Preempting Spotify

Rhapsody announced yesterday that its new Rhapsody 2.0 iPhone app allows users to download their playlists to their phone and listen to them even when an Internet connection is not available. With this announcement, Rhapsody has now fulfilled the three tenets of true cloud-based music services that I put forth in a report last year. Those were: 1) availability across platforms -- Rhapsody is available on phones, set-top boxes, home audio, and, of course, computers; 2) availability across brands -- Rhapsody is available on the iPhone, Android phones, and multiple home audio brands; and 3) availability when the cloud is not available. Rhapsody's execution on all these tenets is a work in progress, but at a price of $10 a month, the service has now vastly improved its value proposition. Rhapsody and its competitors (MOG and Thumbplay) are on their way to providing consumers with new, compelling reasons to rent -- not own -- music. The question is, will it catch on?

We expect the number of subscribers in the US to double in the next few years. But that's still not a very significant number considering the small base it is starting from. Subscriptions are hard to commit to -- but once you are committed, switching away or off is hard to do as well. Therefore, there is a short window of opportunity for Rhapsody and others to lock in some of that growth for themselves before Spotify launches Stateside or Apple launches its own version, thus changing the competitive environment. But these new services could also end up energizing the market, and the rising tide may perhaps lift all boats.

But what Rhapsody really needs now is to get a service provider to subsidize the service across platforms.

How to make a great music app

Mobile apps are all the rage these days in the music industry circles and justifiably so. Sales of traditional console-based music games have dropped significantly, but music and gaming still do make great partners. And while people’s interest in paying for music is waning, paying for apps is a growing phenomenon. Universal Music Group’s newly launched “Six-String” music app for iPhone/iPod touch is a case in point. The question now is not whether the industry should invest in iPhone apps but what is the best way to do so.

For an answer to that question let’s examine the current most successful paid music app on iTunes - I am T-Pain. “I am T-Pain” allows users to record their version of the T-Pain song into iTunes and auto-tune it. Here’s why I think the app is successful –

The game is engaging to all levels of gamers and music fans – Most people can sing an out-of-tune song into a micro phone. As the app is not very challenging it attracts a wider range of individuals and than the instrument simulation apps such as Six-String would.

It allows users to share the experience and be social – Once you have auto-tuned your voice you can upload it to your Facebook, MySpace page or email it to your friends. You can also check out the best auto-tuned songs that others have uploaded. Unlike other social games, however, this app is not really about competition and shows that music apps don’t have to be.

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The new digital home audio device – the television

…or something connected to it.

The addition of Internet radio feature (Pandora/Slacker/Last.fm) to Internet connected televisions and set-top boxes (Blu-ray players, Tivo, Roku, Xbox etc) raise this existential question - do we need a stand-alone device for audio in the home?

I know what you’re thinking. Adding a radio channel to a primarily video device does not mean the end of the audio only product category. But it could very well be the beginning of the decline. And here are some of the reasons why.

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Introducing: Our first digital music licensing forecast for the U.S.

We have just published our annual music forecast for 2009-2014 for the US market. Recorded music revenues for the year 2009 are expected to close at $6.3 billion (not including ring tones and ring backs). That's down 13 percent from the year before. The outlook for the near future is not too bright either. Recorded music revenues will continue to decline before settling at around $5.5 billion in 2012.

Some other highlights of the forecast are - 

  • We are still bullish on subscriptions and think that the category will grow both in terms of number of subscribers and revenue in 2010 and beyond.
  • 2010 will be also be a better year than 2009 for the digital download market but its growth rate will be on a downward trajectory thereafter.

It is no secret that the industry has stepped up its efforts to diversify its revenue streams in the last few years. Licensing to digital music services (MySpace, Youtube) and performance royalties from Internet radio are thus becoming an important source of revenue for the industry. We have therefore included revenues from digital music licensing in this year’s forecast report.

Bottom line for digital music licensing is this – revenue from digital music licensing will be a decent amount  but it will be nowhere near filling the hole in the revenue from recorded music created between now and 2014.

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Notes from India: Digital music across the world

 

We have just published a report examining the digital music adoption patterns of the different regions around the globe. While there are pockets of sunshine, the overall picture indicates that making money from digital music is tough everywhere. Europeans for instance are quite savvy in both online and mobile music activities but have yet to start buying digital downloads in meaningful numbers. In the US, which took the lead early on in online music activities and paying for downloads; adoption is starting to plateau even before hitting mass market. And across Asia, mobile is king but piracy is and will likely remain a big issue in all but a few of the countries. 

 

I also happened to be in India, part of the time that I was writing this report. Here are a few observations on digital music adoption in India:

 

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Google's Music Strategy - Search to Buy

In a very democratic fashion, Google announced partnership with most of the major online music services yesterday, to allow music searchers to “find and discover” music. Check out my colleague Mark Mulligan’s post on Google’s relevance to digital music from last week. The note worthy point about Google's execution  is how carefully it nudges searchers to buy music and not just stream it for free. The two main partners, Lala and iLike, that are getting premium placement by the play button, allow only limited streaming of the song. iLike lets you stream only some songs full length for the first time. After that users can only listen to 30 second sample of the song or buy an MP3. Lala also allows one free listen per song and then offers 10 cent Web singles or full MP3s.

 

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One more attempt from Napster to attract the masses

Subscription based music services have a niche appeal. But under Best Buy’s ownership, Napster is truly attempting to go mass market. First it came up with its 5 for 5 offer, whereby you pay $5 a month for unlimited streaming and you can keep 5 MP3s at the end of the month. And now it is giving that away for free for a year (i.e. 60 MP3s and unlimited streaming for a year) when you buy select Dell PCs from Best Buy or directly from Dell. 

 

It’s a great offer for consumers. It’s also a no brainer for Dell. Free Napster for a year can really help them differentiate in a highly commoditized PC markets. How it will work out for Napster remains to be seen. In order to be successful, Napster will have to hope that

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Rhapsody on iPhone

Rhapsody announced today that it is submitting an app for iPhone.
If approved, it will be the first on-demand music streaming app
on phones in the U.S.
I won’t speculate about whether Apple will approve the app or not. Even if Apple
doesn’t, others such as Android, Palm Pre, or Blackberry might. This means that on-demand streaming to the phone is essentially here.

The question remains, however, whether on-demand
streaming apps such as Rhapsody’s will lead people to really use phones for music. Currently, only 10 percent of cell phone users in the U.S. listen to
music on their phones. 
iPhone users are already more likely to use them to listen to music than users
of other phones (59% versus 8% respectively) . So Rhapsody may help move the dial only if it enrolls users
of other phones for this service.

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Napster Changes the Subscription Game

Faced with competition from the growing ranks of free on-demand music streaming services and upcoming all you can eat services such as Nokia’s Comes With Music, Napster has wisely changed the value proposition of its core offering of unlimited music streaming to a browser. Napster has dropped the price from $12.95 a month to $5 and now allows you to keep 5 songs as MP3 downloads at the end of the month. If you download all your allotted 5 songs each month then the unlimited streaming is essentially free.  Needless to say, that for a consumer this a very compelling offer. Median annual spending on music in the

U.S. is $80. So at $60 annually, this fits nicely into an average consumer’s music budget.  

 

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