Tag Archives: Apple Music

Did Pharrell Just Kill the Exclusive?

pharrell-freedom-680x676I’m pretty sure I’ve found the song of the summer, and it just so happens that this same song has killed off a central strategic pillar of several music streaming services.

First of all, let’s start with some background.  Pharrell’s “Freedom” is an irresistibly infectious hit (la la la la… la la la la la—good luck getting that out of your head).  And, blurry legal issue aside, Pharrell’s been on an uninterrupted A-list hit streak for a few years now.

As well, Apple spent a lot of time and money to let people know that he was going to drop an exclusive on Apple Music to launch the whole enterprise putting it everywhere from press releases to their big TV spot  to the social channels of everyone from Apple to Pharrell himself.

Now we’re a week and a half into the track, and it’s really starting to catch the mainstream with everyone from the USA Today to Kanye talking about it.

But here’s the rub: now that the track is catching on everywhere, it’s available everywhere.  As soon as everyone started to like the exclusive, the exclusivity was gone.

This raises some pretty fundamental questions not just about this effort from Apple but also about music exclusives overall.

First, in a world where even hit songs from huge artists take at least a week to really catch hold, is there any benefit to a brand or streaming service to have it for the first few days when a track is just starting to take off?  Does your average (Spotify) user care?  More pointedly, is there anyone who does care about having the track in those first few days who won’t go through the trouble of finding it on YouTube or another not-so-legal destination?

Second, what is the residual value of an exclusive track?  In a month’s time, will anyone remember that Apple had the track exclusively for a few days?  Or is the only value realized if you keep doing exclusives over and over again, leaving you chasing the proverbial rabbit around the race track to make any of it matter?

Third, how much of your brand do you need to uncomfortably contort to promote exclusives?  Apple found this out the hard way– Zane Lowe played the song repeatedly during the time that the song was exclusive to Beats One radio… but the trouble is, that’s the opposite of the point of Beats One Radio, and completely contrary to pretty much everything Zane Lowe stands for (Twitter complained plenty about this).  To promote the exclusive, Apple had to compromise the core beliefs of the service.  Tricky.

These three questions clearly demonstrate that Apple’s last week with Pharrell casts some pretty big doubts on the exclusive windows that are presumed to be a pillar of the strategies of streaming services.

Can Taylor-esque boycotts leave marks on Spotify and scare Eddy Cue?  Yes, but these scenarios are limited to the nearly singular kinds of artists that yield as much market power as she does (see below for the source of Taylor’s singularly stunning market power).

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To be fair to Apple, exclusives aren’t a strategy of theirs as much as they are an enabler of their curation strategy.  Apple has bet big on curation over algorithms, but their experience with Beats Music taught them that anonymous curation doesn’t work: playlists made by anonymous editors won’t work among mainstream audiences… but playlists made by celebrities just might.  So, for Apple, celebrity exclusives are an ingredient that turbo charges their curation strategy.

But, for others (read: Tidal), the implications are far more worrying.  From the first moments of their re-launch, Tidal has ignored the high fidelity sound that had been their niche trademark, and bet big on exclusives of everything from songs to videos to playlists.  In fact, the only place you can currently stream Prince tracks is Tidal.  But you didn’t know that until just now, and that’s the point.

One of the biggest stars on the planet just invalidated one of the few strategic paths that have been identified by streaming services. If not exclusives, what should they do?

More on that in the days to come.

Get Rich and Die Trying: A Look Inside the Music Industry’s Collective Death Wish

Money in fist

When you love music as much as I do, it’s hard not to be troubled when you see the entire industry careening toward economic collapse. It’s even more troubling when it’s so evident that the industry is bringing its demise upon itself.

The clubby collaboration between the major record labels and Spotify has placed the entire music industry on top of a precarious investment bubble, and in so doing has left the industry on the teetering brink of economic implosion.

Spotify’s most recent round of funding a few months ago valued the company at $8.4 billion. The entire US recording industry was valued at $6.972 billion at the close of 2014. Though Spotify has yet to make a profit (their net loss tripled from 2013 to 2014), its valuation is based upon the growth of its customer base. It’s valued like a tech company, not a traditional music or entertainment company. One might think this is healthy for the industry, a sign that the music industry has embraced technology and is receiving valuations that acknowledge as much.

But here’s the first problem.

One of the reasons why tech valuations can be supported is economies of scale: as a customer base grows, a company not only gains a greater hold on the market but its costs go down (as calculated per customer).  But that is not at all the case with Spotify.  Sure, there are some tiny tech-based economies of scale as it relates to Spotify’s servers and whatnot.  But nearly 75% of their post-tax revenue is paid out to record labels, and these royalty costs do not go down at all as Spotify grows.  As Spotify grows, more songs are listened to, and their cost base goes up.

Here’s the second problem.

Spotify’s insistence on the freemium model locks it into chasing customers that just aren’t profitable.  A paying Spotify customer generates 26 times more revenue than a user of the free service, and although the percentage of Spotify users is stuck at around 25%, paying customers account for 91% of the company’s income.

But won’t the freemium model convert users to paying customers over time?

Here’s the third problem.

The average customer spends about $48 per year on iTunes.  Given iTunes scale, you can consider their average customer to be a pretty good proxy for an overall average customer (probably even spendier than your average customer, given that they are customers who are still buying music to begin with).  So, if you are betting on people to convert to the paid tier of Spotify and other streaming services, you are expecting your average person to nearly triple their yearly expenditure on music.  And you are expecting people to do this despite the fact that there are going to be legal and free alternatives available to them… with the second most popular alternative (second to YouTube) provided by Spotify itself!

For paid (read: profitable) streaming services to succeed, the pricing is probably going to need to come down by half. And, as it turns out, Apple tried exactly this. In the early days of their negotiations with labels, Apple had planned to charge $5 per month. But the major labels wouldn’t allow this. Subsequently, Apple tried to dig in its heels at a $7.99 monthly charge, but once again the major labels wouldn’t sign any agreements below $9.99 per month.

Why are labels not trying to steer this boat away from what is obviously an iceberg of permanent unprofitability?

And here’s the fourth (and biggest) problem.

The major record labels, collectively, own about 20% of Spotify.  That means that they have a stake in Spotify that is worth about $1.7 billion, and they have seen this stake double in value just since September of 2013.  So, despite the fact that Spotify is unprofitable and is contributing mightily to the persistent unprofitability of the entire music business, why on earth would the labels care?  They are getting significant royalty payments that Spotify has to pay regardless of profitability, and with their collective 20% stake in Spotify they are riding the valuation that is predicated upon the false hope that the company will some day become profitable.

This intertwined interdependency of the music industrial complex risks ruining the economics of the music industry permanently.

So how can the industry innovate and pull out of this death spiral? This very question is the fuel for future blog posts.

Stay tuned.