Spotify has today flicked the switch on a rich suite of additional functionality that lays the groundwork for some ambitious strategic objectives. You can read the Spotify blog for a detailed breakdown.

Simplicity has been central to Spotify’s success to date.  In fact the Spotify experience was so simple it looked positively archaic compared to more feature-rich and socially-rich services such as Last.FM and imeem.  But that simplicity was Apple-like in its elegance and a key reason it has proven so popular.  The barriers to entry were lowered so that it had mass-market appeal rather than being condemned to ending up as another niche hide-out for the tech savvy music aficionados.

Spotify was always going to flick the switch on a greater level of sophistication, but only when it needed to.  Doing so now is a very cleverly timed move. Today’s announcement both raises the stakes for new entrants such as mFlow and beats Apple to the music cloud. To understand why, we need to take a quick look at what strategy the new functionality implies.  The two most important groups of functionality are social and cloud. 

Spotify becomes a social experience. Spotify has always had a keen sense of how to coexist in the broader ecosystem rather than try to do everything itself (cf  integrating audio scrobbling). It has now taken that a step further with Facebook integration and relatively sophisticated sharing and interaction. Doing it in the context of Facebook simplifies the education process for users.

Regular readers will be familiar with the mantra that I and my colleagues repeat: we are leaving the distribution era of the 20th century where music revenues were based upon selling units and entering the consumption paradigm, where monetizing consumption will be key to future success.

I recently came across a case study that illustrates well just how far along we are in the transition from a consumer perspective, if not yet from a business model viewpoint.

Armin van Buuren is a leading dance music DJ and producer, but unless you are Dutch, or a dance music aficionado it is unlikely you’ll be too familiar with him. Hailing from the Netherlands van Buuren has been producing music and DJing since the mid-nineties. Throughout the noughties he went from strength to strength, in no small part due to a very savvy use of digital technology including a weekly radio show (A State of Trance) that is syndicated across multiple analog and digital stations and platforms and reaches a weekly global audience of 40 million.

This context is important because van Buuren understands the importance of building an engaged digital audience. Which brings us onto the case study: his track ‘In and Out of Love’ featuring vocalist Sharon den Adel. The official video currently has 50.5 million views on YouTube. There are an addition 3.3 million unofficial video views of the track, of which 0.5 million are remixes and live versions. So that's a net total of just under 54 million views.

Consider those numbers for a moment. The biggest ever selling global single was Elton John’s Candle in the Wind in 1997 with 37 million copies. The biggest that the noughties had to offer was Leona Lewis’ ‘Bleeding Love’ with 12 million. Even Lady Gaga only made 11 million with 'Poker Face'. Getting to number in the UK charts can be done with less than 25,000 if you catch the charts on a bad week (Orson did it with just 17,694 in 2003 with ‘No Tomorrow’).

Last.FM have announced that they will stop streaming full on demand songs to users, instead providing integrated streaming from 3^rd parties.  Though this certainly highlights some of the challenges in today’s on-demand streaming music business it says less about the fundamentals than it might first appear to do.

This is one more chapter in the Last.FM / CBS integration story. Last.FM was an early mover in the streaming music and had tens of millions of users when Spotify was just a twinkle inn Daniel Ek’s eye.  Many – myself included – were surprised by the $280 million that CBS paid just under three years ago to acquire Last.FM.  Since then Last.FM’s fortunes have been a mixed bag. Though user numbers are at an all time high, Last.FM has struggled to find its new identity within CBS and its paymasters recently took the decision to turn off free-streaming in outside of the major territories due to the inability to generate sufficient advertising revenue.

CBS are doing what you would expect a major media organization to do with an expensive start-up acquisition: they are trying to make it contribute to the bottom line. These objectives often do not align closely with the innovative vision that drive start-ups to scale and market profile, though usually not to profitability.

At last! One of the majors finally takes the brave but long over due move to slash CD prices (UMG has announced it will be reducing prices to just $10 for frontline CDs in the US).  There have been experiments with CD price drops for the last few years.  Finally we see some marketplace movement.

The simple fact is that CDs are perceived to be too expensive for many consumers.  CD price changes will bring some much needed momentum back to CD sales but – and it’s a crucial ‘but’ – it won’t halt the decline. Instead it will slow the prolonged demise.  The CD is a dying music product format, but it has some life left in it because downloads haven’t generated the format replacement they were expected to.  With all previous music formats the successor format was firmly in the ascendancy by the time its predecessor was in terminal decline (see chart below).  So until the online marketplace gets its act together there’s a stay of execution for the CD.  And the labels need this breathing space, because the core impact of online’s under performance is that the CD paradoxically remains the bedrock of revenue.

There’s still more distance to go with CD pricing though. The next crucial step is tiered products with a basic product at c $5, the standard at $10 and the deluxe at $15.  We’re some way off that becoming reality, but it will - and must - happen some time in the next few years if maximum extended life is to be squeezed out of the shiny little disc.

News reports today suggest that Warner Music may be planning for buying some or all of EMI in a post-bankruptcy fire sale.  As a Brit I’d be particularly sad to see EMI meet such a disappointing end, but there is an unnerving sense of inevitability with current events.  I’m not a financial analyst and I’m not going to attempt to comment on the likelihood of Terra Firma meeting its debt obligations.  But what I do think is interesting and relevant from a strategic perspective are the questions EMI’s predicament raises about the role of record labels in the digital age.
 

In fact there are three key questions record labels need to ask themselves:

1. Are they relevant and necessary anymore?
2. Are they innovating enough?
3. What role should they play?

Here's my take on what the answers should look like...