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.
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