Spotify May Not Spur Music Sales; But What If It Makes Music Consumers More Valuable?

from the lifetime-value? dept

There was some news a few days back about how people who use Pandora end up buying more music, while people who use Spotify do not. Of course, if you understand these two services, this should be completely obvious. After all, Pandora is like radio -- with a bit of randomness, and no real way to just play what you want. Spotify, on the other hand, is designed to replicate your music collection -- a cloud-based iTunes. Unfortunately, those who focus too narrowly on the idea that music sales is the music business may find this news as further support for moving away from services like Spotify. On top of that, I've heard from people who were at the conference where this "research" was announced, and it turns out that the guy presenting it never mentioned Spotify at all. It's just that the press is assuming he meant Spotify.

However, either way, just looking narrowly at music sales is a mistake. As we've discussed, selling music is not a very good business any more, but that doesn't mean that there aren't good music business models -- it's just that selling music probably isn't one of them.

With that in mind, it's worth taking a look at a recent report put out by Will Page, an economist for PRS in the UK -- and the guy who put out that report last year showing that the music industry was actually growing, not shrinking, when you looked at all the component parts. In his latest report, Page takes on the question of "average revenue per user" (ARPU) when it comes to the music consumer out there -- with a specific look at Spotify (and, unlike the NPD report that's getting all this press, Page actually has real info about Spotify).

Around here, we're used to hearing about ARPU in the context of telcos. It's a stat that telco execs and Wall Street money folks obsess over. Five years back, we warned why the telcos obsessive focus on ARPU was dangerous, and could lead to bad long-term strategic decisions. Page's report effectively suggests the same thing is true in the case of the music business. With the move to various music services, such as Spotify and Pandora, there is a sudden push to look at "ARPU" of music consumers as well -- and if the average music buyer in the UK spends £63 on music, and Spotify can get them to sign up for a £120 plan, that seems like a pretty good thing. Right?

But, as Page notes, the real story is a hell of a lot more complicated than that. What if Spotify is picking off just the "top users" who were actually spending £150 per year? Or, what if it's getting people who didn't buy music at all to pay for subscriptions? Then, any direct revenue is incremental, and the pricing could really matter -- since lower prices could bring in a lot more total revenue by bringing new "buyers" into the market. Furthermore, just focusing on the ARPU from direct payments for music (sales or subscriptions) misses a big part of the story. Live shows are a large and growing part of the market, but don't make it into such calculations. Merchandise and other direct-to-fan offerings also probably aren't included in many of those calculations. And, in fact, we've heard that Spotify is looking to enable those other business models as well -- and isn't just focused on the obsolete metric of "music sales."

As such, services like Pandora and Spotify shouldn't necessarily be judged on how much they contribute to plain old music sales, or even direct ARPU -- but how much they drive people to spend money within the music ecosystem -- and then figure out where that money goes, and whether or not it's allocated in a way that benefits or harms the various players in the space. If Spotify helps make every other aspect of the music industry more valuable, but depresses the market for direct music sales, that shouldn't be seen as a bad thing at all.

Once again, it reminds us of the necessity to not get too narrowly focused on a subsegment of the market when trying to figure out what's happening -- but to explore the larger ecosystem of how much money is being generated around music -- and then we can look at where it goes and what it funds. That is, we shouldn't be worried about how much people spend on horse carriages, but on transportation. So remember that whenever you hear numbers being thrown around about how much money is being made or "lost" in various industries. If you don't look at the overall ecosystem, you often miss what's happening.

Filed Under: arpu, ecosystem, lifetime value, music, music sales
Companies: pandora, spotify

Growth Of Music Digital Sales Is Slowing Down

from the false-hope dept

In the presentation I did last year at the NARM event, one of the things I noted was that people who were pinning their hopes on the music industry making a revival through digital sales of songs were betting on a false hope. They were betting on the idea that they could just take the old world (Tower Records) and move it to the new world (iTunes) with a digital facelift. Doing so ignored the reality of what the internet does and allows. The internet doesn't just let you take a store and move it online. It changes nearly every aspect of the creation, promotion, distribution and business models around music. Yet, this was a point that I got a lot of pushback on. People still insisted that selling music files was going to be "the thing" that worked. They might want to check that assumption. Reports are coming out, noting that while digital music sales are still growing, the pace at which they're growing is slowing down, in some cases drastically.

Now, you can't expect massive growth forever. At some point, every growth market begins to mature and saturate and the growth rate slows down. But, digital music sales are still a relatively small market. It seems much wiser to focus on the markets that actually have much more potential than the one that tries to just recreate the old world by applying artificial scarcities.

Filed Under: digital music, music, music sales

Are Entertainment Industry Tactics Working?

from the or-is-it-a-dead-cat-bounce dept

It's been somewhat amusing over the last day or so to see a bunch of our usual critics all submit the same exact story with some sort of triumphant "I told you so!!!!!" (usually in less friendly language). It's a report that music sales are up in Sweden following the strict anti-piracy law that went into effect earlier this year. The claim is that this is proof that the RIAA/MPAA/IFPI/BPI/etc strategies work. To them, this is clear, irrefutable evidence that draconian measures to crack down on unauthorized file sharing really does make people buy. That would be quite interesting if true, but our friends employed by these companies might want to wait a bit before breaking out the champagne over a dead cat bounce.

First, there are some who are questioning the actual numbers. So far, the only numbers have come directly from the IFPI, who hasn't provided much in the way of detail (and have a long history of publishing questionable, fact-challenged numbers). In fact, the very lack of detail would likely indicate that there are extenuating circumstances here. And, when we're talking about Sweden, it has to also be noted that services like Spotify (which dragged the labels kicking and screaming into the modern world) were just launched at the very end of last year. So, it could be that it was one of these more modern services that helped convince people to buy music rather than any crackdown. But, of course, the bigger question is whether or not any boost is sustainable. It was reported that there was a drop in file sharing after the Swedish IPRED law went into effect (though, again, many argue that the "drop" was simply because more people started using encryption and those who measure file sharing traffic had no way to deal with it, so pretended they all stopped). Yet, it didn't take long for the traffic numbers to bounce back up.

And that's the issue. If your entire business model is based on whacking people with a stick and telling them what they can't do, you may get brief moments of compliance, but at the first chance they get to go back to a more consumer-friendly system, they will. So while our friends in the entertainment industry will likely misread this situation into believing that its strategy of pissing off pretty much everyone makes business sense, let's wait and see how this works out in the next year or so. Dead cat bounces can fool lots of folks, but there are very few industries that succeed by basing their future on such things.

Filed Under: anti-piracy, copyright, dead cat bounce, music sales, sweden