When Virgin Media, a UK Internet service provider, and Universal Music Group announced their plan to launch a music subscription service, the recording industry took major, positive steps in a new direction. The new service will feature UMG content, will offer DRM-free downloads and unlimited streaming and will be available to all Virgin Media customers.
Ultimately, for the industry, this means a new era in how music is packaged, bundled and priced. It is a step away from the traditional manner of pricing music per transaction. Flat-fee pricing has existed for streaming services but is foreign to downloads. (eMusic is the obvious exception, but it only recently announced plans to add Sony catalog and will offer only titles two years or older.) If “music as a service” is ever going to be a reality, this type of subscription service is a good first step. In its current incarnation, the service is far from perfect, however, and its future is clouded by a number of unknown factors.
The wins:
1. Partnership with an ISP. Labels have new partners in the digital age. By teaming with Virgin Media, UMG connects with consumers where they already gather. UMG benefits from the breadth of Virgin Media’s customer base, as well as its billing relationships, marketing abilities, customer support and technical support.
2. A move away from a la carte transactions. Offering subscriptions based on intended consumption is good for consumers because it gives them more options, allowing for recurring revenue. Moving into subscriptions is a necessary step for record labels, which are far more comfortable with individual transactions (they are built for transactions, after all, as is much of the industry). Many consumers will continue to buy downloads; iTunes is not in jeopardy. But treating music as a service rather than a product is an important evolution.
3. Multiple tiers. Early reports say the service will come with various tiers, such as a more expensive, unlimited download plan and cheaper plans with a set number of downloads.
4. Unlimited streaming as part of a bundle. There are a number of free alternatives, and we have yet to see the streaming interface, but it’s good that UMG is bundling the free streaming with downloads. Free streaming services are going to exist, but they are a lousy way to monetize recorded music assets. It’s best to extract value via downloads. In addition, it is smart to position the service as a download plan plus streaming, not a streaming service with downloads.
5. Harmony with the Digital Britain Report. The UK government’s Digital Britain final report, issued on Tuesday, calls for a 70-80% reduction of illegal file-sharing as well as a new era of commercial agreements and business models that “give the consumer or the fan highly affordable and convenient content.” The record industry-ISP tandem will allow for the desired combination of education and legal alternatives. Most importantly for record labels, the Digital Britain report endorses sanctions against file sharers. It appears that market-based sanctions will be the preferred method, but the government will use legislation as an “underpinning of these market models.”
6. New revenue. The record industry has been a zero-sum game for many years. One label takes a purchase away from another label. Consumer spending is flat or decreasing. The ISP-based subscription model is an opportunity to increase per-head spending as well as the number of active music buyers.
The downside:
The catalog is less than the sum of its parts. UMG has the largest market share and many consumers could find plenty to download, but the current pricing tiers are for only one major music group’s catalog. The value of a music service increases at a quickened rate as it licenses more and more content. When the catalog is relatively small, the value of a service is a fraction of its sticker price.
The unknowns
1. The streaming/download application. Great programming equals a greater chance of success. Just because you build it does not mean they will come. Consumers may be lured by the value of the music, but they can depart the service if the user experience is substandard. Considering most digital consumers have a good deal of experience with two of the best user experiences in the field, iTunes and YouTube, any newcomer must be able to do far more than clear the easiest of hurdles.
Depending on the quality of the streaming/download application, attempts to push infringers to the legal alternative may not be successful. If Virgin Media and UMG are going to position its service as a worthy legal alternative, it will be important that the application is between very good and excellent.
2. The packages. Until the pricing and packages are announced, it’s too early to say if this service will appeal to all but the most active shoppers. Early indications are that there will be a variety of tiers ranging from a starter package for light users to an unlimited download option.
3. How hard will Virgin Media push its customers toward the service? That is to say, will Virgin Media wield a big stick or lovingly nudge its customers – especially those suspected of copyright infringement – toward its legal alternative? The service is underpinned by an agreement that Virgin Media will take measures against illegal file sharing. Such anti-piracy tactics are in their infancy so not much is known about their effectiveness or ISPs’ willingness and ability to carry through on pledges to content owners and threats to customers.
4. Uptake by non-pirates. Non-file sharers outnumber file sharers, and those who do not regularly buy music outnumber frequent music buyers. Because of these differences in populations, there is far more upside in getting infrequent music buyers to subscribe to the service than there is potential in converting pirates into subscribers. (And file sharers tend to purchase more music than non file sharers, so it’s not like record labels are getting nothing out of copyright infringers.) The lucrative payoff for this subscription service will be achieved if Virgin Media can sign up the infrequent music buyers. If Virgin Media positions the service only as an alternative to piracy, the gains will be much smaller.
