The future of digital is access models, according to many top executives. But, there’s one main problem: to trade CD and download dollars for access model dimes and nickels, music services need a level of consumer adoption well beyond what has been attained to this point. Rhapsody topped out around one million users. Napster had fewer. The next generation of services will need to do far better.
“Access models, which typically bundle the purchase of a mobile device with access to music, continue to gain ground,” said Edgar Bronfman Jr. during Warner Music Group’s most recent earnings call, “supporting our view that these models will be one of the long-term drivers of digital revenue.” But labels are understandably concerned about growing digital revenue while not pushing the CD off a cliff completely. And they are doubtful that free services will offer decent returns.
In addition, executives may be wary of endorsing the wrong model. “I want to make sure I don’t screw up my future opportunity around interesting new models because I put free in competition with those new models,” one unnamed executive told Billboard late last year.
How will businesses navigate from Point A (knowing access models are the future) to Point Z (a future with successful access models)? Let’s walk through the thought process:
1. To succeed, access models need massive scale. Not just a few million users, but many tens of millions of users. Bronfman alluded to this in the earnings call. Bronfman admitted WMG cannot predict consumer reaction to access models, but acknowledged that expanding music consumption across a “vastly greater number of consumers” would be positive for the record industry.
2. The end goal of access models is higher total revenue through greater adoption. Content owners should accept lower average revenue per user (ARPU) because it is an inevitable result of massive adoption. Adding extra low-value users will add little revenue, and converting them to the paid version will be very difficult. A company like Spotify may not be able to hold a 10% conversion rate if it keeps signing up millions of low-value users of its free, ad-supported site. The more mainstream, low-value users adopt Spotify, the lower Spotify’s conversion rate.
3. Growth through other means. Since there is a limited number of users willing to pay a premium for a streaming service, services and content owners must seek growth through means other than direct consumer payments. In other words, don’t expect people to pay through discrete transactions. This is why partnerships with mobile carriers and broadband service providers will become so important. Indirect payments, made possible by bundling music services with mobile and data packages, for example, and subscriptions subsidized by promotional partners, will become preferred ways to reach the price-sensitive and borderline uninterested. Mass adoption will not be achievable otherwise.
4. Bundling Music services will have to segment the market and approach different groups of consumers based on each group’s willingness to pay. Most importantly, they will have to accept that some users either won’t pay or won’t pay much. Fine. The goal is to grow total revenue, not ARPU. But there is still potential in low-value users. A hundred users at $5 ARPU are better than ten users at $15 each.
5. The leap of faith. If access models are indeed the future, and if that future requires mass adoption by millions of low-value users, at some point labels will have to take a leap of faith. They will have to dive into streaming services, accept a lower ARPU, set a goal of signing up tens of millions of users, and maybe suffer through some near-term consequences to CD sales. Small steps marked by doubt and trepidation won’t help labels reach their desired future.
For a similar point of view, read this post by Forrester analyst Mike Mulligan. “On-demand, access-based services will be the foundation stone of the 21st-century music business,” he wrote. “Added to that, the majority of consumers simply have no appetite for paying for digital music, certainly not on a subscription basis. Free and subsidized services are quite simply part of the future.”
