Subscription Streaming: A Measly Billion Dollar Industry

Congratulations subscription music! You are finally a billion-dollar industry. The IFPI, the trade organization for the worldwide recorded music industry, last week reported that subscription streaming music revenues finally broke the billion dollar mark in 2013. Let’s mark this moment. It’s a huge number for the industry and at long last a confirmation of what many of us who have worked on the streaming side have believed in ever since Rhapsody launched as the first legal service in 2003.

While Spotify might be music for everyone, a select few subscribed to a streaming music service in the US.
While Spotify might sell itself music for everyone, only a select few subscribed to a streaming music service in the US in 2013.

Yet with all the congratulatory backslapping and shaking of hands, dark clouds still threaten to limit what subscription music could become. Why? The secrets are revealed in the data, my friends. You see, subscription streaming might be the same product around the world, but the business results have varied. While perhaps not by design, markets are delivering vastly different revenues and subscribers.

The US market is creating a great deal of revenue, but it hasn’t caught on as a mainstream product. Outside of the US the goal seems much less about revenue—it’s about bundling the service with other providers. Additionally rightsholders seem to be much more willing to experiment with other models in the rest of the world rather than the good ol’ US of A.

Negotiation Before Innovation

A product manager for a streaming service spends a lot of time obsessing about what people value. We research of what customers do daily and what causes them open their pocketbooks. Then we craft product concepts that potentially could satisfy those needs. In a past life I had one of those jobs where I would take these ideas and package them up for presentation in front of the labels in order to gain licenses.  You might think ‘oh, you already have a license to a catalog of music, so why do you need anything else.’ Well, every functionality and technical detail must go through a vetting and approval process with labels. And that’s where this gets interesting.

Just for fun, let’s say I’ve just created a service that allows a user play anything from a 20 million song catalog for free on demand while you listen on a laptop. But if you pay $3 a month, we’ll automatically save the top 100 songs you’ve played to your phone. It’s simple: download the app onto your phone and based on what you play on your laptop, we’ll automagically save ’em on your phone. Just for fun, let’s name it something cute like The Roo, as in Kangeroo, because it saves favorite songs in its mobile pouch. My logo is a cuddly ‘Roo wearing headphones and holding a mobile phone.

For the record, I’ve never pitched The Roo to anyone. I just made it up.  But I can imagine the feedback I’d get from places like TheMarketingHeaven.com and the label representatives. The first thing I’d hear is that I’m really pitching a freemium product, which has a different cost to a service than a premium product. After all, there is a cost to giving away a bunch of music as a marketing ploy to attract users. I might also hear that The Roo gives away too much value compared to other products that are already in the marketplace at that price point, like premium radio. And finally I’d probably hear how I’m “giving away” the equivalent of 10 albums a month for $3.

In my tenure I’ve pitched dozens and dozens of these ideas and very few even get past the first round of negotiation. Major labels in particular keep a tight rein on what is in the market by not granting licenses for new ideas. And I don’t think my experience was unique. While trading war stories with colleagues in the industry it’s pretty clear we’ve all had similar meetings.

Trust me, they’re not all good ideas—most of the are probably just as lame-brained as The Roo and deserve not to see the light of day. Yet the approach of startups and rightsholders does shine a light on how each party approaches new products. Most of the startups focus on creating products that will attract the attention of the customer. The best ones work hard on getting those users to pay something, anything, for music. Labels seem to be more focused on protecting current revenues and current products, and seem terrified of upsetting the price floor.

So where does that leave the US market? Only 6.1 million subscribed to a service last year–21 percent of the estimated worldwide 28 million. Meanwhile a whopping 57 percent of all worldwide revenues come from those 6.1 million customers. That works out to $102 per customer, while the rest of the world–$22 a person.

So at least in the US, we are creating a very small subclass of customers who are contributing lots of revenue, but we’re not creating enough consumers of subscription services. We’ve built two tiers of products: free and very expensive. And that’s just not the way people think about music. There are probably hundreds of ideas for paid on-demand products that might find an audience. Instead of licensing tons of them and let the market sort itself out, we only license a couple models and call it a day.

Labels seem to be willing to try other models outside of the US, though. For a £1 a week O2 Tracks lets you listen to any song in the Top 40 on your phone. With Bloom.fm you can download 20, 200 or unlimited number of songs to your phone at varying price points. The United States is the crown jewel of the music business, and the industry treats it as such, at the expense of innovative digital music products.

Music With Plenty of Limits

There are of course many other factors. In the rest of the world, cell phone companies compete much more aggressively with services. Nearly every carrier in Europe has a bundled music service offering from Spotify, Deezer or Napster. The only true bundled offering in the US is MuveMusic, while MetroPCS and AT&T have offerings that are billed on top of the price of the phone service.

The cell carrier duopoly of AT&T and Verizon, who lock up customers in long term contracts, have been less than willing to share the costs of music with startups and labels. That won’t last forever. T-Mobile has declared war against the contract. Perhaps if the company makes a strong move into the market it could spur growth and motivate the entire industry.

Growing Customers

If our goal as an industry is to protect the revenues we have today instead of growing a class of customers who will pay anywhere from $1 up to $20 for different valued package of services, we’ll probably hear the same story for the next several years.

NPD estimates 44 million US customers bought digital music in 2012. If streaming subscription could build up to 20 million paying customers, we might not greatly increase the subscription revenues of today, but we will build a new generation of customers who start to value paid music services, and maybe even become delighted with features that solve their problems. With time, the revenues will follow.

And if anyone wants to invest the $25 million needed to start up The Roo, drop me an email. I’ll start writing the business plan now.

More Growing Concerns

IFPI: Worldwide 2013 Digital Music Report

RIAA: US 2013 Revenue Report

Music Industry Blog: First Take on 2013 Numbers

The Tipping Point: Streaming Music Finally Delivers The Goods

Screen Shot 2014-03-19 at 2.51.05 PM
Source: RIAA, reports from Pandora, YouTube and NPD plus a healthy amount of guesswork (see note on numbers at end of article)

The RIAA recently released US music industry statistics for 2013 and it’s good news for the streaming services. More than six million customers subscribe to a service like Spotify, Rdio, Rhapsody and others. And these companies are providing a massive amount of money for the industry. Those six million created over $600 million in revenue. These are far and away the most valuable music customers, dwarfing the amount of money that each CD purchaser, ad supported (e.g. YouTube) or digital radio user contributes.

Based on the number of purchasers from NPDs 2013 Annual Music Report and available estimates of YouTube and Pandora users, subscription users are worth more per user than all the other major categories combined.

A Mixed Bag

I’m sure many artists and management firms are saying ‘that’s great, but why am I not seeing the money?’ Two reasons: scale and deals. First, only 6.1 million customers subscribe, which is the smallest reach of any other recorded music product. How does it compare? Well Pandora reports 140 million active users on mobile. YouTube says it has 156 million actives per month, with nearly 40 percent consuming music. NPD estimates that 44 million bought at least a single track in iTunes. Six million pales in comparison.

What’s also unclear are the rates by which artists are compensated by streaming services. A vast majority of the streaming deals for master recordings are with major label groups and indies. While many indies have said they split revenues 50/50 with artists, understanding what an artist receives from a major label deal, often executed well before streaming services existed, is a dark art. The industry could do much better by committing to transparent and standardized reporting, where every deduction is laid out and an artist can see how many plays of their repertoire were on Spotify and understand what it means to their pocketbook.  But then again, mysterious accounting has been the labels’ modus operandi for many decades.

Varying The Product Portfolio

WME’s Marc Geiger mentioned at MIDEM this year that all we have to do is build scale. This is the one flaw in his excellent speech. Instead of expecting everyone will pay $10 a month, the industry needs to consider many more options that focus on different ways fans listen and value music.

Source: RIAA
Source: RIAA

I have been beating the drum for subscription services to diversify their products. While 6.1 million people paying $10 a month for all you can listen to music products is great, we need to grow the number of people who pay for a music subscription. The truth we must accept is that the average person does not–and will not–spend $10 per month for infinite music.  They just won’t. There are too many free options and most people are happy with a much smaller slice of the music universe. Instead, we need to redefine how we package and market digital music. What’s the music app that 30 million people will pay $1 a month? How about a $3 and $5 price point?

To grow the number of people who will pay for services, diversification of product offering must take place, even if the revenue per user drops closer to retail levels. Success is getting 50 million customers paying a range of prices that fit tastes and budgets. Not selling a one-size-fits-all product.

A note on the numbers: while the RIAA numbers for the revenues as well as the streaming subscriber count are accurate , I had to guesstimate on the other user counts. By cobbling together estimated revenue that each company contributes and comparing it to the active customers of each, I came up with a rough number, but without reliable information and transparent accounting, it’s just that–rough.

More Variable Priced Links

MIDEMMarc Geiger’s Keynote (Video)

RockonomicsIs a Spotify Free User Worth $1.50

Too Much Joy: My Hilarious Warner Bros. Statement

NPD: 2012 Annual Music Study

Sonic Boom: How Spotify Acquiring The Echo Nest Remakes Digital Music’s Landscape

The Echo Nest: now part of Spotify
The Echo Nest: now part of Spotify

Whoa! Did you hear that? If you’re in the digital music business, that ear piercing sound you just heard is the cracking of the industry’s landscape. Maybe not right away, and maybe it won’t cripple many companies, but the fact that Spotify purchased The Echo Nest today puts a spotlight on the challenges all the companies that partnered with the music discovery company now face. And even beyond that, it could give Spotify a huge advantage.

The Echo Nest powers music discovery for quite a few of the music services, from Rdio to Rhapsody to iHeartRadio to Vevo. The companies use it primarily to run their radio services. But the service can take any piece of content–tracks, albums, playlists, radio, similar artists, or genres–and create recommendations. And The Echo Nest makes the recommendations personal for each of their client’s customers. The service provides the company with all the plays that a customer logged and The Echo Nest creates a ‘taste profile’ for every user. That, in turn, guides the recommendations algorithm.

Within an hour of the announcement, an exec from one of Echo Nest’s customers told me that The Echo Nest said they will fulfill their contract, which he understood to mean that after the contract is up, his firm will need to build a recommendation algorithm. “It’s tractable work. It just requires time and money,” he said.

And talent, too. Let’s not forget that part of the equation. What has made The Echo Nest so attractive to music startups is the peerless quality of their algorithm. To create a great algorithm, you need to understand music, you need to understand technology and you need to understand cultural significance. These are three different skillsets that don’t naturally go together and getting them to work as successfully as The Echo Nest has, for a massive number of customers, is extremely challenging.

So unless startups are willing to create highly skilled teams of musicologists, machine learning Ph.Ds. and engineers that know how to tap big data, a company isn’t going to get close to what The Echo Nest can do. Conservatively it’s at least a million bucks to get into the game, and probably more than that just to get to parity with them. And instead of development times taking a minimum of a year, The Echo Nest can get you up and running in about a month.

But here’s the thing: to do a deal with The Echo Nest, a company most likely chooses to not build its own algorithm, which is what all these companies are staring down the barrel of today. Everyone who is a customer considered The Echo Nest to be a neutral partner that didn’t play favorites to any of their competitors.

But not everyone thought about it this way.

When Spotify launched their radio product in 2011 it was with The Echo Nest’s algorithm, but it quickly developed its own. Why? The company knew owning its algorithm was strategically important. Beyond that, it might not have wanted to hand over customer play data to personalize the system. And that’s where this deal gets very scary.

Think about play data for a digital music company like you’d think about a country’s natural resources. It contains amazing insights of what customers like, what songs relate to each other and a great deal of intelligence about customer behavior. But just like getting natural resources out of the ground, it requires a big data infrastructure to mine it and make it actionable. Some companies have invested in heavily in this infrastructure, but most have this data—perhaps a service’s most important asset—buried deep in within their usage logs.

It just so happens that The Echo Nest has all this data—from all of its customers—to power its algorithms. Services are very protective of this data and are therefore extremely concerned about exposing their streams to competitors, and of the ability for The Echo Nest to potentially centralize the data and create products that show a total view of online listening.

But here’s my question: did Spotify just get access to all the listening data for all of The Echo Nest customers? Even if it does not commercialize it, just seeing that data could lead to enormous advantage for the company.

Look, all these services have different customer bases. An iHeart customer is very different from an Rdio one. Rhapsody customers listen differently than an Xbox one. Insights on how these music fans are different (and are alike) would give Spotify a total view of the listening universe, which could help in everything from tuning their algorithm to targeting customers for acquisition.

And if Spotify wants to continue to sell The Echo Nest’s algorithm, wouldn’t that give the company an enormous, NSA level of music playback? The company confirmed today that they’re pulling out of the algorithm business for other platforms once all the terms are up. But if you want to build an app on the Spotify ecosystem, you can have access to The Echo Nest’s goodness.

Daniel Ek has built Spotify into a company with the best technology in the industry. He’s now bought the shiniest tech toy on the market and he’s taking it home to play with it. Alone.

Algorithmic-Free Linkage

TechCrunchTogether, Spotify And Echo Nest Want To Build The Facebook Connect Of Music

GeekwireSpotify acquires music discovery service The Echo Nest to the dismay of Rhapsody, Xbox Music

HypebotSpotify and Beats Music Acquisitions Illustrate Differing Strategies

Gigaom: Spotify Acquires The Echo Nest and Its Musical Smarts

The VergeSpotify Could Be Making Trouble for Rdio

Growing Pains: Can YouTube’s Plans Power Music Revenues?

This was originally included in Billboard’s print edition dated March 4, 2014. The entire article is not available online without a subscription, but I’m reposting it to my network.

And no, I didn’t write the headline or the deck.

Opinion Column: Screwed By YouTube?

40 percent of its plays are music – even as its rights payments remain disproportionate

Do billions of YouTube views of Gangnam Style translate to millions for Psy?
Did billions of YouTube views of Gangnam Style translate to millions for Psy?

First it was broadcast radio, then MTV. Now YouTube? Could it be that the music industry is a three-time loser in getting its fair share for distribution of content? Did it give away the golden goose by not suing the bejeezus out of YouTube when it was a startup, or at least cut better deals when Google acquired it in 2006?

Of course it’s not a simple question. At first glance it’s clear that today YouTube isn’t delivering the goods. During a MIDEM panel this year, YouTube vp content Tom Pickett said the company had paid more than $1 billion to music rights holders during the past several years. Well, that’s sweet. Hey, you know who else has done that? Spotify. The difference: Spotify did it with a fraction of YouTube’s audience.

Let’s face it: When the worldwide market is $16 billion annually a billion isn’t that much, not when you consider the size and scope of YouTube’s mighty reach and insatiable thirst for more and more fresh content. While there have been some holdouts on paid streaming services, no working artist would dare skip YouTube — one of the world’s largest promotional channels — and limit his or her reach. According to comScore, YouTube’s 159 million active monthly U.S. users watched 13 billion videos in December 2013. And YouTube says nearly 40 percent of all videos were music-related.

But YouTube doesn’t just represent a promotional channel. It delivers a burgeoning stream of advertising revenue, and could soon find more ways to monetize its massive audience. YouTube does pay a split of ad revenue with rights holders, although the rates for ads are paltry when compared with such established players as broadcast radio. The company is trying to boost its revenue-per-impression rate with premium content, but this will take time.

By comparison, Spotify looks more attractive to rights holders, since it already delivers multiple revenue streams. Like YouTube, Spotify pays a low per-stream ad-supported fee for a play by a free consumer, but its average payout is much higher because it offers premium subscription fees as well. That’s why YouTube has long planned a paid subscription service that is finally expected to launch this year. If the company can convert even 1 percent of its active users to pay for on-demand music, it would be the largest service in the United States. At least that’s the theory.

In practice, converting these free users to paying customers could be much harder to execute. Why? Every all-you-can-eat music service has similar pricing. Want to stream your music on the desktop or on your phone? It’s free. Want to save your music to your Android phone? That’ll be 10 bucks. Asking for $10 from a customer base that has become accustomed to accessing all the music they want for the low, low price of free is a steep hill to climb.

The industry and Google will need to partner to create a new value proposition at a variety of price points. What could it offer the music fan for a buck a month? How about a top 40 app for $3? What about a catalog slice, say indie/alternative, for $6? How about a $2 Vevo subscription?

The truth is, all consumers are not alike. Defining those price points and offers will require innovative thinking and risk-taking by both sides. Remember, yearlong Spotify Premium subscribers pay more than three times what the average customer spends in a year for music.

The industry needs to think of ways to serve a mass audience. But if instead consumers see the same old offer of 20 million songs for $10 a month, we could end up with another Google Play All Access Music, which hasn’t blown the doors off with subscriber growth. That would be disappointing for the entire industry.

Perhaps the industry is learning. Certainly holding out content from YouTube would have made it much more challenging to build new revenue streams, so it was the right decision to bring the service into the fold.

Now it’s time to supercharge it.

Note: I have corrected an error. YouTube was acquired by Google in 2006, not in 2005 as it appeared in print. I regret the error.