Music listeners today want to fool around with all sorts of artists without the hassle of commitment. Spotify's cool with that. Here's what the streaming service brings to the U.S. music biz and freewheelin' music consumers like you.
Spotify launched in the U.S. today and offered the greatest proof to date that MP3s are the new CDs. Except you can't use MP3s as drink coasters.
Remember, CD sales tanked in 2010 for the fourth year in a row, falling by almost 20%. Even single digital track sales flattened to a meager 1% increase. Digital albums did better, growing by 13%, according to SoundScan, but overall the old music sales model is looking haggard. Digital sales might not be enough to make the industry vibrant again.
Spotify, though, joins a growing number of streaming music services now targeting music consumers who throw away (i.e. quit listening to) digital downloads faster than you can say "Gucci Gucci." (Phrase you won't hear: "Kreayshawn isn't really writing songs, she's writing albums.") Meanwhile, music collectors find fewer things they want to actually own in the scrap bin of pop singles. Streaming services let both types listen to tons of music without the commitment of buying. Sometimes, users will even commit to paying a monthly fee for that service.
In other words, music consumers want to fool around before they settle down. And Spotify is a hot friend with benefits.
I've been playing with the service intermittently for about a year, first via a proxy server that fooled Spotify into thinking I was in the U.K. (Spotify was even cool with that), lately via a legit hookup with the premium Swedish version, now with the new American offering. I'm a full-fledged music flirt now. And I am the future.
What Spotify Is
Acoording to press materials, Spotify has more than 10 million registered users and more than 1.6 million paying subscribers in seven countries in Europe--and now the U.S. And in 2010, Spotify was the second largest source of digital music revenue for record labels in Europe. In early polls, respondents reported curbing piracy in favor of Spotify.
Users are as old as 80 but are typically young, Spotify chief content officer Ken Parks tells Fast Company. Parks says.
"That's a demographic that's been lost by the music industry. The great thing about Spotify is that it's attracted those users. It causes them to revalue music. A significant number of them actually end up subscribing to the paid tiers. That's something that the music industry has been happy about because it points the way to the future."
If you consider record labels innocent victims of digital pickpockets and pirates, then Spotify, like Apple's file laundering Match service, is a consolation prize--it pays labels a fraction of the money earned from physical or even digital music sales but far more than the zero percent they earn from pirated tracks. If you think the music industry cruised too long without innovating and blew massive revenues on coke and limos, then Spotify's just a long overdue come-down. Either way, says Parks,
"That we've come on board in the U.S. with all four of the major labels is validation of the basic precepts of the model."
What Spotify Isn't
As much as various other types of streaming services are mentioned in the context of Spotify--and all help push listeners toward a future of access rather than a future of ownership--only one is a direct competitor.
Spotify isn't really competing with iTunes. It doesn't offer you a chance to own files or even buy them. It's agnostic in terms of what service you use to do that. It doesn't Match your old pirated files to new Spotify files. It will migrate your iTunes tracklisting into the Spotify player, which makes it a replacement for the iTunes on the desktop. Convenient, but hardly a threat to the iTunes behemoth.
Spotify doesn't upload anything you own to the cloud, like Amazon's locker or Google Music, to make it accessible on mobile devices. But like Google Music, Spotify does organize what you own, and that's a minor encroachment. (Also, yes, there is a product that exists called Google Music. You probably don't use it.)
It's not Pandora either. You pick your tracks. Friends can share playlists, and there are highlighted new releases, but mostly you decide what specific tracks to hear.
Which leaves Rhapsody.
"It's a beautiful day out, weather-wise, but is it a good day?"
I joke in a conversation with Jon Irwin, president of Rhapsody, on Thursday morning, the day of Spotify's launch.
"It's always a good day! Why? Did someone come into the industry that I need to know about?"
Irwin jokes right back. But, getting serious, he acknowledges Spotify is his newest, most direct competitor. (Spotify is even using the same "anywhere, anytime, on any device" rhetoric Rhapsody has used for years.). Irwin says.
"What Spotify is doing is that they've been successful in raising a fair amount of capital on a very healthy valuation based on a model in Europe that's promising people music for free in a non-mobile fashion and then over time … they've started turning the screws down."
In Europe, users are capped on the number of hours and the number of times they can play a single track. Irwin quips.
"If I could only listen to 'Paint It Black' five times, I'd jump out the window."
But for invited participants in the U.S. version of Spotify, that's not currently the case.
At the rate of $9.99 per month, there aren't too many differences between Spotify and Rhapsody: Spotify runs quicker and without crashes on an old iPhone; Spotify's standalone desktop player makes it easy to sync locally stored songs. Spotify has more social playlist sharing tools than Rhapsody. They're coming, Irwin says. Any other small difference could change with new versions of either service.
When iTunes announced its cloud offerings and Match service recently, Irwin said Apple's quality product would help Rhapsody by bringing awareness to cloud music. Suffice it to say, Spotify's not quite as welcome. But like the curmudgeon searching for music worth owning or new kids happy to hop from hot track to hot track without committing to ownership, Spotify and Rhapsody have a growing place in the new music economy. Both agree it's headed away from ownership.
Spotify's Parks says.
"Ownership is increasingly less relevant to people who listen to music, especially the Internet-savvy computer generation. What matters most to them is that they have access to an experience that's really great."
On the same topic, Irwin says,
"It's a rental economy. It almost sounds like a bad thing. It's not. It's a very powerful thing."
COMMENTARY: In a blog article dated May 26, 2011, I wrote about Facebook's plans to launch a digital music service and partnership with Spotify. Facebook intends to make music sharing a vital part of its social networking experience, and its users will be able to stream music, see what their friends are listening to, and share their own favorites — a realization of a long-time dream within the company to make music a core part of the site.
Developers are experimenting with Facebook Credits as a digital content payment method. Warner Bros began renting films, and several bands are offering access to pay-per-view concert streaming video in exchange for Facebook's virtual currency. Facebook is currently hiring a desktop software team, which might be building music scrobbling apps that relay a user’s listening habits.
In a blog post dated June 18, 2011, I mentioned that Spotify had raised $100 million in fresh venture capital from heavyweights Kleiner Perkins Caufield & Byers, Accel Partners and Digital Sky Technologies to finance its future expansion and support its expansion into the U.S. The new investor's obviously believe big things are in store for Spotify.
In Europe, Spotify offers a “freemium” service, where registered users can listen to a certain amount of music each month for free, and paying subscribers get unlimited music, which they can stream to their computers or phones. People familiar with the company’s plans indicate that it wants to do the same thing in the U.S., and would likely charge around $10 a month for the premium service.
Unlike Europe, however, the U.S. has several existing subscription services that also stream unlimited tunes for $10 a month, and those have yet to take off, even though the services are now compatible with popular handsets like Google’s Android and Apple’s iPhone.
During the time that Spotify has spent trying to get to the States, meanwhile, three different cloud/locker services have launched in the U.S. as well: Amazon and Google allow users to move their own music to an Internet-based server, where they can stream it to PCs and some phones.
To support its growing music system ecosystem, Spotify is developing a series of partnerships with third-party music playback appliance companies like Sonos (see below) and Onkyo to enhance the music experience within the home.
Spotify is not content with being number No 2 in Europe, and its partnership with Facebook makes its entry into the U.S. digital music market a lot smoother than going it alone. Plus, it has $100 million to play with before a future IPO no doubt. The stakes are tremendous for the recorded music and digital music streaming industries, which have been at loggerheads with each other since that historical day in June 1999 when a guy by the name of Shawn Fanning founded Napster and made digital music downloading fun and easy for everyone, albeit illegally.
The Evolution Of The Recorded Music Industry
One thing remains abundantly clear--changes in music recording technologies have seen recorded music evolve from photograph discs to polyvinyl phonograph records to magnetic tape to compact discs and finally to digital music formats. Driving this evolution is the internet and the tremendous growth of mobile devices from smartphones, digital music players, tablet computers and cloud technologies.
For the recorded music industry this has been a very scary evolution. Between 1997 and 2010, it has seen global revenues at wholesale decline from $26.1 billion to $10.4 billion, a decline of $15.7 billion or 60.1%. In retrospect, global digital music streaming has increased from a mere $400 million in 2004 to $4.6 billion. Apple launched iTunes in 2003, and by 2004 digital music downloads just exploded.
According to eMarketer, worldwide music revenues at retail have steadily grown from $60.7 billion in 2006 to a forecasted $67.6 billion in 2011--a compunded annual growth rate of 2.18% per year.
The Future of Digital Music
According to eMarketer, the US recorded music revenues by segment will peak at $5.98 billion by 2011, but begin to decline to $5.52 by 2013. Physical recorded music (CD's) will experience a rapid decline--declining from $5.76 billion in 2008 to about one billion in 2013. Digital music, both online and mobile, will, will experience the exact opposite, increasing from $2.64 billion in 2008 to $4.56 billion in 2013.
Music Ownership Becoming Obsolete
One of the problems for the recorded music industry is that there are other entertainment options (video, games, movies) available to consumers. The other problem, is that music has lost its intrinsic value to the consumer due to commoditization. It's indisputable that music CD's are quickly becoming obsolete (see above graph) and are being replaced by digital music streaming services, but the real problem is music ownership. Ownership music sites like Apple iTunes are giving way to non-ownership music streaming sites like Spotify, Pandora, MySpace Music and Yahoo Music, to name a few. Ownership is simply not as important as it once was.
The above article claims that Spotify should not be compared to iTunes or Pandora. However, the article misses the bigger point: the music streaming business model is rapidly making the transition from ownership to non-ownership of music. The era of the disposable music tune is here, and in my opinion, this represents a real threat to iTunes and the recorded music industry. It also presents a threat to Pandora, which is presently limited within the U.S. and offers customized algorithmiic music choices based on the users music interests. With 100 million subscribers, and fresh off an IPO, they have money in the bank to defend their turf.
For now, iTunes remains the Big Cahuna in the digital music ownership category with an 80% market share, but its days may be numbered. Non-ownership of music will become the new business model, with the ability of music consumers to listen to any genre, any album, any track, anytime and on any device and it's all going to be FREE (sort of). For heavy music listeners who want to listen to the same tune many times over, premium pricing plans will become the new norm. $9.99 per month sounds about right. This creates even more commoditization, reducing the intrinsic value of music even more, and creating more chaos for the music recording industry.
Spotify is ideally suited to dominate the non-ownership digital music market because they recognize that music ownership is slowly becoming obsolete, and more importantly, the importance of social networking and the sharing of music favorites. Its Facebook partnership provides it with a social capability and access to 150 million US potential music listeners and 600 million international music listeners, and that's obviously a big advantage. Facebook also gains financially by adding a new revenue stream, a split of all Spotify music revenues generated through its site. I gave Facebook kudos for thinking this up, althought I thought they should've formed a digital music partership a lot sooner. Now it looks like it will happen very soon.
So what will become of the music recording industry? The industry will not disappear, they are still the principal source for producing new music recordings. However, they will not make as much money as they did before, which means that the music artists will probably take the hit or go straight to the consumer, something a few artists are already doing. That's the subject of another research article. Just stay tuned.
Courtesy of an article dated July 14, 2011 appearing in Fast Company, an article dated June 18, 2011 appearing in Inside Facebook, and an article dated July 15, 2011 appearing in Slash Gear
Loved your write up !! it is mind blowing and worth to read!!
Posted by: peter kenneth | 01/22/2013 at 10:05 PM
Spot on Tommy! Hey man I really enjoyed this post you write some amazing content. You are correct I don't use Google Music never even heard of it. Thanks for staying up on the curve. Maybe you can write guest post on social media for small business on my blog sometime!
Sincerely Ryan, (A.K.A. The C.C.C. Starbucks Crew!)
Posted by: Ryan | 07/18/2011 at 02:07 PM