The Growing Cost of Music's $9.99 Monthly Price Tag

ISSUE 22 2019 - COMMISSIONED FOR ONE TIME USE ONLY
Illustration by George Wylesol
     

For over a decade, music subscription prices have remained static, as services chased growth over profit. But now, that’s starting to change.

What happens when an ­unstoppable force meets an immovable object? The music subscription business is about to find out, as the force of competition ratchets up the pressure on long-rigid streaming prices. The standard $9.99 monthly charge in the United States -- other countries differ -- hasn't budged in over a decade. And according to some experts, that means streaming services and rights owners are missing an opportunity to earn more subscription royalties.

But now prices are starting to move. Amazon's new Amazon Music HD, launched Sept. 17, will test consumers' acceptance of higher prices. Costing Prime members $12.99 and nonmembers $14.99, the new tier provides audio ranging from CD quality to lossless, audiophile-level clarity. Experts say even standard tiers -- with less than CD-quality audio -- could command higher monthly fees for extra features. About half of music streamers age 21-45 surveyed by MusicWatch said they would pay $15 for an enhanced subscription service, says managing partner Russ Crupnick. The higher-priced version could have features such as recording-studio-quality audio, early access to music, live streams and artist-curated playlists, he says.

As paid subscription growth slows, prices are finally started to swing -- both higher and lower. Nielsen Music data shows that both paid subscriber growth is levelling off and that growth in the number of streams -- not the outright number of streams -- dropped in the first half of 2019 from the same period last year. It makes sense: The most popular services have acquired the early adopters; Crupnick puts the market at 60 million accounts, out of 120 million potential subscribers; the RIAA estimates 61 million current subscriptions in the United States. One digital music executive believes competition over the untapped market could be creating downward pressure on the $9.99 price: "If Apple and Spotify are starting to feel like their growth is slowing, and Amazon is gobbling up share, streaming becomes about price, promotion and retention."

Some experts believe higher prices wouldn't necessarily turn away subscribers. Crupnick says subscription services could raise their standard pricing $1 or $2 above $9.99 "with minimal disruption." Pricing consultant Rafi Mohammed agrees. Mohammed encourages his clients to employ a three-tiered approach he simply calls "good, better, best" pricing: The good version of a product has a regular price; the better option is priced higher but provides more value; the best price adds even more value. This tiered approach lets buyers choose their best price without cannibalizing sales. (Pandora has three tiers if counting the free, ad-supported version. Whether the limited-feature free version counts as a good option is debatable. The same goes for Spotify's free alternative to the subscription versions.) If you're willing to pay $15 but only pay $10, the seller is losing an opportunity to make an additional $5. A service that provides high-definition audio, for example, can separate the $10 and $15 customers. "There's something psychological about having more than one option," says Mohammed. "If you give them choice, they're open to the higher price."

The collective music industry should ponder the opportunity cost of maintaining prices year after year. The upper bound of prices hasn't been tested; instead, the people who would pay for more value get the same product as discount subscribers. Steady prices generate declining returns for streaming services: A standard $9.99 price in 2011, the year Spotify launched stateside, is worth about $11.40 today when adjusted for inflation, while streaming companies face increases in salaries, rent and administrative costs. Without price hikes, amassing new subscribers remains essential for growth.

Netflix has found consumers can bear occasional price increase. The company's three tiers have have collectively gone through six price hikes since 2011. Each instance elicits customer complaints and some departures. In 2011, Netflix lost 800,000 of its roughly 25 million customers after separating DVD and streaming subscription prices. In this year's second quarter, Netflix lost 123,000 of its 60 million U.S. subscribers following price increases to all three streaming tiers. But consumers have shown their tolerance for paying another dollar or two. Once the furor dies down, Netflix has consistently added subscribers and has grown global subscriptions to 140 million compared with Spotify's 108 million. The financial benefit is immense: an extra dollar from all 60 million U.S. Nextflix subscribers is worth $720 million annually. If an equal number of music subscription customers paid an extra dollar, labels and publishers would receive about $500 million more each year. 

If music services were to raise the standard price, "It would take courage and brand equity" to win over consumers, says Frank Luby, CEO of communications firm Present Tense and a former consultant to music companies. People would pay for innovation, he adds. Companies could produce a stream of small innovations, as has happened for more than 15 years -- or, as happens from time to time, a company comes up with a game-changing, "complete innovation." Spotify is nearly 12 years old, but it's easy to forget the service, with little latency and a pleasant user experience, was a giant leap forward that jump-started the subscription market. Sometimes a company's path forward requires it to re-imagine itself and its relationship with consumers. Luby points to FedEx's decision to create a retail footprint by acquiring printing services company Kinko's rather than build stores itself. The deal instantly gave FedEx thousands of shipping locations and strengthened Kinko's place in the market.

Even though labels have softly pushed for more revenue per user, according to sources, today's streaming services are priced for customer acquisition. At Spotify, Apple Music, YouTube Music, Napster and SoundCloud, the single, standalone, unbundled subscription account costs the same $9.99 per month. Ever the low-price leader, Amazon's basic service costs $7.99. A $5 student price is standard, while the $15 family plan can host up to six accounts and result in an average revenue of $2.50. Both prices are backed by financial rationale: Student pricing gets subscribers with little income, and while average revenue per user (ARPU) is relatively small, it's better than nothing. 

The newest entrant is Spotfy's Premium Duo, a discount price for two accounts (but only for first-time Premium subscribers). Premium Duo is not available in the United States, but is being tested throughout Latin America, Denmark, Ireland and Poland. Prices vary. In Mexico, Premium Duo costs about $6 compared to $5 for a single Premium account. In Poland, Duo costs about $6.40 compared to $5.10 for a single Premium account. The family plan has a lower ARPU -- two accounts equate to $7.50 at best -- but helps decrease churn. These aren't giveaways, but none will necessarily maximize profit, either.

Instead, streaming services compete mostly on features they don't charge extra for. Last year, Spotify CFO Barry McCarthy admitted as much by saying "the company will invest in growth at the expense of operating profit." Since its 2011 U.S. launch, Spotify's baseline price hasn't changed even though the product has undergone radical improvements in features, editorial and user interface. Among the bigger successes is Spotify's Discover Weekly playlist, launched in 2016. This year, Spotify has a potential win with a pre-save feature that adds a song or album to a user's catalog upon its release. For its part, Apple has turned Beats 1 into a popular, global live radio station in an on-demand era.

The cellphone business could act as a road map once the music business runs out of potential subscribers. In its formative years, cell companies raced for growth and market share rather than profit. Through mergers and acquisitions, they grew and made costs more manageable. When the market started to saturate, they segmented markets to improve retention -- a key industry metric, because keeping a customer is far more expensive than gaining one. Customers could choose from family plans, low-cost prepaid calling, and a range of data limits. Later, mobile plans would be packaged with broadband, cable and satellite television services. The innovations continue to this day. In April, Verizon began offering supplements to existing family plans so parents can have control over if and how their children can use various aspects of their smartphones. Not that innovation alone is enough. For market share and/or to plug financial holes, companies are bought, sold and merged regularly. No matter that the cellular market had revenues of $265 billion in 2018.

Someday, perhaps soon, the music subscription market will begin to saturate. Anybody who wants a subscription will have one -- in other words, the pie won't get much bigger. For years, a company could grow even as its competitors also grew; there was enough to go around. But saturation changes the calculus: growth comes from luring customers from competitors, retaining the customers you already have and creating high-value products that merit higher prices. Hardware will change the landscape -- imagine how ubiquitous 5G networks, with speeds fast enough to download a two-hour movie in a few seconds, might alter and improve how people experience music. Live streaming both audio and video from festivals? Sure. Augmented and virtual reality apps? Yes. Pristine sound quality? Let's hope so.

Prices need not drop to drive subscriber growth. "If a price drops to $5.99 you'd be disappointed" in incremental subscribers, says Crupnick, whose research shows subscribers value features over price. Other than Amazon, Tidal is the only mainstream subscription service to offer both a standard plan and a higher-priced option for HD audio. France-based Qobuz targets more affluent audiophiles with $10, $20 and $25 options. High-res audio files carry higher storage and bandwidth costs, but prospective Qobuz customers will pay extra — textbook marketing. A survey of free and paid Spotify users prior to its April 2018 initial public offering found the 26-35 and 36-45 age groups were willing to pay about $9 per month. Although fewer in number, the 46-55 and over-55 demos would pay $12.55 and $13.05, respectively. "Labels welcomed us as proof there could be a subscription audio service that costs more," says Dan Mackta, managing director of Qobuz USA. "They'd like us to succeed to prove this business doesn't have to be a race to the bottom."

This article originally appeared in the Sept. 21 issue of Billboard.


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