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DISTRIBUTOR PULLS MUSIC FROM SPOTIFY – GOES BELLY-UP THREE YEARS LATER

st-holdings-closes-7.17.2014In November 2011, EDM distributor STHoldings pulled their music from Spotify because of “the poor revenues and the detrimental affect on sales”. Wired reported on this and wondered aloud if Spotify’s fortunes were “unravelling”.

In July of this year, STHoldings went into voluntary liquidation.

This was not a new operation. They’ve been around since 1998 and successfully served a niche music audience well. Amidst all the e-ink spilled on the subject of whether artists should be on Spotify, this certainly stands as a potential example of what happens if you’re not. It also shows that Spotify is not the problem, as STHoldings would still be around. That’s why I’ve personally found Spotify to be the solution.

UNDERSTANDING SPOTIFY

Screenshot 2014-11-07 10.53.26Young people prize “access over ownership”. This sounds like the kind of thing a digital music strategist like myself would be saying to support streaming services like Spotify. However, that’s not where the quote comes from. This was said by Sheryl Connelly, who is the head of Global Trends and Futuring for the Ford Motor Company. That quote was in reference to cars and was made two years ago in an article in The Atlantic. If the access model is affecting the business model of automobiles, what chance does the music business have to change that tide?

The fear that causes an artist to withhold music from Spotify is based on emotion rather than fact. The access/streaming model is scary largely because consumers are given greater choice. A purchase model requires the consumer to make a decision on which artist to support, thereby distributing money into the hands of fewer artists/labels. The access model gives the consumer such a wide choice that they can listen to a greater variety, thereby distributing money into the hands of a larger number of artists/labels.

Yet when faced with the choices that Spotify provides, most consumers shut down and don’t choose much at all. This phenomenon is called The Paradox Of Choice, and was outlined in the book of the same name by Barry Schwartz. Many Spotify users deal with choice by defaulting into playlists that reflect their style or mood at the time they want to listen. In observing the Spotify charts over the last year, the major deviations in weekly play counts almost always correspond to being added or dropped by a playlist.

Spotify’s growth in 2014, like nearly every other digital company, has mostly been in the mobile space. What makes that interesting is that you can’t listen to a particular song on demand on Spotify’s free mobile service. You are forced to listen to music on a random shuffle instead. Most of that listening, by app design and consumer choice, goes to playlists. By extension, this means the majority of free plays on Spotify are just a different iteration of internet radio.

When you understand that, limiting music to the paid-only version of Spotify becomes an obvious mistake. That’s because much of the revenue generated in the free tier doesn’t come from the consumer’s choice, but rather the choice of the playlist creator. If an artist is not on the playlist, they wouldn’t get much of that free-tier money anyway. Conversely, a song chosen on a playlist creates new revenue that wouldn’t exist otherwise.

Screenshot 2014-11-07 10.54.59Therefore, looking at the “free tier” revenue thru the comparison to sales is incorrect. The much more accurate comparison is internet radio. By that measure, Spotify should be embraced as this tier pays a higher royalty rate than Pandora does. Furthermore, Spotify playlist choices are made editorially by either Spotify’s team or individual users around the world. Pandora’s choices are made by algorithm, which leaves exposure decisions to largely be made by machine. From this perspective, artists of all sizes should be embracing Spotify’s model. Pulling music from Spotify’s free tier is akin to dropping songs from a top radio company that appeals to listeners 25 and under.

By understanding this ecosystem, my label DigSin has been experiencing exponential growth from Spotify, and I know we’re not alone. Our marketing division, DigMark, is also being hired by both majors and indies to help navigate this brand new world. With any disruptive technology, emotional response to fear often creates counterproductive decisions. The usage patterns of both free and paid Spotify users show both ecosystems to be smart opportunities for all artists. I strongly urge the music community to not be blinded by emotion. Instead, understand the data and embrace the digital disruption.

“The only way to win is to learn faster than anyone else.” – Eric Ries

3 APPLE/BEATS MERGER GAME CHANGERS FOR MUSIC THAT NOBODY HAS MENTIONED YET

Apple-n-Beats1) IN APP SUBSCRIPTION CAPABILITIES

The biggest hurdle to the adoption of subscription services by the masses is the difficulty in subscribing. Third party players would have to give up 30% of their subscription fee to the App Store if they allowed the ability to subscribe with one button in the app. Profit margins are small to begin with. Since that equals the total income most subscription stores have to operate, this is a financial impossibility. So they have to direct people out of the app to subscribe…without actually saying so in the app. This tiny little hurdle causes a very large number of people to give up on subscribing.

Now that Beats Music will be integrated into Apple, that 30% margin is all within the company. This will likely lead Beats Music to be the first significant app to have subscription occur with one button. It simultaneously makes the billing seamless and nearly invisible (as most people view app purchases now). It also puts nearly every other streaming service at a strategic disadvantage and will likely make Beats Music equal Spotify in paying customers in 18-24 months. Google Play is the one exception, so it’s no surprise that they’ve stepped up their advertising recently.

EDIT: As Ben Patterson pointed out to me, Beats Music already offers in-app subscription. It should also be noted that ad-free radio play subscriptions on Pandora and Slacker are also offered in-app. The reality of the marketplace for full on-demand subscription is that in-app purchases severely cuts into profit margins on a business that’s already got tough margins.

2) FREE SUBSCRIPTIONS TO COLLEGE KIDS

Anyone who’s ever bought a Mac in July or August probably knows that college students get some nice bonuses from Apple when they buy their computer for school. It can be a rare discount on their computer. Recently, it has also meant a $100 gift card to use in the iTunes store. Giving little bonuses to new college students via Apple stores is in the company’s DNA.

This means that it’s a pretty easy transition to give freshmen college students a free year of Beats Music for buying a Mac. Music as a loss leader is something my friend Moses Avalon spoke about a decade ago, though he predicted it would occur with a car purchase. That may still happen, but we’re very close to this happening with a computer purchase. Possibly as soon as next month. This, however, is a good thing. Since the aforementioned iTunes relationship is seamless, getting people hooked for a year and then moved into a paying relationship of $10/month will barely be noticed by them. When this happens, Beats Music will be everywhere on college campuses.

EDIT: Moses reminded me he did mention computers as well, though it was all around files on hard drives instead of subscription cloud streaming.

3) HITS WILL MAKE EVEN MORE MONEY

One of Beats Music’s selling points is that they focus on “curated playlists”. This is a sound strategy as the sea of music available is just overwhelming for the average music listener. While they technically have every song that other streaming services have, those get little use in favor of the focused attention on the playlist. So the flipside to a system focused on curation means the lion’s share of the revenue will only land in the hands of the curated.

While the depth of playlists is very extensive in the Beats ecosystem, you’re probably still talking about maybe 500,000 songs in total that have been selected for any playlist. In a world of these services having 30 million + songs, this means that only about 1-2% of the songs will take in the bulk of the money. That’s largely true anyway, but the gap will get even more exaggerated as Beats Music grows. This also means that the average musician will still have difficulty making a living just by natural virality. Curators will gain influence and a label or artist will need to convince the curator of a song’s merits. Curators become the new radio programmers, and the new music begins to look like the old music business.