Spotify Cannibalises iTunes; Universal Cannibalises Music

Universal Music has been turning in some very unimpressive numbers for parent Vivendi over the last few years. Traditionally record companies blame everyone other than themselves for their failures (I did a brief survey some years ago here). Now in the frame is Spotify, which relies heavily on drawing users in on its free offering, from where it can sell data about them to advertisers and hope they upgrade to a paid plan. That free tier, said an unnamed Universal Music executive to the Financial Times, is not working hard enough for the music company, and moreover it steals consumers who might otherwise be buying downloads. iTunes, by far the dominant download store, is suffering slow but steady attrition.

Quoted in the same Financial Times article (March 2015), Spotify managed to both prove and deny this simple proposition:

The company also rejects the suggestion that its ad-supported tier is responsible for declines in download sales. “Spotify is not cannibalising iTunes,” it says. “Spotify is monetising people who have never been monetised before.” Only 12 per cent of former iTunes users are on Spotify and of that number more than 40 per cent subscribe to the paid tier, it adds.

You don’t need PhD level statistics to see that if 1 in 8 of the people who stop using iTunes do so because they are spending more than they would on a Spotify subscription, and if nearly half of those high rolling stoppers trade down to a spend which is capped at £120 per year including VAT there’s going to be less money in the system for recorded music. Access to all the music they either lacked the time or the money to acquire might convince some lesser spenders to push the boat out, but for the majority of infrequent or parsimonious music buyers, big value 100 track compilations would remain a better deal. The gifting market has a bit of inertia and is more likely to stick with CDs, or default to an iTunes voucher.

More contentious however is that free of charge tier in the subscription service model. For the many who never or only very rarely bought music in any form, the subscription business is as irrelevant as hipster vinyl. But again common sense says that there will be  cannibalisation; between free tiers of service and whatever advertising or taxpayer funded licence fees can be scraped together for broadcast or webcast services, and between free and the paid tiers. And while some services, most notably Spotify and its direct competitors such as Rdio and Deezer, strive to find a balance between free and paid plans, for others, including YouTube and Pandora, paid plans remain commercially insignificant.

I previously calculated very approximately a net loss to recorded music revenue of about 30p for every £1 of subscription revenue. Some analysts say that streaming is just too expensive, and that the revenue maximising full service price is more like £3 per month rather than £10. One of the clearest explanations, by David Touve, can be found here and in more detail in this presentation here (but please ignore the Swedish Internet traffic data as there was a much more plausible explanation than iPred for the drop recorded). At such low prices the cannibalisation effect would be even harder to deny. And even within a single service it seems hugely important just what you get for nothing and what you have to pay for.

So this has been a brief survey of just some of the moving parts in the market for recorded music. But why is it that spats over the finer points of music service revenue models reach the world’s financial press? And why do some of the biggest and most savvy businesses seem to be pushing so hard for apparently sub-optimal results?

That cannibalisation word is a horrible one and nobody is eating people we hope – the idea is contention for finite resources. Record companies and services each have their specialised capabilities that combine to capture value from music, so to some extent they must cooperate. But naturally all music services compete with each other, as do all record labels; and in the middle is a pot of value that could legitimately go to any of the contestants, or indeed to consumers, or to the providers of the devices and networks that connect us to the music.

In that pot is the explanation for the more inflammatory proposition of my headline, that Universal cannibalises music. Here’s how Vivendi describes UMG for investors:

Undisputed global leadership position in recorded music:

  • More than 30% market share

Translate that into a set of rules governing what models and prices a dominant record label would be willing to tolerate, and the trajectory of the market becomes obvious. Dominance means that a market participant not only wins, but is also able to choose the terms of engagement such they will always win. In music that means Universal takes market share away from all the other record companies, and to the extent that it can, also takes value from music services. Those services in turn need to see more of the value they capture also coming from the other labels, and the biggest squeeze will inevitably be put on the smallest. The digital music market has the same kind of inevitability to it as a modulated Conway’s Game of Life. It ends, by the way, when there is either nothing left to contend for, or nobody left to contend for it.

And the lesson I guess for anyone who makes or owns music that they believe is as valuable, or more so, than Universal’s, is not to swim in a shark pool. It’s probably time to test the always dubious notion that a a platform without chart hits (dominated by UMG and Sony, with Warner and the indies taking turns every few weeks to get a look in) would be unacceptable to a consumer with more developed tastes.

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