Wednesday, 24 September 2008

Shifting the needle on new digital music services

This is the second post on new fit for purpose digital business. Following the previous post on music companies this one focuses on digital service providers.

It seems that in recent weeks, there has been a real rush-on in the digital retail space for music. We’ve had announcements from Nokia that Comes With Music is indeed coming soon, with Sony Ericsson pitching in with its own version of the ‘total music’ bundle – PlayNow plus (you can read a nice summary of differences between the two propositions on Mark Mulligan’s blog). We’ve had DRM dropped, Amazon moving into the space and the ongoing saga that is MySpace music now finally emerging with some real news.

In the UK We’ve had a recent announcement from Sky about its forthcoming SkyTunes music subscription bundle, with rival Virgin Media pitching in that it too has plans for a new music service – at least a music portal anyway. Also in the UK we’ve had our much beloved Aunty Beeb (well okay, her ambitious ruthless younger brother, Uncle Worldwide) planning its own branded and ad-funded music streaming service next year, tapping into The Corporation’s vast audio and audio-visual archive. And Amazon said to be launching before the year is out.

It’s enough to leave one breathless really – it’ll certainly hot up the air at the various forthcoming music conferences. My suggested subject for these events might be this:

Is the Digital Music Business Finally Bigger than the Digital Music Conference Business?

2009 is going to be an exciting time of it for digital music that’s for sure. One thing is niggling me about all this though – will this latest flurry of activity on the supply side really shift the needle for the demand for legal digital music? After all, we’ve seen supply-side digital surges before. IFPI’s digital reports (excellent resource if i say so myself as one of the founding authors!) show the high-level indicators each year...

Back in 2003 there were 50 legal music services worldwide, with retail revenues for digital just $20m. This exploded to over 500 services and $2.9billion by the end of 2007. But are those impressive statistics really? Online downloads made up just 48% of those revenues (with mobile – mostly ringtones – making up 47%, and subscription revenues a tiny 5%). With iTunes making up a minimum of 70% of online digital, it leaves only crumb-like revenues to go around the other multi-hundred digital music providers. And we know the profit margins are wafer thin. We’ve seen big brands like Virgin and HMV suffer digitally, while MP3 pioneers like Wippit have died a painful, slow death. As for new big digital brands – only iTunes and possibly eMusic, can be described as successful.

In short, digital music is a difficult market to trade in. And yet look at who we have coming to market!

So what is it that Nokia, Sky, Amazon et al think they can bring to the market that isn’t there already? It’s a searching question when you think about it. It’s not the ability to download single songs from a deep catalogue. It’s not DRM-free. It’s not the ability to sample-stream full tracks. It’s not a more ‘indie’ or long tail catalogue. It’s not music community. All those service elements are well provided for already. So what’s the answer? I’m not sure that these big brands are totally clear themselves.

They each have an angle of course. Sky – an ISP as well as entertainment network – can reach a family market via multiple platforms and is a master of the subscription model. Nokia has, for the time being, a 35% share of the global handset market and knows it must move into the services business. And Amazon has online retail licked. So how do these competitive advantages lend themselves to unique or compelling music services?

There are some fundamental service elements still to play with – price, product and customer experience are still up for grabs in developing something a bit special. But with labels gatekeeping price and savvy service providers unwilling to subsidise music, i think price can almost be ruled out as a differentiator.

This leaves product and customer experience as the two major drivers for breakthrough music services and i think both can be leveraged far more than they have been so far. Firstly, product. It’s silly that we are having debates about albums vs. single songs in a market where the value of both is being steadily commoditised. Kid Rock & Estelle’s non iTunes experiments are fairly meaningless in this context. A service provider that can offer a wider range of music products from one artist or in certain genres, in more interesting bundle packages, will attract interest from paying music audiences as well as file-sharers looking to upgrade a bit on what they can get for their favourite bands.

There are plenty of product elements in the mix to play with other than songs & albums. Video, session tracks, live footage, tickets, merchandise, games, information and editorial offer a plethora of ways a music service can be packaged, presented and sold to consumers, particularly if exclusivity, artist engagement and higher quality thresholds can be achieved as well. There’s no way around it – for a service provider to move the needle with something really special, it will need to get into the content development business – licensing exclusive windows and possibly commissioning exclusives directly from artists. This is very common in TV & film. Comcast, HBO, Channel 4 and the BBC all integrate backwards into production. It takes investment and risk and is expensive, but it’s done with a deeper knowledge of what consumers want than ‘pure-play’ producers, as Comcast demonstrated with its drive to create free VoD services.

Secondly, customer experience. It’s no secret there are major gaps here. Legal music services are still predominantly search based, song-album based and very much push marketed. iTunes has dragged its heals here – taking ages to offer Cover Flow, Mini Store, Complete My Album and now finally, Genius. Nonetheless, Apple shows how customer experience is based on learning by doing, and doing well. Meanwhile eMusic has had some success through focus on editorial and DRM-free.

With recommendation technologies improving by the minute, new open application platforms to drive major improvements in navigation (iPhone Snow Patrol app.) and great editorial brands to link up with (Sony Ericsson& Q), we are getting closer to truly personalised music services, slowly but surely. But it takes research, programming expertise and passion to leverage these resources to offer exciting music services to targeted customer bases.

It’s these elements new market entrants should focus on – not as an ad-on to the basic offer of a DRM-free song catalogue for cheap – but as fundamental to the music offer to consumers who want a better digital music experience and will pay for that pleasure.

1 comment:

Brukewilliams said...

2009 is going to be an exciting time of it for digital music that’s for sure. One thing is niggling me about all this though – will this latest flurry of activity on the supply side really shift the needle for the demand for legal digital music? After all, we’ve seen supply-side digital surges before.
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