2014: Music Services Lost Subscribers…And That’s A Good Thing

Last year was a banner year for music subscription in the US. The RIAA reported big time growth, primarily driven by Spotify’s gains in paying subscribers.

But at the same time, the market stalled a bit in terms of actual subscribers. The RIAA in its midyear report had paid subscribers at 7.8 million, but by the time we got to the end of the year, it was only 7.7, a loss of 100k subs. So what gives?

Well, we had another year of consolidation. Two big players came off the market. The biggest driver of losses is Muve Music, which at its peak, reportedly had two million subscribers. Granted those subs weren’t generating much in revenue for the industry, but it was a big number. AT&T acquired Muve’s parent Cricket Wireless and then treated it like a redheaded stepchild.

Conventional wisdom is that Muve delivered a big number of subs, but it was primarily a sleeper service, where most of the users were inactive. There was a ton of media flaunting how great Muve was for the industry, which in retrospect, now seems absurd. AT&T shuttled off Muve’s subscribers to Deezer in January. However, these kinds of deals generally mean retaining 50 percent of subscribers at best. I’ve seen acquisitions deliver less than 30 percent of subscribers to the new service.

After a big marketing blitz, Beats turned off their acquisition channels once Apple purchased the company, which adversely affected its numbers.

Just totaling up subscribers isn’t the best way to judge success of subscriber. The key number to get the total picture is revenue plus subs. In the first half of this year, streaming subs increased to $371.4 million, and increased even more in the second half to total $799 million for the year.

Perhaps the old adage about lies, damn lies and statistics applies here. It’s easy to fall into the trap of writing provocative headlines based on precursory numbers. But it requires digging a level deeper to understand what the numbers actually mean. Spotify had a great year in 2014. In some respects the company, along with the massive increase of internet radio revenue, kept the industry afloat through another transition.

There’s no need to bemoan the loss of garbage subscribers. We need to focus on revenue and subscribers to get a true sense of what streaming subscribers is delivering to the industry—and where the real growth will come from.

More Reading

RIAA: 2014 Industry Shipment and Revenue Report

CNETCricket’s Deezer Music Partnership Rises From The Ashes of Muve Music

Fierce WirelessCricket’s Muve Music’s Fate Is Up In Air Following AT&T Deal

Billboard: Muve Music Surpasses 2 Million Subscriber In US

Accordion Games: Why Spotify’s Free Service Should Constantly Grow And Contract

Here we go again.

Spotify is running into trouble with someone else in music. This time it’s the behemoth Universal Music Group. UMG’s CEO Lucian Grande woke up one day and figured out that Spotify was giving away too much music and it was impacting digital sales, which have slumped considerably. The company controls a considerable amount of popular music throughout the world. In some markets it’s as much as 40 percent of all music sales, so when it doesn’t like something, you can be assured that something’s gonna change. Outside of the absurdity of all this, there is a point here. And it comes down to the funnel.

You see Spotify uses free music as a customer acquisition funnel. By getting the largest number of people possible playing music, Spotify believes that it can convert a significant number of them into the paid products. Spotify has pushed to create the biggest funnel possible by giving unlimited free music on the desktop, and allowing shuffle play listening for free on mobile phones.

All information has shown that Spotify has had a great year. Its growth numbers in free and paid listeners has grown tremendously. Early data signals are showing that Spotify ate into other free services, like YouTube. And while the company wheels out data points that claims it hasn’t eaten into iTunes sales, it bends credulity to believe that Spotify hasn’t eaten into track sales.

Think Accordion, Not Funnel

The main point of Spotify’s troubles  comes down to how it considers free playback. The company would have much more success in identifying those who would pay by considering free as an accordion that expands and contracts from time to time. Instead of 100 percent free plays all the time, the company could limit free playback occasionally, or better yet, carve up its user base into intelligent cohorts based on their playback behavior and value to the company.

So if listener creates awesome playlists that gets tons of followers, that person gets as much free music they want. If someone shares more playlists than most, free music. If one has more active friends, give ’em free. The company could even create scores based on user’s future possibility that they might subscribe and keep them around. Others should see a wall when they get to a certain number of plays. And when Spotify’s funnel starts to collapse, open it up again. Free music for everyone.

It has been my contention that sooner or later, Spotify will have to have a system like this in place. Right now, the content costs are crushing to the company, and eventually, playtime will be over. Time to get the books right. But right now in its run-up to an initial public offering the company is 100 percent focused on growth. Therefore, it must keep the funnel as big as possible.

And finally, it’s absurd to think that the major labels are going to do anything to jeopardize Spotify’s IPO. All the labels own a chunk in Spotify and will benefit from the IPO. It could be big money. Just last year UMG made hundreds of millions on Beat Electronics sale to Apple. So free music might be more limited sooner or later. But let’s not pretend free music is going anywhere before Spotify makes labels millions.

Jonmaples.com: Major Label Are Truly Home of the Free (Music)

FT: Universal Takes On Spotify’s Free Model

How To Save SXSW From Its Own Success

First time I rolled into Austin for South By Southwest Music Festival, it was like going to different world. Not only was I blown away by the number of great indie bands performing in just a couple block radius, but the city also had an amazing vibe. Musicians, artists, malcontents and loungeabouts all mingling together with the music fans that came to town for the 500 bands playing over three days.

One I couldn’t help but be charmed by Austin and the celebration of live music at SXSW. So I was surprised when I opened the Austin American-Statesmen and read an editorial about the festival’s nearing demise:

“Critics claim the conference’s growing pains are transforming what was a grass-roots gathering of struggling musicians into a corporate haven for suits, ties and profits. The proudly independent music scene that put the Third Coast on the map is being usurped, leaving homegrown talent out in the cold.”

The date was March 18, 1994.

There’s been 20-year history of calling SXSW over. But the past few years have been extremely rough on the festival. For the record, there were 4,258 registrants and 482 artists performing in 1994. In 2013, the city of Austin projected that almost 400,000 people crammed into Austin for the festival.

Over the years the industry has taken notice and has turned what was primarily a showcase for indie music into a major music event. While the festival still books plenty of cutting edge acts, it also has become a place for massive artists to perform, with huge stars like Lady Gaga, Kanye West and Metallica making appearances. 

The Shadow SXSW

And events continue to creep beyond the scope of the official festival. Day parties started in mid-90s and most are free of charge and don’t require an official registration. The day party tradition, which packs up to 10 bands performing short sets in the hours before the official showcases start, are now so common that SXSW has become enormous. Only a small portion of those who come to Austin this week attend the festival itself. 

Outside of all the top-level artists, brands have decided they want to get in on SXSW as well. It seems like every year another major brand throws down big money to have a presence at the festival. Many wonder if it’s a bit much. When Doritos built a stage that resembled a huge vending machine stuffed with oversized bags of Cool Ranch and Nacho flavor, it might have been one chip too far. 

All this popularity is causing severe headaches for festival administration. The city itself cannot handle that many people in such a confined space. At least with the current commitment of services from the festival and the City of Austin. 

Last year, tragedy struck. A suspected drunk driver drove down Red River, one of the main downtown streets closed to traffic and packed with club-goers. Two people lost their lives and many were injured. In some respects, SXSW is lucky something like this hadn’t happened in the past decade, as attendance has climbed every year. 

In Line and Out of Line

Despite the options, most of these free parties are extremely over-subscribed. Many who come into town find themselves left out of the action. Lines at places like the Fader Fort can stretch for several city blocks. SXSW does its best by scheduling a free show at an auditorium not far from downtown, but there’s just not enough to entertain all who come into town.

The experience for those who attend the actual festival is becoming more tiresome. Getting around has become a nightmare. Sixth Street resembles a menacing mosh pit anytime after 7 pm at night. Dinner options are non-existent. Even grabbing a mediocre-at-best Sixth Street pizza slice is getting pricy.

This year, the city and SXSW had enough. Festival management has been unhappy with the amount of services the city provides. It needs more support and security to keep everyone safe. In fact, SXSW said it was considering bidding out the entire festival to let other cities compete. But the festival’s identity is so tied to Austin that it probably could never decamp the city.

The city cut back on event permits for the Shadow SXSW, limiting the number of opportunities to build a stage and fly in a platinum artist for a showcase. And some brands are sitting it out too. The Doritos stage is thankfully gone this year.

All good and well, but will it limit the number of people flocking into town? Perhaps slightly. But the festival’s reputation is now cemented in the music fan’s mind, and I’ll contend that the throngs of people are still going to show up. It’s up to SXSW to solve this problem. On top of the music fans, it’s also college spring break for lots of students, and the city has become a mecca for those looking for a party without ever going to show.

Lighting The Shadows

Instead of burying its head in the sand, SXSW could proactively plan for the mass of humanity that’ll show up without the benefit of a laminate. Just two miles from downtown is Zilker Park, the site of the annual Austin City Limits music festival. There’s no reason that SXSW couldn’t book a half dozen stages for big time artist to perform. The festival could make it free and safe with the appropriate budget for security.

Sure, it’s not perfect. March weather in Austin is extremely mercurial, so booking an outdoor festival will be a gamble. And there will still be overflow for the regular festival. Don’t expect 6th Street to get less congested anytime soon. But at least there would be a plan.

Perhaps it’s just my gaggle of friends in the business, but my experience is that more industry types are skipping this year’s festival than ever before. I’m even taking a break after 11 straight years of sojourning to Austin for tacos, brisket and Shiner Bock whirred together with amazing music discoveries.

Long ago I had come to terms with how SXSW has changed. A few years back, my favorite day party at the Yard Dog was overrun. I couldn’t even get close to the stage or beer. And this wasn’t on the main drag of Sixth Street. It’s in a tucked away courtyard in the South Congress District. Fuming, I took an attitude adjustment walk at dusk on Lake Travis and came to the realization that the festival was still great. I mean where else can you discover the bevvy of new bands I have over the past four days. It’s just different from the one I first experienced 20 years ago. 

Just like the city itself, the festival has grown up. At its core, it’s still an amazing experience, one well worth the hassle. I’m hopeful that the festival administration and the city will partner to solve its problems together. 

Further Reading

New Republic: SXSW Too Big To Fail

NPRDoritos Stage Pulled From SXSW But Issues Remain

Free Expansion: Rhapsody Joins Spotify in Giving Away Music

Wiz on Rhapsody on Twitter
Can Wiz Khalifa help deliver his Twitter followers to Rhapsody.

Today Rhapsody announced that it is launching free playback through an integration with Twitter’s audio cards. It works this way: if you are a subscriber and share a song, album or playlist on Twitter, anyone following you can play it for free in the Twitter mobile app.

It’s a pretty smart integration that solves a few problems for the service:

  • It encourages Rhapsody’s users to share music with all their friends. This is something that Spotify has done very successfully with its social tools baked into the app.
  • It gives artists an opportunity to drive potential customers to Rhapsody from their social channels, which could create an additional revenue stream for artists.
  • It is focused on mobile plays, which is where a majority of listening has migrated to and where Rhapsody’s potential customers hang out.
  • It limits the amount of free music by pegging the free playback to someone with an account and followers on Twitter. You can only listen on Twitter, which is very different than the all-free, all-the-time Spotify offerings.
  • It gets Rhapsody in the news, as you can see by all the press the company has generated by announcing the integration at SXSW today.

Social Mores

Chief Financial Officer Ethan Rudin says that the project is an experiment in the US. He had a couple press quotes that seemed a bit off target.

“It’s going to be a huge experiment in how we make music social again,” Rudin told Geekwire’s Todd Bishop.

“Music has been a bit of red-headed stepchild” on social, Rudin told CNET’s Joan Solsman.

I think he forgot to add the phrase ‘on Rhapsody’ to both of those points.

One could argue that Spotify’s ability fuel enormous grow is because of its very slick social functions coupled with the a mass number of users. Meanwhile, Rhapsody’s loyal and active customers listen to tons of music in the service, but without sharing of that playback it’s locked in a vacuum. It’s been a weakness that the service has yet to address in its decade plus existence.

The integration looks nice. But it still requires Rhapsody user to do the work to help the company mine Twitter for customers. What has made Spotify so damn sticky is that its social features are automatic and on by default. On its service, you have to opt out to not share. Meanwhile Rhapsody requires that you tweet your heart out about your favorite songs to let everyone know what you’re listening to.

About Face

I must point out that Rhapsody has been extremely critical of free music over the years. As Spotify has grown enormously over the past couple of years Rhapsody has ratcheted up the attacks on free music.

When the Taylor Swift vs Spotify controversy was at its peak, Rhapsody Board of Directors Co-Chairmen Rob Glaser and Jason Epstein authored an opinion piece in Billboard that called free music “throwing out the baby with the bath water.” Ethan Rudin last summer told Buzzfeed that free streaming services send the wrong message to potential customers. “If you continually offer somebody the perpetually free model, they’re always going to opt not to pay for it,” is the way Rudin put it.

It should also be noted that today you cannot play on-demand tracks for free on Spotify’s mobile app, but you can play anything on the Rhapsody catalog for free on Twitter. So what happened to aligning around 100 percent paid music?

Look, I get it. A company can change its mind. Business conditions always change and if you don’t adapt, you have a good chance at being swept away. But what is equally important is that we believe in what you say. Consistency is extremely important in the music business, as it has a checkered past.

Scoring points on your competitors for giving away music while planning your own free music offering does smack a bit of talking out of both sides of ones mouth. To say the least.

Disclosure: I worked at Rhapsody for nine years before leaving in September of 2013.

More Free Advice

Billboard: Why Streaming (Done Right) Will Save the Music Business

Buzzfeed: Rhapsody CFO: Taylor Swift Is Right — Free Streaming Is Bad For Music

CNET: Twitter rocks! Rhapsody kicks off free songs through tweets

Geekwire: Rhapsody launches music sharing on Twitter: Full-track playback without subscription

Evolution Trumps Revolution: Why the Macbook Air Unveiling Is the Real Star for Apple

Forget the watch.

This week Apple announced the ship date and details around its first foray onto the wrist, the long-awaited Apple Watch. Of course the press fawned over the details and the design of the device, as the richest company in the world takes on luxury brands like Rolex.

But the watch wasn’t even the most important announcement today. Not when you take into consideration how Apple is approaching the diversity of screen sizes.

We might look back at the announcement of the 12-inch MacBook (note Apple is no longer using the Air name) as the beginning of the end of iPad Era for the company. Over the past few years, the iPad sales have slumped for a variety of reasons, mostly because the pincer maneuver of phones are getting bigger and more useful and computers getting lighter and more efficient with better screen resolutions. The need for a tablet has waned as each of these technology trends eroded the popularity of tablets.

The new Macbook combines a size of an iPad (though slightly larger) with the functionality that once was only available in the MacBook Air or Pro lines. With a Retina display, Apple hopes the 12-inch MacBook will lead lots of iPad consumers to consider it instead. Earlier this year, CEO Tim Cook stated he believes Macs are cannibalizing iPad sales.

Mac Daddy
Apple sold 5.5 million Macs in their record-breaking quarter that ended in December. Granted, that is a drop in the bucket compared to the company selling 74.4 million iPhones or even the 21 million iPads in the same period, but it still shows the strength Apple has in computers. Although Apple doesn’t break out specific sales per model, the company trumpeted the new iMac with a 5K Retina display as the main driver of the sales.

For several years now Apple has been busy slimming down the laptop by removing features that we thought consumers couldn’t live without. With each version, Apple continued to nip a drive here, tuck an under-utilized port there. The end result: a lightweight, killer machine with terrific battery life that leads the industry. The current MacBook Air 13-inch weighs less than three pounds and boasts a performance very close to the MacBook Pro version.

Simplest Mac Ever
For the new MacBook, Apple is even stripping away more, leaving only a headphone jack and one multi-functioning port. The machine takes advantage of the new Intel mobile device microchip, allowing for more battery life and lighter weight. The machine comes in at two pounds that can last all day.

What Apple kept, though, and even greatly improved, was the keyboard. Fact is that despite all the tablet hoopla, consumers like a keyboard. Even Microsoft understood this and added the colorful detachable keyboard to the Surface line.

Some have commented that the machine doesn’t really seem like a real computer. But what a real computer is has changed. Sure the new Macbook isn’t going to perform when crunching massive Excel files or editing video. And yeah, the company is selling a $79 dongle that many hardcore business users will need to project a presentation on a screen.

But devices have been trending toward wireless transmission for years now. I don’t suppose that we’re going back to a wired world anytime soon. The need for a bunch of ports is fading fast.

Apple has clearly seen the future of computing and is creating a device that will just go ahead and compete directly with iPad. It is something that other companies would avoid at all costs. But Apple has seen the writing on the wall and is adopting its strategy to take advantage of the trend.

The Watchman
Yes, the Apple Watch does suggest a shift for the company. It is reminiscent of its big audacious bets with the iPod and iPhone. By creating a huge market that didn’t exist previously, the company believes it can dominate like no other. The iPad was meant to be another example of making a market.

Only time will tell if Apple is able to make a mass market out of wearables. But by re-envisioning what computing looks like in the future and aggressively changing its product, it could be that the new MacBook ends up being the biggest winner from this week’s announcements.

Major Labels Are Truly Home of the Free (Music)

Lucian Grainge, the CEO of Universal Music, has recently been talking about getting tough with companies that offer free music. First, a couple of lieutenants who shepherded digital deals, Rob Wells and David Ring, departed. Some in the industry considered it a sign that Lucian had cooled on ad-supported companies like Spotify.

And recently a video of Lucian’s comments at Re-code’s Media conference surfaced. In the video, Lucian consistently questions the long-term viability of ad-supported offerings. Lucian, apparently, just recognized that these services are giving away free music.

I find this hard to believe. After all Lucian approved of, and personally benefitted from, deals for Spotify, Deezer and Rdio, all who have free offerings. It’s almost like he’s like he’s channelling Captain Louis Renault from the classic film Casablanca, who is shocked, just shocked to find gambling taking place at Rick’s Café Americain. Meanwhile he happens to be winning at the tables!

Back in 2011 there was significant label resistance to granting Spotify a freemium license. Daniel Ek has mentioned that it took years to get over objections to granting the license in the richest music market in the world. Sure, Spotify had proven streaming worked in Scandinavia. But in America? No way!

At least until Spotify wrote a big check to labels guaranteeing revenue as well as a stake in the Swedish based startup. Rumors had the number marked at $200 million, although all figures and deal terms are confidential. Once Spotify wrote the check, then all was hunky dory.

And then it wasn’t.

Excuse me if I don’t completely believe Lucian. You see, it is my contention that major labels are addicted to free services and they are not going anywhere anytime soon. Labels just have too much at stake to pull back now. UMG, Sony and Warner all have sizable stakes in Spotify, as well as other companies. Jean-Rene Fourtou, CEO of UMG’s parent company, Vivendi, stated that it held a five percent stake in Spotify. That will be a sizable payday for UMG if Spotify goes public, which it surely will attempt in the near future.

And remember those label deals for the freemium service that Spotify signed when first launching in the United States in 2011? Those deals are up for renewal and are being negotiated right now. So is it any surprise that the CEO of the biggest recorded music company in the world is suddenly getting cold feet about freemium. Can someone say gamesmanship?

Apparently Lucian’s strategy is working. The NY Post is reporting that Spotify is offering to sweeten the pot by guaranteeing UMG $1bn over the next two years based on its growth projections. The Post also claims that Spotify projects the $1bn to be 39% of UMG’s pretax earnings, an enormous piece of their revenue pie.

The loss of recorded music revenue is real. And it is just common sense that streaming services are partially to blame. Why buy music when you can stream as much as you like? Vivendi recently released earnings that showed UMG’s revenues slumping 3.8 percent last year after excluding costs for selling the Parlophone Label Group, which it acquired in the EMI deal. Digital sales were flat, but transitioned from track sales to streaming revenues. Meanwhile, physical sales continue to slump, as they have for the past 10 years.

Let’s face it: subscription streaming has yet to prove itself the savior of the music business that many have trumpeted. Just replacing digital track sales is not good enough. This industry has shrunk for too long and needs to grow revenue and, more importantly, consumers. But so far, streaming hasn’t been the answer. There are many reasons for this and we need to spread the blame around. Here’s a few reasons:

  • While they will license anyone who can write a check, major labels advantage those players who can raise the most cash, which of course they’ll get a lion’s share of through license agreements.
  • Startups have yet to convince majors of new models that work for the customer. And when a new idea gets licensed, it is extremely hamstrung economics, or the feature set is so limited that it fails to catch on with consumers.
  • Label promotion staffs want to utilize the channels that can deliver the biggest promotional pop, regardless of the revenue model or impact on the market. Seriously, would any major artist drop a record without a YouTube promotion strategy?
  • Major labels see a pot of gold at the end of the rainbow from an IPO or an acquisition. UMG made $433 million on its Beats Electronics stake, for example.
  • The freaking price for on-demand streaming is still too high to drive mass adoption, and companies have yet to convince the industry that $9.99 a month just doesn’t work. Even Apple apparently failed.
  • Consumers don’t want to pay for music, period. Access to products like YouTube, P2P, Pandora and the likes have conditioned a new generation of potential customers to think the cost of music is zero.

So what is the way forward? The answer isn’t to roll back free music as some have suggested. Can we limit access to free? Absolutely, but it comes with risk, especially in subscription services. Spotify has said that 80 percent of subs come from the free tier, and drying up that pipeline will have an impact on its growth potential. So that will need to be closely monitored and managed. Apple, with its 100 percent paid product, won’t be able to pick up the slack. The industry needs Spotify, Google, Apple, YouTube, Deezer and Rhapsody all to contribute premium subscribers.

The industry also desperately needs to embrace new models. Mark Mulligan recently suggested that day passes could be a way that subscription companies could grow incrementally grow revenue and not be wedded to the ‘all-or-nothing’ approach of premium subs. And companies launching these new models need to have flexibility to try offerings without going belly-up immediately. In the startup world, pivoting model and offerings is often a legitimate way to find value. We should be following that model.

And finally, the industry needs to embrace a multi-variate pricing structure for premium subscription. Not everyone needs access to 30 million tracks all the time. Could a $5 mobile price point that smartly gives customers access to a certain number of tracks work? Are there markets that might do better at $7.99, $3.99 or $2.99? The industry really should be attempting to grow as many paying listeners as possible and not obsessing over average revenue per user until the market matures.

More Shocking News

Re/codeLucian Grainge Wants You to Pay Up

Music Ally: What Happened When Ministry of Sound CEO Shared A Stage With Deezer and Rdio

BuzzFeedUniversal Has A Big Stake In Beats That’s Worth Nearly $500 Million

Vivendi: 2014 Annual Results

Jonmaples.com: Fake Fight: As Apple Preps Streaming, Labels Sing The Same Song

Fake Fight: As Apple Preps Streaming, Labels Sing The Same Song

BillboardFight Between Apple and Spotify Could Change Digital Music

This is amazing! First, we hear there’s a lack of comfort with free music and how Spotify should have so many more than 15 million paid subscribers. Then Apple marches in, provides market research evidence to the labels how many more customers (and therefore, revenue) the industry could garner with a lower price point and labels say ‘no way.’

Why? Well, then labels would have to offer lower pricing to the entire industry so to not advantage Apple. Glen Peoples‘ source at the end of the piece is absolute right: labels are deathly afraid of Apple becoming the entire music industry. A strong Spotify is required to counter Apple. Freemium isn’t going anywhere, though a listening cap could come back for a brief time, as it did a couple years ago.

No matter what others in the media absurdly suggest, the reason Apple isn’t interested in freemium is because it doesn’t need it. The main goal of freemium is to attract listeners and then slowly convert them over time into a paid tier. Listeners won’t be a problem for Apple as the streaming app will be pre-loaded on every iOS device and most likely baked into iTunes.

Free Music Lives

Trust me, Apple will feature free music in the streaming product. But instead of paying for freemium, the company will offer labels promotional opportunities. Nobody can bundle the power of the iTunes store with free streaming for a week or month. That’s a killer combination for labels, even with paid downloads falling.

And converting those listeners into subscribers? Apple already has an enormous amount of valid credit cards, so it’s just a matter of signing in to subscribing. So why would Apple pay hundreds of millions of dollars to major labels for freemium when it already has distribution and payment covered?

Price Fixating

Eddy Cue, Jimmy Iovine and the Apple team have been harping on labels to consider lower the price of streaming. There’s been more and more data analysis showing a lower price of streaming will lead to many more customers signing up, more than making up for the loss of revenue. And I’m sure that Apple presented significant market research and bulletproof data that proved the point.

Despite overwhelming evidence, the labels stuck to their guns, and said if you want to charge less, you can pay for it. Meanwhile the largest streaming service in the world, YouTube, continues to give away free music at a scale the dwarfs Spotify and Pandora combined.

And you wonder why the music industry can’t grow. Not that we needed more evidence.