Unboxing Pandora

Why The New Royalty Rate Matters Little For The Digital Radio Giant

Yesterday, the Copyright Royalty Board–the three-judge panel that sets the rates that non-interactive radio services pay –set the new rate for the coming year 21 percent higher than the previous year. Services like Pandora were seeking a lower rate. SoundExchange, which represents rights holders, requested a higher rate. The CRB playing a wise Solomon, split it almost right down the middle, settling at .0017 per song played.

And then the industry yawned.

As a refresher, in the United States, music companies can offer playback by taking advantage of a compulsory license set forth in the Digital Millennial Copyright Act. All you need to do is follow the rules for non-interactive digital streaming and pay SoundExchange for all the plays within 45 days. This rate does not affect directly licensed services, like Spotify, Apple Music, or Deezer.

Disclosure: I work at 8tracks, which offers non-interactive radio in the US and Canada. These opinions are mine and don’t represent the company. See 8tracks CEO David Porter’s opinions on the subject here.

Moving On
The CRB rate seems like it’s already an antique of past days. Call it the iPhone 1 era. Remember way back in 2005 when you’d fire up Pandora, pick an artist and sit back and listen to an awesome radio station?

The world has moved on from those olden days. Thanks to YouTube, Spotify and Soundcloud, a whole new generation of listeners have grown up being able to play whatever she or he wants at any time. Also, listeners can skip as much as they want and save tracks to their phones with a premium account; all functionality that requires agreements with labels .

In terms of growth, relying the compulsory license has hemmed in Pandora. Spotify has been able to grow leaps and bounds by launching in country after country. Meanwhile poor Pandora is only available in the United States, New Zealand, and Australia as only a few countries offer compulsory licenses. Its growth has slowed dramatically compared to Spotify.

Directing the Action
Pandora understands that if it wants to offer some flavor of on-demand features and do it around the world, it’ll have to sign direct deals with labels. The company has already signed similar deals with all the major publishing groups to pay songwriters.

So the days of Pandora relying on the CRB rate are numbered. Of course the rate is still important as it sets the floor from which all parties will negotiate, but it really doesn’t truly matter as much as it once had.

The CRB seems like it would like to get out of the business of setting the rate. The rates in the following four years will be based on the increase of yearly inflation, which might be the template in the future.

A Pound of Flesh
While Pandora said it was pleased with the rate, it’s not all smooth sailing for the company. Up next will be sitting down with major labels to hammer out agreements for sound recordings. After years of deep discontent with Pandora, I would bet that labels will be licking their chops to dictate onerous terms. And if the company wants to offer the ability to download tracks to a phone or up the skip limits, its gonna cost an arm and a leg.

But still, there is a path forward. Pandora recently purchased some of the assets of the much admired yet failing Rdio streaming service in preparation for an on-demand world. After months of uncertainty, Pandora’s stock perked up, rising about 13 percent the day after the announcement.

Beginnings and Endings
The CRB also simplified the rates down to a single one from three. iHeart Media, the terrestrial giant also saw its fortunes improve. Its rates dropped 22 percent when the CRB eliminated the blended rate that companies who offered more than just non-interactive radio used. On the opposite side, the elimination of the small webcaster rate means that tiny services are facing the end of days, as the new rate means their costs have now gone through the roof.

Digital musics’s chorus doesn’t really change much. Let the beatings continue until the morale improves.

 

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.

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

Major Labels Are Truly Home of the Free (Music)

Lucian Grainge, the CEO of Universal Music, has recently been talking about getting tough with companies that offer free music. First, a couple of lieutenants who shepherded digital deals, Rob Wells and David Ring, departed. Some in the industry considered it a sign that Lucian had cooled on ad-supported companies like Spotify.

And recently a video of Lucian’s comments at Re-code’s Media conference surfaced. In the video, Lucian consistently questions the long-term viability of ad-supported offerings. Lucian, apparently, just recognized that these services are giving away free music.

I find this hard to believe. After all Lucian approved of, and personally benefitted from, deals for Spotify, Deezer and Rdio, all who have free offerings. It’s almost like he’s like he’s channelling Captain Louis Renault from the classic film Casablanca, who is shocked, just shocked to find gambling taking place at Rick’s Café Americain. Meanwhile he happens to be winning at the tables!

Back in 2011 there was significant label resistance to granting Spotify a freemium license. Daniel Ek has mentioned that it took years to get over objections to granting the license in the richest music market in the world. Sure, Spotify had proven streaming worked in Scandinavia. But in America? No way!

At least until Spotify wrote a big check to labels guaranteeing revenue as well as a stake in the Swedish based startup. Rumors had the number marked at $200 million, although all figures and deal terms are confidential. Once Spotify wrote the check, then all was hunky dory.

And then it wasn’t.

Excuse me if I don’t completely believe Lucian. You see, it is my contention that major labels are addicted to free services and they are not going anywhere anytime soon. Labels just have too much at stake to pull back now. UMG, Sony and Warner all have sizable stakes in Spotify, as well as other companies. Jean-Rene Fourtou, CEO of UMG’s parent company, Vivendi, stated that it held a five percent stake in Spotify. That will be a sizable payday for UMG if Spotify goes public, which it surely will attempt in the near future.

And remember those label deals for the freemium service that Spotify signed when first launching in the United States in 2011? Those deals are up for renewal and are being negotiated right now. So is it any surprise that the CEO of the biggest recorded music company in the world is suddenly getting cold feet about freemium. Can someone say gamesmanship?

Apparently Lucian’s strategy is working. The NY Post is reporting that Spotify is offering to sweeten the pot by guaranteeing UMG $1bn over the next two years based on its growth projections. The Post also claims that Spotify projects the $1bn to be 39% of UMG’s pretax earnings, an enormous piece of their revenue pie.

The loss of recorded music revenue is real. And it is just common sense that streaming services are partially to blame. Why buy music when you can stream as much as you like? Vivendi recently released earnings that showed UMG’s revenues slumping 3.8 percent last year after excluding costs for selling the Parlophone Label Group, which it acquired in the EMI deal. Digital sales were flat, but transitioned from track sales to streaming revenues. Meanwhile, physical sales continue to slump, as they have for the past 10 years.

Let’s face it: subscription streaming has yet to prove itself the savior of the music business that many have trumpeted. Just replacing digital track sales is not good enough. This industry has shrunk for too long and needs to grow revenue and, more importantly, consumers. But so far, streaming hasn’t been the answer. There are many reasons for this and we need to spread the blame around. Here’s a few reasons:

  • While they will license anyone who can write a check, major labels advantage those players who can raise the most cash, which of course they’ll get a lion’s share of through license agreements.
  • Startups have yet to convince majors of new models that work for the customer. And when a new idea gets licensed, it is extremely hamstrung economics, or the feature set is so limited that it fails to catch on with consumers.
  • Label promotion staffs want to utilize the channels that can deliver the biggest promotional pop, regardless of the revenue model or impact on the market. Seriously, would any major artist drop a record without a YouTube promotion strategy?
  • Major labels see a pot of gold at the end of the rainbow from an IPO or an acquisition. UMG made $433 million on its Beats Electronics stake, for example.
  • The freaking price for on-demand streaming is still too high to drive mass adoption, and companies have yet to convince the industry that $9.99 a month just doesn’t work. Even Apple apparently failed.
  • Consumers don’t want to pay for music, period. Access to products like YouTube, P2P, Pandora and the likes have conditioned a new generation of potential customers to think the cost of music is zero.

So what is the way forward? The answer isn’t to roll back free music as some have suggested. Can we limit access to free? Absolutely, but it comes with risk, especially in subscription services. Spotify has said that 80 percent of subs come from the free tier, and drying up that pipeline will have an impact on its growth potential. So that will need to be closely monitored and managed. Apple, with its 100 percent paid product, won’t be able to pick up the slack. The industry needs Spotify, Google, Apple, YouTube, Deezer and Rhapsody all to contribute premium subscribers.

The industry also desperately needs to embrace new models. Mark Mulligan recently suggested that day passes could be a way that subscription companies could grow incrementally grow revenue and not be wedded to the ‘all-or-nothing’ approach of premium subs. And companies launching these new models need to have flexibility to try offerings without going belly-up immediately. In the startup world, pivoting model and offerings is often a legitimate way to find value. We should be following that model.

And finally, the industry needs to embrace a multi-variate pricing structure for premium subscription. Not everyone needs access to 30 million tracks all the time. Could a $5 mobile price point that smartly gives customers access to a certain number of tracks work? Are there markets that might do better at $7.99, $3.99 or $2.99? The industry really should be attempting to grow as many paying listeners as possible and not obsessing over average revenue per user until the market matures.

More Shocking News

Re/codeLucian Grainge Wants You to Pay Up

Music Ally: What Happened When Ministry of Sound CEO Shared A Stage With Deezer and Rdio

BuzzFeedUniversal Has A Big Stake In Beats That’s Worth Nearly $500 Million

Vivendi: 2014 Annual Results

Jonmaples.com: Fake Fight: As Apple Preps Streaming, Labels Sing The Same Song

Fake Fight: As Apple Preps Streaming, Labels Sing The Same Song

BillboardFight Between Apple and Spotify Could Change Digital Music

This is amazing! First, we hear there’s a lack of comfort with free music and how Spotify should have so many more than 15 million paid subscribers. Then Apple marches in, provides market research evidence to the labels how many more customers (and therefore, revenue) the industry could garner with a lower price point and labels say ‘no way.’

Why? Well, then labels would have to offer lower pricing to the entire industry so to not advantage Apple. Glen Peoples‘ source at the end of the piece is absolute right: labels are deathly afraid of Apple becoming the entire music industry. A strong Spotify is required to counter Apple. Freemium isn’t going anywhere, though a listening cap could come back for a brief time, as it did a couple years ago.

No matter what others in the media absurdly suggest, the reason Apple isn’t interested in freemium is because it doesn’t need it. The main goal of freemium is to attract listeners and then slowly convert them over time into a paid tier. Listeners won’t be a problem for Apple as the streaming app will be pre-loaded on every iOS device and most likely baked into iTunes.

Free Music Lives

Trust me, Apple will feature free music in the streaming product. But instead of paying for freemium, the company will offer labels promotional opportunities. Nobody can bundle the power of the iTunes store with free streaming for a week or month. That’s a killer combination for labels, even with paid downloads falling.

And converting those listeners into subscribers? Apple already has an enormous amount of valid credit cards, so it’s just a matter of signing in to subscribing. So why would Apple pay hundreds of millions of dollars to major labels for freemium when it already has distribution and payment covered?

Price Fixating

Eddy Cue, Jimmy Iovine and the Apple team have been harping on labels to consider lower the price of streaming. There’s been more and more data analysis showing a lower price of streaming will lead to many more customers signing up, more than making up for the loss of revenue. And I’m sure that Apple presented significant market research and bulletproof data that proved the point.

Despite overwhelming evidence, the labels stuck to their guns, and said if you want to charge less, you can pay for it. Meanwhile the largest streaming service in the world, YouTube, continues to give away free music at a scale the dwarfs Spotify and Pandora combined.

And you wonder why the music industry can’t grow. Not that we needed more evidence.

Please Release Me: The Industry, Music Release Day and Listeners

There’s been a brewing controversy in the industry recently about the music release day. What, you might ask in this age of you YouTube, Spotify, Pandora, iTunes, radio, leaks, and Soundcloud, is a release day?

I’m glad you asked. One day every week, new music is released to retail outlets and streaming services. But here’s where it gets tricky. It’s a different day in many countries. In the US new music day is Tuesday. But in the UK it’s Monday. Japan, Wednesday. Germany and France, Friday.

Why is it different? The release day has been driven by music charts. In the US, the Billboard and Soundscan charts run from Tuesday to Monday to match up with the release day. Though the origins of why we ended up with Tuesday in US is not clear, some state it also had to do with physical distribution of LPs, cassettes and CDs.

But with the a global market building and physical retail fading, there’s been clamor for standardizing the day, so that consumers in the UK don’t get a huge global release from an important band a day before consumers in the US or Japan.

After polling the industry and doing market research, this week the IFPI, the global recorded music trade organization, recently suggested Friday is the top contender to become the global music release date.

Once word got out all hell broke loose.

US retail industry, who pushed for either the world changing to Tuesday or even perhaps Monday, strongly objected to Friday. Target actually suggested it would stop selling CDs if the date changed to Friday.

Martin Mills, chairman of the powerful Beggars Group of indie labels had this to say at a conference in the UK:

“Whilst I acknowledge the needs of a digital world for co-ordination, it seems to me to be crazy to throw away one of the trading week’s two peaks, and the ability to restock and rectify errors before the week’s second peak. It astounds me that the major labels are not listening to their customers, their interface with their artists’ fans. I fear their consultation has been a charade, and the market leaders were always going to push this through. I fear this move will also lead to a market in which the mainstream dominates, and the niche, which can be tomorrow’s mainstream, is further marginalised. I fear it will further cement the dominance of the few – and that that is exactly what it is intended to do.”

Music release day matters quite a bit for the industry and Martin is right: the bigger the act, the more important a single release date will become. You can see with global tools like Twitter, Facebook and worldwide(ish) services like Spotify, it’s hard to have a consistent marketing message. After all “Hey, my new record dropped. Check it out Monday in London, Tuesday in New York, Wednesday in Tokyo and Friday in Berlin” won’t really fit in a Tweet.

There’s also other elements to consider: distribution of products, promotional plans, radio appearances and a myriad of other now worldwide tasks that the industry must do to get music–and the word—out to the public.

But that’s really not a music fan problem. It’s an industry problem. So why are we making it a fan problem?

Look, I get it. A single global release day makes sense. And we should be doing everything possible to assist in supporting–if not expanding–retail channels. It’s still, for now anyways, the best way for the industry to make big revenues. A single release day would help.

But it also seems like we’re just rearranging the deck chairs on the Titanic. Why are we focused on these old models? Meanwhile the new way fans listen, streaming music, is held captive by the old models. Based on the amount of customer feedback and market research I did while at a streaming service, it’s clear that a massive number of listeners don’t even know which day is ‘new release day.’ Sure those superfans who raced to Tower Records to pick up Viva Hate at 10 am on Tuesday, March 22, 1988, yeah, they know.

It’s my belief that the average music consumer doesn’t know–or care–which day new music is in the stores or goes live on streaming. And the fact is that streaming services have new material go live every day of the week. So do streaming services need to a ‘new release day?’

Well, if your plan is to prime the publicity pump so you can get a number one record on the charts, sure. But what if your job is to make the music fan happy seven days a week? Not particularly.

In terms of music services, we’re in this awkward stage of development. Sure, services have proven popular with music fans. Yet we haven’t fully transitioned into a different world.

A perfect example of this is the industry’s attempt to determine how many streams equal a track or album sale. Billboard now says a thousand streams equal a track sale. How did Billboard settle on 1,000 plays? It’s not because of revenue generated by the services, because that info is unavailable and disputed. It’s not how many times a listener plays it before purchasing a track. A 1,000 plays seems like a random number that sounds like a lot. Why not 500 plays? Or 5,000? Or 50,000?

While equating plays for a sale does serve those people who are supporting the old model, it’s utterly empty of any value to streaming companies. I wrote in depth about some of these issues in Junk Food Data.

Streaming services are facing significant issues with customer acquisition and retention. Each company needs to be laser focused on what it takes to make customers happier to retain the paltry number who have signed up. Streaming must influence the industry and make it understand its success factors if we have a prayer at replacing the lost retail revenue with paid subscriptions.

And if we continue to pay attention to the past? Then, I’ll take a deck chair with a nice view of that iceberg.

More On Old Models

Billboard Why Are Albums Released on Tuesday (For Now) in the U.S.?

Musicweek IFPI Confirms Friday Global Release Day

Wall Street Journal Record Labels, Retailers Can’t Agree on Which Day of the Week to Release New Music

Jonmaples.com The Value of Nothing: Don’t Except Junk Food Streaming Data

The Roaring Mouse: Rhapsody Faces Its Future

Mark Mulligan recently commented on an announcement from Rhapsody that trumpeted the Seattle-based granddaddy of streaming music’s impressive growth over the past couple years.

His analysis:

Enter investment firm Columbus Nova who acquired an undisclosed stake in Rhapsody in September 2013. A reorg and a repositioning process followed paving the way for strong subscriber growth. Rhapsody had 1.5 million subscribers one year ago. If it continues to grow at its present rate it should hit 3 million by July this year. And if it sustains that growth into the start of 2016 it could find itself the second biggest subscription service globally. Current number two Deezer appears to be slowing so 2nd place could be a realistic target for next year. Quite a turn around for a service that looked like it was falling by the wayside 5 years ago. 

Surprisingly, Mark’s blog piece was extremely thin on the particulars about Rhapsody’s turnaround. I was surprised as he is one of the sharpest analysts in digital music.

Rhapsody’s growth is impressive. But the seeds of Rhapsody’s recent growth were sown years before Columbus Nova showed up to the party. When the company spun out as a standalone entity from its parent, Real Networks, it was given a few on-air marketing dollars from its other owner, Viacom Networks. Previously Viacom had poured hundreds of millions of dollars in advertising credits to Rhapsody, which it used to advertise the service on MTV, Comedy Central and other on-air properties. The efficacy of those dollars was questionable, as the company had around 800,000 paying subscribers. It was just too early to market on-demand music to a mass audience.

After the spin-out, Rhapsody was left without a sizable marketing budget nor the money to invest in a free tier like Spotify or Pandora. So the company was forced creatively figure out how to attract customers. One of the hardest things streaming services faced then–just like now–is getting consumers to plop down their credit card to pay to them. The president at the time, Jon Irwin. opted to partner with companies who already had access to credit cards—cellular carriers.

Precarious Partners
Before we get into that, here’s a little bit about the economics and goals of partnerships between carriers and music services. These kinds of deals have been seen by the music industry as the answer to building mass audiences of subscribers. Customers might ask themselves why they are paying $10 a month for Rhapsody, but if the charge is included in their cellphone bill, they might never see it. It’s always considered better to tap someone else’s customers than build your own.

Deals like these are extremely difficult to navigate. Labels are terrified of offering discounts for the service, which is a requirement to get carriers to agree to the deal. Carriers are reticent to pay for content that customers may or may not use. And everyone wants someone else to take a margin hit. It’s up to the streaming service to get everyone on board and craft a deal that will be successful.

The best deals are ones where all parties–and the consumer–are happy.

Sometimes it works, sometimes it doesn’t. A couple terrible examples: Deezer has built a massive worldwide audience of paying subscribers, and yet the rate of people who actually use the service is pathetic. Mark Mulligan reported that it could be as low as 20 percent. A low active rate infuriates subscribers and, therefore, carriers. While there will always be some level of inactives in a service, when it becomes huge, you aren’t building a distinct brand and service. Muve Music, which previously was offered through the Cricket pre-paid cellphone service, also had massive inactive users and really awful economics due to licensing deals it signed with music labels.

It’s critically important to build the right offering when selling the service. Music services on carriers come in two varieties: a bundled offering and a bolt-on service. In a bundle the consumer is buying a tiered plan that includes the music service. So for $70 a month, you subscribe to the Cellphone + Music and a bunch of other services. The bolt-on is much simpler and cleaner: add music for $5 or $10 a month. As a product guy, I much prefer the bolt-on. Why? Most of the inactives reside in the bundle and all those people represent a time bomb just waiting to blow up. Customers who quit in droves are expensive for everyone, but it tolls the death knell for the service.

And that’s the weakness with the marketing and distribution partnership through carriers. Specifically:

  • Sure the music service gets the massive benefit of not having to capture the credit card, but it also cedes control of the relationship with the customer.
  • With two parties involved, the company’s already thin margins selling music get deeply eroded, requiring the music service to rely on its own retail customers to prop up the distribution costs.
  • The service is completely reliant on the carrier to market to their customers, and the carrier may not be very motivated to do so.
  • The service can quickly lose brand equity, as the carrier might just call the service ‘Comes With Music’ instead of promoting its brand. If the customer is just subscribing to a generic music service this is a very bad thing, as the carrier could replace it at any time.

So the music services must walk a fine line:

  • Build and hold onto a strong brand presence that will motivate the carrier to do the deal in the first place.
  • Make sure the carrier does the right thing in selling the service and focus on the brand.

Do it wrong, and you end up like Muve Music, which AT&T sold to Deezer at auction prices earlier this year after acquiring what was left of the struggling Cricket Wireless. Do it right, and hockey stick growth follows.

A former colleague thought the relationship between the powerful carriers and little music services reminded him of a blend between Aesop’s fable about the lion and the mouse and the Roald Dahl story about the crocodile and the dentist mouse. In my colleague’s telling of it, the powerful and hungry lion wants to eat the mouse, but to do so will ruin his only hope for repairing the tooth. So the mouse has to convince the lion to not eat him before he can fix the tooth. I’m sure you can imagine who is the lion and who is the mouse.

Dialing Up Deals
After months of negotiations, Rhapsody announced its first partnership with the pre-paid carrier MetroPCS in 2011. In the next few years the company announced deals with European carriers, followed by a global deal with Telefonica and then T-Mobile’s offering.

So far, so good. Solid growth. But it’s an open secret that Rhapsody’s brand has been fading for quite some time now. And the partnership strategy isn’t helping develop a strong brand identity. In their thirst to make the deal, the company is making their brand look more like a quilt than something unified. The service is known as Rhapsody on MetroPCS, Unradio on T-Mobile, MTV in Germany, Napster in Greece, Spain, Sonora in Latin America.

It’s an open question if it will be able to maintain its presence with Spotify taking up all the oxygen in the room with customers while YouTube Music Key and Apple’s iStreaming launches. The company has faced issues before and has been written off time and time again. It remains to be seen if it can grow, in particular in the U.S.

As the partnerships ramp, expect the company to face downward margin pressure. Those thin margins will start to eat into the overall revenue of the company. Growth is fantastic, but it could also harm the company’s bottom line.

Maybe even more important, the company needs to answer the hard question about what position it seeks to occupy in the marketplace. There probably is room for a white label music service that works well with big distribution partners like carriers and cable companies. But without a solid brand and a strong direct retail subscriber base, the company could start to see more pressure to deliver meaningful value. It’s far from clear if a mousy little Rhapsody can roar in a den full of lions.

Disclosure: I worked at Rhapsody for nine long rewarding, frustrating, awesome and ridiculous years before last year’s layoff.

More Rhapsodizing

Music Industry Blog: How Rhapsody Became A Top Tier Player Again

Music Ally Rhapsody’s Napster expands across Europe and plots ‘laddered’ pricing strategy

Billboard Why Streaming (Done Right) Will Save The Music Industry

GeekWire Rhapsody Tops 2.5M Subscribers, Up 60% From Last Year

I'm going to make you an offer you can't refuse

Welcome To The Content App Era

Good news! We’re starting a new epoch in the titanic shift technology has foisted upon content creation and consumption. No longer are we stuck under the thumb of huge behemoth companies like Spotify, Facebook, YouTube and Pandora. Those dinosaurs are on their way out.

Oh what’s that you say? ‘Jon, have you been sniffing glue again? YouTube is flexing its muscles and bossing around creators. Didn’t you see the headlines about how poor Zoe Keating is being so mistreated?’ Yep. I sure did. And I say good riddance. Because it is done. Kaput. Collapsing. Sure, maybe not today or in the next couple years. But when bullies like YouTube start dictating insane terms to artists, it forces creators to look at different ways to distribute their work and that creates new opportunities. And companies are already starting to sprout up to take advantage.

Just last week the startup Vessel announced a new model designed to provide a much larger percentage of revenue for content creators than YouTube offers. Of course Vessel must build audience to create big buckets of revenue, which is far from a simple task. But as Peter Kafka of Re/code reported, Vessel is offering a much better experience, including a new advertising product that might mean the end of the dreaded video ad pre-roll. Vessel’s CEO Jason Kilar has long wanted to improve the experience for both viewers and advertisers, which is way overdue.

And Vessel is just the start. We’re at the beginning of the Content App Era. Just like how industries have been affected by the tech boom, there will be a phalanx of highly focused content apps of all different kinds to take on the big guys. In music this phenomenon is already taking shape with the recent launch of the Christian focused Overflow app.

Are all the upstarts going to succeed? Absolutely not. Most will fail spectacular. But a few will find the right audience with the right content and product innovations. They’ll learn from their mistakes, get smarter, and start making more money for creators. There will be a healthy competition for best content and talent. So sure, we’ll still have the big guys, at least for some time. But all these small players will throw enough stones at these monsters until they become a shell of their former selves.

An example of how this might go? Take a gander at broadcast television. For decades, three players dominated ratings. Nearly all Americans watched CBS, ABC or NBC. Advertisers paid a massive premium to reach, well, everyone. And then the audience started to erode away as all kinds of options for casual time came on the scene. Nowadays consumers have the choice of cable, satellite, Call Of Duty, Netflix, Crunchyroll, and hundreds of other services.

So what can these Goliaths do? How about starting with fair policies? YouTube grew monstrously big by ripping off all the video content in the world and allowing their audience and creators to remix it. Its popularity built a massive reach. Now it’s taking that audience hostage by demanding creators grant the company most favored nation status in order to get access to Content ID, which–as a reminder—was first designed to allow creators get at least some compensation for the videos that YouTube users posted without paying creators in the first place. It’s like YouTube is saying: help stop us from stealing your life’s work by just giving us all your life’s work and get paid whatever we decide. That’s some Orwellian logic.

I’m sure as a business school case study you’d get an A+ for devising such a brilliant strategy. But in terms of real life business ethics, it is unconscionable.

More News About Bullies

Music Industry Blog Zoe Keating’s Experience Shows Us Why YouTube’ Attitudes To Its Creators Must Change

Stratechery Dear Zoe Keating: Tell YouTube to Take a Hike

Hulu Blog The Future of TV

Can Spotify Keep Growing?

Spotify today announced it had reached 15 million paying subscribers and 60 million total users. It continues to feed the same narrative that the company has been pitching to the industry recently:

  • The company is growing like a weed
  • The ratio of paid subscribers to free users remains stead at 25%
  • It provides enormous amounts of money to the industry that should be flowing to artists

Spotify’s growth is impressive. Outside of the year the company failed to update us on their sub numbers, the company is averaging 18.5 percent increase in both subs and users quarter over quarter. I’m assuming the company didn’t announce for a year as it appears the growth had slowed. But it has picked up again.

If the company can continue the momentum, it will hit its self-proclaimed goal of 30 million paid and around 120 million free users sometime early in 2016.

It is not clear how much Spotify’s growth is because of inroads in each market and how much is due to launching in new countries. The company recently expanded into Canada, which has been fairly barren when it comes to on-demand music services. The service is now available in 61 countries and their territories (hello unlimited free music Guam).

If the company is finding success launching new countries, it’s good news. There’s plenty more expansion to go if the company is to deliver on its promise in becoming a worldwide platform of music listening.  Unfortunately, the easy countries are out of the way.

Now comes the hard part.

Spotify will have to roll out in countries that might not want the competition (India or China), have yet to fully embrace digital (Japan), might not be able to afford the pricing model (most of Africa) or have a combination of all these factors and Vladimir Putin as president, ahem. How Spotify navigates these thorny issues, along with staving off new competitors like Apple and YouTube, will go a long ways toward determining its success.

Meanwhile, I’m sure these numbers mean Spotify’s IPO apparatus will start to crank up. Based on how hot the market is right now, I would expect the company to go out as soon as it can–before the bubble bursts.