Spotify and other Streaming Services

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This month we have finally been able to include Spotify sales in our monthly accounting. Initially, the data we received from Spotify did not provide sufficient detail to account to labels on a per track basis. Once the accounting was functional, we had another problem to overcome; the sheer enormity of data, with reports for recent months coming in at over 60,000 line item transactions!. Now that we have successfully designed and tested a workable reporting profile, Spotify accounting will be routine.

There has been much debate recently about Spotify, in particular whether or not it is a viable proposition for labels. Revenue income per stream is indeed tiny, coming in at meagre fractions of pennies.

An encouraging start.
Having managed your expectations on Spotify’s turnover, the positive story here is that Spotify is already, from a standing start, one of our top digital accounts in terms of gross revenue. Viewed quarterly, their revenue growth is currently exponential, with gross turnover for PE September 2009 up 124% compared PE June 2009. This is a considerable achievement for a service that is still in Beta, only live in a handful of territories (United Kingdom, Finland, France, Norway, Spain and Sweden), and who, to date, has spent less than £5,000 on marketing.

We need to re-frame how we evaluate these new streaming services. We seem to be still stuck in a per unit mindset, whereas in the digital world, where there are no fixed costs per unit, it’s all about gross turnover.

The Streaming Backlash
There have even been a few labels who have asked us about withhold content from subscription and streaming services, such as Spotify and Napster, or to hold off and deliver content months after the release date in order to protect a la carte sales.

Personally I think this is misguided. Ever since the launch of “the original Napster”, our industry has struggled to come to terms with the new business landscapes that have arisen from changing technologies. Collectively, we strangled the original Napster, rather than embracing it’s technical merits and creating a workable retail model. Today, the general consensus (even at the BPI) is that this was a mistake. We have been on the back foot ever since.

Recent statistics show no firm evidence of Spotify cannibalising sales from established a-la-carte services. This has also been bourne out from our experience. However there is some evidence to show that it is curbing the habits of illegal downloaders.

The Changing allegiance of Technology
In a way, whether or not streaming services will eat into a la carte sales is a moot point, as in reality we have lost the ability to determine which business model will succeed.. As much as we may wish to preserve the status quo, the consumer will eventually get the services they want, as long as there is the technology available to deliver it. Apple understands this, hence their recent purchase of La La.

Historically, technology was developed by The Producer, and served The Producer.
Today it is often developed by The Consumer to serve only The Consumer.

Any technology we, as producers, create for the consumer must meet the challenge of providing the consumer with the services they want at the prices they are prepared to pay. If we fail at this challenge, the consumer can now simply vote with their feet and circumvent our supply chain, or even create a completely new supply chain. We can try to close this path through legal action, or by cutting an errant consumer’s net access, but eventually technology will always find ways around our roadblocks. I honestly believe there will be no technical solution to our malaise because technology no longer works for us. Our eventual salvation will only come from basic economics. We need to provide the best service at prices that represent true value to the consumer.

Early Days
Spotify is still an immature service, and has yet to build a reputation as a successful advertising platform. Anyone who has used the free service knows that there is currently only a very small handful of relatively minor brands advertising. The income pool is therefore very small. This is bound to increase as the service becomes more popular and reaches a wider audience. More importantly, once more advertising kicks in, there will be a greater incentive for consumers to migrate to the premium offering.

The key to success will be migration to premium. The good news is that the incentive to upgrade is pretty compelling. Premium subscriptions rose 104% in October, following the launch if the Iphone app. I would encourage any or you who own an Iphone, Android phone, or Simbian based mobile to try Spotify’s premium service for a month (There is no minimum contract. You wont get tied in). It isn’t perfect (playlists take too long to load), but it is certainly very impressive, with its ability to stream smoothly over a 3G mobile connection and it’ s off line playback of up to 3,333 tracks. Also, the 320 bitrate files sound fantastic over a home system.

The Dilemma
Of course services will only gain popularity and reach viability if it’s content is up to scratch. A hamstrung streaming service will be an unsuccessful streaming service. Withholding content and delaying releases will ultimately drive the consumer elsewhere, (and unfortunately I don’t think it will be to Itunes !).

Tip of the Iceberg
According to IFPI figures, 95% of downloads earn our industry NOTHING. The key to our future is moving that 95% of transactions over to legal services. Once migration is complete there is scope to see how we can extract maximum value from the market. First of all, we need a market.

We have a good precedent for this migration from free to premium with television. Penetration of pay for TV in the UK now stands at over 50% of households and is still rising. There is still a free service available, but the consumer has shown a willingness to pay for additional choice.

So what about A La Carte ?
None of the above should be viewed as Kudos coming out strong in favour of either subscription or add funded models above all others. We still believe that a la carte offers the consumer a great product, which importantly deals with current preferences to “own” music. Ultimately it is for the consumer to decide which model they prefer. All we can do is ensure they have a genuine choice, and that legal services which reward the artist have inherent advantages over their illegal counterparts.

If premium streaming services see a similar level of penetration as pay tv, with the rest of consumers using either add based service (our “terrestrial tv”) or a la carte (out “BT Vision”), we will all be laughing.

8th Jan 2010