Why are music services in such a hurry to dosey doe with carriers? Here are five potential reasons.
Streaming music services run on thin margins because their costs to license music generally eats up more than half their revenue, leaving little left over to run the service, much less spend money on advertising. Carriers, on the other hand, have healthier budgets for marketing and can easily "co-market" their services with a partner without significant increases in their expenses. A great example of this are the AT&T ads that appeared during this year's Super Bowl that feature Beats Music. That exposure alone was worth millions of dollars.
Major carriers have thousands of stores from California to Connecticut. AT&T alone has 2,200 company-owned stores. Each is staffed with employees who sell phones and services. Those employees can be critical to introducing new customers to streaming music, which continues to have a low penetration rate in the U.S. According to the Recording Industry Association of America, only 6.1 million Americans subscribed to an on-demand music service in 2013, less than 2% of the U.S. population of 316.1 million. Though Rdio and Rhapsody are old hat to readers of this column, most people still don't understand how these services work, or even how they are different from Pandora, which is free. Having a sales person introduce people to the concept and answer questions will go a long way towards spreading the word.
3. Frictionless Billing
Consumers hate to pony up their credit cards for new services, especially those they haven't tried before -- even if it's just $10 a month for unlimited access to millions of songs. But they're already in the habit of paying their cellular bills. In the context of a $100 or so phone bill, an extra $10 kicked in for a music service also doesn't appear extravagant. Beats Music reportedly turned more than 70% of listeners who tried its music service on AT&T's free 30-day trial to paying subscribers. This rate, called "conversion," can be ten times or more higher when the subscription is part of the cell phone bill than if listeners paid for the service separately.
comScore recently estimated that 156 million Americans, roughly half the population, owned a smartphone at the end of 2013. That figure continues to grow as more people switch from feature phones to smartphones. Even if just 10% of those people decide to spring for a music subscription, that's 15.6 million people -- that's two-and-a-half times the total number of people who currently pay for on-demand music.
Those apps that magically come with the new cell phone or tablet that you just bought? They're not exactly there for your convenience. Carriers have agreed to pre-load apps belonging to companies with whom they have business relationships. "Pre-loads are the Holy Grail of carrier assistance," said Jonathan Sasse, a digital music consultant who headed up product marketing and content programming at Slacker. This is because the rate of people who register for a music service on a pre-loaded app is upwards of 20 times the rate of apps that were not pre-loaded, Sasse said. Simply put, having an app pre-loaded into new phones results in a massive bump in the number of people who try out the service.