Friday, 20 March 2015

Subscription Models: The Search For Service And Price Utopia

Q. What is the right price for a music streaming subscription? 

Q. What additional features could be added to justify a higher price point? 

Q. Should we be lowering the monthly price point to encourage adoption by the 
non-music aficionados'?

Q. Outside of monthly subscriptions, could top-ups on a PAYG basis be a good interim step between ad funded and paid?

Q. How can the current per stream rates support artists, so they can continue creating new music?

Q. Does the current variable per stream rate help win the support of all the involved?

Just a few of the questions floating around the music industry news wires currently. In answer, there have been many opinion pieces promoting various arguments for and against, always normally with some sort of bias or creating as many questions as they attempt to answer.

The main point is, streaming is growing as a consumption model and looks set to be the dominant revenue source for those involved in the recorded music business in the next few years. Check this great article from Music Business Worldwide which gives a few different predictions on how streaming will develop:

For a while I have been considering a modification to the main aspect of the commercial structure that sits behind this brave new World (really it is as new as paid-for-downloads, both iTunes and the paid version of Napster launched in 2003).

The search for price utopia continues, and my take on this is to borrow from other industries (like Gym's and Telco's) that have been been charging monthly fees for a lot longer than the music industry.

I would like to see a variable subscription considered, rather than a fixed monthly charge to the music fan. Or, more simply put, a 'pay for what you use'.

That is not quite the same as the Pay As You Go (PAYG) which is now being trialled by Pandora as a day pass, or the fixed pay per stream from Psonar which locks the user to a pre-payment that is allocated against a certain amount of streams that can be used up completely. Both ideas require the user to reconsider on a regular basis whether or not they want to continue to top up. That decision will see them assess whether or not the value they have already gained matched the value of the payment. To avoid that 'customer acquisition' hurdle, a variable subscription is a bit of a mixture of these and a regular monthly fixed subscription.

The following looks at some of the main issues, as well as the viewpoints of the current subscription model from the main stakeholders, most importantly including the music fan.

One Size Doesn't Fit All

Some of the commentary has been focused on pricing. Nearly all services as I write this are at 9.99 (insert your own currency) per month. So regardless of how often you listen to music, you'll pay the same. There is some support for lower price points, as it is felt that for the critical mass needed to sustain the current model we need them all paying, as advertising can't alone be 'the other option', especially as many suggest that ad-funded music promotes a devaluation of music, albeit a great introduction to the format. At some point I am sure the argument becomes circular. Certainly there is truth in the idea that the music aficionado destroyed recorded music sales as they now have a price ceiling which they now don't need to break, see Mark Muligan's excellent piece on this: 

Mark of course isn't actually blaming the music fan, let's face it with the amount of investment in advertising, subsidisation and R&D in creating great services really the music fan was just finally given a great alternative (addition?) to the CD, Vinyl and download - and they have voted with their feet.

More Than The Question Of Price

Price alone can't answer all the questions people have but maybe human curation rather than algorithms brings back that indie record store shopkeeper recommendation quality we have lost in the online age? Beats Music was certainly using that as their USP. Apple certainly thought so seeing as it bought the fledgling service back in May 2014.

A recent focus for differentiation and price adjustment has been on audio quality. In the streaming World, the most recent addition is Tidal (Norway's Aspiro company who have been in business with their WiMP service since 2010). These guys not only created a beautiful user experience via a browser as well as in a native application, but they also doubled the monthly cost to the user. It is early days, but some of the opinion pieces I have read suggest that users don't view the cost as totally prohibitive and are signing up. The French service Qobuz has been pioneering this for a while now, and like Tidal really paid attention to the extended experience to a music fan that wants more than just a play button. They follow the same pricing model, either 9.99 per month for standard definition or 19.99 per month for the higher definition audio experience.

Like with all innovation, there are some questions surrounding the actual value of higher definition audio, Neil Young's Pono service coming under particular fire on this subject.

Service Differentiation

As we continue to search for service and price utopia, we have to look back as well as forwards. When it comes to digital services be it download, subscription, streaming or radio there are different tools in the armoury.

Service differentiation:
  • Classic: Exclusive content to a service/retailer
  • Original: Online vs Offline access = price/value change
  • New: Curation & High Definition
A while back there was a lot of talk about interoperability so users could share songs or playlists with other friends who perhaps aren't using the same service. A wealth of 'hacks/aps' cropped up to allow for playlists to be ported from one service to another. But that's not really quite the same thing. The recent Rhapsody and Twitter 'cards' creation is starting to get there, as you don't need to be a subscriber to listen to the track, but the artist/songwriter still get's paid. Certainly a user becomes a little hamstrung if the concept of exclusivity becomes more pronounced than it is right now amongst the various streaming services. We saw this dominate the download market largely by iTunes of course, or Beatport within the dance electronic communities, where labels favoured them over others to launch new albums with exclusive offerings. A dominant service in any part of recorded music's journey to fans is largely viewed as a bad thing, just look at how YouTube has been getting on with labels and artists of late. Choice as a concept to both the music industry and the music fans is fairly central to this debate. I know there are a few low cost subscription streaming services being looked at by established download niche retailers looking to get into the streaming game, which are designed to be a complementary source of music alongside the all you can eat dominant players. Almost proof in itself that choice is lacking in the experience music fans currently have as an option.

So, where does that get us:
  • One size doesn't fit all, there are those that want a lot of music daily, and those that perhaps only want it weekly, monthly or more sporadically, therefore;
  • Price differentiation needs to be achieved, but reducing the price from a low ceiling can't be the only option (or certainly not a universally welcome one)
  • Just having curation as a focus or high definition as an experience differentiator isn't necessarily all that can be done to make one service more attractive to another
  • Exclusive content will always be a negotiated element between services and the labels that provide the repertoire to them so they can hold onto or attract more users
  • Being locked into just one service each month isn't necessarily what every music fan wants
Different Viewpoints

Let's look closer at the various stake holders in this relationship.

Rights Owners
For arguments sake, this will include recording artists as well as songwriters, their respective labels (sometimes via a distributor) and publishers. Aside from the reluctance to have any one service dominate often dictating how an album might be put together at retail, the main gripe it seems is with the price per play, and it's variable nature. It's a break from the old model which wasn't variable and sales tended to be front loaded into the first few weeks after release. This has an impact on cashflow in running the campaign, and setting up for new ones, as well as general confusion over what you'll actually get paid when you learn how many people have been listening to your music. So talk of lowering the price point in a monthly subscription is not a universally welcome move at the present time, despite the research others have done that suggest by doing so will increase adoption by the masses. There is also a price ceiling which has reduced the potential spend of a super fan to the same amount as a casual fan of an artist. This contributes to the cashflow problem for the rights holder as described above.

Streaming Services
There is a wrinkle in the current business model. The problem is a very simple balance of demand outstripping supply of cash. In any one month, due to minimum licensing conditions set by rights owners to protect the low per stream rate, there can be a shortfall in the fund that is distributed to rights owners if too many people use the service. It gets pretty complicated as a calculation because each country and product type (e.g. offline access vs online access) has its own fund that is divided by the number of streams, or marketshare as it is often referred to. So if lots of users, use the service, then the service can be left short due to the amount of money it has to pay rights owners versus the amount it received in either subscriptions or advertising revenue. This also throws light on the concept of breakage and correct distribution of monies, if there is no usage to match against. By being left short, really for those lower funded parts of the business, the streaming service would prefer less usage. Can you imagine creating something that you charge money for, which you'd prefer people not to use? Gym memberships spring to mind of course or all you can eat mobile phone tariffs, in fact that is the game that both the user and the service provider plays on a monthly basis. As for many people with the Gym Membership analogy, if you start to reduce your usage or cease to use it for a month or two, you feel less inclined to maintain the payment that is being taken from your account each month. In fact, you begin to resent it. This creates churn, which adds to the customer acquisition cost of each service, as they try to win them back. More unwanted costs.

Music Fan
The problem here is that the music fan hasn't quite got used to renting music. So this commitment to a monthly investment in music isn't easy for the laggard consumer, because they perhaps have never done the math on how much they might spend on music each month. So just because 9.99 per month sounds like a bargain to music creators and record company executives, that doesn't mean that Joe Bloggs has ever really added up all those impulse purchases they have made over the years, or indeed can really understand how they might get true value from this monthly commitment. This commitment to a direct debit each month, or adoption of the format, is further complicated because it changes how they might access the music. I think we are a long way past the worry of the car stereo or the separates system in the living room being the restriction, most people have moved to a desktop, smart phone or portable media device that they are plugging into headphones, line in jack or using Bluetooth, Apple Airplay, Wifi or something like a Sonos system. In fact that is a further complication of the adoption of this new access vs ownership model. Is the music service going to be compatible with the speaker they bought, does Sonos integrate, can they update their current living room sound system so that it will work hassle free? Then there is the interoperability aspect which means when they have a house party, or they are sharing online via a social network, or via instant messenger, email, etc will they be able to play the file? Amazingly DRM has rejoined the conversation, just no one has really noticed this time round, as it is being used to enable the existence of these services, yet brings the same restrictions to the user felt during the growth of downloads.

Variable Subscription
The main questions to me seem often interlinked. This is a recap from each of the three stake holders in the equation:
  • Rights Owners - price too low, ceiling of spending for music aficionados, monopolistic dominance, transparency for fees
  • Services - risk in too much usage, losing user to competitors, 
  • Music Fan - renting music is new, interoperability, perceived value proposition, choice of consumption
My proposal, is to create a rolling variable subscription. Meaning that we move away from a fixed monthly payment, incorporate a micropayment element within a subscription framework. Instead of asking users to commit to a regular monthly payment, charge them at the point of engagement/signup, then only charge them based on a per play structure after that. There will, like with current subscriptions be a ceiling for the heavy users, but at a higher price point than we are currently at.

Within this structure various packages could be designed, to lower the ceiling in exchange for commitment, in a similar way to how millions of people commit to their mobile phone carrier.

Here are how I see the advantages, and how they address the main questions from each of the stake holders:

Rights Owners
  • Prices Too Low & Low Ceiling - this format allows to establish a higher per play rate than the unknown or low minimum currently employed, as well as enabling a higher ceiling for heavy users
  • Monopolistic Dominance - lowering the barrier to entry to the user with each service through removing the fixed monthly subscription, would mean that each service would have to constantly try and engage their users through an improved service offering as users could sign up to any number of services. From a marketing point of view for the rights holder, the value of exclusive repertoire or promotional content rises as every service would be asking for it in order to compete for engagement
  • Transparency - a hotly debated topic. Currently there is no way of putting a price on a stream, and for some that is too difficult to contemplate. Whilst the idea of a ceiling would still exist, for much of the usage a per play rate would exist. Maybe there are many within each 'package', but at least you could confidently add this to a contract in a far more precise way than the 'if, then, maybe' concept we are currently faced with. Whilst I acknowledge minimum per play rates do exist, they are low, and therefore offer limited protection to the rights holder. Fixing the per play rate as with Psonar demystifies the cost, because everyone from the consumer onwards knows and understands what each play costs
  • Financial Risk - Control per play usage through established per play rates, allow higher ceiling for heavy users to limit exposure through higher usage
  • Customer Retention - create a variety of packages that fit almost any wallet size, and match against users expected usage. With users who are unsure about committing to a service, they never actually need to leave, they would just stop using it. Therefore the barrier for re-entry to a service has been removed nearly completely
Music Fan
  • New Format - for those unsure about renting music for a period of time if a financial commitment isn't met each and every month, they now need not worry. Their money can be used on a month to month rolling term till it is used up. It would essentially feel like an auto-top up should they continue to use the service, a bit like Skype minutes. The ceiling 'bonus' for high consumption starts at the point of top up, and runs for a month from that stage. This creates a transparent relationship between the user and the service, although I appreciate it makes the monthly calculation for the service more complicated potentially, but not impossible
  • Interoperability - as the user doesn't have to make a monthly commitment, they will perhaps adopt multiple services. Whilst this isn't true interoperability, it certainly would start to demonstrate whether or not users wish to stay within one service, or whether choice is more important. It would potentially bring greater diversity into the consumer offering, as niche services could establish themselves. If nothing else it would certainly make the concept of exclusive repertoire important to all services, not just those desperate to try and gain marketshare. Even the dominant services would have to try harder to win over rights holders
  • Value Proposition & Choice - An all you can eat music service that works for almost any user (there will always be many who can't or will never pay for music so ad based models will sit alongside this). Value to the user is matched to their consumption habits. In fact we turn the subscription into a reward based concept rather than its current state which is a barrier to entry; passionate music fans will still have a ceiling as they are not worried about the commitment, those in the middle whose usage fluctuates get the benefits of a ceiling at the top end but no wasted money in the months where they are less engaged, and for the incidental users they can get an ad free music listening experience without having to commit past their usage requirements. This finally introduces choice into the equation.
Much of this concept needs to be modelled from a financial perspective. Decisions would also have to be made as to; what that per play rate is, where the various ceilings should be, how they are defined, what happens to left over credit if the user tops up in a month to re-engage the ceiling, would it count as a discount toward that payment, or does it accrue as a useable balance later on. Maybe one option in an auto-top up model is for the price plan to adjust based on the previous months activity, or an average over the last quarter to always achieve the cheapest or most appropriate subscription plan. Whatever the outcome of these questions, I am confident that all parties involved would enjoy the results, rather than all trying to fit into one, or putting a few sticking plasters over the problem with ad funded and PAYG as the only alternatives.

Is this true Utopia, no not really, but getting to a perfect place for all stakeholders, means you need to consider all the angles. Personally I'm not convinced that has truly been done so far.

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Subscription Models: The Search For Service And Price Utopia

Q. What is the right price for a music streaming subscription?  Q. What additional features could be added to justify a higher price point...