Subscriptions are still only a small share of the music market but their time is coming. That time is long over due (I and my former Jupiter colleagues David Card and Aram Sinnreich first started making the case for subscriptions back in 2000) and a slew of big players are getting ready to play ball now that subscription look ready for primetime. But they will find it far from plain sailing.
Spotify, Deezer, Rhapsody, Muve, Rdio, WiMP etc. have done much get the market moving and although there are still major challenges ahead (e.g. 9.99 not being a mass market price point) a host of new entrants are poised to make their moves. The much mooted / touted (delete as appropriate) Daisy is one of the more eagerly anticipated ones (see my take here) but focus has recently turned to potential moves from big players like Amazon and Google, while Apple’s arrival in the subscription market is becoming Godot-esque.
All of these companies bring fantastic assets to the subscription market –scale being the most important – but they will all find the subscription transition difficult. However good their technology assets, however big their marketing spend, however big their customer base, none of these companies have subscriptions running through the DNA of their products nor, most importantly, their customers. Here are the key challenges each will face:
- Apple: Apple was the music industry’s digital beachhead but now Apple has a problem. Downloads were a transition strategy with one foot in the digital future and one foot in the analogue past. Apple has built a paid content customer base founded on ownership, a la carte transactions and downloads. Meanwhile it tiers its hardware pricing by hard-drive capacity. In some ways this latter point matters most: in the streaming era consumers download less which means there is less need for higher capacity devices, which in turn means that demand for the higher priced, higher capacity devices tails off. Apple can use subscriptions to address this issue by creating bundles e.g. iPad Gold, a $200 price premium with device-lifetime access to an iTunes music, video and Apps subscription. This sort of tactic will be crucial for Apple because the concept of digital content subscriptions is alien to the vast majority of its 400 million iTunes customers. If anyone can make subscriptions work, it is Apple – and I believe they will – but currently its customer base, hardware pricing and content offerings (iMatch and movie rentals excepted) are simply not the right foundations for building a subscription service on. A lot needs to change before Apple and its customers are ready for subscriptions.
- Amazon: Amazon’s content-device strategy is the mirror opposite of Apple’s: Amazon is selling devices to help sell content. Amazon needs to be a key player in the music and video business because these low price point items are the bottom rung on the purchase ladder that Amazon hooks new customers in with. Subscriptions though, are high consideration items. Amazon is hoping it can nudge customers up to monthly subscriptions in the same way it can nudge customers from a CD to a laptop. But it isn’t the same transition. Most Amazon customers have a lot of one-night stands with the retailer rather than a relationship: it is where they go to get stuff, not to immerse themselves in experiences. Of course Amazon is trying to change that – particularly with video – but it requires a fundamental change in the relationship with its customers. As with Apple, a device / subscription bundle strategy will deliver best near-term results.
- Google: Google has the most diverse set of assets at its disposal. In YouTube it has the most successful streaming music service on the planet and in Google Play it has, well, not the most successful digital content store on the planet. Launching a subscription service on YouTube is an obvious option and the sheer scale of YouTube means that even with highly modest conversion rate it can easily become a major player very quickly. But the fact that YouTube is free is core to why it is so popular, so the vast majority of its users have little interest in paying fees. Thus Google will have to ‘think different’ to make subscriptions work on YouTube. But where Google could really make the subscription play work is, well, on Play. Not Play by itself though but instead as a tightly integrated subscription – device ecosystem with Motorola. A while ago I wrote that Google ‘needs to do an Apple with Motorola’. It still does, but it should do so in a manner fit for the cloud era by hard bundling a Play subscription service into Motorola handsets. (You should be spotting the theme by now).
- Samsung / HTC / Nokia et al. By this stage any readers from a non-Apple and non-Motorola handset business might be beginning to wonder how on earth their companies are going able to squeeze themselves into the subscription equation. It is a very good question. Most mobile handset companies are at a crucial juncture, they now face the same problem as ISPs did in the mid-2000’s: unless something changes mobile handset companies are going to become ‘dumb devices’ just as ISPs ‘became dumb pipes’. Nokia recognized this earlier than most but got the solution wrong – or at least the implementation – with Ovi and is slowly clawing its way back. But all of them have a huge task ahead them if they are to avoid becoming helpless observers as other companies build robust digital businesses on the back of their hardware. If they can harness the carrier billing relationship then they have a truly unique asset for building a music subscription market, but that is much, much easier said then done (remember Comes With Music?).
All of these business have the potential to be successful subscription businesses but none of them will find it an easy transition and none of them are guaranteed success. Not only will they have to transform their products, pricing and customer bases, but they will also have to develop entirely new business practices. To some degree or another, all of these companies have to make the transition from being retail businesses to being subscription businesses. Being in the subscription business is all about managing churn. It doesn’t matter how good a job you do of acquiring customers if you can’t keep hold of them. These are the skillsets that Rhapsody has been quietly perfecting for years and that Spotify is quickly learning. A successful subscription business can appear like a duck, slow moving above the water line, but feet moving furiously fast below.
The Churn Killer: Device Subscription Bundles
Any business that is new to subscriptions – whatever they may say to the contrary and whatever talent they might hire in – is going to be learning the ropes. Which is another reason why hard-bundling subscriptions with hardware makes so much sense for these new entrants. Besides the consumer benefits of turning an ethereal subscription into a tangible product, they allow the providers to plan for 12 to 24 months worth of customer life time value rather than worrying about subscribers churning out after just a month or two.
Even though downloads and CDs will still dominate global music revenues by the end of 2013, it is going to be a big year for subscriptions. Whether the new entrants can help turn that into a big decade remains to be seen.