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.

 

 

Consumerless Recovery: Music Revenues Are Up But Is More Pain Coming?

News this week, for once, was positive for the music business. The RIAA released its report for the first half of this year and there was an eight percent growth in revenues over the same time 2015, thanks to subscription streaming. At long last, after years and years of losses, we’re finally on the other side of the decline and now we’re going to see a huge run up of revenues as the industry continues to grow like gangbusters. At least that’s what you’d think from the headlines. I agree: it’s a good result. But there are also troubling signs in the numbers.

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Source: Recording Industry Association of America

You see, while revenues are up, the number of people who buy music has steadily fallen for the past decade. According to MusicWatch, a music industry research firm, the number of people buying rebounded a bit in 2015 to 85 million, it’s still significantly down from the buying population 10 years previous.

Not all consumers are created equally. Over the years the average consumer spent around $50 a year on music. Sounds pretty good, right? Well, the average consumer only about about 1.5 CDs a year. So how is that possible. Well, there was small number of consumers who bought 10 or 20 times what most consumers did. I used to see this all the time in line at my local record store. I’d be wondering if I should be buying the 10 CDs in my hand on my meager first job salary (the answer was no). Meanwhile, the woman in front of me was buying the Debbie Gibson CD for her daughter. It most likely was the only CD she’d buy all year.

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Sources: MusicWatch and U.S. Census Bureau                     Music Buyers in Millions

This has all changed in the subscription era.  We’ve flattened that curve between the casual buyer, who only bought Adele’s 25 last year, and that obsessive-compulsive music nut who happily subscribes to Spotify. Sure, the nut is still spending much more than casual fan. But at $10 a month, it’s capped at $120. And yes, the music nut might also purchase vinyl, buy up posters at Flatstock, and attend music festivals, but they don’t have to pay more for all that music. Many super fans I interviewed to while working at a streaming service thought they were getting away with something by only paying $10 a month.

The theory of the streaming era is that we’ll produce so many more subscribers, that we’ll make up the difference in revenue. But thinking that casual fan will pay twice as much as the average consumer spends is fairly flawed logic.

Especially when one considers how people are listening today.

 

Based on MusicWatch’s recent audiocensus report, more than 70% of all listening today is on services that are free, like Pandora, YouTube, Spotify’s free service and iHeartRadio. Because when faced with the choice of $10 a month for something they use rarely or free, casual fans choose free. Duh. Hence the massive decrease in the percentage of buyers.

Much like how the U.S. economy recovered in the years after the housing market collapse, but only with many fewer jobs, the music industry is recovering. But with many fewer customers. And the pain is just coming. Compact discs may only be a shadow of its former self, but there were still 38 million CDs shipped in the first half of this year. Question: when was the last year you bought a device that can even play a CD? While vinyl and even downloads have a purpose and will maintain some attractiveness, my contention is that CDs will go to zero. This, my friends, is a problem.

So what can be done?

Perhaps address the product itself. Streaming services main use case is access to all the music. While it’s great for the fan that knows what she or he wants to play, it causes more problem than it solves for the casual fan. After all, how many times do you sit at your computer and not know what to play next. Even with 30 million songs only a seconds from a search.

Considering after all these years peddling subscriptions to consumers, we now have a total of  18 million subscribers in the U.S., I’m sure it’s safe to say that the $10 all you can eat music subscription isn’t the product for anything but the super fan. Will there be more growth? Yeah, sure, no doubt. Can it grow to 50 million? Doubtful.

So what about lowering the price, which has been bandied about as a cure all? Beyond the fact that rights holders won’t budge on price, it probably is the wrong product for those who like to listen occasionally. “Casual fans have different needs than super fans and may be fine with a more basic experience,” Russ Crupnick, managing partner of MusicWatch, told me via email. “So converting them to paid requires a different set of strategies and tactics. Lowering price alone won’t automatically convert them into super fans.”

Last week Pandora announced improvements to its free service as well as Pandora Plus, a product that merges a few on demand features, like more skips and the ability to save tracks to the phone for offline use, to its core experience. Can the new product as well as Amazon’s planned subscription service, which apparently will share Pandora Plus’s $5 price, help? Perhaps.

But those are just two ideas. In the world of product development, it takes many attempts to find the perfect product market fit that people are willing to pay for. Licensing two and saying ‘okay, we’re done,’ is not going to cut it. It took 15 years, a handful of flopped companies and at least a couple hundred million in funding before AYCE streaming services finally produced a billion dollars in revenue. My guess is that it will take years to attract the casual fan. Fact is, we’re going to need wave after wave of ideas to grow customers again.

Variety: Music Streaming Wars: Consolidation Looms as Lower Prices Kick In

Music Industry Blog: Have Spotify and Apple Music Just Won The Streaming Wars?

 

 

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

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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:

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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

 

                                                                                                   

 

Don’t Look Back: The Return of Napster Highlights a Company Running Out of Options

Oh Rhapsody! Or should I say, oh Napster! The pioneering Seattle-based streaming music company yesterday finally announced a long-planned rebranding of its service to Napster. While it certainly got some attention, it wasn’t exactly the kind of attention one craves.

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[Disclosure: I argued about which brand to support while serving as VP of Product for Rhapsody International until 2013]

Rhapsody acquired the Napster brand when it bought the assets of the company from Best Buy in 2011. Instead of rebranding the service Rhapsody in Germany and the UK, the company has operated two brands since—Rhapsody in the States and Napster internationally.

So it would make sense that the company would need to unite under a single name. We can all agree that Rhapsody hasn’t been a powerful brand. It’s better known as your Dad’s first streaming service, back from the days when you had to listen to on the computer or on a weirdo MP3 player (Philips Go Gear or SanDisk Sansa, anyone?) but definitely, absolutely NOT the iPod. When we did surveys on the brand back in the day, the overwhelming consensus from music fans was, ‘meh.’

While the company Rhapsody International has had some success growing recently, it’s all about Napster. All of the company’s expansion in past few years in Europe and Latin America has been under the Napster brand. Meanwhile, Rhapsody has failed to find traction.

As I have written about before, Rhapsody’s strategy is to focus on cell carriers to market and sign up users, as it does with e-Plus in Germany, Telefonica in Latin America, and Metro PCS in the United States.

Rhapsody has a loyal core of high margin subscribers who have been with the service for years. But those numbers dwindle each year as new products come into the marketplace that are aimed directly at the music fan. I’m sure the execs in Seattle had a number in mind when the company could roll out a new brand without risking a mass loss of revenue. So, now they have nothing to lose.

Napster is a powerful brand, bringing back a strong sense of nostalgia for many music fans. So I can understand the temptation to want to utilize that asset. However in the United States, Napster’s negatives are huge. Most consumers still associate Napster with stealing music. And it’s just not potential consumers. Sources tell me that at least one major label is not very happy with the return of the brand.

Look, the world has changed. Does it make sense to continue to look back to an era when people (again, your dad, if you’re a young Millennial) stole mass amounts of music, or should the company look ahead and come up with a new name that is associated with something else than the early days of digital music? I mean, if the problem is that Rhapsody is an old tired brand, why do you go back further in the past and pick a name that has more baggage than Samsonite? And no, ‘just because we had this brand laying around’ is not a good answer.

My personal favorite would have been the original proposed name for Rhapsody, Aladdin. Equally difficult to spell, but somehow apt. You just rub the magic lamp and watch money disappear.

 

 

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.

Up A Stream: Why Spotify Is Music’s Latest Whipping Boy

scapegoatWhat’s the old saying? There are lies, damn lies and then statistics? Or how about the other one that is attributed to Mark Twain: a lie can make it around the world while the truth is just putting on its boots.

Based on the biased, one-sided and sloppy piece authored by Scott Timberg on Salon, it’s pretty clear that the lies are winning. The piece trots out the usual tripe of how streaming is ripping off artists and how artists used to make a lot of money and now they make nothing.

As usual, the problem is that streaming is hot right now, especially everyone’s favorite whipping boy, Spotify, and therefore anyone with a pen goes after Daniel Ek’s startup. None moreso than Scott, whose tome seems to completely support his to-be-released book “Culture Crash: The Killing of the Creative Class” at the peril of facts.

The facts and numbers are hand-picked to prove his point. The truth about the numbers remains very different. For example, Scott points to the mid-year numbers from the RIAA that show streaming to be up by 42 percent, but CD sales are down 19.6 percent and digital downloads lost 11.6 percent. All true but also devoid of meaning. What he doesn’t point out is there is revenue associated with streaming. In the first half of 2014, for the three categories associated with streaming: Internet radio services like Pandora, subscription revenue and on-demand advertising services payouts rose 22% over the previous year—up to $886 million. (For the record, subscription revenue is up 42 percent which is just part of the streaming category).

The whole theme of the piece is that streaming is the big boogeyman that’s killing artists. Especially based on this quote in Scott’s story:

“I used to sell CDs of my music,” says Richard Danielpour, a celebrated American composer who has written an opera with Toni Morrison and once had an exclusive recording contract with Sony Classical. “And now we get nothing.”

Okay, fine. But is that all or even mostly streaming’s responsibility?

Look, there’s no doubt that streaming has had an impact on sales. Let’s not kid ourselves. The fan who ends up paying for a full year of a streaming service gets awesome value, as they don’t need to buy tons of CDs. It’s a fixed upper cost of $120 a year. But it’s also a fixed lower cost of $120 a year too. Mobile all-you-can-eat is that price regardless of what kind of customer you were in past life—either on single CD buyer or someone who bought 20 a year. While I have grave misgivings about this pricing model, it isn’t really the reason why artist compensation has tanked.

Remember Stealing Music?

Streaming only really got rolling in the United States when Spotify came to our shores in September of 2011. Before then, piracy was the main perpetrator killing music. In the decade before streaming took hold in the United States, CD sales fell by 443 million units a year, from 669 million in 2002 to 223 million in 2011. That’s nearly 300 percent! And sure digital tracks and albums stemmed some of the bleeding, but the US business overall shrank from $12.6bn to $7.1bn. Certainly there was streaming before Spotify. Pandora had quite a bit of success, as did YouTube and other services. But to make Spotify the villain of this story is asinine.

Spotify is a big deal and bound to get bigger. But it’s not the reason that artists are losing their livelihood. As I have written about in the past, the problem is when one equates a play on Spotify to a loss of a CD sale. Sure there might be some that stopped buying CDs and instead access all their music on the smartphone. But a curious listener is more likely to go listen to the track for free on Spotify, YouTube or an illegal source than they are to rush to the record store or even to buy it on iTunes. That’s just not the way the world works anymore. In other words, Spotify is more like radio than the loss of a digital track or CD sale.

And while Spotify is a Big Deal, its reach pales in comparison to YouTube or Pandora. Spotify claims 50 million users worldwide and 10 million paid subscribers. The company does not break out numbers by country, however the RIAA reports that there were 7.8 million streaming subscribers in the US in the first half of 2014. Those are split between Spotify, Rdio, Google Play All Access, Rhapsody and other assorted services.

Let’s just say that Spotify has the vast majority of subscribers, like five million. And then let’s use the company’s reported 20/80 ratio between paid and free users. That would put the overall reach in the US at 25 million, less than half of Pandora’s audience and a rounding error of YouTube’s billion global active users.

So what exactly is YouTube providing for the industry, with its awesome reach and nearly universal catalog of music? Well, the on-demand ad supported category created $164 million in revenue in 1H of 2014–about the amount vinyl is selling. Nice job, Google.

I have no idea what the amount of revenue YouTube generates per user, but it’s probably infinitesimal to subscription’s $47 per customer for six months service.

I’m not without concerns about streaming’s economic future, which I’ll get into with a post tomorrow. There are some significant issues about pricing, growth and, maybe most of all, throughput of artist compensation. But why authors continue to flog these services with the same old stories about destroying artist’s livelihoods is a mystery to me.

So as a public service, here’s a few suggested topics for writers that address some serious subjects for the music industry.

-Each replacement of previous music products is eating into revenues. First paid downloads replaced CDs and now streaming is replacing downloads. Why is this? And when do we reach a point when this is unsustainable for artist?

-Streaming is just now starting to generate big money. But is the money actually getting to artists?

-Can the music industry survive by investing in startups and expecting a big payday on a sale or an IPO, or do we need new revenue models?

-When will ad supported on-demand services like YouTube start creating real revenue?

-How has streaming changed the behavior of music fans? Are they happier? What are they missing?

Oh sure, some of these are obvious, but it would be better to address topics in a thoughtful and comprehensive way instead of blaming the death of the music business on greedy technologists.

Read On

Salon It’s not just David Byrne and Radiohead: Spotify, Pandora and how streaming music kills jazz and classical

Billboard Is 2014 The Year Digital Takes Over

Quartz An epic battle in streaming music is about to begin, and only a few will survive

JonMaples.com Liars Poker: Why can’t anyone write a fair assessment of streaming music

Following Their Own Beat: Spotify’s Ambitions Outsize Anyone in Digital Music

In December of last year Spotify held a press conference to announce the service had finally bagged a big one: longtime-streaming holdout Led Zeppelin. The service now had the band’s legendary catalog of albums, clearing one of the last major artists not on streaming services. The press fell all over themselves raving about what a big deal it was to finally woo the elusive holdout.

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Spotify Founder and CEO Daniel Ek has global ambitions.

In the same press conference Daniel Ek announced something even more important to those involved in digital music. After months, if not years, of negotiations with labels, Spotify announced shuffle play—the ability to play any artist in the Spotify catalog for free on mobile devices. Shuffle play is exactly what it sounds like: a customer can play songs from an artist’s catalog only randomly instead of on-demand. But it does mark the first time that rights holders had allowed a free product on mobile after years of insisting that mobile access was, and always would remain, a paid product.

Spotify was not about to take no for an answer. Daniel Ek clearly has seen the trends in mobile and knows that the world is increasingly connected through their phones. Maybe you can reach scale with free on desktop in Europe and the US. But most of the world only has mobile access. The company had to have a free mobile offering to execute the company’s overall strategy. So Spotify cajoled, threatened, begged, and–most assuredly–wrote a big freaking check, to get free access on mobile.

It’s not the first time that Spotify has done something very difficult that other streaming companies couldn’t get done. It actually has made a habit of it. When Spotify was ready to come to the US, it won over execs nervous that free music would wipe out the world’s richest music market. After a couple years of trying in vain to best The Echo Nest in recommendations, the company bought it outright.  When Spotify couldn’t gain label okay for their bundled Sprint deal, it went ahead and launched without all the agreements in place.

Nobody in digital music has the determination, guile, brass and—maybe most importantly—the ability to raise money by the boatload to execute their vision.  And on the heels of Apple’s rumored purchase of Beats Electronics, it’s I’m important to understand the difference between a me-too streaming service and a firm as disruptive as Spotify.

A Global Media Channel

Spotify isn’t comparing itself to other music services, or even other digital media companies. Ek sees the company as a worldwide channel of music listening.  If someone is listening to music, from Beijing to Auckland to Los Angeles to Nairobi to Stockholm to Rio, Spotify wants to be the customer’s solution.

To execute that strategy the company has created two offerings–a free and a subscription service. Both are extremely challenging businesses build and manage, but just like overcoming label qualms, Spotify is undeterred. Imagine a company deciding to build both Pandora and Beats Music from scratch at the same time and rolling it out around the world.

The services work in tandem.  Spotify needs a huge base of free users in order to identify those customers to pay for music and build an audience for advertising. And once a customer uses the product for a fair amount of time, they are hooked. So if they are paying, or just convert into the free tier for a while, it just means another impression for brand advertising.

The company believes in this double-barreled approach to revenue and users will make it the dominant channel of music playback around the world. After rumors the Beats/Apple news floated last week, some in the media wondered if Google would now acquire Spotify. Spotify doesn’t see it that way. The company believes that their main competition is YouTube, the only other global digital media channel.

Faith In Free

Of the two services, the one that requires more of a leap of faith is the free service. Spotify believes that a worldwide audience of music lovers will loosen the pocketbook of global brands who will pay a premium to advertise to the audience. Spotify has already had some success in this arena with a global Coke deal. While most advertising businesses in music focus on local ads, Spotify is different. The company intends to continue to carve off a certain number of customers into the paid tier. And it will need to because the costs of the free service are astronomical.

Why so expensive? It’s all about the content rights. To launch in the United States, Spotify had to work on the labels for a long time, nearly a year, to get the licenses for music. In the end, Spotify agreed to pay for every free play and paid a significant advance—rumors had it around $200 million—to launch in the US. Compare this to YouTube, who has virtually no content costs. But Spotify believes the blend of converting a number of free users to paid, along with the advertising revenue will cover the costs.

Here’s where it gets tricky. While it might make good sense to spread the costs of the free service with paid customers, most folks running subscription music businesses have had a hard time making the model work, due to massive subscriber acquisition costs (SAC) and, maybe most importantly, the rate at which customers leave a service, otherwise known as churn. While Spotify’s SAC is covered in the free product, Spotify will, eventually, have to get their churn to a reasonable level.

But that’s for another day. Today the market is strongly favoring those who can show growth. And Spotify’s growth, in particular with its paid subscribers, has been astounding. The company is privately saying it’s at 10 million subs, though not  officially announcing that number.

IPO, Belly-Up or Bailout?

Even with the company’s great vision and uncompromising execution, it’s not clear that Spotify will succeed.  The company has raised nearly $600 million in venture funding and remains nowhere near profitable. Spotify is readying an IPO for later this year which will be required as it will need to make more investments to launch into Russia, India and China, territories that are necessary to be a worldwide music channel. But getting an IPO out later this year looks suspect, as there is growing concern that we’re in another tech bubble. If Spotify can’t use the public markets to complete their expansion, it will have to make very painful decisions.

A former colleague, who always was skeptical about their financials, said that Spotify’s future was either to be one of two troubled company’s–Lehman Brothers or General Motors. Once Spotify reaches significant scale of, say, 20 million paying subs and 60 million free users, the company will control enough of label revenues that it’ll be able to demand a much lower rate. At that point the record labels will need to decide if they provide a bailout or let Spotify go belly-up.

One thing is clear. Regardless of the high stakes, Spotify will continue to play their game.

The Magic Numbers: How Apple Beats The Demise of Music Downloads

There are two numbers that you need to pay attention to in order to make sense of Apple’s breathtaking acquisition of Beats Electronics. Neither of them is the rumored $3.2 billion price. They are 13.3 and 800 million.

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Apple’s saint Steven P. Jobs  said customers wanted to own their music. Not anymore.

The first number is the percentage that music downloads have decreased in Q1 of this year compared with 2013. This is on the heels of a 5% decrease last year, so it’s looking like the decline is picking up speed. It’s pretty clear that the download era is waning and Apple knows this better than anyone. I’m sure the company has a phalanx of data analysts poring over projections and understand that the rate that customers buy downloads might not be in a freefall, but it could be coming quicker than anyone expects.

It’s pretty clear when it comes to the choice between buying downloads or using a streaming service, customers are beginning to choose streaming. But so far, Apple has sat out of the subscription music trend. After all, the Book of Jobs says that customers wanted to own rather than rent music.

Those days have passed. Apple needed to hedge their bets and get into streaming. But instead of building another bolt-on to iTunes as the company did with their underperforming radio service, Apple decided to speed their way to market by purchasing a hot new service that had a lot of buzz, but hadn’t scaled so much that it was prohibitively expensive. Beats is the most viable of all acquisition targets.

While music purchases may be falling, it’s still a big business for Apple. So instead of creating another option in iTunes that would potentially cannibalize download sales, why not just buy a service and keep it separate? Streaming blows up: Apple wins. Streaming doesn’t pan out, well, it will still have the iTunes store chugging along.

In The Cards

The second number refers to the 800 million iTunes accounts, most with credit cards on file.  Those credit cards are the keys to the kingdom for anyone who wants to sell something in the store. Apple charges a 30 percent premium for companies to use their in-app purchasing system, where a customer can subscribe directly from the native app.

After Beats Music’s troubled launch period didn’t produce many subscribers from the 7-day trial, company executives were calling around to see how other firms dealt with the 30 percent Apple tax (answer—you eat the $3 per customer a month).  In late April, Beats launched in-app purchase and the results were stunning. Their iOS app became the number one overall free app.

Just as important as in-app purchase is getting featured in the iTunes store. Placement in the iTunes store can make a hit out of an app and can mean hundreds of thousands of downloads. Combined with in-app purchase, the store is a kingmaker that can make or break a company. So once Apple integrates the Beats app, it wouldn’t be surprising that the app will get a permanent featured position in the store. Cha-ching.

Oh, and that $3.2 billion price tag? With Beats Electronics’ hardware business already creating significant profits, Apple’s purchase price could be covered within a couple years. So in essence the company is getting into streaming music for a song.

More Acquiring Minds

FT: Apple In Talks to Acquire Beats

Re/Code: Why Apple Is Betting Big On Beats

Om.co: On Streaming: Apple, Beats & Spotify

Apple Insider: Jimmy Iovine Set To Join Apple?

The Tipping Point: Streaming Music Finally Delivers The Goods

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Source: RIAA, reports from Pandora, YouTube and NPD plus a healthy amount of guesswork (see note on numbers at end of article)

The RIAA recently released US music industry statistics for 2013 and it’s good news for the streaming services. More than six million customers subscribe to a service like Spotify, Rdio, Rhapsody and others. And these companies are providing a massive amount of money for the industry. Those six million created over $600 million in revenue. These are far and away the most valuable music customers, dwarfing the amount of money that each CD purchaser, ad supported (e.g. YouTube) or digital radio user contributes.

Based on the number of purchasers from NPDs 2013 Annual Music Report and available estimates of YouTube and Pandora users, subscription users are worth more per user than all the other major categories combined.

A Mixed Bag

I’m sure many artists and management firms are saying ‘that’s great, but why am I not seeing the money?’ Two reasons: scale and deals. First, only 6.1 million customers subscribe, which is the smallest reach of any other recorded music product. How does it compare? Well Pandora reports 140 million active users on mobile. YouTube says it has 156 million actives per month, with nearly 40 percent consuming music. NPD estimates that 44 million bought at least a single track in iTunes. Six million pales in comparison.

What’s also unclear are the rates by which artists are compensated by streaming services. A vast majority of the streaming deals for master recordings are with major label groups and indies. While many indies have said they split revenues 50/50 with artists, understanding what an artist receives from a major label deal, often executed well before streaming services existed, is a dark art. The industry could do much better by committing to transparent and standardized reporting, where every deduction is laid out and an artist can see how many plays of their repertoire were on Spotify and understand what it means to their pocketbook.  But then again, mysterious accounting has been the labels’ modus operandi for many decades.

Varying The Product Portfolio

WME’s Marc Geiger mentioned at MIDEM this year that all we have to do is build scale. This is the one flaw in his excellent speech. Instead of expecting everyone will pay $10 a month, the industry needs to consider many more options that focus on different ways fans listen and value music.

Source: RIAA
Source: RIAA

I have been beating the drum for subscription services to diversify their products. While 6.1 million people paying $10 a month for all you can listen to music products is great, we need to grow the number of people who pay for a music subscription. The truth we must accept is that the average person does not–and will not–spend $10 per month for infinite music.  They just won’t. There are too many free options and most people are happy with a much smaller slice of the music universe. Instead, we need to redefine how we package and market digital music. What’s the music app that 30 million people will pay $1 a month? How about a $3 and $5 price point?

To grow the number of people who will pay for services, diversification of product offering must take place, even if the revenue per user drops closer to retail levels. Success is getting 50 million customers paying a range of prices that fit tastes and budgets. Not selling a one-size-fits-all product.

A note on the numbers: while the RIAA numbers for the revenues as well as the streaming subscriber count are accurate , I had to guesstimate on the other user counts. By cobbling together estimated revenue that each company contributes and comparing it to the active customers of each, I came up with a rough number, but without reliable information and transparent accounting, it’s just that–rough.

More Variable Priced Links

MIDEMMarc Geiger’s Keynote (Video)

RockonomicsIs a Spotify Free User Worth $1.50

Too Much Joy: My Hilarious Warner Bros. Statement

NPD: 2012 Annual Music Study