CMU Trends Digital Labels & Publishers

Trends: The challenge of converting freemium

By | Published on Friday 17 July 2015


It’s hard to compile accurate figures for various reasons, but it’s reasonable to assume well over a billion people are now streaming music from online services that are either licensed (including the likes of Spotify, Pandora and YouTube) or which have been embraced by the music industry even if licensing issues remain (mainly SoundCloud). Yet a quick tally of the figures released by subscription-based streaming platforms, and some estimates for those that are yet to declare, suggests that under 50 million people are currently paying for such services.

But it’s mainly income from the premium services where users pay to access content that is driving the much documented boom in streaming revenue for the record industry, and which is now compensating – more or less – for declines in download and CD sales. Noting this fact, global record industry trade group IFPI said earlier this year: “Total global revenues to record companies generated by … content platforms [like] YouTube amounted to just $641 million in 2014, less than half the total amount paid to the industry by subscription services such as Spotify and Deezer”.

However, turning much of the freemium majority into paying subscribers is going to be tricky while the price point of most premium services is the same: ie ten dollars, euros or pounds a month, or £120 a year.

Because while the basic Spotify-style premium offer – about 30 million tracks fully on-demand on all devices – is incredibly good value, for the average music consumer who used to buy two to three albums each year, spending £120 a year on recorded music is a lot of money. In that way Apple Music, operating on basically the same model, will be a big test: if Apple can’t sell that service at that price point to the masses, no one can.

So what are the other options? Has the music industry given up too soon on ad revenues and is there more to be gained from the free platforms long term? Or do record labels and digital service providers need to create alternative lower-cost subscription options for more casual music consumers? And if so, what do those services look like, what price points would work, what kind of content and functionality would they provide, how would money be taken, and will record labels and music publishers license them?

These various debates were under the spotlight at a recent Music 4.5 event in London, bringing a number of voices to the table, with CMU Business Editor Chris Cooke overseeing the proceedings. Here he provides five take-aways from the session.

1. Premium will always have to carry a lot of freemium
Perhaps one of the most eye-opening presentations of the Music 4.5 event came from Jeremy Yates, reflecting on his time as MD of Playboy TV and the business model of its operator Mindgeek, which also runs a number of freemium adult entertainment websites, including and perhaps most notably Pornhub.

Yates explained that porn producers, like record companies, initially balked at the idea of giving away their content, and resisted the rise of the free-to-access content-sharing websites, which were initially about user-generated content but which were soon hosting plenty of professionally-produced videos too. The conventional producers didn’t like giving away their content for free, nor that the traditional adult entertainment business model – the more hardcore the content, the higher the cost – was being eroded by these new services, because these sites hosted a bit of everything.

But over time the traditional porn producers learned to embrace sites like Pornhub, which – like YouTube for music – have become one of the most important marketing channels in the industry. This despite the fact that, whereas YouTube shares ad revenue with labels and music publishers, sites like Pornhub pay nothing to the rights owners whose content appears on their platforms. Not only that, the hub sites often expect a referral fee if people click through to the content owners’ own services and pay to subscribe.

And it’s worth noting that porn producers are not accepting these less-than-favourable terms because there is an incredibly high conversion rate from freemium to premium in adult entertainment. In fact the vast majority of users only ever access the free sites where only the Pornhub-type operator has any chance of making money. But, crucially, enough consumers are subsequently signing up to paid-for sites so that the content owners are doing good business, despite the majority of consumers tapping their output without contributing any revenue.

Now there are, of course, crucial differences between porn and pop music. Not least, when users follow the click-throughs on sites like Pornhub they are immediately invited to sign-up to subscription services owned by the content makers themselves. Pop videos might link to an iTunes download, or maybe a Spotify stream, but the content owners don’t generally have their own repeat-revenue services to direct consumers to.

But the music companies may have to follow the lead of the porn industry in one regard, and that’s accepting that the majority of consumers will continue to get their content for free.

And while that doesn’t mean labels and publishers should give up trying to monetise freemium, it does mean that they might have to live with a minority of consumers generating the majority of the industry’s income, while the majority of consumers enjoy something of a free ride at the minority’s expense. Which you could argue isn’t actually anything new, if you compare numbers of CD buyers to radio listeners in the past.

2. Other approaches are needed to get mainstream consumers to pay
Of course, this isn’t to say that none of the freemium majority can be persuaded to pay. And perhaps a sizable number will, come October, be persuaded to sign up to the ten dollars a month standard by Apple.

Though it seems likely that services cheaper than the current £10 a month standard will be needed to enable any serious shift in the freemium-to-premium ratio. Various digital firms are dabbling in this domain of course, perhaps most notably Rdio which recently launched its mid-market Select service in some markets.

Unlike Spotify, Rdio only offers personalised radio (Pandora style) for free, while fully on-demand comes for $10 a month. Spotify gives free users fully on-demand on their PC and personalised radio on mobile, but a pretty flexible personalised radio experience. The $10 a month subscription removes ads and brings full functionality to mobile devices. Rdio Select – at $3.99 – aims to be half-way house, providing ad-free personalised radio at a higher sound quality across the board and the option to have a library of 25 tracks available on-demand at any time on all devices.

In many ways, Rdio’s experiments in pricing make it one of the more interesting streaming companies, though whether it can make its mid-market option work remains to be seen; ie will users pay to have 25 tracks available on-demand on their mobile, when for free on Spotify they get lots more on their PC and only slightly less on their phone? I think something closer to 250 tracks would definitely be needed for this one to work.

Though either way, some reckon that the real opportunity for getting mass-market involvement in paid-for streaming is through alliances with mobile networks. Of course, the bundling of Spotify et al with mobile packages is already playing a key role in the streaming boom, but at the current price point for subscriptions, tel cos can’t bundle music in with their mass-market products. But if you could get to $1-2 a month, then they could.

Jason Binks reckons his business Psonar is part of the solution here. In development for a number of years now, Psonar is pay-as-you-go streaming, where users are charged a nominal sum each time they listen to a track. Designed for more casual low consumption consumers, Binks revealed at Music 4.5 that his service is now ready for market, and even sees it being added to pay-as-you-go mobile packages, opening up a whole new massive consumer base for paid-for digital music.

It may be just one of many mid-market packages going live in the next year, but all are worth monitoring.

3. We mustn’t forget the super-fan
With the recent boom in streaming dominating the headlines, it’s been easy to forget our key message at CMU Insights @ The Great Escape in 2014, but that key message remains: for artists the real revolution caused by the internet is direct-to-fan.

And that’s relevant to this debate, as Shelley Taylor of Digital Fan Clubs was keen to point out during the Music 4.5 event. Of the sizable slice of the market who seem unlikely to actively pay to access recorded music online, how many would, instead, pay to connect to a specific music maker?
It’s a reminder that in many ways record labels and artists are ultimately in different businesses – Universal Music is in the record business, but Taylor Swift is in the Taylor Swift business. Which is to say, Swift’s success is only partly reliant on music fans signing up to premium services and streaming her music (if its there), because she also has the much more lucrative option of selling a range of products and services to Taylor Swift fans direct.

So while featured artists may be right to worry about the royalties being paid by the big streaming platforms, or what happens to those royalties as they move through their record companies, at the same time they should be focusing on something much more within their control, the direct-to-fan relationship. Shelley Taylor talked through a number of app-based direct-to-fan products, some purely promotional, some designed to up-sell premium products, and some artist-subscription services, so ‘digital fan clubs’.

Though anecdotal evidence suggests that the key challenge we identified last year about direct-to-fan remains. It’s great that this revenue stream, with so much potential, is in the control of artists and management, but do they have the resources to capitalise on the opportunity, especially with newer talent?

Could the scale, manpower and expertise of the label not help here? But how do you incentivise the label to get involved in D2F? And even if you could, is it as yet equipped to channel its resources in the right way to build truly engaging direct-to-fan services, whether subscription or premium up-sell based? Which brings us back to one of the discussions at this year’s Great Escape: what should the label/artist relationship look like for both parties to realise all this potential?

Though in more practical terms, another challenge artists and their business partners need to tackle in the D2F domain is working out how to provide fans with a steady stream of content – media style – when artists are traditionally used to putting out one body of new content just every couple of years, ie the labour-intensive album. The different services showcased by Taylor showed that every artist’s D2F offer needs to be different depending on fanbase, and that innovation – and even the gimmick – can be the key to success. That and constantly refreshing the proposition.

4. Marketing content might be the product
Which brings us to this point. Many of the most creative, innovative and content-savvy people in the music industry sit in marketing. The record industry has long used content to sell other content, whether that be promotional content created directly by the label or in partnership with media. And that activity has only increased in the digital age, when artists and labels have more channels through which to distribute their promo materials.

LoveLive’s Head Of Content & Programming Will McGillivray kick-started the Music 4.5 proceedings by discussing how he works with artists, labels, media and brands to put some ‘scarcity’ back into the music mix. It’s often been remarked how music has become too ubiquitous in the digital age, with each and any track freely flowing all over the net, whether via premium, freemium or illegal channels. It’s hard to charge a premium for content when it’s so readily available to all.

But beyond the record itself, value can be added to content by doing something special and ‘in the moment’, something with a fixed time and place where fans recognise there is a benefit to seeing it first or seeing it live. Quite what this content, and these events, might be will vary from artist to artist, fanbase to fanbase, month to month, but they boast an exclusivity that an album or single track on general release cannot.

Now, the music industry is already busy in this space, with McGillivray himself sharing numerous examples. Though they nearly always take place as part of a marketing campaign or brand partnership, designed to sell a record, or whatever the brand partner is trying to promote. But why not make these exclusives the product, sold through direct-to-fan channels? Perhaps by using the exclusive to sell the album the music industry has it the wrong way round, it’s using the premium product (the exclusive content) to promote what is actually now the marketing tool (the record).

5. The continued fight against piracy is still part of all this
Whereas piracy used to be a headline debate at many a music conference, the industry seems to have moved on from putting copyright infringement at the top of every agenda. Which is a good thing. In the early days of the web the record industry put far too much energy into fighting piracy (with debatable results), when it should have been investing its time and money into developing new digital products to capitalise on the potential of the net. And that misguided obsession with the pirates arguably set the evolution of the digital music market back several years. But in more recent years the industry seems to have got much better at balancing the carrot with the stick.

Though it is worth reminding ourselves that the continued fight against piracy – even if less high profile – is still very much part of the converting freemium discussion. In the early days of the file-sharing boom, many labels bemoaned the challenge of “competing with free”. That challenge remains, but a distinction needs to be made between legitimate free (freemium) and illegitimate free (piracy). Legitimate digital platforms – whatever the business model – need to keep online piracy in check even more than the record labels, and certainly more than the artists, who in some cases might concede that there are “promo benefits” to having their music shared without licence. For digital music platforms – excluding, perhaps, those with device or data businesses on the side – digital music delivery is all there is to sell.

There are various tactics still being employed by the record industry in the ongoing fight against piracy, but like Alec Cameron – an in-house lawyer at Telefonica also speaking at Music 4.5 – I remain most optimistic about responsible web-blocking, ie securing injunctions to force internet service providers to block access to copyright infringing websites. In those countries where copyright law has allowed such blockades – not least the UK – the ISPs have generally gone along with this method, and it was interesting to hear a legal rep from a net firm talking up this approach at this event.

Though, of course, critics point out that web-blocks are very easily circumvented via the plethora of ‘proxies’ that spring up whenever a blockade is constructed in front of any one piracy operation. Though rights owners argue that consumers seeing web-block notices is still an important educational tool, even if a large portion then seek out a proxy to evade any blockade. And, of course, if only Google could be persuaded or forced to play ball, by proactively delisting the proxies as they emerge, the web-blocks – while no panacea – could be the most effective anti-piracy method to date.

And whatever the rights and wrongs of any one tactic, it is worth remembering that anti-piracy work will always have its role to play in successfully converting freemium.