Analysis

7digital’s Pete Downton talks streaming, telcos, voice control and Apple


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In the mid-2000s, Pete Downton had a PowerPoint presentation. It included a slide with a map of the world plotting Warner Music Group’s licensing partnerships with 40 mobile operators: a network with a theoretical reach of 1.8 billion customers.

“There was a certain amount of truth in that, because we had deals in place to do products with all of them. But none of them had the teams, expertise or frankly the business reason to focus on executing those relationships,” says Downton now.

With 2017’s focus on the rapid subscriber growth for music-streaming services like Spotify, Apple Music and Amazon Prime Music, it’s easy to forget that a decade and a half ago, telcos and mobile phone manufacturers were among the great hopes to turn around the music industry’s sales decline.

As a business development and strategic partnerships exec at WMG, Downton saw these hopes – and the disappointments when almost all these partnerships failed to deliver – at close quarters. Yet in 2017, now deputy CEO at B2B digital-music firm 7digital, he thinks telco music partnerships may be due a revival.

That’s why he’s talking to Music Ally, about some of the parallels between the industry’s early digital days and 2017’s streaming environment, as well as the potential of smart speakers and voice control; the coming together of radio and digital music; the importance of emerging markets; and why he smiled – but also cheered – when Lyor Cohen joined YouTube.

Telco failures

But back to those telcos in the mid-2000s, and the mistakes they made when launching their own music services, nominally backed at board level but actually under the control of someone lower down, with the best intentions but little clout to deliver on them.

“You always had this mindset that they came from this industry with tremendous margins, and so this expectation that they were going to get the same margins dealing with music. And they never really looked at the absolute financial cost and potential benefits,” says Downton.

“Irrespective of what the senior execs said, and how much money they had potentially to spend on something, every one bar probably TDC was the same. They would launch it to great fanfare, have a great party, and then they’d close it down.”

Danish telco TDC remains one of the only positive case studies: its TDC Play service bundled unlimited access to a catalogue of music downloads as part of its home-broadband plan. The service was powered by German firm 24-7 Entertainment, which 7digital acquired this year.

“TDC was only the second time I’d seen a company where the CEO and the CMO and the CTO were all aligned. They all understood why they were doing it as a senior executive team. It was the first time I’d seen those three execs lined up in a single business,” says Downton.

“They knew what they were doing: they understood cause and effect. They understood that if you spent $10m of your marketing budget to achieve this, for example, and it led to $15m of benefit in terms of churn reduction, that this was a sensible business decision.”

Downton admits that the music industry must share the blame for some of the telco disappointments, suggesting that it was often “almost impossible” to work with rightsholders at this time.

“The music industry still had this obsession with essentially two things: one was replacing the lost revenue from CD sales, and secondly, it was more obsessed in competing for market share with itself than it was on trying to grow the size of the market,” says Downton.

“That led to every single deal being analysed as if it was potentially cannibalising CD sales. The amount of analysis we did even around launching downloads and the launch of iTunes, to convince ourselves that actually this would not be dilutive and it would not be cannibalistic.”

“We had no real idea: there was no basis for that analysis. But the real obsession, the real fear was ‘are we going to do something here that undermines the existing business?’”

Apple to the rescue

The iTunes launch in 2003 was a pivotal point for the music industry, coming after the initial explosion in filesharing and online piracy, as well as the flop of the PressPlay and Medianet download services launched by the industry itself.

Enter Apple, although in the early days of its negotiations with rightsholders, the company was not always taken as seriously as we’d imagine today. Downton remembers being sent to Cupertino by Warner Music chairman Roger Ames “who suddenly got religious about Apple”..

“One time I was over in Helsinki meeting with Anssi [Vanjoki] at Nokia. Nokia at the time were a $260bn market-cap business. Apple was just over $8bn market-cap business, and rumours were that Steve was just about to get fired for again. That was the word on the street,” says Downton.

“I sent a note to my boss Jay Durgan and Roger saying ‘I’m in Helsinki that week. Are you kidding me? Why would I leave this mobile phone company and travel to see this company that had two and a half or 3% of the PC market at the time? None of us really had any idea how big it was going to be.”

“The forecast for the first year, I remember, was a million downloads. And it did a million downloads in the first two-and-a-half days.”

Downton says that the fact that iTunes came along “at a time when the industry was frankly on its arse, and when Apple was on its arse” was crucial: both sides had plenty to gain and arguably nothing to lose, even if labels had to overcome their cannibalisation fears.

He adds that Apple shared more cultural values with music executives than most of the telcos had, which was also crucial. Ames wasn’t alone in advocating this strategy. He was fortunate to have had the counsel of Paul Vidich and Michael Nash at the time, both saw the potential of Apple entering this market

“We spent hours talking with Eddy Cue and his colleagues about music, and the importance of music in people’s lives. And the very first conference call I was on when Steve [Jobs] came on and talked about the world thinking they were crazy for doing what they were going to do: investing money having spent the previous few years explaining to people how they could rip music and share it.”

“He said ‘For me this is really simple: music’s like water, it’s essential to human life. There was a music industry hundreds of years ago, there’ll be one hundreds of years from now when Apple’s a footnote in history. It’s essential to human life’.”

“Having someone at the top of an organisation who understands that means that you then focus on implementing as opposed to second-guessing the strategy every five minutes… They could talk about music in a way that the labels understood, and they went straight to the artist community too.”

Return of the telcos

Apple went on to be the single dominant platform in the music-downloads era, and while in 2017 it is playing second fiddle to Spotify in the music-streaming world with 30 million and 60 million subscribers respectively, it remains an influential force.

At the end of 2016, 112 million people globally were using a paid music subscription service according to the IFPI, with that figure expected to grow sharply again in 2017. Telcos have played a part in that rise, but through their marketing partnerships with the likes of Spotify rather than through their own-brand streaming services.

Downton thinks we are due a revival of the telcos’ ambitions to do more, however. And yes, he now works for a company – 7digital – which is pitching itself as the B2B partner capable of running services for them, so is hardly unbiased. But here’s his case for such a revival making commercial sense.

“If you compare investing in music and music rights compared to certainly exclusive sports rights, and increasingly film rights, which are becoming global industries where the table-stakes are into the tens of billions, music starts to look incredibly cheap in absolute-cost terms,” he says.

“There’s still a concern about margin, but if what you’re doing is fighting to protect your existing business, and your existing business is generating revenues that dwarf anything that the music industry could ever hope to do, it starts to be a more sensible and compelling commercial proposition.”

Downton cites BT in the UK as a prime example, spending upwards of £3bn on exclusive sports rights over a three-year period to attract new broadband and digital TV customers, as well as retain existing ones.

“For that amount in the UK, you could pretty much own the UK music industry for five years… Exclusive sports rights takes you into, through that model, maybe 25%-30% of homes. Music takes you into 90% of people’s homes,” says Downton.

“We have still not seen any serious adoption of music services by network operators, and there are hundreds of those around the world that generate more than a billion dollars of annual revenue each. That’s a big old opportunity for the music industry,” he adds.

“That’s not to say they will necessarily be the dominant players in this market, but I cannot believe, and I do not believe, that they won’t – that some of them won’t be successful in this regard over the next four or five years as the market changes.”

“These businesses need relevance, they need reach, and they need revenues that result from that. Music is an incredibly powerful way of doing that. But they’re only going to do that if they have people that fundamentally understand the importance of music in people’s lives.”

Amazon Echo

Voice and the Passive Massive

Downton is also super-enthusiastic about one of 2017’s most talked-about trends in digital music: the emergence of smart speakers like Amazon’s Echo, Google Home and the (now delayed until 2018) Apple HomePod.

He lasers in on Amazon in particular, which through Echo and the way its basic-tier streaming service Prime Music is bundled into its wider Prime membership, may be carving out new territory for digital music.

“Spotify and Apple Music are definitely playing a part in trying to replace the half a billion people that used to buy CDs in five or six countries: those music enthusiasts. But I think Amazon Echo is the first one to really open up a new market,” he says.

“If you think about the Amazon Prime model, you have got a product where you don’t need to be a music expert in order to use it. You can come in and start it whether you’re six years old or 40 years old. And it competes head-on with radio. It’s largely additive to [streaming] music listening, particularly the Prime model. It’s really about that passive massive”

This relates back, again, to the heyday of the CD era, when Warner artists like The Corrs, Alanis Morissette and the Red Hot Chili Peppers were selling multiple millions of copies of their albums.

“To do that, you really needed to reach the passive massive: that next concentric circle of music fans who’d buy records like ‘Talk on Corners’ or ‘Jagged Little Pill’ or ‘Californication’. Amazon Prime speaks to that audience really, really well,” says Downton.

“It rips away the barriers in terms of actually accessing the service… It makes it really easy to say ‘play me some music from…’ and just start that journey. Which most people find terrifying, actually,” he continues.

“‘What to play next’ is the music fan’s problem. Most people’s problem is ‘What do I play first? How do I even get started?’ And how do they get started if they’ve only got 15 minutes sat having their breakfast before leaving the house? They just want to press play, and don’t have time to think about it.”

Downton also praises Amazon for the way it approached licensing talks with the music industry, breaking out of the $9.99-a-month model with a limited catalogue of music – something that attracted some criticism at the time, but which has looked like a smart bet in the longer term.

“Amazon came in with a very clear business model and said ‘here’s a certain amount of money, we need to build a service within this budget, and we’re prepared to restrict what’s available’… it’s a far more straightforward and mature way to approach the music industry.”

Pete Downton 7digital

Fragile recovery

Downton, like many in the music industry, is excited about the growth in revenues that we have seen in 2016 and so far in 2017. But he also delivers a warning to any companies and executives getting too comfortable with the industry’s bouncebackability.

“I think we’re at a relatively fragile point in the recovery. It’s easy to sit there and say ‘everything’s great’. We’re talking about these tremendous valuations of the record companies again,” he says, referring to recent figures touted for Universal Music Group.

Downton’s fear is that if this progress starts to slow, the industry may adopt a cautious mindset and start over-thinking about cannibalisation again, focusing its energy on the largest music markets rather than supporting innovative new models in some of the emerging territories.

He hopes that won’t be the case, citing Eastern Europe as one region where music audiences “are practically not monetised at all” but which are ripe for change.

“All the evidence I see from the conversations that we have with the major labels and major publishers, is that they’re shifting their focus to how can they encourage companies to invest in music in those markets?” he says.

Downton hopes that rightsholders will also continue to experiment in the big markets where Spotify and Apple Music are booming, including giving more leeway rather than less to advertising-supported models for music.

He cites the explosion in inventory (and thus a depression in ad rates) on services like YouTube, as well as Spotify’s strategy of seeing its free tier predominantly as a funnel towards subscriptions, as two reasons why ad-supported music is held in low esteem by many labels.

“Those two things had the music industry convince itself that there was not a future in ad-supported music. Which of course is nonsense. It’s a complete nonsense. It’s a case of you’ve got to learn to walk and chew gum,” he says.

“You can build a viable $9.99 (or whatever that price might be) music-enthusiast marketplace, but at the same time, you can migrate that $38bn radio market, 75% of which is advertising, to a [streaming] music model.”

“You’ve got more than three billion people listening to the radio every week, and a few hundred million who had formed the basis of this CD industry. It just makes no sense that these worlds were not going to fuse together,” he continues.

“If you look at the radio industry, it’s done that abbreviated grieving process, like music, but probably is still in largely in denial… It’s a case of when does it migrate to the internet, not will it… Without interactivity not many advertisers are going to be spending a lot of money on radio five years from now.”

Crossing the music-tech chasm

If flexible, innovative dealmaking is going to be crucial to the next phase of growth for the music industry, Downton thinks that one of the key barriers from those original telco partnerships – a lack of understanding on both sides of how the other worked – has to be torn down.

There’s a contradiction here though. Downton thinks that there’s a need for more music executives to step outside their own industry and work in the technology world, to better understand it. Yet he thinks they must make sure they don’t take entrenched thinking with them.

“If you hire an expert from the music industry to go and negotiate your deals, they’re going to look a lot like the deals they did when they were in the music industry. How do we break that cycle?” he says.

“People often ask me when they’re thinking of hiring someone, and for me the question is have they spent time outside of the music industry?”

“If you look across the labels now you’ve got some really clever people, but they’ve spent a good deal of their careers inside the music labels. They approach things with an open mind, but they don’t necessarily have enough information about the businesses they’re dealing with to make recommendations that are based on what’s fair.”

Facebook, for example, has been hiring high-profile executives with music-industry experience, but does not appear to be rushing towards a $9.99-a-month audio-streaming template.

That may be positive: while there’s certainly impatience among rightsholders for Facebook to enter the market, if it can take its time to do something different again from Spotify/Apple and Amazon which cannibalises neither of those approaches, that would be positive.

Of course, one of the highest-profile examples of a music executive crossing over to work in the tech industry is Lyor Cohen, a former colleague of Downton’s at WMG. Cohen has already sparked some rows with his views on why YouTube is a friend not a foe for the music industry, but it’s what he does as head of music that will speak louder.

“I think for all the extent to which Lyor can be caricatured in the industry, having worked with him, I know he’s someone who really understands the cultural glue that is music,” says Downton.

“Whilst the irony of his general displeasure when the YouTube deal was done in the first instance [in September 2006, WMG became the first major to license YouTube] is there – him jumping up and down on executives’ desks asking them where his money was from YouTube! – his understanding of artists and repertoire is just phenomenal,” he continues.

“So I smiled when he went to YouTube, but equally I’ve sat there in an A&R meeting when he’s been talking about the emotions you go through when you let an artist go. I think the period that we’re now in means that those people, whether they’re in the labels, or outside the labels, have got a role to play in this next chapter.”

Stuart Dredge

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