CMU Trends Digital

Trends: The big challenge of mid-price and free streams

By | Published on Monday 26 September 2016


Amazon, Pandora and iHeart are all bringing $5 a month streaming services to market. The record industry arguably needs mid-price services of this kind to succeed as streaming becomes its dominant revenue stream, but will these products find a consumer base? And what about the free services? Is the industry giving up too soon on the ad-funded model?

Record industry chiefs seem genuinely more optimistic of late, as streaming revenues not only continue to boom, but in many markets are now more than compensating for the ongoing declines in CD and download sales. But there are plenty of outstanding issues that should counter that optimism. These are issues that will remain even if the music industry gets its way on safe harbours, which sometimes feels like the only issue label bosses and their trade organisations want to talk about at the moment.

For starters, there is the fact that, on a global level, most of the growth in streaming revenues stems from just two companies, Apple and Spotify. And neither Apple Music nor Spotify are as yet profitable. The monies the record industry receives from these services are artificially boosted by the minimum guarantees new streaming platforms must commit to pay. But those commitments are not sustainable long-term, and eventually the streaming services will want to simply share their revenues with the labels without making up the difference when certain minima aren’t met.

Then there are the three big unanswered questions about streaming services of the Apple Music and Spotify variety. First, can the current impressive subscriber growth rates be sustained for the foreseeable future? Two, how many paying subscribers do Spotify and Apple Music need to be profitable businesses? And three, how many paying subscribers does the record industry need to stay in growth, even as CD and downloads become niche products, and especially if the dominant streaming services start to try and negotiate away the minimum guarantees?

That latter question could in turn be influenced by the lingering digital pie debate, which is to say how streaming income is shared between the different stakeholders in the music rights industry: labels, artists, publishers and songwriters.

Labels currently take by far the biggest slice of the digital pie – as they did with CD and download income – on the basis they take by far the biggest financial risk when creating new music, especially by new talent. Though both artists and songwriters have argued that those risks are not so significant in the streaming domain and therefore there should be a repositioning of how streaming monies are shared.

Either way, even if we take an optimistic view of Spotify and Apple Music’s near future – and we assume user-figures will continue to rapidly grow for some time yet, and that ultimately they will both become viable businesses in themselves, paying sizable and sustainable income into the music industry even once minimum guarantees fall away – it is almost certainly true that only a minority of consumers will ever sign up to a $10 a month subscription package. So what about everybody else?

It has long been observed that, for most consumers, $120 a year – or the local economic equivalent – is a lot of money to spend on recorded music. For avid music fans, the package offered by Spotify, Apple Music and all the other services operating basically the same model, is a really good deal. But for most consumers, who perhaps bought one or two CDs a year in the pre-digital age, $120 is too much. And all-you-can-eat streaming music isn’t a big enough turn on to justify that price point; indeed for the more mainstream consumer all-you-can-eat can be daunting and therefore a turn off.

Therefore, beyond the race to sign up as many $10 a month subscribers as possible, the music industry needs to develop mid-range streaming services. That is to say, less content and/or less functionality for less money each month. But what will those services look like, given that they need to be better than the current free services available, but not as good as what Spotify and Apple currently provide their premium users?

Earlier this month Pandora relaunched its existing $5 a month service, while last week its main rival iHeartRadio announced its intent to move into paid-for streaming for the first time, with a similar mid-price package part of that move.

In both cases, these are enhanced personalised radio services, as opposed to the fully on-demand streaming offered by Spotify and Apple. We have more information about the Pandora service, as it’s actually live. Unlike the free version of Pandora, paying users get more functionality in the form of unlimited skips, offline listening and some limited on-demand playlisting. Plus there are no ads.

Some have argued in the past that, aside from the lower price point, an enhanced ad-free personalised radio service is actually more attractive to more mainstream consumers than fully on-demand streams, because it involves less work on their part – they just press a button and music they like with play.

iHeart makes its personalised radio service even more familiar to those yet to properly jump into streaming music by integrating its vast network of AM and FM radio stations, so that the starting point for a new user can be to browse a plethora of conventional radio channels.

Though it is worth noting that enhanced personalised radio at $5 a month has been tried before. Indeed, Pandora is relaunching rather than launching anew its premium personalised radio package. To date the vast majority of Pandora users have opted for the free version and it remains to be seen if the extra features and a new marketing push will result in a better freemium-to-premium conversion rate.

Amazon is also expected to launch a $5 a month package when it launches a standalone streaming service this autumn, locked to the firm’s proprietary Echo speaker device. Subscribers will have to upgrade to the more typical $10 a month package to use Amazon’s streaming platform on all their other devices.

Spotify previously experimented with a half price subscription based on limiting the devices it could be used on, with a £5 option that only worked on desktop computers, while the £10 package also worked on mobile devices. Though, as mobile became the dominant device for streaming services, Spotify seemed to think that any paid-for service that lacked mobile functionality wasn’t a goer.

It remains to be seen how Amazon fairs with its experiment. With Echo speakers retailing at £150 in the UK, the pitch will presumably go “get a year’s unlimited streaming from your speaker for just another £60”. Which might be attractive to anyone not currently signed up to a streaming platform, though you sense that that will be more use as a short-term marketing channel – hook hardware customers in at £60, and then try and upsell them to £120 a year for all devices – rather than it being a long-term mid-price option.

But, of course, the fact that past attempts at mid-price streaming have, in the main, failed doesn’t necessarily mean they can’t succeed this time. Previous mid-price streaming set-ups might simply have come to the market too early, with the more mainstream consumers they are targeted not yet ready to embrace such products.

It may be that for those more mainstream consumers, $5 a month is still too high a price, and something more around the $2 a month price point is required.

Or perhaps those services that bundle music with other content – such as the existing music element of Amazon Prime – are actually the way to reach this mid-market, rather than standalone mid-price services.

The other big issue impacting on mid-price streaming is all the free services, including the freemium levels of Pandora, iHeart, Spotify and Deezer, plus big bad YouTube, the industry’s own Vevo and the now licensed SoundCloud.

As it currently stands, a savvy consumer might recognise that the experience being offered by Pandora and iHeart for $5 a month can pretty much be replicated for free on Spotify freemium – providing you are willing to tolerate the occasional advert – plus Spotify offers a whole lot more, for free.

Pandora and iHeart might argue that they have a simpler and more user-friendly interface, better personalisation and, in the latter’s case, all those radio channels, but the fact that free services exist that offer more functionality than many of the mid-price services being developed has to be an issue.

Spotify has always claimed that it’s because of its freemium level that it is able to sign up so many premium users. And given how much faster it has signed up users than those competitors without the free option, that is probably true.

Nevertheless, it’s no secret that many in the labels would like to start streamlining Spotify’s free offer (indeed, some label execs would like to shut it down), and it seems inevitable that the service will have to concede to at least the windowing of big new releases off freemium in the relatively near future.

Though, while the labels can continue to pressure Spotify (and Deezer for that matter) to cut back its free service, the music industry is more constrained when it comes to the likes of Pandora and iHeart, because of the compulsory licence they can tap into in the US, and with YouTube, which will continue to have a strong negotiating hand while the safe harbours the music industry hates so much continue to operate in key markets.

Though, while the problem with free in the short term is the impact the freebie streams may or may not be having of the emergence of a mid-price streaming market, in the long term the problem with free is actually this: what does the music industry do about the significant slice of the market (very possibly the majority of consumers) who will never pay for digital music?

Let’s say the record industry got its way on safe harbours and could exploit its new direct relationships with Pandora and iHeart to have more control over their free services even in the US, what does it then do about the fact that many, many consumers will simply never pay to stream?

Does it try to shut down free streaming, in a bid to convert a fraction of those people to some kind of paid-for option, before writing off all those who do not convert, a sizable of portion of which could be lost to piracy? Or does it accept that there will always be some kind of legitimate free streaming, consumed by the masses, generating relatively nominal royalties, and upselling premium streams and other music products?

The latter seems more likely. Which brings us to the final question: has the music industry fully tapped the potential of ad income? For a brief time, the labels seemed to see ad-funded streams as a big opportunity, and it was around about that time that the record industry licensed Spotify’s free level and embraced early-days YouTube.

Since then, labels have become less convinced about the potential of ad money, in no small part because YouTube’s ad sales couldn’t keep up with the huge rises in consumption, and possibly also because of more direct experiences trying to sell ads via label or Vevo-managed channels on the YouTube platform or elsewhere.

And, of course, one of the reasons why Pandora and iHeart are moving into subscriptions is because they don’t believe ad income alone can sustain their businesses, while the one streaming service that insisted advertising was the future of streaming, Guvera, has had a very tricky year indeed.

Though there are various issues with the way advertising has been sold around streaming music that could be addressed.

First of all, the ad industry has always allocated way more money to TV than radio, and generally categorises online audio ads under the latter. Secondly, radio advertising has always relied heavily on local advertisers, and while streaming services can deliver ads on a local basis, they often don’t have localised sales teams. And thirdly, by making one of the big selling points of premium the fact that it is ad-free, that makes for a weird pitch to advertisers along the lines of “advertise with us so we can annoy free users into upgrading”.

There is also the issue that when people are requesting three minute tracks or videos on demand, a 30-60 second advert is simply too long. Those aware of user-experience therefore offer a five second skip option, which most people utilise, and the advertiser isn’t charged. This is a challenge for the ad industry more than anything else – it needs to start selling its clients’ products in five seconds, ten seconds max.

Assuming some sort of free streaming has to be part of the long-term future of digital music, finding a way to overcome these challenges in the advertising space should be on the music industry’s agenda. Vevo, providing it doesn’t get too distracted by its own move into premium subscriptions, could lead on this. Though it possibly also needs the record companies to collaborate with some current foes, including big bad YouTube.