Tuesday, 31 March 2009

Quick & dirty digital state of the nation #1: Music’s future face-off - Streaming vs. Transactions

By almost popular request, this is number one of two brief posts forming a digital state-of-the-nation, so we can move on to see what could happen next and more importantly, in a post or two’s time, look at who actually decides what can happen next.

I occasionally write about music on this blog, not just the business of music. If I were to write about music that interests you, what are you most likely to do? a) park it for later/never b) stream some of the songs I mention on Spotify c) buy the music from a digital music store. File-sharing isn’t an option I’ll include for now but obviously if you really wanted to, you could. If I really wanted to know the answer I could add a voting widget on the blog, but the question is actually kind of rhetorical.

But it is no less critical for that. With Spotify probably coming in somewhere close to 1.5 million unique users by now, ad-funded streaming seems to have momentum, so you might answer b) stream it. On the other hand, if you have been persuaded by any of the arguments & threads on this blog at all, you might well opt for c) buy it. I’ve posted several times on the limitations of streaming for music discovery and enjoyment, but also many times on the lack of inspiration to buy digital. But both are accepted options on the future of recorded music’s rather limited, menu. The technology evangelists will insist that transactions aren’t even on the menu at all – and they are quite wrong about that.

State of the Nation for Digital Music: Streaming vs. Transactions

First, streaming music. Consumers love streaming when it’s free. The first generation of subscription-based streaming services (led by Rhapsody) found a limited niche. Even the free ad-funded options later released by Rhapsody & Napster couldn’t take them into the mainstream. The second generation ad-funded streaming services really worked. Last.fm gained traction as a music social network & recommendation service then introduced full-track streaming. iMeem followed. Then Spotify took off and flew in the UK and Europe.

So far so good, except for the weaknesses in music streaming we are learning more about as things unfold: the business model. It’s tough, tough, tough. These services pay the labels advances and the publishers per stream, and now operate in a recession where ad-funding isn’t flowing into digital platforms like it did last year. This has had a lot of coverage in the past few weeks but was first exposed by on Michael Robertson’s blog over a year ago.

Consumers won’t pay in numbers for streaming or recommendation. They will tolerate some advertising if the trade-off seems reasonable. They have yet to really work out how streaming music for free impacts on their overall, long-term music consumption, but the chances are they will use streaming services to listen to a greater variety of music and take the risk out of music purchases. Since this means more time listening than shopping, that will inevitably mean less music purchases.

Now, since I posted last time on this subject of streaming outweighing transactions, Spotify has done an affiliate deal with & Digital whereby all the tracks on Spotify are one or maybe two clicks away from being purchased. Good stuff. So is the problem solved? Not really. Streaming on Spotify is quite passive, quite lean back. It is unlikely users will stream on Spotify to screen music prior to any kind of purchase and then go ahead with gusto to 7 digital to buy. It’s unlikely that stream-like-buy will establish itself as a major pattern of consumer behaviour. The instant buy button for music was always overrated.

Now to transactions. Why do we buy a piece of music? We’ve been conditioned to and that trend is ingrained and is still strong – if you are over 30 at least. For under 30s not so strong perhaps, but still very much present. But plenty of under 30s music fans prefer CD to digital, which seems weird but is logical. We’ll buy digital because it’s quicker than physical, usually – slightly more convenient and slightly cheaper. Now DRM is gone it’s less risky & confusing.

We mostly buy digital to add to a device, hence iTunes has the market sewn up, occupying 80% of a large niche. As opposed to streaming, all second generation market entrants have struggled like hell. Smaller brands have made no headway into iTunes market share and Amazon & Play have done okay with aggressive pricing but not shifted the needle for the market, really.

Interestingly, none of these digital stores have introduced the ability for customers to stream the songs in full before they buy. Unlike the streamers introducing click-to-buys, these established retailers know the game too well to expect full sampling to shift their sales up. It’s likely to go the other way, they know that.

On the other hand the innovation in the transaction market has been poor compared with streaming. iTunes isn’t sexy anymore it’s a 7-11. DRM got stripped, so what. Genius is okay but not game changing. Differential pricing isn’t the same as dynamic pricing and it looks like it will leverage some standard prices up as well as down. Amazon has gone aggressive with pricing, not impressing anyone, much.

But there have been, and still are, some interesting takes on selling music. Amie Street’s dynamic pricing model. E-music’s hybrid, great value music club-type subscription for indie content. Some higher-quality & lossless song-file services etc. – all niche. We’ve had music market-places such as Burnlounge and now we have the Peoplesmusicstore (I like this, more about it in a later post).

Finally, as I wrote a few posts ago, some services are, at last, focusing around particular audiences and repertoire rather than getting hung-up on payment models - Lost Tunes for example.

That’s the digital market covered (minus file-sharing and a few mobile services, granted) – in total worth roughly $3billion, under one fifth of music and not making up for lost CD sales. Growth is slowing down already at around 25% in 2008. In short we’re in a bit of a spot. But it is early days let’s use this brief history to see what might happen next.

Digital Music: What happens next?

What we have to realise is that the consumer adoption curve is law. The mass market simply does not go for things that aren’t convenient, simple and good value compared with the alternative. We have no right to believe that digital will grow significantly unless we see greater innovation and value arrive on the supply side. There might not be one big breakthrough to rival iTunes initial impact, but some clear ways to go as follows, with my view on the medium-term (say five year) potential:

The outlook isn’t too rosy. Is it really much more than personalised radio? With its simple functionality there isn’t room on the market for more than 2-3 key players and they’re already here, which becomes very challenging for new entrants like Myspace Music. Ad-funding on its own won’t sustain Spotify, but people love it, so a good chunk of users might be happy to pay around £2 per month to not have to live without it. Spotify might be able to earn £50m or so from direct subscriptions in addition to its ad-revenues. Medium-term potential: low

Music stores
Despite the dominance of iTunes there is still some ground to be made through targeting services better to audiences (particularly new digital adopters in the more mature demographic segments). See previous posts around product development in this area. Through more compelling services and some innovation around targeting the market for transactions could easily double, though in the longer term it depends how much music is commoditised in other ways. Potential: medium

Hybrid models
E-music was always a good idea, an innovative model. But it’s pricing is still way too aggressive for music producers and it is yet to convince the market that the ARPU model is an effective replacement for transactions. So it stays niche. But ISP’s (or even Spotify of Myspace) could offer a simple hybrid whereby 30 tracks per month are keep-able within a streaming subscription, maybe with some sharing capabilities. The pricing equation isn’t easy, but with a good value package and great presentation across multiple platforms this could shift the needle and could reach a hitherto indifferent digital consumer. Potential: high

Cloud-based models
These are still some way off. The cloud with everything available and consumers paying for access isn’t quite as inevitable as people think – it’s back to business models that actually work. Play Anywhere is an interesting B2B offer that bridges what we have now with some kind of future cloud-based mother jukebox but it’s too complex to be mass market. Potential: low

New technologies arrive weekly, but don’t seem to really get that much better. They come and go, with nothing making a mark more than Pandora or Last.fm has already. Even if someone perfected music recommendation it’s not something that consumers will pay for in itself and will not drive transactions for the same reason Spotify will struggle to – music purchases don’t work that way. Potential: low

Playlisting applications
On the brink for over a decade digitally, playlists have been a key music currency for as long as tapes existed. As with all things music though, what made mix tapes great – the time, thought and love it took to create them – has been commoditised by digital, with playlist services swamped with literally millions of crap compilations. Still, some services like Muxtape and Mixwit were built on traditional mix taping values and looked promising until licensing issues killed them off early. But now the labels are licensing project playlist, so the sector might yet deliver. Key to its potential are two factors: built-in natural friction on music use (keeping the industry comfortable and consumers tolerant) and the ability to offer great value since sales can be seen as incremental to all of the current product offers on the market, even commercial compilations. Potential: medium

Making it happen. Who decides?

I’m sure I’ve missed a few key developments above, but I hope to have demonstrated that there are plenty of elements that can still bring value to digital music and help the market grow significantly. However, most critical of all is how the various market players interact to bring these elements to consumers in coherent, sustainable ways. It’s the subject of the next post or one after so please keep a look out for it.


Anonymous said...

Great article with one exception.

Where you said "Interestingly, none of these digital stores have introduced the ability for customers to stream the songs (in full) before they buy," the iYou can add a Full Length song to Nimbit.com music store widgets.

I did on mine and I was pleased with the results. You're right! A full length sample is what music artists want from digital store catalog placements.

= = = = = = =
My Nimbit

Tamayu said...

How about working with say internet providers and putting an extra monthly charge on peoples bills to equate the amount of songs that are being downloaded for free??

La Chips said...

""Last.fm gained traction as a music social network & recommendation service then introduced full-track streaming. iMeem followed. Then Spotify took off and flew in the UK and Europe.""

What about Deezer?

Anonymous said...

Tamayu, I wouldn't want my Internet Provider to do that. I can think of a few reasons why:

1)wifi unprotected networks. The owner would get the bill, not the person who downloads the music.

2)trust. Do you really "love" your internet service provider enough to allow them to bill you more? I don't.

3)control. its possible that ISPs would limit your selections. Music eTailers would offer them incentatives to become default subscriber download locations. That takes away freedom of choice. Not good.

Miller Muses said...

v. comprehensive - i am enlightened!

one question, where does napster fit into this - i'm guessing they are within the hybrid category? and as a die hard napster fan who consumes and listens to a lot of music on the go, i agree that the potential is high.