January 20, 2014:Report claims key to streaming music’s growth is cheaper subscriptions

alvarez-and-marsalIs £9.99 a month too much to pay for a streaming music subscription service like Spotify or Deezer? A report published today by professional services firm Alvarez & Marsal (A&M) thinks it might be.

What’s more, it has some numbers to put its case, claiming that if the standard price of a streaming music subscription was dropped to £5 in the UK, 40% of free users would upgrade, compared to an average of 17% at the moment.

The report suggests this would mean 2.4m more streaming music subscribers, generating between £62m and £95m of additional revenues a year in the UK alone. Bear in mind the latest BPI figures suggest that streaming subscriptions generated £103m of revenues in the UK in 2013.

It performs the same analysis for Germany, suggesting that conversion rates would increase from 9% to 40% if standard subscription costs were halved, meaning 4.7m more paying subscribers, and between €202m and €265m of additional annual revenues. The upper figure in each case is based on a 10% increase in the internet population and 10% increase in awareness of streaming music services.

“Our research shows that reducing prices will have a significant effect on subscription rates and, subsequently, be more than off-set by an increase in aggregate revenues,” said A&M’s Faisal Galaria in a statement this morning. “While reducing prices may seem like a dramatic step, with the right proposition and price points in place, there is an opportunity to build sustainable interactive music businesses and even create the Netflix of music.”

Boom! There’s the buzzphrase right there. But what are the workings behind this report, and are they credible? A&M commissioned Harris Interactive to poll internet users in the US, UK and Germany in October 2013, conducting 3,329 interviews via online survey among “a representative sample of internet users aged 16-64”.

The research was independent. Chris Gorman of MusicQubed, which runs O2’s £1-a-week subscription service O2 Tracks, is quoted in the press release, but after Music Ally checked, A&M told us this was the extent of the company’s involvement – it didn’t commission the research (which could be seen to support its business model) or get involved in the survey.

Galaria is a director of SingleView Systems, which is one of MusicQubed’s early-stage investors advisers according to his LinkedIn profile. (Update: A&M contacted us to clarify that SingleView isn’t an investor, just an adviser).

The first key assumption in the report is that streaming music subscriptions are overprice in the UK and Germany compared to the US, at £10, €10 and $10 respectively. “Taking into account the exchange rate and the level of disposable income in each country, US customers are actually paying less than half for music streaming than their counterparts in the UK and Germany,” claims the report.

Its survey found that of current non-subscribers, 44% of Brits and 41% of Germans said pricing is the main barrier to them paying for streaming music, while 41% and 36% said they weren’t interested, 19% and 25% said they want more education on the services, and 8% and 16% said “ownership” – note Germany’s status as a heavily-CD-focused market on that last one. Interestingly, 39% of Americans who aren’t paying for streaming music surveyed also said that pricing was the main barrier.

A&M has some ideas about how streaming music firms can lower their prices: vary them depending on the number of tracks allowed or the sound quality, while also looking for partnerships with mobile operators to get distribution. It also moots the possibility of bundling in video content – TV shows and films – to increase the appeal of premium music subscriptions.

“There is even more scope for commercial opportunity if additional content, such as movies, TV shows, sports and other programs, is added. Our research suggests that consumers are willing to move to the next price level, as long as it is realistically capped at the $/£/€20 level,” suggests the report. “However evidence of spending patterns on traditional TV bundled with other media services indicates consumers’ price tolerance level may actually be higher.”

So it’s actually a more nuanced position than simply ‘cut prices!’. What A&M is suggesting is that while a basic streaming music subscription’s price should be lower in the UK and Germany, the companies offering it may be able to charge more than the current £10 / €10 standard price if they bundle in video and other content.

Something to think about, then. Streaming music service Rdio looked well positioned to explore the latter strategy when it got a sister service for TV shows and films called Vdio, but it’s shutting down after failing to catch on.

Spotify was rumoured to be thinking about an expansion last March, when Business Insider claimed it had plans “to become an on-demand music and video service – one that would invest in original content and compete heads-on with Netflix”. It’s all gone quiet on that rumour since then.

On the cheaper-subscriptions front, Spotify and its rivals have been offering half-price subscriptions for some time, although they tended to be offered as web-only subscriptions, without mobile access. Spotify now has a free ad-supported version of its service that leaves out fully on-demand listening in favour of personal radio and artist-based shuffling.

Meanwhile, services like O2 Tracks, Bloom.fm and Nokia MixRadio+ are exploring cheaper subscription-based models already – the former two based on a limited selection of tracks, while the latter is more of a personal radio service with extra features to its free tier.

Bloom.fm conducted its own research into price sensitivity among music fans last year, commissioning a survey of 976 Brits that found 84% agreeing that £120 a year was too much to pay for streaming music.

Two questions remain after reading A&M’s report, though. First, people might say they’d pay for a half-price streaming music subscription, but would they actually do it in the numbers suggested? Second, how on earth can the big existing streaming services square dropping prices with their financial commitments to rightsholders. Answers to that one on a postcard, please. Well, a few thousand postcards…


Stuart Dredge
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