Independent music analyst Mark Mulligan, formerly with Forrester Research, raised some eyebrows when he told the Future Music Forum in Barcelona that today's music subscription services have a "natural ceiling" that prevent the sort of widespread adoption the industry hopes they attain.
"This market should be much more dynamic than where we are now," Mulligan said, according to paidContent. "It's a niche proposition. The majority of mass-market consumers are still not interested in that price point."
Mulligan is correct to say there is a "natural ceiling of adoption" of people willing to pay $9.99 per month for a subscription service. He's right to say subscriptions are a niche proposition. (I'm sure there was much more to Mulligan's comments and many nuances, and I'm only going off of the two reports of his presentation I've seen online.)
But subscription services are not in jeopardy of hitting a ceiling. The only danger is failing to deal with the issues -- price is just one of them -- that prevent mainstream consumers from using these services. Price is a problem that can be solved in numerous ways.
We've been here before. Four or five years ago subscription services were at a standstill. Rhapsody and Napster could not break through into the U.S. mainstream. iTunes was growing the U.S. download market by leaps and bounds. YouTube was turning the web into a free streaming oasis. A market research analyst could have rationally said in 2007 that subscription services had reached a "natural ceiling of adoption." In fact, the U.S. subscription market appeared to be shedding consumers as recently as late 2009.
Two innovations would push the subscription model to new levels: mobile apps and the freemium business model. The iPhone, and its mobile and tablet followers, allowed the subscription market to grow for the first time in years. The freemium model gave consumers a chance to experience the service without engaging in a trial period -- which usually involves a credit card -- or signing up for a subscription.
Greater growth is imminently achievable. Existing companies will expand in existing and new markets. New entrants will bring new innovations to market. Established companies will give the business model greater awareness in the marketplace. Partnerships with major telecommunications companies effectively lower the price for consumers and allow for direct billing.
Price is one factor here. David Touve, Washington and Lee assistant professor of business, has studied subscription service pricing for years. His most recent blog post on the topic (posted last month) encouraged labels and music services to lower prices. In the post he showed a graphic from a presentation he made in 2009 at the World Copyright Summit in Brussels. Using data from surveys, Touve estimated that a $9.99 price point would attract no more than 2.7% of the broadband population. Lower prices points -- even as low as $3 per month -- would generate more revenue than the $9.99 price point, Touve estimated.
It's no surprise that low prices would help attract new customers. The average person doesn't spend much on recorded music. U.S. music revenues in 2011 were $6.56 billion in 2011, according to the RIAA, or $21.92 per person over the age of 12. To make matters worse, U.S. median home income in 2011 was its lowest in 16 years when adjusted for inflation, according to data from the Census Bureau. Many people and their families are simply priced out of premium subscription services.
The way through the ceiling is not to think linearly. Subscription services have more than one variable -- price paid out of pocket by individuals -- through which to grow. Partnerships allow companies such as mobile carriers and broadband providers to subsidize the cost of the subscription. What feels like a $5 monthly fee to the consumer could return the full $7 wholesale that rights holders would get from a $10 premium subscription.
Or the subscription could be subsidized to feel totally free to the consumer. In a bit over a year-and-a-half, Muve Music by Cricket Wireless has more than 600,000 subscribers to its unlimited music, talk, text and data plans. Muve Music is now available to every new Cricket Wireless plan for Android devices, and the company is looking to license its service to other markets.
Muve Music a great example of how partnerships will help grow the market. Imagine a basic music service becoming a standard part of a mobile or broadband service. That's what Aspiro Music is doing with its WiMP music service with mobile, TV and broadband providers in Sweden, Norway and Denmark. Customers will demand it, service providers will need it for competitive reasons and labels will be able to drop their royalties because of the greater volume.
Subscription services are still in their early days. None of the major U.S. mobile carriers, broadband companies or cable companies has thrown their full weight behind any of the U.S. subscription services, either. Paid television, digital recording devices and high-definition broadcasts would have been niche products or services -- just as music subscription services are today -- without the full backing of these companies.
Perhaps labels need an occasional reminder that $9.99 per month isn't going to grow the subscription market beyond a small group of niche music and technology addicts. A good kick in the pants never hurts, and Mulligan's comments delivered at least that much. But the reality I described above should be plainly obviously to all stakeholders. The digital download market is getting stagnate in its old age. The CD market -- in the U.S. at least -- is being kept on life support by low prices. A healthy subscription market in 10 years requires proper steps being taken today.