Tuesday, December 8, 2015

Why Music Streaming Isn't Really About The Music

Written by Alaister Moughan — It may seem strange for companies like YouTube and Amazon to be entering the streaming industry, particularly given how notoriously unprofitable it is, but by offering it bundled with other services, profitability becomes less important than long-term customer loyalty.

Why Does YouTube need a music streaming service? What’s the point of having music in Amazon Prime? The entrance of YouTube and Amazon into the streaming market is intriguing. Why would they want to enter an unprofitable business, let alone enter it so late?

The motivation is strategic. The rationale for YouTube, Amazon, and Apple to enter the music streaming market isn’t to compete in the market, but rather absorb a music service as part of a wide service offering - the way Time/Warner or Verizon bundles cable and internet.

These “generalist” competitors have the power and scale not only to compete but also to change the basis of competition itself - to change the record so to speak. And for once, that record doesn't play music.

Let’s look at the recently announced YouTube Red as an example. YouTube Red offers subscribers access to its streaming service “Google Play” as well as an “ad free” YouTube.

Although you might prefer Spotify to Google Play, YouTube Red is offering more than an on demand music subscription - it’s also a subscription to the biggest music streaming service in the world - YouTube.

Even if a small number of current free users subscribe, the sheer volume makes YouTube Red an instant competitor. While Spotify can boast about its conversion rate, and Tidal celebrate landmarks in converting free trial users to paid users - if only 10% of YouTube’s users sign up for YouTube Red it will be bigger than Spotify and every other interactive services.

With so many potential subscribers at their fingertips, there is a much larger time frame to provide “trial offers”, “family discounts” or “limited loyalty” subscriptions in an effective, direct manner. For the likes of YouTube Red the launch phase is much less significant. It’s all about the long game.

YouTube’s popularity also gives it significant bargaining power. While artists and competitors have taken stands against the free offerings of services such as Spotify, few have been brave enough to take on YouTube who until recently was a completely subscription free service (Foot Note: although YouTube’s content ID system does enable some creators to earn a set amount on streams, typically much lower than a subscribed streaming rate).

The reason why artists haven’t been so brave is that the platform provides huge exposure to most high profile artists, a huge Catch-22. Rich Greenfield, speaking on the latest Musonomics podcast made the analogy to Radio. Radio also doesn't pay a royalty to master rights holders, however a major label artist who withdrew their music from radio would lose massive visibility and record sales by doing so. YouTube is much the same.

An ad-free YouTube is an attractive and unique “add on” service. YouTube reports that an average viewer watches 40 minutes of content. YouTube Red also has an enormous target market of over a billion users.

The other attribute of music streaming which allows these bundled offerings is that few negligible functional differences aside, most music streaming services are the same:

“Unlike the video world, what distinguishes the music world is that there’s really no barrier to entry. If you want House of Cards or Game of Thrones, those are not things just anyone can go out and get. Most content in the video world is generally locked up in an exclusive basis,” Richard Greenfield.

Instead of competing on catalogue or music features, the distinctive differences are in the other services offered in the subscription bundle.

For Amazon, it’s bundling music services with the Amazon shopping Prime Service as well as video content. For YouTube Red it’s an ad free YouTube and for Apple its bundling the service well, with Apple.

Apple Music is a small part of Apple’s multi platform/device strategy. It wants its users to use Apple products on their iPhone, Apple TV, Car Play and beyond. The standalone profitability of Apple Music isn’t critical.

As Julia Greenberg suggests with huge cash resources and no venture capitalists to cater to Apple is “is playing the long game...it doesn’t need everything to be perfect immediately.” It also doesn't necessarily need the service to be profitable, it only needs to contribute and be valued as part of Apple’s broad range of services.

Generalist competitors can also gain greater benefit from the hidden value of streaming - data. Music subscribers provide these firms with huge volumes of user-specific data that can provide invaluable consumer insights.

Amazon, and Apple can use their existing sophisticated ‘Customer Relationship Management; databases and ‘Data Mining’ infrastructure to collect user data and use it to help tailor how and what they offer to you, in and outside of music. Google meanwhile has more data from its Google Analytics service. Pure streaming services without these collateral offerings have less direct use for this data and ethical dilemmas around sharing it.

The “pure” music streaming services are following the trend of diversification with both Spotify and Tidal recently announcing they will also be providing exclusive video content. However, without the buying power of generalist competitors, providing valuable exclusive video content will be a difficult exercise in an increasingly saturated video content market.

It appears that in the long term ‘pure’ music streaming services which compete on curation, artist involvement or functionality may only appeal to the hardcore ‘music first’ fans- the future’s vinyl revivalists (a grass-roots music first revival business in which Amazon ironically already dominates). This has major implications for the music business.

As the streaming market matures, the potential dominance of generalists has significant implications for those that actually create the music.

The music itself may no longer be an important bargaining chip to negotiate with music streaming services. For a generalist, being able to offer access to an artist's or labels content is a very small part of a much larger package. Music becomes the stocking filler, rather than the main prize.

This means artists have much less power to negotiate. A Prince Tidal exclusive is a lot less meaningful when the consumer is subscribed to the service for more than the music. It’s a tough choice, but the average subscriber might favor ad-free YouTube over access to Prince’s catalogue.

Such a market will not be able to create a reasonable balance between providing fans with access to music and ensuring artists are reasonably rewarded for their creativity seems meek at best

Establishing reasonable royalty rates for creators and improving transparency around these streaming revenues won’t be solved by the market because the music streaming market is now a hybrid e-commerce/tech mutt. Already there are signs that creators currently miniscule streaming earnings will shrink further. YouTube Red subscriptions will pay content owners 55% of net revenues from subscriptions compared to around 70% for Spotify and Apple Music.

A generalist dominated streaming market will further impede music creators from receiving reasonable or meaningful royalties. The generalist trend furthers the urgent need for direct action. Legislated compulsory royalty rates such as those used in mechanical licenses and non-interactive streaming are one pragmatic solution. Since the dawn of streaming services the need for such direct conversation has been a polite nudge, perhaps now it’s time for someone to slam the fist on the table.

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