Churn Baby Churn: Why TIDAL’s Losses Only Tell Part Of The Story

Screen Shot 2015-04-01 at 10.07.52 AM
TIDAL, the Jay-Z led streaming service may have a problem retaining user it has signed up. 

The Wall Street Journal recently published some pretty terrible numbers on the train wreck that is called TIDAL. Naturally, the entire industry started piling on Jay-Z’s music startup, determined to show what a cluster the company finds itself in. But to us music vets, it’s pretty much the same old, same old. Losing lots of money isn’t the problem—it’s actually required these days if you’re running a digital music company; due to the enormous costs of content, and the fight for paying subscribers. It should be pointed out that Spotify’s losses are much greater than TIDAL’s reported numbers.

The bigger problem that TIDAL faces is revenue growth. According to the filings the WSJ reported on, TIDAL lost $28 million on revenues of $43 million in 2015. And while that’s a lot of money to lose, Spotify lost nearly $194 million, and Rhapsody lost $35 in 2015. But the scale of both of those companies is impressive. Spotify nearly doubled its revenue last year, recording of $2 billion. Even Rhapsody logged around $200 million last year.

So what gives? Why is TIDAL’s revenue just a drop in the bucket compared to its competition? I think it has to do with its reliance of exclusives to sign up subscribers. A caveat here: this is speculation based on one report from Sweden, which might not even show the accurate financial picture of the company. A source told the Journal that the filing didn’t include all U.S. revenue, for example. Additionally, it doesn’t account for 2016, when TIDAL rolled out wave after wave of impressive exclusives, from Rihanna to Kanye to Beyoncé. So it doesn’t really account for its power moves.

However, if you just divide the revenues of each company and into each self-reported subscriber count, TIDAL lags well behind in revenue per subscriber. Rhapsody banks $57 per sub per year and Spotify is an impressive $87. TIDAL didn’t announce year end subs, but in March it said it had 3 million, so let’s just say they had 2.5 million at year’s end, for a total of $17 per subscriber. Don’t like that number? Fine. Let’s just go on the TIDAL subscriber number reported on October 1, 2015 of a million subscribers. Based on that, TIDAL is still generating half the revenue per sub of Spotify and a 25 percent less than Rhapsody, a company with a significant base of lower-revenue bundled subscribers.

I know what you’re thinking. How can this be? TIDAL doesn’t have a free offering. It also claims that a huge number of its subs are on the $20 plan for better audio quality, much higher than all streaming services. Shouldn’t TIDAL be generating tons of cash per user? Well, yes. Except for one nagging little problem: churn.

Churn, the amount of subscribers that quit your service every month, is the canary in the coal mine for a subscription business. Low churn means people are happy. High churn is a disaster, as you need to replace all those subscribers just to tread water–let alone to grow. Churn is the one metric subscription companies obsess over. Netflix has famously spent a great deal of effort lowering its churn and is considered the gold standard for an entertainment company.

In the next stage of subscription services, churn will be one of the most important factors in determining health of businesses. There were reports this summer that Apple Music’s churn was significantly higher than Spotify’s, and the company has recently been recruiting talent to deal with its problem. So it’s just not TIDAL that has to worry about it. However, the company is much more suspect to massive churn that its competitors.

My theory is that TIDAL does indeed harvest a lot of credit cards from people who just have to have access to The Life of Pablo or Lemonade. But the minute the exclusive is over, those subscribers leave. In droves.

I would suggest that TIDAL has done a great job at signing people up. And a terrible job at converting them to the service long term. Mostly because TIDAL isn’t marketing the service outside of the only place where you can get exclusives for a short period of time.

One of the measures of performance for companies I track is App Annie data on downloads for iOS in the U.S. It doesn’t tell the whole story, but it does suggest popularity of an app. More downloads: more new customers. One would expect small changes from time to time, but steady, consistent demand. Kind of like Spotify’s iOS downlaods:

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In comparison to the TIDAL’s downloads over the past year:

screen-shot-2016-09-15-at-4-10-17-pm

That’s one bumpy ride.

You’ll also note that the scale between Spotify and TIDAL is significantly different. Spotify never dropped out of the top 30 apps, whereas TIDAL has bumped between 1 and 1,250 since churning out the exclusives.

TIDAL in June announced it has 4.2 million subscribers after signing up 1.2 million fans during Lemonade alone. But let’s not pay attention to how many subscribers TIDAL adds. It’s all about how many it retains.

One last caveat: maybe I’m wrong. Maybe TIDAL is signing up tons of people and they’re sticking around. But if that is the case, the company should have lots of cash on hand to pay its bills in the form of operating income. The fact that seems to be short of cash and it isn’t able to turn its exclusives into a consistent funnel of customers leads me to believe that something isn’t working with exclusives.

WSJ: Jay Z’s Music Streaming Service Tidal Posts Huge Loss in 2015

Recode: Spotify is adding more subscribers and is losing its chief revenue officer

Billboard: Rhapsody Nears 3.5 Million Global Subscribers

 

                                                                                                   

 

Wearing It Well: Can Apple Turn Wearables Mainstream?

A version of this first appeared on Re/Code

By South by Southwest standards, it was early. Obscenely early. But there we were, tromping out of our hotel into the unusually foggy morning, mere hours after falling into bed, ears still ringing from a band that had sounded excruciatingly like all the others we heard for the past 12 hours.

Hugging our coffees close (no Starbucks line at 8 am during SXSW Music!), we marched down the street and queued up outside a venue. Why were we in line so early? The sports giant Nike was taking a huge step forward in the wearables industry with the release of its Nike FuelBand. And we could be some of the first people in the country to purchase one as part of its launch program; the company sold 100 per day at the festival.

We were greeted by our own personal Nike rep, who guided us into a venue that had been transformed into a glitzy FuelBand showroom. He showed us the FuelBand, and helped us set ours up. We then went out into the world to try our hand at the “quantified self” movement, where you collect metrics of everything you do in your life. Nike’s own metric, “Fuel points,” would let us measure our activity and compare it to ourselves and friends.

Get me Jonny Ive now!
Get me Jony Ive now!

Two years later, almost to the day, I recorded my last Fuel point. I had long ago stopped caring about the metric, for a variety of reasons: The band didn’t capture all my activity, it wasn’t very accurate or sensitive to movement, and it wasn’t based on anything that brought meaning to my life.

But the main reason that was my last Fuel point day was that the damn thing had stopped working. I got the dreaded “801” code, which required a trip to the Nike store for replacement. This had happened repeatedly — six times since that day in March.

That was enough for me. I left the device on my desk and never picked it up again. I found that the untracked life wasn’t much different from my tracked life. The only difference was that I didn’t have a watch, which is primarily what I had used on the band.

I wasn’t alone in giving up on the FuelBand. And I’m not just talking about customers churning like me, though my guess is that there are a lot of us. In April, Nike announced that it was discontinuing the device, firing the entire FuelBand team and focusing on “other digital initiatives.”

Even with Nike’s big failure to capture the imagination of the active world, wearable computing is still considered the next huge growth area in technology. Credit Suisse sees it growing from $5 billion in 2013 to $30 billion by 2018. IDC says that companies will sell more than 112 million devices by that year.

It may be the right time in the technology cycle for wearables, too. Sensors of all kinds are smaller, cheaper and much more accurate. Displays are smaller, and even flexible glass looks like a possibility soon. You can imagine that a device with multiple sensors could find ways to track your fitness, as well as providing location-aware features like mapping, shopping and even banking.

Not only would wearables expand a company’s device portfolio, if it sells enough of them, but these firms will have access to all kinds of big data, with enormous amounts of real-time information that could be used for everything from personal communication to advanced location-based commerce. Big, big data.

Wearing out its welcome

So far, though, companies have failed in making wearables something people want to, um, wear. Most of the products have been either for geeky early adopters of new technology, or for hobbyists who absolutely need the data, like triathletes training for an Iron Man event. Sure, there have been technical problems, as well as a couple of health scares with the devices, but the two core issues these gadgets face going mainstream are their design and the product’s value.

Maxwell
Would you believe it’s checking my heartrate?

Designs have reflected the technical bent of products. Most look more like what you’d expect in “Minority Report” than what you’ve ever seen in a high-end watch store. And the generally bulky form factor lacks appeal for women, who have been underserved by most wearables so far. While the FuelBand may have been a bit different, it’s kinda just a souped-up Livestrong bracelet. In my informal and nonscientific customer reviews of wearables, most of them aren’t something an average customer wants. And don’t get me started on Google Glass.

Outside of the design — and maybe even more core to the problem — there doesn’t seem to be much demand for the features touted by the wearables manufacturers. If you start with the standard product-manager mantra of “What problem does the product solve?” there’s not much you can pinpoint. Most wearable devices track activity, but not really uniformly or correctly. Some, but not all, track sleep. The Samsung devices combine some fitness tracking with phone connectivity, but they’re cumbersome. And ugly.

You want to attract the attention and the interest of mainstream consumers? It had better be something people really want. And no company has been better at turning technology into desire than the big one: Apple.

Apple’s wearable moment

It’s clear that Tim Cook is betting big on a suite of wearable products. Bloomberg reports that the company has more than 100 designers working on a device. They’ve hired professionals from the fashion industry, the medical industry, the fitness industry and watch brands, as well as sensor experts by the dozens. All to work on what has been described as a luxury, high-fashion wearable device that will allow customers to communicate and track their vital information, including location and health-and-fitness metrics.

This isn’t the first time that Apple is entering a field where many companies have tried and failed. There were many MP3 players before the iPod, millions of phones before the iPhone, and even tablets before the iPad. It’s an Apple specialty to create something really valuable out of others’ failures by picking the right time, and creating an ecosystem that didn’t exist before. Apple doesn’t invent as much as it perfects.

Wearables pose a bigger challenge. Instead of a single strong compelling value (think “1,000 songs in your pocket”), the iWatch looks like it will package an assortment of features. And unlike the iPhone, which replaced three devices (phone, music player and Internet portal) with a single unit, it’s unclear if the iWatch will replace anything customers already use. At its core, the main purpose of the iWatch appears to be that it will gather data and work well with the iPhone. That will have value to some, but will it be enough to drive the industry to the estimated numbers? I can’t say that it’s a slam-dunk.

Five musts for the iWatch to be “ready to wear”

So, what would it take to make the upcoming device the breakthrough hit that Tim Cook craves? Forgive the impudence, but here are a few categories that Apple must nail if they expect to build the market:

  • It must be fashion-forward. Outside of the Nike FuelBand — and, some might argue, the Misfit Shine (I wouldn’t — I think it looks like it was issued by the CIA) — most wearables are terribly designed, at least if you consider reaching a mass audience. Apple is clearly investing in talent here, but the company needs to deliver the goods on a stylish watch that men and women wouldn’t be embarrassed to wear. This isn’t like any market Apple has entered, as the watch will be compared to classic brands like Tag Heuer, Rolex and Swatch. Jony Ive had better bring his “A” game.
  • The user benefits need to be clear, concise and limited. It has to be instantly clear why you need this device and what its main purpose is. Over the past few years, Apple has gotten away from the simplicity of its marketing pitches. There has also been an annoying habit of throwing in a bunch of half-baked products (Passbook, anyone?) well before they were ready for prime time. The watch can’t have any of these issues. My product-manager adage of “How do you want users to describe your product?” applies here. It must be crystal clear.
  • It has to work. Consumers will forgive many issues. But inaccurate recording or even fine-tuning of the algorithm will drive users nuts. In retrospect, the FuelBand’s problems with activity spelled its doom. After all, if Nike couldn’t monitor activity correctly, what the hell could it do? Apple will be held to a much higher standard than Nike. So what it tracks, and the way it tracks that data, must be baked by the time it ships.
  • Apple must be very careful with the information it tracks. Let’s face it. People hate Google Glass. Part of the hatred is because the device is extraordinary dorkified (see the first “must” on this list), but there are also privacy concerns with tons of people walking around with a camera on their head. The iWatch apparently will gather quite a bit of personal and sensitive information. It goes without saying that keeping that information private and secure will be incredibly important. But it’s also paramount that assuring customers that the rules of engagement around health data in particular are clear, and will primarily benefit users.
  • It has to appeal to an influencer community. Who will lead the adoption of the product? Apple has reportedly been targeting athletes, which sounds like a page right out of Nike’s FuelBand playbook. Somehow that didn’t work for Nike, which could be blamed on product issues just as much as marketing. Making sure that the company targets the right kind of influencers will be just as important as its marketing pitch. I’m not quite sure that tapping only pro athletes will give Apple the vast appeal it seeks. Apple will need to reach into popular culture — like that Steven P. Jobs wannabe and Louis Vuitton designer Kanye West, as well as others who lead cultural trends.

The stakes are high for Apple and Tim Cook. The iWatch will be the first foray into a category outside of its core offerings since the Jobs era ended. But it remains an open question as to whether the company has the intestinal fortitude to ship the right product, or — if it doesn’t live up to the exacting standards of consumers — to cancel the project and do something else with its billions in the bank.

The Value of Nothing: Don’t Accept Junk Food Streaming Music Numbers

It really should be a great day for streaming music. After all Nielsen released a report that showed unbelievable growth for the listening format. In the first half of this year streams have increased by 50 percent over the past year. But these numbers also are leading to discomfort for the streaming industry. Because along with the streaming increases are massive declines in all retail formats. CDs, digital tracks and digital albums are all down around 15 percent in the same period.

Mmmm, junk data.
Mmmm, easily consumable streaming music junk data.

Today’s numbers clearly demonstrate that consumers greatly favor access to their music over purchasing tracks. What isn’t clear is what this means for the music industry. While the revenue model for a purchase is well understood, we have no clarity on streaming’s value.  This is partly because a stream really can’t be equated to a purchase. After all a listen can’t really be compared to a retail event. But the real problem is that streaming services that make up the Nielsen numbers are vastly diverse.

Look, nobody in their right mind is going to compare YouTube and Spotify. But today’s numbers jams several different services with a variety of business models into a single number. It leads us to a question: should we really accept these numbers that don’t tell us anything about the business value?

Discerning A Difference

There are several different streaming products and each one has a different method of providing revenue for the rights holder. Unfortunately, the streaming number Nielsen posted was a single all-in number designed to show huge gains, but not to create clarity. These numbers would actually be revelatory if Nielsen would start tracking and reporting on each of these metrics separately.

As they say at the old ball yard, you can’t keep score without a scorecard. Same with streaming music. And since nobody else is doing it, I thought I’d describe the main streaming sectors and how revenues are generated by each. I’ve also included a few metrics that would help the industry understand the real value of each of these services.

Ad-Supported Streaming

The biggest contributor to Nielsen’s streaming number is ad-supported streams, which is dominated by YouTube’s massive reach and nearly unlimited catalog of music. While it doesn’t have the hype of Spotify or Beats Music, when we in the industry talk about streaming, we’re mostly talking about YouTube. YouTube is free and only generates revenue from advertising that is sold against the plays. Unfortunately, very little of the content on YouTube is monetized and the amount of money it generates per play is unbelievably tiny. Because of YouTube’s scale, a tiny increase in ad sales could vastly increase overall streaming revenues. But it requires significant growth in sales staffing and performance from Google.

Metrics We’d Like to See

-Active users
-Plays per active
-Revenue per play rate

Internet Radio

Comprised of non-interactive services and direct licensed radio, Internet radio includes services like Pandora, IHeartRadio and Slacker. A majority of these pay a stream rate or a percentage of revenue depending if the listener is free or is paying a subscription fee. In the US, Internet radio has performed very nicely. While YouTube can be described as a sampling platform, Internet radio is sticky, with listeners in droves using the services month after month for free, and some even paying to remove ads. The rates are wildly different depending on the deals for both recording and publishing rights. There has been major kerfuffle with this, primarily as Pandora has sought to keep publishing costs at their (nearly unjustifiably) low rate. But it remains a fact that every Internet radio play produces revenue for both rights holders, something that broadcast radio doesn’t do.

Metrics We’d Like to See

-Plays per user
-Number of plays per user
-Number of subscribers
-Lifetime duration of subscribers
-Revenue per play rate for free streams

On-Demand Streaming

When people refer to streaming, many times they’re talking about this bucket, which is dominated around the globe by Spotify, but includes Deezer and Rhapsody amongst others. However there are two different types of on-demand streams. Spotify has found that by having a free tier of the service, the company can build a pipeline of potential customers that it can monetize with advertising and convert into the paid tier. A vast majority of users in Spotify don’t pay a dime for the service. Spotify does pay for every free play, but it’s significantly less than the amount of revenue generated by the premium subscribers. That rate is confidential and differs based on the deal with rights holders. However many artists have seen it on their statements as low as one third of a premium play. It is worth noting that others have followed Spotify into the free racket, like Rdio, but services like Beats Music have stayed away from free.  It’s also worth noting that the number of people who use an on-demand service pales in comparison to Internet radio or ad supported streaming.

Metrics We’d Like to See

-Free users
-Free plays
-Revenue per free play
-Subscribers
-Subscriber plays
-Revenue per subscriber play
-Lifetime duration of subscribers

It’s A Trap

It’s easy to fall into the trap of pointing the finger at streaming services for the loss of retail sales in music. And there’s probably a whole lot of truth that many consumers who previously purchased music now just access it either for free or paying. But since customers are voting strongly for streaming and we’re committed to building new revenue models as opposed to suing upstarts out of existence, we should be asking much better questions about the streaming business.  That’s not only the suit who have their hands on the controls of the business, but also reporters, analysts and industry insiders. We should demand that Nielsen and other market research firms create better metrics that illuminate business value, when instead we get sensationalist reports that deliver big headlines. Good data is good for everybody—especially Nielsen, when we all start obsessing over these metrics like we used to with SoundScan every Wednesday.