2017 Digital Music Scoreboard

I was recently asked to participate in RAIN News’ 2017 predictions for the audio industry. Not one to follow directions, I filed wishful thinking ‘predictions’ that assumed the industry would get its act together when considering streaming and make fans and listeners the main focus instead of treating them like a piggy bank that keeps on giving.

So why no real predictions? For the most part I find them pretty boring. Mostly because you have a pretty wide knowledge-to-blab gap. Those who truly know what’s going on are not in a position to say, and those who are willing to blab certainly don’t know enough to make insightful predictions.

Like this one from RAIN’s 2016 predictions, for example:

“…Pandora’s on-demand service will arrive in November to good reviews and international expansion. As a result P stock will soar to about $30 one year from now. And by mid-2017 P will be close to Apple and Spotify for on-demand subscribers.”

Ouch! Fact is most predictions are wrong and even if correct, all you really get is bragging rights. I certainly wouldn’t create an investment strategy based on industry prognostications.

But as 2017 starts, I do think it’s worth pausing to reflect on where the industry is and how it’s trending. After all, without a scorecard, how are we supposed to know who’s leading? So I offer you my 2017 Digital Music Scoreboard.

1. Spotify

Daniel Ek’s company capped another tremendous year that earns the number one slot here. The biggest number is the huge increase in paid users. The company announced it passed 40 million users in September, up from around 25 million at this time last year. Oddly, every time there is big launch from a competitor, Spotify seems to increase the number of subs, which leads me to believe that the company is hitting a Kleenex-level of dominance. Have we gotten to the point that the company is the only brand name consumers associate with the music category? Perhaps.

However. The company has a bomb under the table problem. Because of its most recent funding rounds, Spotify must go public by September or start coughing up big chunks of the company to investors. And to go out, Spotify must disclose huge gobs of financial information that hasn’t been seen, which could well impact its ability to go public. Deezer’s failed attempt to go public in France this year is a prime example.

While it might be a bit scary for the company, the employees, and investors, I can’t be more excited to dig into the company’s financials. Access to Spotify’s financials will allow us to answer many core questions about the viability of streaming music. At this point we have a small window into these questions through Pandora and a sliver of Napster’s business metrics. A full reveal of these metrics will allow us to see if Spotify is the future of the business music, or as a former colleague once put it, ‘destined to become General Motors or Lehman Brothers.’

2. Amazon

The Seattle commerce giant doesn’t really care about music, not like Apple and Spotify, at least. You don’t see Amazon spending massive amounts of money on launching radio stations, or spending millions on user acquisition. However, Amazon has a full stack of music products and also has been able to launch several different price points (from free to $9.99) for on-demand streaming, depending if a consumer owns an Echo device or is a Prime subscriber. Amazon is never going to be as sexy as Spotify, but it understands the role music plays for the company and utilizes it effectively.

And finally: has there ever been a better device for consumption of all kinds than the Echo. Not only has it done well as a music device, but it has been the trojan horse for turbocharging buying from Amazon. Slice Intelligence reports that Prime customers spend seven percent more at Amazon once an Echo device enters a household.  If you were taking bets five years ago on  who would win voice in the house, Amazon would be maybe your fourth pick. Soon it will even work with Sonos, which will make a bunch of music nuts who have invested heavily in the speakers (like me) very happy.

3. Apple

For all of its strengths, the company hasn’t had the best past few years. It nearly missed streaming altogether and when it did enter the field, it certainly didn’t blow the doors off the competition. The company launched Apple Music in more territories than anyone else. Better yet, nobody has more credit cards on file than Apple, which would make it seem like a slam dunk that it would quickly sign up tens of millions of subs. In September, the last time the company reported, Apple said it had 17 million subs–nothing to sneeze at, certainly–but well under the company’s lofty goals.

Additionally, there have been reports that Apple Music’s churn is nearly twice that of Spotify, which is very debilitating for a company that doesn’t have Spotify’s built-in funnel of free users to squeeze into a paid tier.

But there’s good news. Apple launched a new design that seemed to be well received, and there was a spate of hiring of pros who can help with churn and retention. It seems impossible that Apple won’t get the wheels greased and start to perform better this year. As MP3 sales continue to crater, it might just in time.

4. Sirius XM

I never understood Sirius, all the way back when the two companies were first launching. Did it make sense to start an untested offering when you had buy a $20 million FCC license, launch 20 satellites and pay for an expensive radio in new every car coming out of worldwide auto plant before you sign up a single customer?

Somehow the companies found a way to join forces, executed a nifty jujitsu move on its massive debt and all those car radios actually became its long-term user funnel. Of course Sirius is still a transitional technology and is only slightly better than terrestrial offerings in a world where today you can play anything anywhere. How will the company ever compete? A marriage with Pandora really would make a lot of sense.

6. Google/YouTube

Well that didn’t work. YouTube Red, its paid tier, reportedly only signed up 1.5 million subs as of late summer. While only in a handful of countries, it still makes you wonder if its billion free streamers use the service specifically because of the price point. In the words of Homer J. Simpson, “Free! I can afford that!” Meanwhile, the company is facing massive pressure from the industry about its ‘value gap’ for giving away free music by the boatful (again, to the people who weren’t going to pay to start with). The company’s real workhorse is Google Music All Access, which continues to perform solidly, but without fanfare. One wonders if it might put all its paid eggs into that basket.

6. Pandora

Too little, too late? Tim Westegren came back and focused the team as CEO. The company closed tricky negotiations with labels and publishers that will allow the company to expand internationally and enter on demand. Pandora probably needed to pivot well before even tardy Apple; and now is the third or fourth option in the field.

There are a few positive signs. Since launching its full suite of subscription products, Pandora has stuck to the top of the charts in the iTunes store for both downloads and grossing. And there’s plenty of room to grow as the service is still only in a few markets compared to Spotify and Apple.

But it might be too late. The company is under significant pressure to figure out its future from institutional and big foot investors. Rumors of a merger with Sirius XM near the end of the year propped up its sagging stock, which is still only a third of its price two years ago.

7. Tidal

If it pleases the fine women and men of the jury, I offer Tidal as example numero uno of why exclusives are very challenging for a music service. Tidal’s strategy is to offer boatloads of cash to artists for exclusive and watch the fans flock to the service! And just look this past year, Rihanna, Kanye, Beyonce, Prince! That’s some serious firepower! So how did Tidal do with its 32 exclusive releases this year? Good. But not great. Apple Music has nearly four times as many subs as Tidal’s last reported 4.2 million, Spotify 10 times as many.

By focusing strictly on the releases, Tidal has gotten a lot of people who just had to hear a new record, but maybe didn’t really want to subscribe to a music service. Couple sluggish growth with reports that the company is late on paying bills and it starts to look bleak.

The company does have strong relationships with artists that it could use to craft a unique offering. However, this will not be a short play, nor a cheap one. Tidal will need a huge war chest to continue to grease the wheels of exclusives. And as I wrote in the fall, there could be an inherent weakness when marketing solely through exclusives because of high churn. So it might not be a viable strategy, even if the company successfully gets people to try Tidal. Then there are the costs. On-demand streaming is a very expensive business before you start writing six figure checks for a two-week exclusive window. Is there any way that this strategy makes fiscal sense? It’s very doubtful.

8. Napster/Deezer

These two companies share the same model and operational challenges of being a quasi-white label music service for cell phone services. Napster took it even further by powering iHeart Radio’s on-demand service. Can either company can survive in this environment? Deezer quickly withdrew that failed IPO in France after it became apparent that the market wasn’t going to cooperate and Napster rebranded after deep staff cuts. A merger between these two companies and getting the headcount to a sensible size that the thin margins justify could be a path forward.

9.  Soundcloud

The ink wasn’t even dry on the deals with labels when the company figured out that it was in trouble. It makes sense, too. Sure Soundcloud has scale, but it has less ability to monetize that audience than even YouTube. Now that the life buoy from USS Spotify has been retracted (apparently over those pesky major label deals), it probably is just a matter of time before Soundcloud sinks.



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