In 2005, I warned that the fuse had been lit on a demographic time bomb for music product strategy, that young consumers were growing up without any concept of music as a paid-for commodity and were unlikely to ever start paying for it unless the music industry met their needs. Now the effects are keenly felt. Revenues are tumbling, and digital music's growth is stalling, highlighting the diminishing relevance of current music products. Efforts zeroed in on converting thirtysomething CD buyers to digital downloads and winning over file-sharing Millennials (16- to 24-year-olds), and with only modest success.
The byproduct of this strategy was to leave the Digital Natives (12- to 15-year-olds) uncatered for, so that now a second generation of music fans is following the Millennials out of the music-buying marketplace. So, while the Millennials' demographic time bomb blows up in the record labels' faces, the fuse has just been lit on another. A radical shift in music product strategy is the only feasible defense.
As the canary in the mine for media businesses more broadly, the experience of music companies presents lessons for product strategists across all content genres.
"Though they’re unlikely to admit it, the mainstream social networking race against Facebook is as good as over. By contrast they remain the No. 1 destination for artist communities online, yet without a major reinvention they’ll start to feel the competitive pressure bite there also."
The major reinvention came far too late, and it was too little.
Ironically, even though MySpace let basic usability and functionality stutter, artists stuck with it because that’s where their audiences were. A host of much more competitive and differentiated alternatives came to the fore, focusing on subsets of the broader MySpace music value proposition. Sites like Sellaband, Bandcamp, SoundCloud, and PledgeMusic each have very different value propositions, but all took from MySpace the baton of developing the artist-fan relationship and ran with it.
HMV is a victim of the Media Meltdown. Consumers are falling out of love with physical media products and unfortunately are not yet anywhere close to entering into whirlwind romances with premium digital products. The net result is declining sales across massive swathes of HMV’s product portfolio.
Of course consumers still love media. They’re even paying for a lot of it (e.g., Pay TV). But the Media Meltdown loosened the monopoly of control enjoyed by media companies and retailers. We are currently in the midst of a painful transition, and we don’t yet have a set of next-generation media products that consumers will pay for on the scale they paid for physical products.
It may be that people will never pay directly for media products in such numbers ever again. It’s certain the media retailers will have a vastly diminished role to play on the high street and in the mall. If they want to be major players digitally they have to reinvent themselves as content destinations rather than just digital retailers. Selling digital downloads of content is a temporary fix. A third way is required.
“Need some help: if 'Buy & Listen' was 20th cent. music consumption, 'Rip & Burn' the 1st digital generation, what's it for Digital Natives?”
I got a lot of good suggestions and though there was great diversity in the responses sharing featured heavily. What’s interesting is that though Digital Natives do share music a lot, it is more in a social context than the peer-to-peer kind of file sharing more common among Millennials.
We are working on a new report to try to help our clients understand what the next generation of music products should look like. I of course advocate music product innovation to such an extent that I sometimes sound like a stuck record (spot the oh-so-analogue metaphor). But the early results of the consumer data we’re mining for this report are building a case for a music product strategy reset so extensive in reach that it makes my previous protestations look too modest by far.
Researching the report (which we’re provisionally calling ‘Digital Natives, The Generation Music Product Strategy Forgot’) has been eye-opening. Whilst record labels have been focusing energies on winning over CD buyers and converting Millennial file sharers, the Digital Natives have been left without music products that meet their needs. The Millennials used digital to reinvent analaogue behaviors (such as replacing the CD with the paid or free download) but Digital Natives are creating their own rules of social context, experience and visuals.
The result is that YouTube emerges as digital music’s killer app.
Which is why I’ve opted for ‘Share and Watch’ as the tag line for the Digital Native’s (see below). What do you think? Does this slogan sufficiently capture the essence?
Sky’s much vaunted music service Sky Songs in the UK has announced that it is closing its virtual doors a little over one year after launch. As I’ve been saying for some time, digital music is at an impasse and the end of Sky Songs illustrates the point. There was nothing fundamentally wrong with Sky Songs, but there was nothing spectacularly right about it either. It was a cookie-cutter premium subscription service with a few nice twists but one that fundamentally played by the record label licenses' standard rule book and consequently lacked differentiation in the marketplace.
However good Sky might be at marketing premium subscriptions to mass-market customers, if the product is a dud, it’s just not going to fly. At launch, I stated that to succeed Sky needed to leverage its differentiated assets (i.e., integrate into TV hardware and bundle with TV packages). It didn’t. Instead it left Sky Songs tied with chains to the PC as a premium rental service whilst Spotify pushed on to 10 million users.
I have to admit I thought Sky was playing a smart long game where it would leverage those assets and make serious inroads into the mainstream. I wonder how much of its failure to do so is down to its business objectives and how much is down to what it could secure licenses for at what it deemed financially viable rates.
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.
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.
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.
Over the last year within the Consumer Product Strategy team here at Forrester, we’ve been spending a lot of time looking at how media companies should innovate products to build relevancy in the digital age. We’ve had many interesting conversations with media companies of every shape, flavor and size you could imagine. Each of them of course have their own unique challenges and opportunities, but one of the things which applies almost universally is the need to reassess what it is that they sell. In short, to understand what their product actually is.
In the 20th century, the answers would have appeared so obvious as to make the question look facile. ‘We sell books of course!’ or ‘CDs!’ or ‘Newspapers!’. Now though, in the age of digital delivery and on-demand access, it is increasingly apparent that those were simply the packaging in which the actual products were delivered. The product is what is delivered within those packages. ‘Content is king’ right? Well yes, but that’s only half of the equation. People didn’t just pay for the content, they also paid for the experience that the format helped deliver -- whether that be the experience of settling down on the sofa with a first-edition hardcover book, reading a double-page spread in the Sunday newspaper, or listening to the warm crackle of a vinyl LP on the living room hi-fi.