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.

 

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.”

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

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

Sweet and Lowedown

Will Apple’s Tastemaker Test Win The Streaming Music Challenge?

Apple made big news last week by hiring one of the music’s best tastemakers, Zane Lowe, the preeminent DJ on BBC Radio 1 who has introduced the world to artists like Arctic Monkeys, Gnarls Barkley, Adele and Sam Smith.

With Zane’s hiring and the reported tapping of other music journalism talents, Apple is betting big on the ‘human curation’ chestnut that Jimmy Iovine used to sell the service to music fans, and more importantly, to Apple last spring.

Curation is believed to be a solution for streaming music’s problem of what to play next. All-you-can-eat music services like Spotify and Beats provide access to tens of millions of songs, but listeners consistently run into the issue of figuring out what they want to hear next. So by creating recommendations, radio stations and playlists that the music fan might like, curation helps alleviate the problem.

Except it isn’t that easy.

Why? First, is there’s a lot of music. Millions and millions of songs are available on these services and figuring out everything about the music is rather difficult. And then there’s the user expectation. A broadcast radio tastemaker like Zane is pretty adept at talking to a lot of people at once, but streaming the music customer expects—if not demands—a unique music experience based on their taste and listening habits.

The Beats Formula

Curation solutions have come in two flavors. Companies either use automated technology solutions, like Pandora’s ‘music genome’ and the Echo Nest’s taste profile. Or you hire a staff of music experts to pick music.

Beats’ Co-CEO Jimmy Iovine and Chief Creative Officer Trent Reznor rightfully pointed out that most services have the soul of a hard drive and that music fans craved more in a music experience.

Beats preferred playlists selected by humans, experts on music who understood what the listener needed music for, like cooking dinner, exercising or studying. The startup went on a spending spree, hiring a team of music programmers to build playlists and pick the perfect song. While others, like Rhapsody and Emusic, had staffs of curation experts long before Beats, Jimmy was the first to make human curation the main selling point.

When it launched, Beats had subscribers  select their favorite style of music. Afterwards, the service would feature playlists built by their staff of music experts who hailed from the radio industry and music blogs. Beats playlists were indeed compelling but the depth of the lists appeared to be light and the curation stale. After all, how many times can you listen to the same 15 tracks on the Indie Breakup or 2006 Hip Hop Gems playlist? Fact is hand curation requires a lot of hands to consistently churn out new lists, something the service didn’t quite get right.

Emotional Math

Beats management objected to algorithms that automatically choose the next song based on a set of rules. “The promise of algorithms that we’ve all bought into over the past few years, that you enter a band and you are going to hear a ton of music that’s all based on that seed,” Trent Reznor told USA Today last year. “I think we’ve all realized the reality of that is that it’s a shallow puddle, it immediately kind of sounds good and then you realize the limitations and you start to hear the machine in there.”

“(With an algorithm) you are using math to solve an emotional problem,” is the way Jimmy Iovine put it. He is partially correct. When the catalog is tens of millions of songs and you have millions of customers, picking what song comes next can only be tackled by math.

It’s impossible for a service to function without any algorithms. There’s just too much data and you need to rely on something with automated rules to do some of the heavy lifting. Even Beats, despite its marketing message of ‘the music service with music experts’ had several different algorithms that were used in the service or under development.

So marketing pitch or not, everyone (in one way or another) must use math to solve these problems. The success or failure of algorithms and curation depends on how companies employ the products and who’s in charge.

It’s far from me to tell Apple what to do, but hey, that’s never stopped me from dispensing advice of questionable value. Here are my guiding principles for building curation and algorithms in streaming services.

  1. The Right Tool for the Right Job

As much as I have a problem with Pandora and their marketing of the ‘music genome,’ the company sure went about solving the right problem with their algorithm. Simply put, Pandora is designed to serve up around 40 solid minutes of songs for the person who likes to listen to music. It doesn’t do more than that and that’s a good thing.

Technology products get unwieldy because they are designed like a Swiss Army Knife. My general rule is that technology solutions need to be designed to nail one solid use case at a time. Expansion beyond that gets to be tricky.

A good example: I recently spoke to David Porter, CEO of 8tracks, a radio service that features playlists curated primarily by the service’s pro DJ community. David mentioned that 8tracks had recently hired a data scientist to match his listeners to playlists that they might enjoy.

An algorithm must be very good to nail this use case, but it doesn’t rise to the level of a playlisting algorithm, where a user will think you don’t know music nor them if a Coldplay song ends up in a Jose Gonzalez playlist.

Defining what your algorithms are meant to do and sticking closely to those use cases is vital for success.

  1. Man Guides The Machine

An algorithm must be built as a tool for curators and not simply a technology product. Therefore it must be tunable and adaptable. There is no such thing as ‘code lock’ on an algorithm.

In my experience, this is not the way many algorithms have been built. Machine learning–the ability for algorithms to improve based on usage–is a big topic right now for many technology companies, but I have yet to see one example of a music algorithm that gets smarter with time. Ensuring curators have input and a modicum of control of algorithms is extremely important.

  1. Playing Your Position

What makes managing a music algorithm so absurdly challenging is that no single person is qualified to manage it. You must posses a full understanding of music composition as well as its place in culture. You should have the knowledge of how a data scientist goes about their work. And you have to have a keen observation about how consumers behave in the system.

Without any leg of this stool, the product will end up hamstrung. It cannot be managed by one human, unless you have a consumer driven, musicologist, data scientist on staff (not bloody likely), therefore it requires a team of experts to tackle the problem.

Each will bring an expertise and needs to trust other members of the team. Success should be judged on results and data; not taste or perfect code.

  1. Match Curation to the Taste of Your Listeners

This one is easy to say and hard to pull off. Curation should closely mimic the usage in your system. While a marketing approach will influence who your listeners are, good old data and analytics should be fastidiously monitored and results fully understood by the team.

A curatorial staff must adapt their approach to what the listener is doing, and what brings more value to their experience. And above all, it’s about your listeners’ tastes. Not your own.

Tim Quirk, my former boss at Rhapsody and formerly Google’s global content programming head, authored the objective approach to editorial that we practiced heartily at the service. He recently posted a series of tweets that questioned the practice of tastemakers being the lead programmers at services and believes that curators should function more like ‘park rangers than gatekeepers.’ “Yay curation. But boo anyone who thinks he or she knows better than you what you should listen to,” Tim summed up.

  1. There Is No Finish Line

The algorithm will constantly need to adapt to the music, the customer usage and the technology. Likewise music trends change over time. After all, few could have predicted the amazing rise (and the fall) of EDM? As long as you have music, you must have a team who lives and dies to have the perfect music catalog, the algorithm and the curation to fully create a great music experience.

The promise

The first generation of streaming services focused closely on catalog and access. We’re nearing the end of this era, as pretty much everyone has the same catalog and the apps are very similar. The next phase will focus on the music experience of the services. Curation, whether lovingly hand-crafted by humans, or processing massive amounts of data crunched down by an algorithm, will be the battlefield all the services will vie on over the next couple years.

We can already see this battle taking form as ‘the humans’ vs. ‘the geeks.’ That’s a mistake. A company needs to seamlessly blend these talents together to build curation that listeners will enjoy and create true value.

More Curation on Curation

Billboard What Apple’s Hiring of Zane Lowe Signals for the Company’s Music Strategy

Hypebot Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

Music Ally Apple Hiring for iTunes Role with ‘Specific Expertise in Music Journalism’

Business Insider What We’re Hearing About The New Music Streaming Service Apple is Developing in Secret

Taylor Swift

Taylor Swift Vs Spotify: Fact or Fiction

Well, that was fun. The spin was hot and heavy last week after Taylor Swift said goodbye to Spotify. You had Taylor describing why she left, her label president, Scott Borchetta, offering some facts and figures, Daniel Ek giving his side of the controversy, and a myriad of opinions on what the deal really was about (including mine). So what’s really going on? Let’s take a look at a few of the issues and see if there’s truth or not to the claims.

Number 1: Taylor Swift made a rash decision to leave Spotify

Fiction

Taylor Swift and Big Machine made a rationale decision based on the numbers and what they considered real value and what Spotify is actually paying out. Or at least what they saw in their pocketbooks. Nobody is in a better position in the industry to make that decision than Team Taylor and I’m sure it wasn’t without some deep consideration.

However, the timing of the decision appeared to be made to milk the maximum value out of Spotify in terms of promotion. When an artist is releasing an album, he or she is looking for the largest number of people to know it and hear it. YouTube, Late Night With Jimmy Kimmel, covers of magazines, tv ads, and yes, even Spotify plays its part. Shake It Off was one of the most popular tracks on the service until it disappeared. It also should be noted that Taylor’s catalog didn’t get yanked until a full week after release of 1989, allowing her fans to listen to her old releases before removal Monday, providing lots more headlines and curiosity of her albums.

Number 2: Spotify is not paying Taylor Swift for her music

Fiction

Spotify does have a free-to-the-listener tier. However every spin of her music generates some revenue. But how much? It’s actually a fact that most of the revenue Spotify pays comes from its paid service. But the company doesn’t pay per stream from subscribers. The formula divides up all of its revenue by the popularity of artists/catalog and then cuts a check.

It is unknown how the free plays are paid, but artists have noticed a difference between free plays and paid plays, which could mean that there is indeed a micropayment for every play. Or there could be a much lower active rate per listener.

Spotify says it needs the free service to drive more listeners into the paid tier. Daniel Ek claims that 80 percent of paid subscribers were once free listeners. And Spotify has had great success scaling its business with the free tier. At 12.5 million worldwide subscribers, Spotify paid subs has made all the other services currently in the market an afterthought.

Taylor’s camp also made a pretty strong point about how she doesn’t believe in free music, and had asked to be removed from Spotify’s free tier. Citing how vital free is to its acquisition strategy, the company refused to do so. It might also be pointed out that besides P2P and semi-pirate services like Grooveshark, several of Taylor’s new songs, including Shake It Off remains free on the world’s largest streaming service, YouTube.

Number 3: Spotify Pays Much Less Than Other Services

Fiction

Earlier this week The Trichordist posted a chart of all the per-play “rates” from services and asked if Nokia Music was paying a much higher rate, then why can’t Spotify. Unfortunately, that formula didn’t include the most important number: revenue.

Nokia doesn’t pay more than Spotify. In fact, it pays less. Much less. Yes, the per-play rate might seem bigger. But Nokia’s service is so unpopular and content costs are so high that it appears they are paying much more per play. In terms of real dollars, Spotify is the labels’ number two or three account in every territory worldwide behind Walmart and iTunes. They will probably pay out a billion in revenue in 2014. And remember: this is a company that didn’t exist six years ago.

Number 4: Spotify pays artists

Fiction

For the most part, Spotify has an agreement with and pays the rights holder, generally a major label or aggregator, like Tunecore. The rights holder distributes the money to the artist based on their deal with that entity.

Number 5: Artists have no idea what Spotify pays

Fact

This is where Spotify really gets into really deep doodoo. It is far from clear what Spotify contributes to artists. There’s a ton of reasons for this. Bear with me as we go through it:

  • Spotify has an agreement with a rights holder for the license to the catalog. It can include a bunch of fees due to the label, like a minimum revenue guarantee, an advance, or an equity stake. It’s unclear where these buckets of revenue would show up in a royalty calculation for an artist (most likely, these fees would go to the rights holder’s bottom line and not into a revenue shared bucket).
  • The artist has an agreement with a label. There’s generally a split of revenue, which has traditionally meant CD, LPs and digital track sales. There are also some deductions from the artist’s revenue pool before money is dispersed. Most of these expenses are from a time when the labels made tons of money by egregiously marking up physical distribution and marketing costs. For some reason, some of these deductions at some labels remain in the digital world. There have been some tragically hilarious lawsuits where legacy acts, like the Temptations, have sued their major label for continuing to charge deductions on iTunes downloads when the company clearly didn’t incur any costs. There are also deductions from negotiations with streaming services. As a rule the deductions cover bandwidth, credit card processing costs, and any type of deal the streaming service gets for, say, a discount on the royalty as the label is sharing on the costs to get billing from a cellular carrier.
  • The artist gets an incomplete, indecipherable royalty report from their major labels that shows plays divided by revenue, but nothing else.

A transparent royalty statement doesn’t need to be complicated. It could be pretty simple, but it should detail where all the money went.

At a minimum a streaming royalty report should include this:

  • How many plays I had on Spotify: XXXXXXX
  • How much revenue that generated: XXXXXXXX
  • Itemized deductions from my revenue: XXXXXXX

Spotify’s position on transparency has been tone deaf. I’ve heard representatives say ‘go ask your label’ when lack of transparency is brought up. Without any clarity to what the artist is generating from Spotify and what deductions came out of the revenue bucket, it’s impossible for anyone to make a decision about 1) what’s the value of Spotify and 2) how badly an artist is getting ripped off.

I’m sure there are cases, maybe an overwhelming number of them, where Spotify isn’t actually creating revenue for the artist. But arcane royalty reporting is making it hard for an artist to make an informed decision about streaming’s value. It may be unfair, but Spotify needs to help solve this problem. It’s also clear that the company has zero leverage in changing the way business is done. It makes the company’s mission to change the way fans listen to music seem easy in comparison. At the end of the day, though, Spotify will need to make it much simpler for artists to understand their value and revenue in the service.

Number 6: Spotify Believes That Scaling The Business Will Create Enough Money For Everyone

Fact(ish)

Nobody has grown like Spotify in the streaming. Its revenue growth is phenomenal and they’ve done something that company after company has failed at: getting a mass number of people to pay for music subscription. Daniel Ek claimed 12.5 million subs and 50 million users worldwide. The company did a roadshow recently for artists and showed what kind of monies it’ll contribute when it reaches 40 million subs.

I’ve written about how Spotify’s goal is to be the biggest media channel dedicated to music, but that requires rolling out services around the world. Spotify is still not in some massive markets, like, Russia, India, and China. But it must be pointed out that piracy is so rampant in those countries that there isn’t even a thought about paying for content. The company claims that it has wiped out P2P services in some territories it has launched in. It’s a huge gamble to believe if Ek will be able to convince residence in Shanghai to change their behaviors and start paying for music.

If Ek can accomplish this feat, it could well see a couple hundred million active listeners and 80-100 million paying fans. But it’s not a given that the company will do so.

Number 7: Spotify Is Killing Digital Music Sales

Fiction

First Napster andP2P maimed CDs and then iTunes tore its heart out as it lay dying. Now here comes Spotify that will turn $1 downloads into micropennies for artists. This is the theme you hear from people in the industry. It’s undeniable what P2P did to CD sales.

But it’s questionable that the death of iTunes sales is solely Spotify’s fault. It probably has more to do with consumers having always connected devices with a variety of apps in their pockets. iPod sales have fallen through the floor as the iPhone has taken over. And instead of buying tracks, consumers use Pandora, YouTube, Soundhound, Spotify, Rhapsody, iHeartRadio, Stitcher, Deezer and a flood of other services to fulfill their streaming music needs. Customers have changed their behavior as the technology changed. It’s hard to blame it on one service.

Number 8: Spotify Is Killing The Album Buyer

Fact (with a caveat)

It is true that music fans (like me and probably most people in the music industry) that used to end up with a stack of CDs at the Tower Records checkout line are now getting awesome value. For the monthly price of one CD, that fan now gets hundreds of thousands of releases, available whenever they want. And say you want to keep it for your subway ride to Williamsburg? No problem, just download it as part of your subscription.

But here’s the deal: if someone subscribes continuously to Spotify, they are paying more than double what the average music customer bought during the heyday of CD buying ($65 a year). Spotify’s bet is that it’ll signup enough subscribers to the service and stay with the service long-term that it’ll far outstrip the CD sales. Others believe that even if Spotify scales the business, it will completely obliterate CD and digital sales, further shrinking the global music business.

You can’t blame skeptics for seeing the world as half empty rather than half full, but even in a Spotify-free world, those big customers aren’t coming back any time soon.

Number 9: Spotify is only exists because they’re full of greedy technologists and venture capitalists who want to get rich off musician’s lifework.

Fiction(ish)

Spotify is preparing an initial public offering so that they can fund the expansion of their business. It is true that many employees who work at Spotify will get rich off the IPO and start buying houses, boats, horses and other trappings of the nouveau rich. Investors in the company will also see a payday, including the major labels. But that’s what happens in venture funding.

And it’s also not a given that Spotify will have a successful IPO. Many investors and analysts are extremely skeptical. There is much we do not know about the company. The good thing about the march to an IPO is that Spotify will be compelled to disclose a treasure trove of facts about the business and the risk factors in investing in its stock. It will make it easier to ascertain the company’s long-term prospects. An IPO, an acquisition or even bankruptcy and liquidation all seem possible at this point.

It’s necessary to point out that the big payday is amazingly rare in digital music. You can count successful companies on one hand. More common is the experience of (the legal) Napster, which lost tens of millions for a couple companies before selling to Rhapsody for pretty much nothing. The digital music graveyard is filled with corpses of great ideas, and every day there are new companies popping up that will undoubtedly join the lost souls.

Digital music seems like a good way to turn billions of venture financing into nothing. I hold the overwhelming majority of people (but not all) who start digital music businesses aren’t motivated by the payday. They do so because they love it.

Number 10: Spotify is a good bet for investing

Fiction

Good god, no. This isn’t Joe Montana with the ball and 2 minutes left in Super Bowl XXIII against the Cincinnati Bengals. This is Joe Montana against a coliseum filled with unfed, angry Bengal Tigers (who have a much stouter defense). Okay, maybe that’s a bit much. But Spotify faces huge challenges even if Taylor Swift and Daniel Ek make up.

Outside of the previously mentioned leap of trying to get a majority of the world’s population to pay for content for the first time ever, Spotify’s free service is extremely expensive to run. Some believe too expensive to allow profitability. Additionally, subscription businesses are extremely tricky to get right, in particular if you aren’t a quasi-utility that requires a monthly fee, like a cell phone or cable bill.

In the words of my former boss, Mike Lunsford, this calls for the ‘what would it take for you to believe’ test. Meaning what assumptions will have to become true if you believe that a company like Spotify will succeed.

Here’s my list of assumptions:

  • Spotify will succeed in rolling out around the world and make most of their markets successful, but in particular the big ones, like Russia, China and India.
  • Spotify can build a worldwide channel of music listening that international brands will pay top dollar to be part of, and therefore defer free listening costs.
  • Spotify can convert enough free listeners to paying customers and (maybe even more importantly) keep them paying for a long time.
  • Spotify can keep the cost of acquiring customers (mainly in free music costs) to a minimum.
  • Spotify can pay artists enough money that they won’t follow Taylor Swift and leave in droves, eating into its value proposition and watch customers quit because there’s no music in the service.
  • Spotify can continue its hockey stick growth chart as YouTube’s Music Key and Apple’s iStream launch.
  • Spotify can fix search, which sucks.

Okay, I threw that last one in there. But a misstep in any one of the above could deeply harm the company. Missing on two could potentially add Spotify to the Digital Music Graveyard. Use extreme caution when considering its future.

More Spins Than A Record

JonMaples.com: Following Their Own Beat: Spotify’s Ambitions Outsize Anyone In Digital Music

Time.com: Taylor Swift on 1989, Spotify, Her Next Tour and Female Role Models

The Guardian: Spotify Paid Out $300k To Stream Shake It Off

NY Times: Billboard Changes Charts, Will Count Streaming

Digital Spy: Dave Grohl on Taylor Swift and Spotify “I don’t f**king care”

Spotify Blog: Two billion and Counting

Separation Disagreement: Why Taylor Swift and Spotify Is Not (Just) About The Music

News yesterday shined a light on the new queen of popular music, Taylor Swift. After selling 1.3 million copies of her shiny new pop release, 1989, she made the decision to remove her whole catalog of music from Spotify. It’s hard to overstate the effect this decision has on Spotify. “Shake It Off” was the most popular song in the service. The company said that Taylor’s music was included in 19 million playlists. Obviously losing the most popular artists on the service is a huge loss for Daniel Ek’s company.

Taylor has been a critic of streaming services and strongly believes that album sales are still the way most artists should make a living. In a Wall Street Journal article this July she mentioned that some major artists have given their albums away as promotion and believes this is a mistake. As she put it:

“Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for. It’s my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album’s price point is. I hope they don’t underestimate themselves or undervalue their art.”

But is this really about free? After all, streaming services pay for the right to play the music, as do Internet radio services like Pandora. And if we’re going to really discuss about free, shouldn’t we discuss YouTube, which provides so little money back for playing music that it might as well be free? No artist in the world, even Taylor, would release music without a YouTube strategy. It’s reach and power is enormous. And as of today, YouTube is the only place users can stream the three biggest songs from 1989. For free.

With 1989 Taylor decided to hold the release back from streaming services to help increase retail sales, just like she did for the previous release, Red. Windowing to streaming services is an emerging tactic for artists, as it limits access to fans only to retail to experience the entire record. After the retail window closes, the record becomes available on streaming outlets.

While 1989 is windowed on all services, Spotify was singled out for elimination of Taylor’s music. Her catalog remains available for play on streaming services like Beats Music, Rhapsody and Rdio, and on the world’s biggest streaming service, YouTube.

So what’s going on here? Why would Taylor stiff one of the largest music listening platforms in the world, one that is providing the third most revenue in the music industry, while leaving her music up on other services that are smaller, but pay nearly the same on a per-play basis as Spotify, and on YouTube–which pays diddly squat compared to streaming services?

It’s all about participation.

That is, participation in financial events, like initial public offerings and acquisitions. In this day and age of frothy music startups, there are those who get a stake and those that are left looking in from the outside. Can you take a guess which respective side of the line artists and major labels fall?

In August, Vivendi reported that Universal Music Group closed the sale of Beats Electronics to Apple and gained a nice tidy sum of $404 million. Granted UMG was an early investor in Beats. Nevertheless, UMG cleaning up on these kinds of investment strikes artists as unfair. Without music, would there be any company to sell to Apple?

It’s also been widely reported that all the major labels have sizable investments in Spotify. As the company prepares its IPO, the major labels have a huge stake at stake at making it successful, as they’ll get a big chunk of change that won’t be shared with artists.

When you are most popular artist in the world, you probably believe that you should participate in an event where the label gets paid. After all, labels are compensated for providing a catalog. And the catalog is woefully incomplete without Taylor Swift. In fact, Taylor’s decision to withhold her music from Spotify will have a fairly sizable impact on UMG’s topline revenue.

UMG is the distribution partner for Taylor’s label, the independent Big Machine. All their music rolls up into UMG revenue for streaming services. Sure, UMG still must pay Big Machine for the plays, but artists and even labels have long been unhappy with unfavorable streaming deals and sloppy (or worse) accounting practices of major labels.

Even without knowledge about Big Machine’s deal with UMG, it’s easy to speculate that the label is unhappy–or at least unimpressed–with their revenue from Spotify. And as an added extra, news broke yesterday that the label–along with Taylor as its flagship artist—is for sale. And one of the leading suitors for the Nashville-based firm? UMG.

With all this information, it leads to these questions:

-Did Taylor’s catalog suddenly come out of Spotify to pump the price of Big Machine’s acquisition by UMG? Nothing would show the power of Big Machine like pulling one of the most popular artists at the top of her game. It will also have a material impact on UMG’s revenues. How much? Just my meatball math based on Spotify’s reported revenue and Taylor’s probable popularity, removing the catalog could decrease UMG’s share by a full percentage, meaning at least $13 million less.

-Was Big Machine negotiating a relationship directly with Spotify and hit an impasse? Spotify has come to agreements with holdout artists like Led Zeppelin, The Red Hot Chili Peppers and Metallica. But all those are legacy acts  that have all made tons of cash on their deep catalogs. These acts got a big check were ready to  move on.

Spotify has never done a deal with a premier active artist, and I’m sure it is very reticent to start, as Rihanna, Beyonce, Jay-Z and other big acts will line up for their own deals. Big Machine also would be looking for participation points above and beyond any compensation for plays, such as equity and potentially advances.

Also, Spotify will correctly claim that it already is paying top dollar for the catalog. Why should the company have to pay twice for the same content?

Answer: because that’s the way business is done.

More Breakup News

NY Times: Taylor Swift Announces World Tour and Pulls Her Music From Spotify

Wall Street Journal ($$): For Taylor Swift, the Future of Music Is a Love Story

Bill Werde: An Open Letter To Spotify About Taylor Swift And Why I’m Unsubscribing

NY Post: Taylor Swift’s Label On The Block For $200 million

Vivendi/Universal Music Group: Closing Of The Interest Sale In Beats

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.

Image
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.