11 03 15

What happened when Ministry of Sound CEO shared a stage with Deezer and Rdio

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lohan-presencer

“Your objective is to grow your user base, to tell a story such that you can IPO or you can sell, and you can exit, and you can put money back in the pockets of your investors. You are not the ones who are investing in developing talent. You are not the ones who are signing artists. And our artists and investment – our creative community – is contracting daily, as a result of the free services that are out there and giving music away, with the objective of you achieving some sort of exit at the end.”

Conference panel sessions are often anodyne affairs nowadays, with speakers eager to agree with one another and spout platitudes. So hats off to whoever bucked that trend by putting Ministry of Sound CEO Lohan Presencer on a Mobile World Congress “MMIX” panel with representatives of two streaming music services: Rdio’s global head of business development Chris Burton and Deezer’s VP of Europe Gerrit Schumann, and moderated by Music Ally’s Paul Brindley.

That opening quote comes from Presencer, building up a head of steam midway through a session that’s best described as ‘spiky’, as he unloaded his frustrations with free, on-demand streaming models on Burton and Schumann. The video of the session has just been released, and while critics of streaming will relish two prominent services being hauled over the coals in front of an audience, both made some points that bear further discussion.

The session opened softly enough, with Schumann discussing Deezer’s mobile shift. “On the consumption side, more than 70% of our consumption today is on mobile, and if I look at the new users coming on to the platform, in most markets even 90% plus are coming through that,” he said. “In some markets – emerging markets – it’s mobile-only. It’s been a tremendous shift in the last 24 months towards mobile, for us at least.”

Rdio’s Burton agreed. “We have about 70% usage on mobile devices and about 70% of new users coming in on mobile,” he said, before noting the importance of Android smartphones in particular in some markets. “For us, in Brazil and Mexico over 50% of usage is on Android devices alone, so it’s hugely important.”

Presencer’s entry into the debate came with a question about the business of streaming music. “The reality is streaming is a very insignificant part of revenue for my business as a whole. It represents less than 5% of our total revenue from digital music, and less than 1% of the income for the group as a whole,” he said.

(Note, this isn’t as surprising as it sounds. Ministry of Sound’s traditional recorded-music business was based on compilation albums, which aren’t available on streaming services. And while the company does have a growing business signing original artists like London Grammar, many of those were withheld from streaming services until very recently.)

But Presencer had another topic in mind. “My beef continually over the last few years has been with the free aspect, the freemium model. I just can’t see how that is sustainable or supportable. The argument goes that by making a free ad-funded service available, you capture – you give – the pirates an alternative. I just don’t buy it,” he said.

“I think what you do is you take casual consumers of music and you turn them from purchasers into noshers, into browsers, into snackers. They don’t have to engage in the subscription model. The reality of some of the bigger streaming services is that 75% of their user base are free, which has a horrific impact on the music industry and its ability to invest in talent going forward.”

Burton stood his ground at this point, pointing out that Rdio existed for four years as a premium-only streaming service before launching its free tier in 2014. “We found from our four years of running a paid only service [that] it’s really really difficult to get users to come in, with all the alternatives they have for accessing music – some of that illegal, some of it legal – we found it very difficult to bring people in to a 30-day trial or in some cases less, and to get them to actually pay for content,” he said.

Cue a testy exchange between Presencer and Schumann:

Schumann: “The music streaming market is going to exceed 15% of the overall recorded music market this year, at least. We’ve seen growth rates of over 50% and the music markets globally are growing again. And i don’t think it’s coming from CD sales, and I don’t think it’s coming from downloads.”

Presencer: “These figures can be massaged in the way you want to massage them. Universal Music Group, the largest group, saw its revenues fall by 7% in its announcement last week.”

Schumann: “I’m looking up at the overall ecosystem of music and what a particular label’s concerned, that’s definitely a different analysis than looking at the overall…”

Presencer: “That’s the biggest label in the world. They saw their revenues fall by 7% last year! The reality is that streaming is not making up the gap.”

Schumann: “That was related to new releases: every year we have shifts in market share in every market from label to label. This is the first time in over 10 years that the music market is actually growing again. We have reason to be very optimistic and very positive that streaming has a positive impact on music consumption overall. Secondly, we’re comparing…”

Presencer: “How many of your users are free?”

Schumann: “It doesn’t matter.”

Presencer: “Well, how many of your users are free?”

Schumann: “Well how many users are not engaged with music without any free service?”

Presencer: “What value is a consumer, who is engaging with music without paying, to a record company who’s investing in the music? You just said the reason the record industry is down is due to a lack of new releases.”

(Note: Deezer’s number of free users as Schumann later pointed out, is public knowledge: it has 16m active users and 6m subscribers, meaning 10m free users.)

Schumann did go on to outline the case for free, on-demand streaming pretty succinctly though. “I’m not going after people who are willing to pay today, and I’m gonna stop them from paying. That’s not our intention. We’re looking at a new way of consuming music and obviously I have to get people excited about a new product. And that’s what freemium does, and it gets engagement. And my competition today is about attention and engagement, not about monetisation yet,” he said.

“If i look at YouTube, if I look at all the music that’s available out there for free today, with or without music streaming – music streaming has been available for a long time, whether it’s piracy or legal… a lot of people are not willing to pay for music, but they’re engaged with it, and that’s the first point. We see a lot of people coming to us who don’t buy CDs any more. They haven’t for about 20 years. But now, they go in the freemium funnel, or they get a free trial. It’s easy, it’s on mobile, and they start paying for music again. It’s that simple.”

gerrit-schumann

Burton echoed the point, suggesting that “it’s really, really tough to get people to pay for music these days” without introducing them to it in a way that helps them become familiar with the streaming service and its benefits. If not: “It’s going to be extremely difficult for the music industry to keep growing revenues as it is right now.”

At this point, the conversation took a twist, with Presencer drawing a line between major and independent labels, claiming that it costs Ministry of Sound around $750k to take a new artist to market, with only three majors and “a handful of independent labels” able to do it.

“If we talk about how consumers love the free service, and how it acts as a funnel into drawing people in, the bottom line is that neither of your businesses can stand alone without external investment. You are constantly raising cash, which in turn you are handing over to the major record companies,” he said.

I looked at the streaming charts in the UK – the top 75 most streamed records in the uk over the last four weeks – and less than 2% of that content was delivered by independent record labels. We are seeing a homogenisation of content creation, we are seeing a reduction in choice.

“And the bottom line is if not enough money is coming into the pockets of record companies such that they can invest in talent, there will be a reduced amount of music delivered to the market, and that will eventually see further decline in the market.”

What does Presencer want to see instead from the streaming services? “More imaginative ways of charging”, from pay-as-you-go models – he cited startups Psonar and MusicQubed’s experiments as interesting examples, while suggesting that they are “struggling to get the licences from the major labels”.

Schumann said Deezer is not deaf to criticism of the freemium model. “We have good relationships with the labels and it’s an ongoing discussion. And I’m not saying we have the model perfect today. By far, no. It’s a lively debate, and things are dynamic and we change from year to year. And we look at the market, we test a lot of things. We’ve tested a lot of propositions in different markets, and it’s an iterative process and we learn.”

He added that Deezer still sees people who signed up as free users three or four years ago only upgrading to premium subscriptions now. “We didn’t expect that to take that long,” he said.

“We tried different models: we tried a one-month free trial and converted them then and there. but the concept of music streaming is very new, and for consumers to embrace it, it just takes a little bit more time. And if we force them to subscribe as this commitment too early on, we’re probably going to have to go back to them in a year and pitch them the same message again. That’s not very efficient.”

“I think the key is here that we are supposed to be working together on this. It sounds like Deezer are doing a bunch of experimentation with different services and offerings and things. We’re doing the same. We’re going down this path together, right?” said Burton.

Asked whether the standard streaming subscription price of $9.99 a month is too high, he warned against generalising: for some, $120 a year is very good value and they might even pay more for higher-quality music or other features, but that for some, it’s too much.

chris-burton

Schumann – interrupted several times by a disbelieving Presencer – claimed that in the CD age, there were between 300m and 400m music buyers spending an average of $40-$50 a year, and suggested that compared to that, a streaming subscription’s $120 a year is pretty good going if it reaches scale.

“If i could flip the switch and have an instant switch from the old world to the new world, a €5 or $5 price point would probably make sense, because the price elasticity is so great that we reach higher volumes,” he said. “The problem is, we can’t just flip the switch, and so there’s a transition period, and that’s why the discussion becomes so complex. In which markets at what stage do we have which price points?”

It’s at this point that Presencer launched into the speech about streaming services being focused on their ultimate exit via IPO or acquisition, and delivering a return to their investors rather than long-term value to the music industry.

Schumann: “So you are, like most labels, a not-for-profit organisation?”

Presencer: “I’m not saying there’s anything wrong with your objectives. I’m saying your business strategy is sucking creative investment out of the industry.”

Schumann: “what’s your alternative strategy? How would the music industry invest billions of dollars into a market that was, let’s say, in a difficult position five years ago?”

Lohan: “We need to switch off free across the board. We need to switch off free… and we need to come up with clever alternative payment mechanisms that allow people to snack, that allow them to pay as they go, that allow them to pay through micro-payments, nudging them when they have used up various levels of investment that they’ve put into it… The reality is that on-demand music is a consumption medium, and giving it away for free just kills the industry.”

Then he said something interesting: “Unfortunately I think the horse has almost certainly bolted. None of this is going to change. YouTube is out there and that’s the great big elephant in the room, y’know, but we are in this position. I’m not going to sit here as a creative business and tell you that what you’re doing to our industry is good, because it isn’t.”

(Hold on to that YouTube comment for a bit. We’ll come back to it.)

At this point in the debate, Schumann and Burton must have been relieved to see questions opened up to the audience, which given this was Mobile World Congress, could be expected to be fairly techy in nature.

Small relief, though: the first questioner started with the statement “Your services are making peanuts for the artists” and finished with “At the moment, your models are lose-lose-lose – lose for the artists, for the fans and for the labels. Please explain one win. it’s a disaster right now.”

Burton: “I’m so glad I joined this panel. Erm, we totally disagree… The services like Rdio and Deezer and Spotify, we’re out there trying to make this work, and as I said before, it’s a partnership with the labels. There’s no mystery in the sense…”

Presencer: “We’re very grateful to be part of your experiment.”

Burton: “I come back to the point what else should we be doing? We’re very willing to have more experimental conversations with the labels… It has to be a partnership, right?”

Burton went on to make a fair point: that smartphones are currently the driving force behind the growth of streaming services, and that while one in two adults has a smartphone now “we know that’s going to increase to about 80% of adults in the next five years”, with usage of music services on these devices almost at the level of usage of Facebook in terms of hours per day.

“The opportunity, the scale is huge, and i think this conversation is very different when we’re talking about much bigger scale,” he said. But then another audience question about the difference between streaming and (traditional) radio sparked a return to the verbal jousting.

Presencer: “The point with radio is it’s not on-demand, it’s a curated service, it’s a discovery mechanism. You can’t go to radio and say I want to listen to the London Grammar album…’”

Schumann: “Our mobile service is a radio-driven service.”

Presencer: “There’s no on-demand on your freemium tier?”

Schumann: “On mobile, yeah.”

Presencer: “But on your desktop, there is on-demand on your freemium tier?”

Schumann: “Right, which is 20% of our usage, so…”

Presencer: “Mmm, semantics. On-demand free is not the same as radio. Radio is programmed by somebody else.”

But it’s not just semantics in this case. In a way, it’s surprising it took this long in the debate for the streaming representatives to point out that on mobile – their core platform – their free tiers are not on-demand. The same is true of Spotify: its free mobile version only provides personal radio-style features.

Still, Presencer’s last contribution to the session came in response to a question about whether labels should be trying to fight “free” rather than finding digital models that satisfy consumers’ demands for it – particularly young people.

“At the moment the one-size-fits-all $10 or £10 a month premium subscription, or that service bundled doesn’t seem to be getting the volume… The reality is there is only one model available to subscription music at the moment. We need to find other ways of incentivising people to transact,” he said.

“And you might find young people are less frustrated if they can put a pound a week in, or two pounds a week, or $5 a month, and then there’s a notification that comes up, it tells them they’ve run out and they can top that up. I don’t know. I’ve got enough of a job trying to run my business…”

panel

Schumann and Burton at least got the last word, with a question asking them how streaming services can differentiate themselves in the future, given that many have the same price, catalogue and core features now. Schumann talked about Deezer’s strategy of looking for different “user segments” and trying to super-serve them, citing the hi-res Deezer Elite service as an example.

“We’re seeing there is an audiophile segment that is willing to pay more and get higher quality and better services than on premium tiers. We’re looking at different segments, whether it’s kids or other specific needs. And I think then we can talk about diversified free strategies for sure,” he said.

“But at the core for me, and that’s what i said earlier: the attention of the user is what we need to keep in mind, because right now there is so much distraction in the market, on mobile, on any device, and that’s the true currency today.”

Burton, meanwhile, noted that while there’s still some room to differentiate on business models and products, “that’s in conjunction with the record labels, and you can be pretty sure that if one of those works, the other services are going to adopt it too”. But he said user interface and features will be key, as well as accessibility.

“We’ve got to make it very very simple for the consumer to understand what’s going on, we have to offer them a choice. and actually I totally agree with you [addressing Presencer] there needs to be a choice of different ways in which someone can pay for the service,” said Burton.

“I think beyond that, it comes own to our ability to be on every single connected device possible, and have a good, cohesive marketing strategy.”

A stormy session, but an instructive one. We doubt any streaming service will be willing to join a panel with Presencer again, but perhaps that’s a shame – sometimes it’s the fiercest, most direct criticism that rouses the least unmediated and most convincing defence. Plus, on some key points, like the need for more experimentation on ways to pay for streaming music, Presencer, Schumann and Burton weren’t so far away from one another.

As a postscript, though, what about that “great big elephant in the room” referred to by Presencer but not followed up on at the time? Music Ally asked him this week, and here’s what he had to add:

“YouTube has been the elephant in the room for many years. As an industry we openly, and somewhat naively, embraced it and Vevo as promotional platforms. Clearly when content is available on demand that shifts from promotion to consumption. For a whole generation that has grown up with YouTube, it’s the primary destination for listening to music,” said Presencer.

No strategy for addressing the pernicious nature of legal free music is complete without putting YouTube behind some sort of pay mechanic. I fear it may be too late, but as an industry we owe it to ourselves to try.”

Putting music behind a paywall on YouTube? That’s explicitly not the strategy with YouTube Music Key, where the catalogue is the same across its free and premium tiers, with the latter charging for extra features like offline access.

And it’s the existence of free access to just about everything on YouTube that bubbles below any debate about whether streaming audio services should place more restrictions on their free tiers. On this point, at least, Ministry of Sound is singing from the same hymn sheet as all the streaming services.

Here’s the full video of the panel session. Thanks to Momentum, Popshop and the GSMA for filming and sharing the footage:

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Stuart Dredge
READ MORE: Analysis News
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3 responses
  • Jon Hockley says:

    A few points i picked up on.

    So Rdio said “they started their free tier because their paid tier wasn’t working out”. Right so they created a problem and solved it by pushing it onto the artists and labels.

    Deezer said “their free tier isn’t free it’s generating revenue”. Well so do pirate sites with all their adverts so what makes them any different.

    Deezer said “well youtube have been giving away music for years so why point the finger at us.” With regards to music Youtube is used as promotion. Only some artists upload all their music for free and the rest of the music is only up there is because fans have uploaded it and no one has bothered to pull it down.

    Deezer effectively said “their business is still experiment and they are still trying to figure it out” So how long do rights holders have to suffer as we wait for Deezer to figure it out.

  • mikjlaws@gmail.com says:

    Hi Jon

    Re Pirate sites, the ad revenue on a pirate site ends up only with the Pirate operators who operate the website while on Rdio/Deezer, ad revenue is used to service the royalty fees these platforms must pay. Thus cash generated through ads on Pirate sites doesn’t end up going back to the rights holder while cash generated on legal streaming platforms does.This makes them fundamentally different, much in the same way that someone selling a stolen bike keeps all the money for themselves while someone selling a bike legally will have to pay the costs they incurred in creating the bike/buying it from a manufacturer.

  • Will+Buckley says:

    mikijlaws, while the research on the impact of free ad supported streaming vs ad supported free file sharing (piracy) are incomplete in many ways the damage done by legalized free interactive music streaming may be even more negative on musicians and songwriters than piracy.

    What these services have done to hurt the music business is two fold:

    1. They’ve scooped up those who listen to and purchased music and drawn them into a directionless, non-discovery model.

    2. And most damaging; have reinforced the perception that music has no value and it’s readily available for free EVERYWHERE, so why would anyone purchase music.

    As Mr. Presencer has pointed out. Interactive Music Streaming is a total exit strategy business with only the investors and principals truly benefitting from the business. This is fact, not someone’s opinion.

    One need look no further than Pandora to confirm this reality.

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