ve had years of record label investment and suddenly decide they want to go ‘free’ in order to drive sales concert tickets and merchandise. But the small artists who are just trying to make a decent living out of something they love, ideally enough to pay the rent and the bills.
A few years ago, I posted a couple of discussion pieces on "why music can’t just be free." Not free as in no cost to the consumer, but as in no monetization. (Regular readers will know I’m a big believer in music monetization models needing to embrace free-to-consumer pricing strategies.)
There’s been a lot of buzz (some positive and not so positive!) about comments I have made about the current state of the digital music market in The New York Times and at Midem.
The quote that really grabbed the attention was “As Things Stand Now, Digital Music Has Failed.”
The problem with a quote like that, of course, is that it can mean many things to many people without further context, so here’s the additional context I gave around this in my Midem speech:
Digital music is at an impasse. Digital music has failed to reach its three key objectives:
1 – To offset the impact of declining CD sales.
2 – To generate a format replacement cycle.
3 - To compete effectively with piracy.
With music’s first digital decade behind us, we’re still trying to define a role for mobile; we’re still waiting for a 99-cent download market to emerge outside of iTunes; we’re still waiting for 9.99 subscriptions to break out of a niche; we’re still trying to work out how to make the economics of ad-supported add up; we’re still waiting for piracy to decline; we’re still watching recorded music revenues decline; and we’ve still got CDs as the bedrock of music sales.
The simple fact is that current music products do not meet consumer demand, and the divergence between emerging consumer behavior and legitimate music products is widening at an alarming rate.