New emerging markets are fascinating. Like a real-life iteration of Russian Roulette and with similar unpredictability, those who dare play can seemingly become billionaire visionaries overnight, or lose millions and appear hopelessly out of touch. The music industry is no stranger to changing forms of consumption and the new markets that creates; from LP records to 8-track tapes to cassettes to CDs to the digital download. The fundamental and notable difference between those formats and today’s streaming services is that those all represent ownership models — you pay for something and you own it forever — whereas streaming services represent access models.
With such a notable change, it is surprising how the music industry has, in recent years, been unusually quick to dismiss claims that streaming services are cannibalizing digital download sales. Sure, the evidence was up until recently inconclusive, but this is the same industry we’re talking about that believed home taping (recording music from the radio with cassette recorders) was killing the music industry in the 80s (spoiler: it wasn’t and didn’t). The reason for the backing is equity. The emerging digital economy’s frontrunner, Spotify, was recently valued at $4bn and is reported to have given a combined 20% of equity for next-to-nothing to major labels when it was starting up; meanwhile, Access Industries (who own Warner Music Group) have made $60m and $130m investments in Beats Music and Deezer respectively. This is the case with many streaming services, and ultimately, it means that if they grow and are sold or undertake a public offering of shares, the labels and their parent companies are due for a huge payday. Last year, however, both the US and UK saw rapid streaming increases and declines in digital and overall sales. US digital track sales decreased for the first time by 5.7% and digital album sales fell 0.1%; similarly, UK digital track sales fell 6.4% while digital album sales fell 3.4%.
There are reasons to be positive about the future as the streaming model is still maturing; in Norway, where Spotify launched in 2008 — three years before the US — streaming accounted for 84.1% of total revenue, which grew by 10%. Indeed, the confidence of both venture capital investors and leading technology corporations wishing to have their own service to compliment other offerings in streaming services is evident (e.g. Sony Unlimited for Sony, Xbox Music for Microsoft). This has acted as a vote of confidence for the proprietors of the new model to invest in expansion and to lose money before they begin making it – and the emergence of at least two new services this year is testament to this.
Don’t Forget About Dre
Eagerly anticipated and hotly tipped to make an impact and take streaming services further to the mainstream is Beats Music. Created by the same people who made Beats by Dre a billion dollar business, the service launched on January 21st and has been carefully curated to cater to an individual’s tastes, social demographics, and to provide a soundtrack for activities such as starting a day, working out, partying, and many more (an often overlooked and lesser known service, Songza, has been doing this for over six years). Celebrity backers and personalized user experience aside, the key to Beats Music’s success — at least in the US — will be its partnership with service provider AT&T. Carrier partnerships make billing easier by subsidizing or hiding the monthly cost of a streaming service in phone bills, and enable services to reach an untapped mainstream. Similar carrier relationships are ubiquitous and key to the growth of streaming services in Europe, with Spotify and Deezer having carrier partnerships in most countries where they operate, and Muve Music’s exclusive partnership with Cricket Wireless in the US has been successful on a smaller scale (Muve is thought to be one of the few streaming services not currently operating at a loss).
Cricket is a tiny provider with around 5m users, but AT&T is the largest in the US with a customer base of over 107.8m people. While speculating on the number of customers who will adopt the Beats Music service – which is offering a family plan and a free trial as part of the partnership – would be, uhh, speculative, only 5% of AT&T customers would need to subscribe to the service to easily match Spotify’s 6m worldwide subscribers. AT&T provide Beats Music with an excellent platform to enter the marketplace without suffering the huge losses most services do in the name of customer acquisition, and if anyone can make streaming services truly mainstream, it is surely the same team that made expensive headphones a ‘must have’ item for casual music listeners.
While the French streaming service may not have a media presence as prominent as Spotify, it does boast an impressive 5m paying subscribers (Spotify’s last available figure is 6m, but that’s almost a year old). With an initial focus on key European markets, the service has expanded rapidly in the past few years and is available in 182 countries today. Notably, however, Deezer has avoided the US market (much like Spotify did initially) due to the high cost of expanding into and breaking the US market as well as the huge competition, but with a proven track record in Europe and recent investments including $130m from Access Industries, a US launch is poised for 2014. The key to Deezer’s success in Europe can be greatly attributed to carrier partnerships such as with Orange in France and EE in the UK, and the service even has carrier partners in parts of South America and Africa. It seems incredibly unlikely and incredibly unwise that Deezer will launch in the US without a carrier partnership… and while no details have been announced, don’t be surprised if a major carrier like Verizon (who have 102.8m subscribers) or someone similar partners with Deezer.
Another Project for the Google Graveyard?
Since Google launched Google Play Music All Access (say that ten times fast) in May 2013, it has begun to seem more and more like the technology giant wanted a subscription streaming service for the sake of having one, serving the niche group of diehard Android users who wanted a streaming service to accompany the Google Play store (which, in similar fashion, arrived a couple of years too late and, when it comes to music, pales in comparison to iTunes and even Amazon MP3). Without a free tier – a defining but controversial component streaming services such as Spotify championed as a way of enticing and eventually converting paying customers – or a carrier partnership, the service has made little effort to grow or distinguish itself in a competitive market, and has therefore had little impact and fallen into the growing abyss of failed Google products (its lack of publicly available figures are code for: ‘our figures suck and we don’t want to publicize that’). There is certainly room in the future for something incredible – imagine if Google built a cloud-based subscription service that dealt with music, movies, TV shows, and games, and integrated perfectly with Gmail and Google Plus — but the current iteration leaves much to be desired.
A Billion Users…But Is YouTube the Answer?
The news that YouTube, owned by Google, is preparing to launch its own streaming service is simultaneously confusing and long overdue. YouTube is a modern day superpower with 1 billion unique users per month; more importantly, music makes up a huge part of those users’ activity (30% according to Sysomos) and it is also the most popular service teenagers use to listen to music (64% according to Nielsen). If view counts and fan-led social media movements to break 24-hour stream records for One Direction and Miley Cyrus videos are any indication, a YouTube-based streaming service would have no problem attracting users.
That being said, the reality is that YouTube must overcome a multitude of issues to ensure the upcoming service, dubbed ‘Music Pass’, isn’t a failure that falls out of sight and mind months after launch, and that it becomes a serious player in the digital music marketplace. The first and most fundamental issue is that YouTube is and always will be a video service. Consumer behavior takes years to form and change; will YouTube’s youthful, mainstream, and unsophisticated (based on the awful comment sections) core demographic be receptive to changing their habits and shifting to a different form of consumption? This audience poses another problem, as it makes it likely that Music Pass will be slanted towards hit singles, rather than the catalog depth and new buzz releases that most streaming services are geared towards. This seems self-defeating; if you wanted to listen to a hit single, why not just watch the music video on YouTube?
Speaking of self-defeating, how would a successful music service affect YouTube’s current booming service or, more dangerously, the fortunes of its network partners? Music-oriented video service Vevo, co-founded by Universal Music Group and Sony Music Entertainment, share a partnership agreement with YouTube, where YouTube carries Vevo content and splits advertising revenue with the service. While Vevo pulling their catalog from YouTube seems unlikely, Sony CEO Doug Morris has threatened to do so in the past in order to negotiate better terms, teasing a move to a competitor such as Amazon or Facebook. Alternatively, while YouTube is reported to have secured all the necessary licenses to launch Music Pass, Warner Music Group (who decided against licensing their catalog to Vevo and instead launched their own hugely successful channel, The Warner Sound) could choose to pull their catalog from Music Pass if their YouTube channel is adversely affected. Such a huge gap in Music Pass’s offering would likely prove fatal and make it difficult for the service to attract users, particularly when competing services have full catalogs. And on the topic of catalogs, while the Music Pass is unlikely to be intergrated with YouTube’s video offerings, how would YouTube navigate unlicensed user videos? Allowing user videos to remain wouldn’t exactly promote Music Pass, while deleting the content would surely spark outrage.
Lastly, could a YouTube streaming service ever be profitable? Securing licenses, building, and marketing a music streaming service isn’t cheap, particularly when you consider that YouTube has paid absolutely nothing for an overwhelming majority of its content (and monetizes much of its content with great success, although exact figures are not disclosed for YouTube’s finances). Likewise, YouTube’s viewers share the same culture — they’re accustomed to a free service, and it seems unlikely that masses would jump at the prospect of a paid service (see: YouTube’s ongoing attempts at movie/TV rentals vs. Netflix’s market domination). With Music Pass reportedly set to include a free tier as well as a paid tier, expect YouTube to have lower free-to-paid conversion rates than its rivals.
2014 and Beyond
After $400m was invested in streaming services last year, 2014 is certainly poised to be an interesting year in the digital marketplace. Spotify’s steady growth and market leadership looks set to continue — don’t be surprised if, in the face of competition, they pen a US carrier deal similar to Beats Music. And while it is too early to truly assess Beats’ long-term prospects, the initial response has been positive and there is little doubt the service will make an impact in its maiden year — just how great an impact depends on the strength of their partnership with AT&T. With Deezer’s expansion plans still unannounced, it is difficult to speculate on how great an impact the service could have — but without a doubt, with the right partnerships in place, the European service could become a major player in an increasingly competitive US market. And don’t be surprised if an acquisition or two is on the horizon — streaming cult-favorites Rdio and Microsoft have been subject to takeover rumors for years, and such a deal would make sense for both companies, as the former struggles to keep up with better-funded competition and the latter continues its battle to stay relevant beyond the 20th century. As for YouTube’s chances, the upcoming Music Pass service is at best a serious market contender backed by an astronomical power with challenges to overcome, and at worst a licensing war, aesthetic mess, and an unwanted and unprofitable service. The difficulties that lie ahead for YouTube’s do tell us one very interesting thing, however: even for a global superpower, the music streaming market is really, really difficult. And that democratization is reason enough to keep a curious eye on how streaming services develop in 2014 and beyond.