Tag Archives: itunes

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.

KIDS BUYING MUSIC AGAIN? IS THAT POSSIBLE?

Believe it or not, young adults may actually be on a path towards ever increasing purchases of recorded music. Instinct might suggest otherwise. Yet I realized this week that some music business history combined with general business practices can show us that we are headed towards years of sales increases that have nothing to do with piracy or even the quality of music.

Several things this week sparked this notion. First was respected industry analyst Russ Crupnick’s report that music sales were heading up and piracy traffic was decreasing. These figures were then debated with Sandy Pearlman, a great producer and now Professor at McGill University where I spoke this week. Sandy contended that the piracy figure is much higher, and cites his anecdotal evidence of most students he teaches being active pirates who use difficult-to-track “darknets”. This was reiterated in Steve Meyer’s Disc and DAT newsletter today.

Then, I went to an A2IM (American Association of Independent Music) event in Nashville where my friend Tom Silverman, the founder of Tommy Boy Records, spoke. In his speech about the state of the industry, he reminded the audience that most casual music purchasers do not think like us music fans. This was part of my argument to Sandy. Piracy may indeed be in darker corners, but sales figures are undeniably growing. Adele might have had an outsize impact, but other tracks and albums are selling in sizable numbers. But I wondered: are we asking the right question?

Freakonomics was a successful book a few years ago where Steven Levitt and Stephen Dubner proved that certain events and statistics were actually the result of heretofore unrealized events. One chapter that got a lot of attention was dissecting how the legalization of abortion may actually be responsible for the drop in crime two decades later. Many children who would’ve grown up neglected and then become criminals were suddenly not being born. 18 years later, when they would’ve been “of age” to commit crimes, they existed in fewer numbers.

So maybe we can ask ourselves where the music business is headed “freakonomically”. Is there an additional factor contributing to music sales that we aren’t looking at? For example, why do Happy Meals exist? McDonald’s barely makes a profit on them, but they sell them to bring the parents in. Parents buy the more profitable meal, and the kid gets trained to think of McDonald’s as a place to get a comforting meal. So over a decade after getting Happy Meals, when kids have independence, they regularly show up to eat at McDonald’s with their friends eating more profitable items.

So what does the record business use as a Happy Meal? For years, it was the 45 RPM single. They made very little profit from these sales, but it established kids to become album buyers years later. If they needed to buy a single with their pocket change every month at 10 years old, then they’d have a desire to buy an album with their real money at 20 years old.

Music business consolidation in the nineties resulted in maximizing profitability as the main focus. Since CDs were more profitable, labels drove more people to buy them. If they eliminated singles, or the ability to just buy the hit, people would buy more CDs. Somewhere in the mid-nineties (around 1994 or 1995), record companies adopted various policies to stop making singles. First, they used singles to get to a peak Billboard chart position and then they stopped pressing that song. Then, they just stopped making singles altogether. This did lead to more CD sales, but at what cost?

So imagine yourself as a 10 year old new record consumer in 1994. You have 2 dollars in your pocket and want to buy your favorite pop hit, but it’s not available unless you spent 15 bucks on a CD. If you spent several years going into a store and constantly finding you didn’t have enough money to buy your favorite tune, you’d just stop going into the store. Why bother, right?

Well, cut to 2000 and that 10 year old kid is now 16 years old. He has grown up with the expectation that he can’t afford music. Then, you put Napster in front of this kid. It becomes the dominant method for his music consumption not just because it was free. It’s also because he never had a buying habit going into it. If someone is never taught to buy at a young age, how are they ever going to see the value in purchasing?

Now let’s look at the start of iTunes. Not really the “start” start. When iTunes was introduced, it was Mac-only and had a limited audience. It was when iTunes was introduced to the PC that sales really started to take off. That occurred in October 2003, which led to a lot of kids finally getting an iPod for Christmas that year.

So let’s follow the pattern. The 10 year old kid who gets the iPod for Christmas in 2003 now enters 2004 a few days later where he looks at iTunes all the time. Which has a store. Which mom & dad helped foster by buying iTunes gift cards for them. Which meant they would go and actually make purchases of singles. And they could easily throw in a couple of their own dollars towards it as well, since the kid could afford 99 cents. Thereby starting a habit of music purchasing.

So cut to 2011 and that 10 year old kid is now 17 years old with a habit of buying tracks. Do they steal tracks too? Do they burn and swap tracks with their friends too? Yes, let’s not be naive here. When I was that age, I probably copied 4 albums for every one that I bought. So did all my friends. But I still bought because I had that habit. So does the 17 year old of today.

I don’t have hard evidence to back this up. I’m just theorizing here. If this is true, though, then the uptick in sales from 2011 and so far in 2012 aren’t flukes. Piracy hasn’t stopped, because as Sandy rightfully argued, “darknets” are easily found. Adele might be an outlier release, but there are a lot of singles selling 4 & 5 million copies right behind her.

However, there is a real possibility that we just missed training kids to buy our product. We shouldn’t be blinded to the passionate music fans we talk to daily. Talk to those young adults for whom music is not their life focus, and they are buying music regularly. If iTunes got them back in this habit, we should look forward to them as buyers for many years to come.

IT’S NOT SPOTIFY’S FAULT, PT. 2

The debate on Spotify has continued in recent weeks as mainstream press has been covering the fact that big artists like Adele and Coldplay are holding back their releases since they believe it cuts into sales. For their part, a Spotify spokeswoman says there’s “not a shred of evidence that holding back downloads cannibalizes downloads”. There’s probably not enough evidence yet to support either argument convincingly, but it’s not the real issue. To find that, we need to step back for a second to look at the business from 30,000 feet.

I’m a big fan of the book The Curse Of The Mogul. Authors Jonathan A. Knee, Bruce C. Greenwald and Ava Seave discuss the historical facts of disruption on many businesses and how it relates to the modern entertainment business. One important idea is that when the walls of distribution come down, with access comes devaluation. In recent weeks, I’ve come to fully embrace this as the root cause behind artists’ displeasure at perceived royalty rates.

The first clue came in a recent Businessweek article where three anonymous music executives said the average person spends $60 a year on iTunes. Since Spotify and other subscription services charge $10 a month, this means the revenue per consumer should double. Sounds like great news for the music business. While I know that the “average” won’t literally double, let’s just go with it for the sake of this example, and keep in mind that what I’ll outline is therefore a “best case” scenario.

If the average person is spending $60 a year on iTunes, it stands to reason that they are spending it on a minimum of 4 artists (4 albums x $15 price tag for deluxe albums) and a maximum of 87 artists (87 singles x $.69 discount price). Realistically, most people will be smack in the middle having bought a couple of regular $9.99 albums and a few singles at the $1.29 premium. If narrowed down to a month, on average the most someone would spend money on is 7 artists.

But how do we know how many artists get heard on Spotify? Well, we can make an educated guess by looking at the Facebook streams of playlists. This is admittedly unscientific, but will highlight the issue nevertheless. I examined what 10 random Facebook friends of mine listened to on a variety of subscription services. They ran the gamut from one person who listened to only one album to someone who listened to over 400 songs, which included albums, singles and playlists. What I found is that the average person listened to 3 songs per artist.

Data on how much people are listening to subscription services on a monthly basis is not available enough to get an exact reliable statistic. However, looking both anecdotally online and from my own personal knowledge, the average person is likely listening to 10-15 hours a month. Using this statistic, we can deduce that people are listening to somewhere between 40 artists (120 songs (5 minute song average x 10 hours) divided by 3 songs per artist) and 100 artists (300 songs (3 minute song average x 15 hours) divided by 3 songs per artist) per month.

In an iTunes world, the average person consumes music by, at most, 7 artists a month. In a Spotify world, the average person consumes music by, at least 40 artists a month. So in the best case scenario, even though the dollar pool has increased by 2x, the number of artists the payouts are distributed to has increased by nearly 6x. Given that this is the best case scenario, the figure is almost certainly higher than that. In a dollars and cent perspective, while the average artist grossed as little as 69 cents per person in iTunes revenue, the average artist probably grosses no more than 25 cents in subscription revenue.

The reality is that the very thing that gives indie artists access to subscription distribution is what is keeping the royalty rate low for everyone. The pool to increase payouts per artists not only doesn’t exist, it CAN’T exist without raising the price of subscription to a price-prohibitive rate of $50/month or higher. The only other potential solution would be to create a service that excluded access to many artists to allow existing artists to obtain a larger chunk of the royalty pie. This would give services a gatekeeper role not unlike current physical music retailers. Many artists would certainly complain because they were kept out, but the ones that did get in would be happier with a more reasonable rate.

As a new independent label owner, I actually welcome all the artists and labels keeping themselves off Spotify. It actually allows for an opportunity for us that are on these services to command a larger slice of the royalty pie. However, don’t think of Spotify as being cheapskates. The truth is that as an unknown artist, if you want access to the big game, you must understand that until you’re popular that it comes at a (lower) price.

THE FUTUREHIT 2011 MIDYEAR REPORT

It’s halfway thru 2011 and time to make my 2nd annual midyear report. This report defines a hit as a song that has sold the most downloads. I look at the Top 50 biggest selling downloads in the US as a group. This year, these Top 50 downloads accounted for nearly 89 million downloads (and nearly $115 million in gross revenue). Once again, about 1 out of every 3 paid downloads of a new song came from this list of 50 titles. The exact figure is 32.9%, which is an increase over the 32.3% from last year. In fact, having a hit is becoming increasingly important. While the overall download market has increased 11% so far over 2010, the Top 50 downloads have increased in sales at a faster rate (by 15%). The #1 selling single for the year so far is Katy Perry’s “E.T.” with 4.1 million downloads sold. That’s a 22% increase over last year’s #1 song at this time. Also, for the first time, every single title in the Top 50 downloads has sold platinum in the last 6 months.

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DIGITAL OLIGOPOLY & SUGGESTIONS ON BREAKING IT

This week, the UK-based AIM (Association of Independent Music) announced that their members receive over 94% of their digital revenue from 3 outlets: iTunes, Amazon and Spotify. The story, first reported in Music Week and then in Digital Music News and MusicAlly, highlights that 51 other companies are splitting the remaining 5.6%. AIM CEO Alison Wenham is not looking at this positively as she tells Music Week, “There are now a series of monopolies and it is jolly hard for anyone else to get a slice of the market.”

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REBECCA BLACK: WINNERS AND LOSERS

A week ago, I certainly didn’t intend to write (or obsess) so much about Rebecca Black and her viral internet meme “Friday”. However, there is so so much to learn from this track. In one week, this song basically upended the music business conversation. What are the results of this?

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DIGITAL DOWNLOAD’S DEATH IS EXAGGERATED

Have you ever moved 12.5 million units of anything? Music? Dollars? Grains of rice? Almost certainly not. Would you agree that this is a lot? If you were to move this many units in music, it would be a good success, right?

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