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Spotify Video, Apple Sales, Netflix At Sundance, Music Pricing, We're Hiring and more
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THE MUSIC INDUSTRY IS FORCING CONSUMERS TO CHOOSE BETWEEN BUYING A LEXUS AND TAKING THE BUS

It was an eventful week for the digital music market with developments such as the launch of a whole new breed of unlicensed Spotify clones using the APIs of Spotify and YouTube, and with Spotify raising another $500 million and targeting an IPO within 12 months. But it is the launch of a new mid-tier music service CÜR Music that has some of the most significant connotations, not because of what it is, but because of what it represents.

When Everything Is A Lexus

Over the last half decade or so the big record labels have developed highly capable data teams with increasingly sophisticated data tools and resources. These guys know all about segmenting and targeting audiences, unfortunately when it comes to licensing streaming music their bosses too often just don’t listen to them. 2015 was really big year for streaming, in fact you could say it was the year that streaming came of age with Spotify growing strongly, Apple entering the market and Amazon also gaining momentum. But with the notable exception of Amazon Prime Music (which is part of Amazon’s free shipping and streaming video bundle) each of the dozens of AYCE streaming services offer the same $9.99 product with the same 30 million tracks. And because $9.99 is more than double what the average music consumer spends, this pricing strategy is the equivalent of every single car manufacturer suddenly being told by some central car tech licensing agency that they all have to start exclusively building and selling Lexus.

So while the $9.99 services grew well enough (though Spotify’s $1 a month promo helped no end) free streaming grew faster. More than just that, YouTube grew faster than anyone else. If the only choice of car is a Lexus then no wonder everyone starts taking public transport.

CÜR Music Illustrates Mid Tier Pricing Deflation

Enter stage left CÜR Music, a premium radio service with pricing starting at $1.99 (mistakenly reported elsewhere as $2.99) which gives limited skips and 8 pinned tracks. The $4.99 tier gives 16 pinned tracks, unlimited skips, offline playback and lyrics. CÜR Music is not breaking the mold with its value proposition (premium radio services like Rhapsody’s unRadio and Pandora’s One account for around 7 million subscribers) and the addition of pinned tracks had already been seen in the now defunct Rdio Select. But the $1.99 price point is significant. Spotify’s $1 for 3 months promo has been a major driver of its growth but in doing so it has impacted consumers’ perception of value. If an AYCE service costs $0.33 a month suddenly $4.99 for premium radio looks like terrible value for money.

Because the labels are only reluctant supports of free tiers as acquisition drivers in developed markets super-low priced offers are a lesser of two evils for them, which means they’ll stick around for a while. Which means that the downward pressure on pricing is going to a long term market dynamic, not a temporary blip. Hence supporting a $1.99 product in the US – the market the majors are most protective of.

So on this basis you might be forgiven for thinking that the major labels’ business affairs teams have been listening to their insights teams. To some extent they have, but the premium-radio-with-a-little-bit-extra product proposition is simply not compelling enough. In fact it is entirely begat out of what labels have proposed. Last time the labels pushed through their ideas of what products should look like we ended up with hybrid on-demand subscription / download quota models that failed miserably (remember Sky Songs anyone?).

Mid Tier Customers Are No Easy Sell

Low spending, mass market, casual music fans are inherently more difficult to engage than high spending aficionados. The easy answer is to just let them go to free. But free streaming should be the transition path for passive radio listeners not casual music buyers. Pandora IS the future of radio and that model will be the long term future of where passive audiences end up. Right now they’re also capturing a bunch of the engaged mainstream – too low spending for Spotify but into music and tech enough to want a compelling streaming experience. The market needs a rich seam of mid-priced services that deliver something different, that is neither radio nor AYCE. Right now there are remarkably few services doing this, the most notable of which are MusicQubed, Psonar and Digster Playlists and that is because the major labels (one in particular) are wary of building up a vibrant mid tier marketplace. Why? Because they’re scared that a whole bunch of $9.99 subscribers that are actually relatively casual users don’t use them that much. There is a really meaningful share of $9.99 users that stream 50 tracks or fewer a week, not exactly great value for money.

The Prisoners’ Dilemma

Which is why we are where we are. Think of it like a prisoner’s dilemma: the labels are scared that if they empower mid tier services they will lose premium tier subscribers but they are also aware that unless they do so they are abandoning mid tier customers to free. But now with the $1/3 month promo becoming a semi-permanent feature of the landscape the labels are finding their hand forced. What remains to be seen is whether they accept that they must formalize the other consequence, namely mid tier price deflation. $4.99 has no place in the market while AYCE is available for $0.33.

Labels and publishers need to take a long hard look in the mirror and decide whether they want to continue to force their customer base into choosing between buying a Lexus or taking the bus.

POSTCRIPT: Keep an eye out for what the major label backed Now Music app will do when it launches some time soon.

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WHY SPOTIFY IS GETTING INTO VIDEO

This week looks set to herald the launch of video content on Spotify’s Android app with a video enabling update coming to the service’s iOS app coming later. Initially the video viewing functionality will be available to Spotify users in the U.S, the U.K, Germany and Sweden where less than 10% of customers have already had beta access to the video functionality and have helped drive the overall look and feel of the new feature. Video integration has been under development ever since the world’s largest music streaming service announced that it as moving into video in May 2015.

Since then it has acquired a host of content partners who are being paid to deliver relevant and premium content to Spotify customers. These range from Comedy Central, the BBC, right through to the Native Content Creators of Maker Studios. So whilst a music focus can clearly be expected from this new content it is restricted to music themed video. And crucially it will not be (at least initially) monetized with Spotify’s vice president of product, Shiva Rajaraman stating to the Wall Street Journal that “this is primarily a demand play.”

Why A Music Streaming Service Feels The Need For Video Content

Spotify, despite having 75 million users and 20 million paying subscribers faces disruption. Audio alone is increasingly no longer enough for today’s digital consumer, and as we pointed out in our 2016 Predictions “Video Eats The World” report, video content is now at the forefront of all digital media interaction. Nowhere is this more so than for music. With 44% of consumers now watching music video compared to 37% who stream audio for free, music video is digital music’s killer app.

How the music industry as a whole responds to this pivot in consumer behaviour is one thing. How Spotify reacts is straightforward –they get into video. And this is where Spotify’s self-selecting user base should work to the service’s advantage- Spotify already knows what they want. In some respects Spotify can be viewed as a data company firstly, and only secondly as a music service. Data-driven content already account for much of what the end user sees from listening recommendations to early bird discounts to gigs. Adding video to this mix aligns Spotify with direction of travel of consumer behaviour and represents a lucrative marketing channel for advertisers.

Video Content Is No Longer An Optional Extra

In a smartphone world with data limits being constantly expanded, video has become the default means of reaching a new audience. Although frequently presented as a lean-in experience of the consumer, in reality many now find watching video less demanding than reading copy on a web page- for those raised on the internet-video is a lean back experience.

But Spotify’s big challenge will be whether it can convince its users to consider it as a video destination as well as a music service. The risk is that video ends up as some poorly frequented backwater. But transitions are possible. Just look at Facebook and Snapchat – in a couple of years they have come from nowhere to become the second and third biggest short form video platforms. And while they clearly have assets Spotify does not, Spotify’s approach is much more akin to become a Netflix than it is a YouTube. If Spotify pulls this off it could well change the face of the streaming business, music and video.

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WHY APPLE WILL WIN THE SMARTPHONE MARKET MATURATION

Apple is expecting iPhone sales to drop in the next quarter, for the first time ever. Apple’s stock has plummeted more than 6% since the announcement. The iPhone represents the majority of Apple’s revenue and any slowdown in this stream naturally spooks investors. However the anticipated slow down has much more to do with macroeconomic dynamics than Apple specific problems. In fact, as the smartphone market matures, Apple is well positioned because it can start putting increased weight on content and services while it searches for the next big hardware hit.

The Smartphone Market Is Maturing, But It’s Not Apple That’s In Trouble

Despite all the gloom about declining future iPhone sales, Apple increased its market share of smartphone shipments from 14.8% in 2014 to 16.2% in 2015. Meanwhile, the leading competitor Samsung lost share from 24.4% to 22.7%.

With less room to reach new customers, high margins and smart replacement strategies gain importance. With over 30% margin, Apple operates at a substantially higher rate than it’s top 5 competitors. Samsung tried to raise margins with its high end Galaxy s6, but without much success. Furthermore, Samsung’s lower-end device market share is being challenged by the likes of Huawei and Xiaomi – both increased shipments significantly in 2015.

Much of the current smartphone competition is based around price. While the low and mid-end is highly competitive there is no real competitor at Apple’s price point. Samsung’s average device price in China is around USD $300 while that of iPhone is over twice as much. The average selling price of upstarts Huawei and Xiaomi however is less than $250. Although the top end Samsung models are in a similar ballpark to the iPhone, brand perception is a holistic issue. The average price across product portfolios shape consumers’ perceptions. Samsung’s sheer range is problematic. Consumers looking for a cost effective option may prefer an established low-end vendor, while those seeking luxury will aspire to the iPhone.

Brand loyalty will play a crucial role as the smartphone market matures. This is Apple’s domain. Apple is the only major handset manufacturer that owns and exclusively protects its own operating system is thus able to continuously provide a distinct user experience. In June 2015, RBC Capital Markets polled 6,000 users on brand loyalty. 84% of Apple consumers planning to stay with Apple for their next upgrade compared to 64% for Samsung users.

Apple’s Revenue Outlook Is More Diversified

Apple is a hardware company but it has always used software and services to ensure that it delivers a best in class device experience. Content, services and ancillary devices will give Apple the breathing space while it searches for the next hardware hit:

Services: Tim Cook has called on analysts to think of Apple as a service company which means Apple will have to make its service push more aggressive, positioning itself into direct competition with Facebook and Google over some services. Apple will be a dominant competitor right from the start: MIDiA projects iOS app revenue to hit $31.2bn by 2020, with $10bn in revenue for Apple. Another service component, Apple Music is close to breaking the $1 billion annual revenue mark after less than a year in operation. And then there is Apple Pay. Apple will be a strong player in this space as it gets more retailers on board, such as the coming partnership with Starbucks. While Apple might not have a single-hit service equivalent to its hardware product line, it certainly has a compelling services portfolio.

Other Products: Emerging products including Apple TV, Apple Watch, Beats, and accessories are Apple’s fastest growing revenue segment accounting for over 9% of revenues in Q4 2015. ‘Other Products’ is the home of future hits and the graveyard of the honoured veterans (like the iPod). Besides Apple TV and Watch there are other areas Apple will explore. Apple’s Virtual Reality play is an obvious one. Tim Cook rather mysteriously called it ‘cool’ and Apple has a good reputation of bringing cool things to the mainstream when they are ready for prime time.

Apple’s strategy readjustment will not be painless, but unlike others reliant on smartphones; it has the upper hand. It will not magically transform into a services company but its locked in ecosystem approach means it has been able to develop paid content and services revenues unlike any other hardware company. With over $200 billion in the bank, a walled garden ecosystem, a large loyal user base, and a strong product track record, Apple is well equipped to survive lean smartphone years if they come.

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WHY NETFLIX AND AMAZON ARE OUTBIDDING THE COMPETITION FOR THE BEST OF SUNDANCE

Amid the cold wintery weather of Utah, something extraordinary is happening, and it is not just the annual Sundance Film Festival currently being held in the scenic location of Park City. For the world’s preeminent independent film festival is now firmly in the sights of the two largest global SVOD (subscription video on demand) services: Netflix and Amazon. To much fanfare and media attention, both services are currently outbidding the traditional linear TV networks for the rights to air the most in demand films being auctioned at the event.

To provide an example of just how rapidly the tectonic plates are shifting in the indie film world Manchester By The Sea a drama featuring Casey Affleck which only premiered at the weekend, has been sold to Amazon Prime for $10 million for second window rights (the ability to exclusively air/or rather stream the film after its theatrical release.) To achieve this they beat the likes of Fox and Universal to get the global streaming rights. Netflix on the other hand are buying up indie films for simultaneous release on their video service and have so far bought 3 films to add to their extensive streaming catalogue. They are also paying significant sums for the streaming rights- with Tallulah costing them $ 7 million to secure. In this area it is Netflix which have the prior expertise having orchestrated the simultaneous theatrical and global streaming release of Cary Fukunaga’s Beasts of No Nation back in October 16th 2015 after paying $12 million for the exclusive distribution rights-reputedly double the film production costs.

It’s All About The Content

With nearly 50% of US households now watching Netflix and with global SVOD penetration rates set to reach 50% in 2019 the tactics around SVOD strategy are becoming focused on how to differentiate individual video streaming services rather than through continuing technological innovation. Both Amazon and Netflix are looking to either commission or buy up premium video content that helps to distinguish themselves both from other SVOD competitors but more importantly defines them as an increasingly attractive alternative to Pay-TV.

Securing exclusive rights to independent films is a great way to help achieve this objective as they are both premium quality and by their very nature different from the mainstream alternatives. It is important to remember that SVOD’s core customer base (and this is especially true as they expand internationally) tend to be younger, savvier and culturally attuned consumers who are inclined towards more complex and less derivative drama offerings. And because SVOD has escaped the linear scheduling straitjacket they are able to offer niche, rather than four quadrant movies. (films which supposedly appeal to the four main audience demographic beloved of Hollywood Studios- Male/Female/Under 25/Over 25)

The Future For Independent Film-Making

So does this herald a new era of opportunity for independent film-makers? Like most things the answer is both yes and no and largely defined by the two SVOD giants and the consumer trends upon which they both fuel and follow.

Netflix is in the business of adding to its catalogue, especially since it has started winding down expensive film licensing catalogues such as the $ 1billion Epix partnership last September. Netflix has calculated that it stands to gain far more by securing original premium niche content than by licensing aged mainstream films. Hence buying Indie Films preferably with a sprinkling of A-list appeal such as Tallulah which features former Disney Star Selena Gomez and Ant-Man’s Paul Rudd.

Amazon on the other hand have stated that they want to work with indie production companies to offer them the widest possible audiences for films which they buy the rights to. So unlike Netflix’s simultaneous theatrical and streaming releases, Amazon will wait until after the theatrical release before streaming their acquired films on Amazon Prime. Amazon effectively had presented itself as an indie film distribution service.

In theory Amazon presents the better alternative for indie film-makers keen on finding a balance between selling to highest bidder and ensuring that their art gets seen by the largest possible audience. However both the market and consumer preferences are shifting. Netflix is currently by far and way the most successful SVOD service with a presence in 130 countries compared to Amazon Prime’s 5, so offering the largest and most varied audience reach And then there is the simple fact that people overwhelmingly prefer watching film as video content –be they Hollywood blockbusters or Indies.

Now is a great time to make money out of independent film making, but the chances of the films being seen and truly appreciated by large audiences depends both upon the subscriber base and the promotional push given by the SVOD services hosting the content.

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THIS WEEK'S DATA POINTS OF THE DAY

PAID CONTENT ANALYST: MIDIA RESEARCH IS HIRING

We’re looking for a Paid Content Analyst to join our small but quickly growing team. The position will be based in our London Tileyard office.

The analyst will provide analysis on digital content monetization strategies across all three of our research areas (Music, Online Video and Mobile Content). His or her research will cover topics such as freemium, pricing, audience segmentation, cross-industry best practices, digital product innovation, free-to-paid conversion, full stack companies, competing with free and entertainment wallet share. If these are the sorts of topics that excite you then you’re the person for us!

Roles and responsibilities include:

  • Write regular, thoroughly researched, analytical reports to be published in the MIDiA Research subscription service
  • Generate and maintain datasets, and systematically track key companies and their metrics
  • Build a network of key industry contacts
  • Work on client consulting projects
  • Write regular blog posts on the MIDiA blog
  • Provide advice and analysis to MIDiA clients
  • Present at industry events and client sessions
  • Support MIDiA’s commercial strategy
  • Build a reputation as an industry thought leader

In short, this is an exciting job in which you get paid to learn and to stay on top of the latest trends, as well as getting to work with some of the most important and innovative companies in media and technology.

Requirements and experience: This is a mid level position – we’re looking for someone who has established a track record and reputation in digital content strategy in either a media company or the content division of a technology company. Hands-on experience of content strategy, digital rights and commercial strategy are key, as are experience of working with data and the ability to identify trends and grasp the bigger picture. We want someone who is able to think on their feet, make bold observations, actionable recommendations, and make difficult calls when they need to be made. Excellent writing skills with the ability to transform data into a succinct, gripping narrative are essential. Experience within music, TV or mobile is preferred, as are strong Powerpoint and Excel skills.

We are a small but quickly growing company so this is an opportunity to get in near the start of what will be an exciting journey. But that also means it is crucial that the successful candidate is a team player with a flexible approach. This is not a standard 9 to 5 office job! Some travel may also be required.

If you are interested in applying for this position please email info AT midiaresearch DOT COM with the subject line ‘PAID CONTENT ANALYST’. Tell us in no more than one paragraph why you are the right person for this role, and include a link to your LinkedIn profile, your Twitter handle (if you have one), your blog (if you have one) and links to any other materials you think are relevant. Also tell us your current salary. Please do not send CVs.

Closing date for applications is February 29th. We cannot guarantee to reply to all emails so if you have not heard from us within 2 weeks of sending then please assume that your application has not been successful.

A quick bit about us: MIDiA Research is an analysis, research and data provider focused on the intersection of media and technology. Clients pay an annual fee for on demand access to our research, data and our analysts. Our clients range from big media and technology companies through to small start ups. You can find out more about us here.

MIDiA CHART OF THE WEEK: YOUTUBE SUBSCRIBERS

The global mobile app market was worth $35 billion in 2015 with revenue market share virtually split down the middle between Apple and Google. A host of big mobile app publishers such as King.com, Supercell and Mojang are the poster boys of paid content yet the app economy is first and foremost a free marketplace.  Although paid app revenue accounted for 77% of all app revenue in 2015, the vast majority of users were free. Indeed there were 1.3 billion free app users compared to just 380 million paid app users. Matters are complicated further by the fact that App Whales – i.e the super heavy spenders – account for 59% of all the premium revenue. Or to put it another way, 4% of app users account for nearly half of all app revenues. Not exactly the most robust of foundations.

These data points are taken from MIDiA's Mobile App Forecasts which can be purchased along with the report from the MIDiA Report Store.

NEW MIDiA RESEARCH REPORT

STATE OF THE STREAMING NATION - A Comprehensive Assessment Of the Global Streaming Market
2015 was the year in which streaming music came of age, with robust growth from market leader Spotify and the rapid ascent into second place of new entrant Apple Music. Though questions remain about the commercial viability of the model right across the value chain, there is no doubt that momentum is now with streaming. This the definitive assessment of the global streaming market with market sizes, forecasts, subscriber numbers, pricing and consumer data. MIDiA Research clients can read the report here.

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