SaaSing The Music Business [Ethan Kaplan]
What does the shift to a streaming music economy mean for the industry as a whole? As the business changes and SasS (Software as a Service) providers become the dominant players, artists will have to work hard to remain relevant.
The music business is about to undergo another seismic shift. And Apple’s streaming service is the tsunami that will force the industry to rebuild. Again.
It was around 2005 when I joined Warner Bros. Records as their new head of technology. I was the 20-something-year-old kid who was supposed to have every answer about all things digital. I remember distinctly the first record I worked on. Not because the record was special to me personally (it wasn’t), but because that was when I began to understand how a “record” was viewed by the record labels and the industry.
Back in the day, two things drove music sales: the record itself and the story that publicists told about the record. There were no iTunes pre-sales or bundling the album with new Samsung phones. Everything depended on first-week sales and chart position, as well as how the record rose or fell during the second week. It was a totally anonymous process. Even the record store owners had no idea who was buying. It was a simple transaction reported to SoundScan.
The Story, Sale And Spins
By the late 1990s, the music industry had created a pretty successful promotion and publicity machine. First-week sales were driven by meticulously choosing the best single from the record, getting spins on top radio shows, producing big budget videos for MTV, print and TV promotions, record reviews and interviews with the artists. All things served the commerce transaction funnel.
The results of that first week of sales, along with the radio airplay, helped tell the “story.” If the record charted to No. 1 with millions of sales, the news was used to bolster second-week sales, as well as support the second single on radio and MTV and help launch the tour. The story, the sale and the spins — this marketing dance worked over and over again.
When the iTunes Music Store started dominating digital retail sales, and digital started eating into the total retail picture, the record labels didn’t bother to change the process very much. They just got a level of analysis and quantification that they never had before (for Apple, primarily), as well as higher margins.
Artists and labels that tap into and understand big data will shape every aspect of the music game, from PR and promotions to songwriting and recording.
Music industry professionals never thought about loyalty or customer churn, because the month-over-month cycle (or even year-over-year) was less important than release-over-release.
In fact, the record labels often anticipated that an artist would lose portions of their audience with every new release, in exchange for new fans, as people got older, audiences changed and pop culture evolved. For example, many fans of New Kids on the Block eventually lost interest in the boy band sound and graduated to rock or R&B as they got older and went to high school or college.
Music “As A Service” Is Born
In the late 1990s and early 2000s, the on-demand and “as a service” economy started heating up across a broad range of industries. Enterprise software developers started hosting their applications on the web, with subscription services focused on locking in long-term customers to optimize average revenue per user (ARPU). The traditional high-margin transaction of software sales gave way to by-the-cent optimization of a built-in audience.
And where was the music business through this?
While first-generation SaaS (software as a service) providers were taking hold in the enterprise, a few pioneering streaming music services were making their debut. As Napster fell victim to legal battles, Rhapsody emerged in 2001 as one of the first legal providers of subscription-based music. At that time, the record labels viewed Rhapsody and others subscription services as “just another” source of revenue to support physical retail sales.
When retail sales in Wal-Mart and Target were strong, streaming was a nice additive source of revenue. In the waning days of physical retail sales, iTunes and Amazon propped up the entire music business, and streaming continued to be a small additional source of revenue.
The problem? The music industry is still organized to support the traditional retail and digital sales cycle. As subscription services become the dominant source of revenue for recorded music, the entire business will have to shift gears to survive.
It’s no longer about pre-sales and Week 1, it’s about nurturing an audience month-over-month to drive loyalty and increase returns on a streaming service platform. All of the promotion dollars and methods to support Week 1 have to be retooled for a longer cycle, up to 6 months in many cases.
Now that the narrative has changed, can the music industry move into being an “as a service” economy?
The New Music Paradigm
It used to be that an artist could be meticulous about the rollout of their career, and afford disappearing acts between records. If they disappear now, so does the attention on their music and, ultimately, the money they receive from the streaming services.
For example, Lorde can go from being discovered on a playlist to an international superstar, but veteran artists like U2 have to get creative with promotions, for better or worse, like bundling their new record with a music service and forcing themselves on the masses to re-engage a once-loyal audience. New Kids on the Block is a great example as they continue to play sold-out shows around the world with acts like TLC and Nelly to reignite the nostalgia of the 1990s and 2000s.
The new music paradigm is infinite promotion. For the artist, this means Week 1 will be no different from Week 4 or 8. Music publicity and promotions will have to focus on getting more and more fans engaged to generate plays over much longer periods of time instead of short sales cycles. Artists will have to be on the road longer to generate revenue for live performances and merchandise sales, while also generating new fans to tune into streaming services.
Record labels will have to do a better job of incorporating data and analytics to understand fan loyalty in this new world order. Understanding who is listening, for how long and in what context will be a game changer. This is something that simply couldn’t be captured in the days of physical retail sales. Artists and labels that tap into and understand big data will shape every aspect of the music game, from PR and promotions to songwriting and recording. Those who don’t understand analytics will ultimately fade away.
The streaming services also have to play the SaaS game to ensure subscribers don’t churn and join other streaming services. In many respects, the artists themselves become creative talent for iTunes, Spotify and others, much like engineers and product developers are the rock stars behind other SaaS providers, such as Uber and Airbnb.
The contrast between artists, music services and traditional SaaS providers seems an odd one at first, but not when you think about how they engage audiences and generate revenue. Both provide a service. Both rely on continual engagement to do so profitably. But only one business has a language, workflow and practice oriented around continual, lean product development and quantified customer development.
As of today, it isn’t the business that made Apple put the U2 album on your phone.