The Bundle Deal: The Miracle of Spotify’s Paid Subscription Numbers

We all knew it was coming.

Of course Spotify was going to answer back the big ballyhoo of Apple Music’s underwhelming unveiling. It came today as Spotify announced 1) that it now had 20 million premium users 2) that it was paying more than ever for content ($300 million in the first three months of 2015!) and once again, tried to clear up the misconception of free music. As we all know, Spotify has been in the woodshed for months on end because of its free music scheme to sign up paid users. What brilliant strategy did our Swedish friends cook up this time? Well, when you are facing tough problems, do what everyone turns to: animation!

After watching this extremely informational and entertaining clip, I felt so much better.

Since Spotify has been announcing numbers, it’s mentioned the same conversion rate. Twenty five percent of their entire base is paid. This hasn’t changed in any announcement, year after year. The remarkable consistency of Spotify’s conversion, regardless of the different markets it launches with different consumers and behaviors and competitive pressures, truly boggles the mind. It actually twist credulity.

After word of this came out this morning, a friend who’s a longtime digital music veteran texted:

“36 percent of the users are paid? C’mon! Now that’s insane conversion. Has to be cooked with some underwater bundle deals. I am disgusted.”

It got me thinking about what a paid customer is, and how do we judge one.

The prevailing winds in the industry bends towards thinking that a paid user is good, and all free users suck. Well, maybe not all paid users are the same. You have customer who use mobile and pays $10 a month. You have customer who only has web access and pay $5 a month. And then you have my disgusted friend’s bundled users.

The Bundled Wars

It’s an open secret that there has been a battle between services to bundle on-demand services with cell phone companies. Spotify, Beats, Deezer and Rhapsody have been trading body blows to sign these deals. They are considered the crown jewels of the services because:

  • It provides a huge base of users that you don’t need to worry about billing, since the fee is bundled into the monthly cell phone bill.
  • The cell company will do the heavy lifting of marketing.
  • Cell companies just bake the service in for everyone in a tier. So if someone signs up for the All You Can Play plan, you get paid, regardless if someone uses your service or not!

But these customers also have drawbacks. The service only sees a fraction of the revenue per user than it does for the retail customer. As I have written about before, these deals are complicated because you have more than one party involved. On one side, you have the supplier–the content owner, in this case, labels. On the other side you have your distributor–cell companies. In the middle you have ‘lil ole digital music services, who have to convince these two big bad boys to take a discount to make the deal work.

In theory it all works. Customers get music at a discount. Labels get access to revenue they’d never get. Cell companies get premium services that leads to more loyal customers. And the digital services get lots of users, even if they’re only making a buck a month instead of three a month. Except for one, small issue.

Competition.

These deals have become extremely competitive over the past couple years. All the music services are working hard to land carrier deals and take further discounts off already paltry margins. There have been rumors that Spotify has been the most aggressive of all the companies to close, or at least disrupt, deals. So my disgusted friend wonders how many millions that Spotify loses money every month on, just to say it has more paying users. It’s an excellent question.

Drain The Swamp

There’s an old saying in politics that to get rid of mosquitos (or alligators), you’ve got to drain the swamp. The concept is that once you get rid of the cause of your issues, all your annoyances go away. It could be that Spotify is trying to get rid of its competition by taking a loss on bundled customers to get the deals (the swamp in this instance). Additionally, it doesn’t hurt the PR cause to say you have more subs, because, you know, paid subs are GOOD!!!!

As we get smarter about subscription music, we’ll figure out better questions to ask. My contention is that these bundle deals will need to come under increasing scrutiny as services start to mature. Many in the industry believe the bundle is the answer to all of our problems. But the baggage the bundle contains might make it not worth the trouble.

Apple Music: Millions of Songs, But We’ll Only Play 150 of Them

At Apple’s Worldwide Developers Conference in San Francisco, the company unveiled its long-rumored reboot of Beats Music. In some respects, this day was one that many who have followed streaming music since its inception have anticipated and dreaded.

Many have waited for the day Apple, with its juggernaut marketing muscle and insatiable appetite to create a market out of thin air, got behind subscription music. That day–many posited–streaming music would finally come of age because for the first time everyday people would be aware of the product.
In the 13 years since Rhapsody introduced the first licensed subscription service, the product has been on the fringes of the mainstream. Even today, only 41 million people around the world pay for an on-demand music service.
And why the dread? Many in the business who have been here since the beginning felt that the day Apple came into the market it would be game over for all the existing companies.  Based on its power, many believe that Apple will take all the oxygen out of the market and there would be no room for other players in the field.
Based on the WWDC’s presentation, current streaming players don’t have much to worry about. At least not for now. The product was somewhat all over the place. It featured:
  • A reboot of Beats Music’s streaming service feature Apple Music branding;
  • Apple Music Connect, the way that artists can directly communicate with fans–if artists choose to opt in and talk to fans in the Apple ecosystem (good  luck with that one);
  • Beats 1, a 24-hour radio station, featuring former BBC 1 DJ Zane Lowe.
While there are problems with all three elements, Beats 1 is the most intriguing and confounding. In some respects, a worldwide radio station based on BBC 1 is a bold move. Apple is smart in that it has a captive audience on the phone, and it potentially could gain a sizable audience. But on the other hand, it seems at odds with the value proposition of streaming music. It’s like Apple is saying: hey music lovers, we have millions of songs that you can listen to wherever you are, but we’ll just feature these 150 a day in our service. Enjoy!
Look, streaming services are closely controlled by restrictive licenses from the major labels. There’s very little innovation that a company can create in term of features, offerings or pricing. Because of this, services must utilize content programming strategies to differentiate. In essence, the content programming approach serves as the soul of the company. By focusing on Beats 1, Apple is stating that its soul is about the tightly controlled experience. Sure, Apple will continue the Beats Music blueprint of having music experts create playlists for genre and mood, but that experience was extremely thin and needed improvements to function correctly. And now Apple is adding a broadcast style product.
So why is this approach a mistake?
1) It can’t cover the range of tastes
Sure, a flagship radio station from the largest retailer of music in the world makes sense, but for how many people? Ten percent? Twenty percent? When I was part of the team that managed content programming at Rhapsody we operated with this ethos:  program to the taste spectrum of our listeners. In other words, we looked at the data and created radio stations and playlists for whatever people were listening to. More indie rock? No problem. More easy listening? Sure we could do that. More Beyoncé (always with the Beyoncé)? We would deliver more of that. A single worldwide station seems like a crappy way to service that model. And let’s just say that Apple is super successful and replicates Beats 1 and creates a shitload of stations. That’d be great. But at best it ends up matching exactly what Sirius XM does pretty well. In other words, it just refines broadcast radio.
2) It won’t cover the catalog
At best, Beats 1 will be able to play about 150 songs a day. With a catalog of music over 30 million, even the most adventurous programming in the world will lead to exposing a laughingly small amount of music to its customers. While the idea that a music fan wants 30 million songs is an absurd notion, it would seem that Apple can do better than exposing .0001 percent of the catalog it has licensed.
3) It’s an artifact of the past
Many of us of a certain age grew up with great radio and understand its power and allure. And to my mind, that’s what the geniuses at Apple Music are focusing on: their own experiences. But the world has truly changed. Music fans have access to more music than ever. Because of this, the behavior of listeners–in particular the next generation–has irrevocably changed. Despite the conclusions from Nielsen’s questionable survey about radio discovery from last year, I contend that the next generation isn’t listening to radio. Oh sure, maybe they flip through the five channels programmed in the car to hear the same crap. But then they’ll plug in the phone and listen the way they want on Spotify, Pandora, Slacker, Songza, Beats, Soundcloud or the 35 or so other options at their disposal.
4) There are many more important things it should be doing
Building streaming services is hard work. There will still be many problems that Apple will need to address. The Beats service itself needs significant improvements. Just like Ping, Apple Music Connect will be dead on arrival unless the company puts significant resources towards its development. Apple Music has much work to do to create real value for customers. Throwing resources towards a single radio station seems kinda stupid considering the way the world has changed.
Jimmy Iovine said in his off-kilter presentation that internet radio isn’t truly radio, but rather just playlists masquerading as radio. The implied point was that Apple was gonna reinvent radio by putting all the trust in a few tastemakers. But does that make sense in a world of infinite choice and unlimited possibilities?
In a word: no.