By Mark Mulligan on his Music Industry Blog
2015 started with freemium fighting for its life. 7 months in and it’s still alive and well but the free debate rages on. It is clear that some form of free experience drives paid subscription uptake but it is also clear that too much free reduces the conversion opportunity. A one month trial is probably too little but a year of free is too much. 3 months is emerging as the free, or close to free, sweet-spot as evidenced by Apple’s 3 month free trial and Spotify’s 3 months for $1 a month. In fact Spotify’s cheap trial strategy underscores the constrained ability of unlimited free to convert to paid. Free is crucial to ensure the acquisition funnel is filled but a new approach is needed, one that is more sophisticated than simply stating it is all free or no free.
One of the biggest concerns about free streaming is that it cannibalises sales. Just for the record, it undeniably does. At least on-demand free does. Free has always been part of the music industry, mainly in the form of radio. But the crucial difference with radio is that listeners do not choose what they are listening to. Free streaming needs to start behaving much more like radio, to follow the Pandora model. Crucially it needs to compete head on with traditional radio. Radio is a $46 billion industry globally yet less than 10% of that flows back to labels and publishers, and then on to artists and songwriters (see figure). By contrast the majority of music sales flow back to rights holders and creators. So the music industry needs to optimise streaming to cannibalise radio more than it does sales. To make the majority of free streaming only partially on demand.
The number one streaming metric that the music industry should be paying attention to is the share of total radio listening time that Pandora accounts for. The more that that increases, the more direct revenue flows into the industry.
But at the same on-demand time free streaming’s role in converting subscribers must be protected, albeit within very strictly defined parameters. Subscribers have two key user journey entry points: 1) a trial 2) free. Streaming services need to make better use of their analytics (which are increasingly sophisticated) to identify which free users to invest time and effort into trying to convert and which to side line. Neither Spotify or Deezer is in the business of free music, they are in the business of subscriptions and simply use free as a marketing tool. So they have no reason to cling doggedly to free users that show no sign of converting. Instead after a sufficient period of free music has been offered users should be pushed to subscriptions or onto a radio tier (see figure). There is no business benefit to the streaming services nor rights holders to have perpetual on demand free users.
The assumption that free music is some sort of internet right is symptomatic of the internet’s growing pains. In terms of market development we’re probably at the adolescence stage of the internet, the stage at which carefree childhood starts to be replaced by responsibility and consequences. We’re seeing this happen right across the internet economy, from privacy, data, free speech, jurisdiction etc. Because music has been free online for so long consumers have learned to accept it as fact. That assumption will not be changed any time soon, and try to force the issue too quickly and illegal services will prosper.
Of course YouTube is, and always has been the elephant in the room, buoyed by the schizophrenic attitude of record labels who simultaneously question its impact on the market while continuing to use it as their number 1 digital promotional channel. While the tide may finally be beginning to turn, don’t expect YouTube to go anywhere any time soon. But should the screws tighten do expect YouTube to stop playing ball. As they have made clear in various rights holder conversations, an onside YouTube, warts n’ all, is far more appealing prospect than a rogue YouTube. But implicit threat or otherwise YouTube must be compelled to play by the same rules as everyone else. As I’ve said before, YouTube needs to look more like Pandora.
Competing against radio needs to become the modus operandi of streaming. Only when free music on the internet evolves to more closely resemble radio will the industry be able to fix the apparent paradox of increased consumption translating into reduced revenue.