There’s an important debate raging within the music industry about freemium streaming – how well services like Spotify are converting free users to paying subscribers, and whether their models need to change in the future.
Music isn’t the only industry figuring out freemium, though. Cloud-storage and work-collaboration service Evernote is one of the examples elsewhere in the tech world that’s often held up as a good example of free driving subscription.
Evernote’s service is initially free, and that’s the tier that 95% of its users are on. That leaves 5% – up to 9m people – paying for its Plus (£19.99 a year) or Premium (£34.99 a year) tiers, which add more features and storage space.
Recently, Music Ally met Evernote’s CEO Phil Libin, and asked him about his company’s freemium model works, and specifically for his advice for the music industry.
“A few years ago, I would have said the first thing is to make finding what you want and paying for it a really easy experience. 10 years ago, the illegal music sites were just much better than the legal ones, but I think the music industry to some extent has fixed that,” he said.
“I don’t feel that anyone has a moral right to continue to make money in a certain industry. Maybe it’s possible that record labels cannot stay in business, because the world just no longer needs them. And if that’s the case, I’m not going to have nightmares about that: I don’t think that’s a horrible thing,” he continued.
“Not because I have anything against record labels: that’s just some abstract business model that somebody made, and maybe it’s just not relevant any more, so maybe it should just go away.”
He clarified that this wasn’t to suggest his desire for labels to die: more that they should be judged on their relevancy – survival in the modern music industry because they bring necessary value, rather than simply because they’ve been around for the rest of the recorded music industry’s history.
Libin added that he sees “Wikipedia math” at work in the music industry, as in so many other areas – said maths being the idea of 1% of users contributing 90% of the content, 9% contributing 10%, and the remaining 90% simply consuming it.
“It’s even more true in music. 1,000 years ago, what percentage of the music you would have heard came from the average musician – the averagely popular musician? it was 100%. A thousand years ago all the music you heard was whoever happened to be the most talented guy on the pan flute in your village, and that was it. So it was very evenly distributed,” he said.
“100 years ago, probably 90% of the music you heard came from the top 1%: they were the professional ‘orchestra musicians’ you could go and see, because you could travel a little bit further away. But now, probably 99% of the musical notes that enter your brain are performed by the 0.001% of the most popular musicians.”
“You’ve had this dramatic stratification, where a tiny number of people are producing the content that the vast majority of people hear. That’s the real reason why it’s harder for everyone else to make money. It’s not about ‘paying for music or getting it for free’. It’s about the fact that the vast majority of people no longer contribute anything productive to the music industry. And the same thing is going to happen everywhere.”
About that ‘paying for music or getting it for free’ thing, though. Libin has regularly talked about the idea of making Evernote’s basic tier so good that people want to pay for more features, rather than trying to nudge them into upgrades with restrictions and annoyances.
Is that something Spotify and its licensors can learn from? Before addressing that, Libin had a complaint. “There’s one thing that a lot of the music services do which i think is really wrong and weird: it’s the pay-to-remove-advertising model. I can’t understand what those meetings are like [to decide that strategy],” he said.
“I use Pandora: I pay for it, and I’m very happy with it. I can’t imagine how Pandora goes to advertisers and says ‘you should advertise on our network because we have high-quality users, and these are the demographics and they make this much money, and advertising in Pandora is the best representation for your brand, it will really make you seem high-quality!’ and then they go to users and go ‘pay us five bucks and we won’t subject you to this garbage!’”
“It’s incomprehensibly non-sustainable. You’re either massively disrespecting the advertisers, or you’re massively disrespecting the users. I really love Pandora, but I would NEVER advertise Evernote on Pandora. By definition why would we do that if they’re telling people that our brand is something that people should pay to get rid of?”
Libin said he’d be relaxed if he was presented with restrictions on a streaming music service – for example only being able to listen to songs a certain number of times for free – but outlined Evernote’s approach to upselling from free to paid.
“Of course, the paid version should be better than the free version to some extent, but how do you say what should be free and what should be paid – and what do you optimise for? For us, it’s very straightforward: we’re optimising for retention and for getting more users into it,” he said.
“Anything that improves retention or gets you to add more users ought to be free because it ought to go to the greatest number of people. Things that don’t do that – features that power users want – it’s okay to charge for those. But we’re not religious about that. We can shift features around all we want, as long as we’re clear about what we’re optimising for.”
Interesting, perhaps, in the light of Spotify’s moves to add shortform video to its service as part of the free tier – certainly something that could improve retention or attract new users if it’s done well.
“The goal of the free version of Evernote isn’t to get you to try it: it’s to get you to stay. And that only works for us because we have such good, long-term retention. If I was a video game that people download and only play for a couple of weeks, I look at you as a player and think ‘I only have a week to make money out of you’. Then the goal is to get you to pay,” said Libin.
“At Evernote, I look at you and think ‘well, I’ve got the rest of your life to make money from you’, so then the goal of the free version becomes ‘prolong the life, and maximise my opportunity to sell you other useful stuff later’. What we’re doing isn’t morally superior to what the video game is doing: it just happens to line up that way. But that’s because we spent a lot of time when we started the company lining it up like that.”
Evernote has made its own mistakes in freemium. Libin said that the company had traditionally thought of 5% of its users choosing to pay, and 95% choosing not to. Actually, as it turned out, many of that 95% hadn’t ever been asked to make that choice – they’d simply been using Evernote for free, and may not have even realised there were premium tiers.
“Only about 10% of our users have chosen not to pay us. 85% have never chosen: they’ve never been presented with a choice,” he said. “Most of them don’t even know there’s a decision to be made! And they certainly haven’t been asked to choose. So we said OK, as a first step, why don’t we ask everyone to choose: so they can choose the free version, but they do have to choose.”
Although Evernote had only been doing this for a few weeks when Music Ally met Libin, he claimed that early indications were that it could spark “potentially a long-term doubling of revenue” – which suggests perhaps another 5% of the company’s users chose to start paying.
“The psychology becomes really interesting. We’ve stopped saying upgrade or stay. Let’s say you’re doing something, and there’s a button that says ‘upgrade’. Sometimes you push it, but man, that seems like work. I can push that button and do something, or i can not do anything. Almost always I am going to choose not to do anything. I have more shit to worry about, why do I need to DO something?!” he said.
“So now, lets say you’re doing stuff and we pop up a message saying ‘hey would you like to upgrade?’ and I’m thinking ‘well, I can upgrade, which is a change, or I can stay the same, which is not a change. It’s easier to stay the same than change, so I’m gong to stay the same’. But what if instead of saying stay the same or upgrade, we say ‘choose free or choose paid’?”
“All of a sudden the psychology really changes. I have to order from a menu, I have to make a choice. I don’t have the option to NOT do anything. We’ve now made just as much cognitive load to choose to stay – to choose to use the free version – as it is to choose to use the paid version… Most people are still going to choose the one that costs $0, but radically more will choose to ‘pay’ than choose to ‘upgrade’.”
“Things like that make a huge difference in this model,” he continued. “More than I would have thought. It seems obvious, but it took a long time to have that kind of ‘aha’ moment… You have to make people understand that there is a choice: The fact that it took us eight years to realise that is kinda embarrassing, but most freemium companies are in the same fog as we were.”
For now, Libin remains a happy subscriber to Pandora, and is also using Spotify – despite resisting it for a long time on the grounds that he wasn’t keen on its social features.
“I do not want any of my friends or contacts to ever know what I’m listening to. I was afraid I’d leave some social feature turned on by mistake,” he said. “If I want to listen to the dwarves singing Misty Mountains from the Hobbit soundtrack for the 30th time in a day, no one needs to know about that. I don’t need to be judged about that!”