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.

Grow Fast And Burn Cash

By all accounts, the music service Rhapsody has been on a roll. Subscriber numbers continue to grow. The company announced an innovative use of a trial based on plays that makes it appear like free music on Twitter. It recently acqi-hired a team of developers who built a social sharing application named Reveal.

Disclosure: I dirtied Rhapsody’s white boards when I worked there from 2004 until 2013. 

More revealing, however, is the cost of growth. Real Networks is compelled to disclose Rhapsody’s financials in its 10-K reports, and the most recent results are brutal. Rhapsody lost $8.9 million in the first quarter of 2015. The Seattle-based company lost $1.6 million in the same quarter in 2014. Rhapsody had to borrow $10 million in cash from Real Networks and its other owner–the private equity firm Columbus Nova.

Do You Know ARPU?

So how can the company grow subscribers, but losses continue to escalate? It’s pretty simple. The company’s average revenue per user (ARPU) is slipping. Badly.

Most, if not all, of Rhapsody’s growth has come from their cellular carrier partnerships, like T-Mobile in the United States, Telefonica in Latin America and Vodaphone and SFR in Europe. These deals are awesome for distribution. But the deals provides just a fraction of the revenue a retail customer in the US provides the company. So instead of making, say, $5 bucks a month for each retail customer who signs up directly, Rhapsody might make $0.50 on per each user month of Brazil’s Vivo Musica, if not even less.

As I posted earlier, Rhapsody’s cellphone carrier strategy is a sound one, if the company can do two things: make up the loss of ARPU by dramatically increasing the volume of partner subscribers and bolster its brand to sign up a number of high ARPU customers the company has traditionally attracted in the US.

Rhapsody, just like everyone in digital music, is probably feeling the pressure of Spotify’s successful year. The company continues to sign up tons of high-value premium customers as it expands around the world. There’s some evidence that Spotify is taking the oxygen out of the market. Spotify’s premium users grew the equivalent of Rhapsody’s entire subscriber base in two months at the end of last year. The company grossed over a billion dollars in revenue last year.

And Rhapsody’s losses are a drop in the bucket compared to Spotify. The Swedish-based digital music juggernaut lost $184 million in 2014, according to recent reports. Based on how the company continues to harvest the private markets for more and more cash, Daniel Ek’s company makes Rhapsody’s losses look good in comparison. Rhapsody appears to be more like a rock-ribbed conservative banker compared to Spotify’s sailor-on-shore-leave approach to spending. We are clearly still in a Grow Fast or Die Slow stage of development, and Rhapsody has playing the best hand it has available.

The digital music market has long valued growth at any costs over rational business planning. That may be changing as Universal Music Group is starting to question the value of free music. There’s been many reports that Apple is pushing UMG to have Spotify limit or end its unending stream of free music as a way to sign up paying customers.

UMG CEO Lucian Grainge may see Apple as the best of both worlds: a 100 percent paid service that has access to hundreds of millions of credit cards. If Apple is the White Knight that will save the music business from itself, or just another Trojan Horse is an open question.

7 Points I Wish Team Tidal Made

Tidal talked about its new music service, but didn't give many details. I added a few myself.
Tidal talked about its new music service, but didn’t give many details about plans or product. I added a few myself.

For those not living under a rock, Jay-Z presented Tidal, the industry’s first artist-owned music service on Monday at a press conference that has been widely mocked for being heavy on lip service and platitudes and extremely wanting in details. Jay spent a reported $56 million to buy Tidal from its Norwegian corporate parent Aspiro AB and there’s been a lot of speculation about what Tidal could be up to.

It’s premature to call it a failure (though the tech press didn’t have any qualms doing so) as we don’t know what Tidal is going to do. But without details, I was really wishing for more from 16 of the biggest names in the music business Monday. The fact is that an artist-run streaming service should have a different outlook at how a music service should function, from its relationship to listeners to how artists are compensated. Here’s a few suggestions for what Jay and team could have said.

  1. “First and foremost, Tidal is going to complete the fan experience. Too often we’re asking our fans to do too much work and it hasn’t gotten easier in streaming. It’s gotten harder! I believe first and foremost that if we’re asking fans to pay for music, then we better be delivering a lot more value than just access to music. To that end, Tidal is going to focus on shortening that distance from the music fan and us, the artists.”
  2. “Sharing music is a great way for our fans to show their love for our music. We’re going to make it extremely easy for fans to share music and enable playback of tracks in a limited way, regardless if someone is a Rdio, Pandora, iTunes or Spotify listener. Our project is called EasyShare and it requires all the services to cooperate so that it’s easier for our fans to share their love of music. It also supports all the services, since, let’s face it, people are using a little bit of everything these days.”
  3. “Okay, we’re superstars. But it’s not easy for artists these days in all genres and levels of their career. We believe in fairness for all artists. We’re going to make sure that the way artists get paid in our streaming service works for everyone, from the superstar to the struggling artist. Right now it seems like payments for streaming seem like a ‘winner take all’ proposition. So we’ve asked leading economists to look at the pro-rata share of determining compensation to investigate if it really is the best way to pay artists.”
  4. We’ve informed the major labels that we want to renegotiate our contracts with them. Our number one priority is to make sure that more money from our service goes into the pockets of artists. So we’re going to add what we’re calling a ‘Transparency Clause’ into the contract that will require labels to quantify how much money they’ve received from us, and what percentage goes to artists. We believe this number will help artists understand the moneyflow and make sure that the billions streaming services are paying labels don’t turn into fractions of pennies for artists.”
  5. We also won’t sign non-disclosure clauses with any label and we will post the details of all of our deals so that the artist community knows exactly how much money is going into the coffers of labels for their content.”
  6. “We believe in artists. And that’s just not performers, but also songwriters. So we’re going to help solve the problem of getting songwriters paid. Right now, music services like Tidal can only pay 70 percent of royalties because we just can’t identify who should get paid. We’ve earmarked $5 million that we’ll give to SoundExchange to develop a Global Rights Database. The database will endeavor to identify the publishing rights for every song in the world with the end goal of getting every single rightsholder paid for every play. We have calls later today with Daniel Ek, Doug Morris, Jeff Bezos, Tim Cook and Lucian Grainge urging them to contribute to this extremely important endeavor.”
  7. “We’re going to support artists by investing in causes that are important to them. Therefore, we’re going to contribute the money that Tidal paid us for exclusives to MusicCares, which helps artists who are in need of economic support often for medical problems. We’re asking our subscribers to join us in supporting this vital non-profit service.”

2014: Music Services Lost Subscribers…And That’s A Good Thing

Last year was a banner year for music subscription in the US. The RIAA reported big time growth, primarily driven by Spotify’s gains in paying subscribers.

But at the same time, the market stalled a bit in terms of actual subscribers. The RIAA in its midyear report had paid subscribers at 7.8 million, but by the time we got to the end of the year, it was only 7.7, a loss of 100k subs. So what gives?

Well, we had another year of consolidation. Two big players came off the market. The biggest driver of losses is Muve Music, which at its peak, reportedly had two million subscribers. Granted those subs weren’t generating much in revenue for the industry, but it was a big number. AT&T acquired Muve’s parent Cricket Wireless and then treated it like a redheaded stepchild.

Conventional wisdom is that Muve delivered a big number of subs, but it was primarily a sleeper service, where most of the users were inactive. There was a ton of media flaunting how great Muve was for the industry, which in retrospect, now seems absurd. AT&T shuttled off Muve’s subscribers to Deezer in January. However, these kinds of deals generally mean retaining 50 percent of subscribers at best. I’ve seen acquisitions deliver less than 30 percent of subscribers to the new service.

After a big marketing blitz, Beats turned off their acquisition channels once Apple purchased the company, which adversely affected its numbers.

Just totaling up subscribers isn’t the best way to judge success of subscriber. The key number to get the total picture is revenue plus subs. In the first half of this year, streaming subs increased to $371.4 million, and increased even more in the second half to total $799 million for the year.

Perhaps the old adage about lies, damn lies and statistics applies here. It’s easy to fall into the trap of writing provocative headlines based on precursory numbers. But it requires digging a level deeper to understand what the numbers actually mean. Spotify had a great year in 2014. In some respects the company, along with the massive increase of internet radio revenue, kept the industry afloat through another transition.

There’s no need to bemoan the loss of garbage subscribers. We need to focus on revenue and subscribers to get a true sense of what streaming subscribers is delivering to the industry—and where the real growth will come from.

More Reading

RIAA: 2014 Industry Shipment and Revenue Report

CNETCricket’s Deezer Music Partnership Rises From The Ashes of Muve Music

Fierce WirelessCricket’s Muve Music’s Fate Is Up In Air Following AT&T Deal

Billboard: Muve Music Surpasses 2 Million Subscriber In US

Accordion Games: Why Spotify’s Free Service Should Constantly Grow And Contract

Here we go again.

Spotify is running into trouble with someone else in music. This time it’s the behemoth Universal Music Group. UMG’s CEO Lucian Grande woke up one day and figured out that Spotify was giving away too much music and it was impacting digital sales, which have slumped considerably. The company controls a considerable amount of popular music throughout the world. In some markets it’s as much as 40 percent of all music sales, so when it doesn’t like something, you can be assured that something’s gonna change. Outside of the absurdity of all this, there is a point here. And it comes down to the funnel.

You see Spotify uses free music as a customer acquisition funnel. By getting the largest number of people possible playing music, Spotify believes that it can convert a significant number of them into the paid products. Spotify has pushed to create the biggest funnel possible by giving unlimited free music on the desktop, and allowing shuffle play listening for free on mobile phones.

All information has shown that Spotify has had a great year. Its growth numbers in free and paid listeners has grown tremendously. Early data signals are showing that Spotify ate into other free services, like YouTube. And while the company wheels out data points that claims it hasn’t eaten into iTunes sales, it bends credulity to believe that Spotify hasn’t eaten into track sales.

Think Accordion, Not Funnel

The main point of Spotify’s troubles  comes down to how it considers free playback. The company would have much more success in identifying those who would pay by considering free as an accordion that expands and contracts from time to time. Instead of 100 percent free plays all the time, the company could limit free playback occasionally, or better yet, carve up its user base into intelligent cohorts based on their playback behavior and value to the company.

So if listener creates awesome playlists that gets tons of followers, that person gets as much free music they want. If someone shares more playlists than most, free music. If one has more active friends, give ’em free. The company could even create scores based on user’s future possibility that they might subscribe and keep them around. Others should see a wall when they get to a certain number of plays. And when Spotify’s funnel starts to collapse, open it up again. Free music for everyone.

It has been my contention that sooner or later, Spotify will have to have a system like this in place. Right now, the content costs are crushing to the company, and eventually, playtime will be over. Time to get the books right. But right now in its run-up to an initial public offering the company is 100 percent focused on growth. Therefore, it must keep the funnel as big as possible.

And finally, it’s absurd to think that the major labels are going to do anything to jeopardize Spotify’s IPO. All the labels own a chunk in Spotify and will benefit from the IPO. It could be big money. Just last year UMG made hundreds of millions on Beat Electronics sale to Apple. So free music might be more limited sooner or later. But let’s not pretend free music is going anywhere before Spotify makes labels millions.

Jonmaples.com: Major Label Are Truly Home of the Free (Music)

FT: Universal Takes On Spotify’s Free Model

How To Save SXSW From Its Own Success

First time I rolled into Austin for South By Southwest Music Festival, it was like going to different world. Not only was I blown away by the number of great indie bands performing in just a couple block radius, but the city also had an amazing vibe. Musicians, artists, malcontents and loungeabouts all mingling together with the music fans that came to town for the 500 bands playing over three days.

One I couldn’t help but be charmed by Austin and the celebration of live music at SXSW. So I was surprised when I opened the Austin American-Statesmen and read an editorial about the festival’s nearing demise:

“Critics claim the conference’s growing pains are transforming what was a grass-roots gathering of struggling musicians into a corporate haven for suits, ties and profits. The proudly independent music scene that put the Third Coast on the map is being usurped, leaving homegrown talent out in the cold.”

The date was March 18, 1994.

There’s been 20-year history of calling SXSW over. But the past few years have been extremely rough on the festival. For the record, there were 4,258 registrants and 482 artists performing in 1994. In 2013, the city of Austin projected that almost 400,000 people crammed into Austin for the festival.

Over the years the industry has taken notice and has turned what was primarily a showcase for indie music into a major music event. While the festival still books plenty of cutting edge acts, it also has become a place for massive artists to perform, with huge stars like Lady Gaga, Kanye West and Metallica making appearances. 

The Shadow SXSW

And events continue to creep beyond the scope of the official festival. Day parties started in mid-90s and most are free of charge and don’t require an official registration. The day party tradition, which packs up to 10 bands performing short sets in the hours before the official showcases start, are now so common that SXSW has become enormous. Only a small portion of those who come to Austin this week attend the festival itself. 

Outside of all the top-level artists, brands have decided they want to get in on SXSW as well. It seems like every year another major brand throws down big money to have a presence at the festival. Many wonder if it’s a bit much. When Doritos built a stage that resembled a huge vending machine stuffed with oversized bags of Cool Ranch and Nacho flavor, it might have been one chip too far. 

All this popularity is causing severe headaches for festival administration. The city itself cannot handle that many people in such a confined space. At least with the current commitment of services from the festival and the City of Austin. 

Last year, tragedy struck. A suspected drunk driver drove down Red River, one of the main downtown streets closed to traffic and packed with club-goers. Two people lost their lives and many were injured. In some respects, SXSW is lucky something like this hadn’t happened in the past decade, as attendance has climbed every year. 

In Line and Out of Line

Despite the options, most of these free parties are extremely over-subscribed. Many who come into town find themselves left out of the action. Lines at places like the Fader Fort can stretch for several city blocks. SXSW does its best by scheduling a free show at an auditorium not far from downtown, but there’s just not enough to entertain all who come into town.

The experience for those who attend the actual festival is becoming more tiresome. Getting around has become a nightmare. Sixth Street resembles a menacing mosh pit anytime after 7 pm at night. Dinner options are non-existent. Even grabbing a mediocre-at-best Sixth Street pizza slice is getting pricy.

This year, the city and SXSW had enough. Festival management has been unhappy with the amount of services the city provides. It needs more support and security to keep everyone safe. In fact, SXSW said it was considering bidding out the entire festival to let other cities compete. But the festival’s identity is so tied to Austin that it probably could never decamp the city.

The city cut back on event permits for the Shadow SXSW, limiting the number of opportunities to build a stage and fly in a platinum artist for a showcase. And some brands are sitting it out too. The Doritos stage is thankfully gone this year.

All good and well, but will it limit the number of people flocking into town? Perhaps slightly. But the festival’s reputation is now cemented in the music fan’s mind, and I’ll contend that the throngs of people are still going to show up. It’s up to SXSW to solve this problem. On top of the music fans, it’s also college spring break for lots of students, and the city has become a mecca for those looking for a party without ever going to show.

Lighting The Shadows

Instead of burying its head in the sand, SXSW could proactively plan for the mass of humanity that’ll show up without the benefit of a laminate. Just two miles from downtown is Zilker Park, the site of the annual Austin City Limits music festival. There’s no reason that SXSW couldn’t book a half dozen stages for big time artist to perform. The festival could make it free and safe with the appropriate budget for security.

Sure, it’s not perfect. March weather in Austin is extremely mercurial, so booking an outdoor festival will be a gamble. And there will still be overflow for the regular festival. Don’t expect 6th Street to get less congested anytime soon. But at least there would be a plan.

Perhaps it’s just my gaggle of friends in the business, but my experience is that more industry types are skipping this year’s festival than ever before. I’m even taking a break after 11 straight years of sojourning to Austin for tacos, brisket and Shiner Bock whirred together with amazing music discoveries.

Long ago I had come to terms with how SXSW has changed. A few years back, my favorite day party at the Yard Dog was overrun. I couldn’t even get close to the stage or beer. And this wasn’t on the main drag of Sixth Street. It’s in a tucked away courtyard in the South Congress District. Fuming, I took an attitude adjustment walk at dusk on Lake Travis and came to the realization that the festival was still great. I mean where else can you discover the bevvy of new bands I have over the past four days. It’s just different from the one I first experienced 20 years ago. 

Just like the city itself, the festival has grown up. At its core, it’s still an amazing experience, one well worth the hassle. I’m hopeful that the festival administration and the city will partner to solve its problems together. 

Further Reading

New Republic: SXSW Too Big To Fail

NPRDoritos Stage Pulled From SXSW But Issues Remain