Hello, good evening and welcome. We’re at Universal Music UK’s headquarters for the label’s Investors’ Open Day, where the company and selected partners are talking about… well, all things digital music.
Read on for our ‘as-live’ report (i.e. we wrote it live during the event, and published as soon as it finished).
First up was Hugh Campbell, founding partner at investment banking firm GPBullhound. “To be honest, the investment community have had a pretty rough ride from investing in digital music,” he said.
“It’s irrationally seductive, because the business models of five or ten years ago were pretty poor. It’s taken time for those to improve… In digital music 1.0, from 2000 to 2007, investors lost a lot of money that they invested in digital music.”
But he said that investors are “starting to see the green shoots of success”, citing Pandora’s IPO, the global growth of Spotify and SoundHound’s recent monster investment round.
Next up was Alice Enders, founder of independent research and consultancy firm Enders Analysis, talking about where the value is in music. “That value has shifted away from the content itself to the technology, the layer, the user experience. And there have been some very important innovators in that space. Apple obviously, but Spotify, Deezer and so forth.”
She said Apple is the “outstanding winner in digital music”, innovating in software, hardware and its store. But she pointed out that music is less than 3% of Apple’s overall revenues. She said that with Google now entering the download space with Google Music, it’s much tougher for any startups with designs on getting into the downloads game.
How about streaming? Enders said that while raising funding for a new startup is achievable, getting the market entry strategy right is much harder – she cited Beyond Oblivion’s recent collapse as a case in point: the company has filed for bankruptcy protection, owing up to $500m to creditors.
“We’re told it had to put up about $200m in minimum guarantees, because naturally its business was new and different,” said Enders, although she noted that there are some recognisable digital music services that have not had to pay such onerous minimum guarantees.
Enders talked about the importance of smartphones for the growth of digital music, especially telecoms partnerships with mobile operators and handset makers.
She also talked about the success so far of personalised radio service Pandora, saying it benefited from being in the world’s biggest music market – the US – while also innovating in its software and mobile apps. It has also benefited from statutory royalty rates, although Enders noted this was a double-edged sword.
“Anyone can go and set up a webcasting service,” she said, before suggesting that Pandora still has a first mover’s advantage: the bigger it gets, the harder it is for another startup to steal its thunder.
Enders said that Europe is a much tougher nut to crack for a digital music service, given that it’s not one homogenous market like the US. “You have to take into account the complexity of so many different licensing regimes,” she said.
She also talked about Spotify’s success so far, citing the importance of its partnerships with telecoms operators like Telia in Sweden – with Deezer/Orange being another example. “You can’t really be thinking about a digital music service without thinking upfront about the partnerships you can conclude,” she said.
“The mobile data plan channel to market is a really powerful channel to market… They have scale, and you can pick up subscribers incredibly quickly. Deezer picked up a million subscribers in under a year in France thanks to the Orange partnership.”
She also pointed to the fact that telecoms partners like exclusivity: Spotify is exclusive to Telia in Sweden, and Deezer to Orange in France. Which opens up the chance for other digital music services to strike similar deals with other telecoms operators.
“Choose your market, choose your audience and choose your channels to market. Those are the key success factors,” said Enders, predicting that Germany will see a lot of activity with new services in 2012. “Almost too much activity!”
Over to Ken Parks, chief content officer at Spotify. “We say there are about half a billion people who listen to music online today… The vast majority of them don’t pay a thing for music. The opportunity there is enormous if you can just get it right.”
He pointed out that the average teenager would reply ‘no’ when asked if they would spend £10 a month for music, but after “a thousand hours on Spotify” they’d change their mind. “Out of the demographic that was buying very little or nothing in many cases – the 18-24 demographic – we’ve now grown 3m users who are paying for the service.”
Yes, Spotify now has three million paying subscribers, up from 2.5 million a month and a half ago.
Parks also addressed the current farrago about artists like Coldplay and Adele withholding albums from Spotify. Starting with a historical view. “When iTunes launched in 2003, it didn’t do so without controversy. There were a lot of high profile artists who were not thrilled with that particular model… Unbundling the album felt like the end of the world.”
Parks also said “there is not a molecule of evidence” to show that Spotify and other streaming services cannibalises downloads and physical album sales. He also claimed that withholding an album from Spotify does not mean it’s not available to stream – it may be on YouTube, which he said “does not monetise as well” as Spotify, or on Grooveshark, “which does not monetise at all.”
He concluded. “We think the best days of the record business are ahead. We think this opportunity to scale from three million to thirty, to a hundred, is here… Sure there was a rocky period for about a decade, but we strongly believe we have a model that can return health to the industry and in the meantime can happily co-exist with the other models out there.”
Finally, Luke Wood, CEO of headphones firm Beats by Dr Dre, although he worked for Universal Music Group for 20 years before that.
He said that there are two main factors in the rise of Beats: the way piracy “destroyed” audio quality – people with entire collections of 128kbps MP3 files downloaded from P2P services – and the explosion in the consumer electronics industry.
Not necessarily a good thing, in Wood’s opinion, citing the way TVs have been getting slimmer and sleeker for the last decade. “What was lost was sound,” he said. “As the edge got thinner, the speakers evolved away into nothing.”
Hence Beats, a partnership with hip-hop producer Dr Dre and music mogul Jimmy Iovine, which has so far sold almost 1.5m units of its first pair of audiophile headphones. It has since launched a succession of over-ear and in-ear headphones, taking an ever-larger share of the US headphones market.
“Consumers have responded,” he said. “We want to make sure what the artist makes in the studio is what you hear in your headphones.” The company has also got a response from artists, having partnered with Lady Gaga and Justin Bieber to make their own branded headphones.
A Q&A session now kicked in with Campbell, Wood, Parks and Universal Music’s Francis Keeling. Campbell was asked if there’s a danger of over-saturation in the digital music market: should the number of new services be limited?
“The consumer ultimately will make a choice. If you try to limit the number of services, you’re going to dramatically limit the innovation. We have to drive the innovation faster and faster, and get people to put more money in, particularly at the early seed stage.”
Parks chipped in with some thoughts on what makes a good digital music service. “The service that has the best chance of succeeding doesn’t try to change user behaviour, it looks at what users are doing and adapts to that.”
And too many services? “Simplicity is really important,” he said. “In order to explain the access model you have to have a simple proposition. Does that mean you can’t have more than one entrant into the market? No. We welcome that competition.”
Keeling said that services can grow very quickly, but they can also lose customers. “We’ve got more than 460 services in Europe, and since we did this event last year, we’ve licensed 58 new services… Consumers will ultimately decide which ones will be successful, and it’s up to the others to adapt quickly.”
Is that not just throwing lots of stuff at the wall to see what sticks? “We are going to license as much as we can,” he said. “What we do encourage them to do is not copy. Don’t do the same thing. You need to innovate, to find your own space, and let the consumers decide.”
Keeling also suggested that success comes from “how services present music, and how they talk about local content and local artists, and how they make recommendations… using technology to do that is what’s going to drive success.”
However, Campbell said he thinks users don’t care about technology – how Beats headphones are built or what’s powering Spotify. “They care about simplicity,” he said.
Keeling was asked about artist payouts. “The one thing that Spotify has taught us is the necessity to have a trial period to get consumers to experience these services and understand how good they are,” he said. “You invest time and build your playlists, and it’s at that time they think they might lose their playlists, or you give it to them on another device to take away with them, and that’s when they subscribe.”
Keeling also said that everyone in the value chain for music “needs to understand” that getting people from pirating music to paying for a subscription service inevitably means a period in the middle of getting a free (legal) service, which may not necessarily be paying rightsholders and artists as much as they’d like.
“The only way to get to that is all of us investing and taking a hit on the free services,” said Keeling – an argument that is doubtless being made by Spotify’s label backers/licensors to artists and managers who are sceptical about streaming.
The conversation moved onto Facebook. How important is it and other social networks to the digital music business at the moment. Have social networks replaced recommendation engines?
Parks said that Spotify’s Facebook partnership has been “great” – unsurprisingly. “We know that the way to get users to convert is not hitting them over the head with a stick,” he said. Instead it’s about getting them more engaged by music, with social sharing a key factor.
“We’ve found that users on Spotify who are Facebook connected, and exposing all their listening on the open graph on Facebook, are three times more likely to become paid users.”
He also said that artists whose music is on Spotify are benefiting from this: people see what tracks and artists their friends are playing, with a new layer provided by Spotify’s Apps platform – people may see that a friend is listening to artist X, play them, and if they have the Songkick app installed, they may then see that the artist is playing a gig, and buy a ticket.
His strong implication: artists who withhold their music from Spotify won’t be benefiting from this virality. Sceptics might argue that this doesn’t seem to be harming Coldplay and Adele too much, but the role Facebook might play in making artists more money from Spotify is a debate we’ll be hearing more about.
Where are the gaps in the market: where should investors be looking to fund new services and startups? Parks said that Spotify’s new Apps platform is set to flourish, as he would. But he also said “there’s a heck of a way to go on the recommendations side… there’s enormous room for recommendations. We think games and things like that are really just starting to leverage music in the way that they could”.
Games on Spotify’s Apps platform? One to watch.
Keeling agreed on the recommendations front: more services pushing to help people discover new music. Meanwhile, Campbell suggested the big opportunity is around radio. “Here is an industry that is absolutely asleep at the wheel. They don’t know what to do, and the big radio companies are petrified of being cannibalise by Spotify and Pandora, but they don’t know what to do about it.”
Over to questions from the audience. What about user-generated content: remixing, mash-ups, videos. Is that dead commercially as a model? Keeling said that there “aren’t that many services offering that kind of model”, but admitted that it can be complex on the rights side – a lot of artists don’t want “consumers” to remix their songs.
Another question, about artists and music services, referring to the recent Mega Song video with lots of artists endorsing MegaUpload, just weeks before it was shut down in the face of criminal charges for racketeering and copyright infringement. Is there a failure in getting artists to endorse legal services rather than something like MegaUpload?
“This is going to take time,” said Keeling. “If any of those artists had met Kim Dotcom or seen his residence or his lifestyle, I don’t think they would have endorsed it!” But he went on to say that artists who withhold their albums from Spotify are “alienating their fanbases”. Even though some of those artists are signed to Universal.
“The ownership model is an accident of history and technology,” added Parks, as the discussion moved on to access-based models like Spotify. “It just so happened that there was no other way for a consumer to access music than by owning a thing.”
What would the panel like to see Apple do in the next year or two with music? “Launch in new markets,” said Keeling. “The one thing Apple get right is their ability to market locally – they are always experts in the local market and local talent. We are encouraging them to launch in as many markets as possible.”
Wood said Apple has made “some of the best instruments to play back digital music, but where they have not done so well is focus on the earbud, so I would guess they would focus on that area.”
Campbell referred to the company’s latest quarterly results. “It would be great if we could see them starting to recycle some of that capital into some of what we’ve talked about today. They do not have an active investment arm… It would be great if we saw Apple start to contribute a bit more to all of the innovation rather than just picking up the best ones [startups] when they get to the top.”
And that was a wrap.
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