The following guest post comes from Martijn Tjho, CEO of Amsterdam-based digital distribution platform FUGA.
The platform has a number of big clients, including Ultra, Armada, and Black Hole Recordings. Tijho has candidly pointed us to a growing problem for Spotify: growing attrition among member labels, many of whom are quietly (and confidentially) leaving.
“While participating in a Panel Discussion during ADE [Amsterdam Dance Event] this year, seated next to Stuart Knight from Toolroom Records (a customer of FUGA). We discussed services like Spotify and praised them for their growth. Anticipating the ‘label’ business would grow at the same pace. However, over the last couple of weeks, I’ve seen a shift indicating it could be more complicated, causing me to re-evaluate my position on the subject or at least do more research.
The reason for my doubt is directly related to several requests from our labels to perform a ‘Take Down’ in FUGA. We use this feature in FUGA to remove our customer’s entire catalog or parts thereof from Digital Service Providers. The label executives (who shall remain nameless), mentioned that the reason for their take down directly corresponded to the lowering of revenues through iTunes and other a la carte services.
A couple of months ago, while in London I met with a former major label CEO and he told me that he thought “subscription services” are a bit like what book/music clubs were in the past, serving a particular niche. He believed that these services would eventually end up having a small, but important market share. At the time of our meeting, I told him I thought he was wrong and a bit old-fashioned in his thinking with regards to the digital music space. Most people who know me, know that I cannot hide my passion for digital music nor my frustration with Major record label executives. However, those people also know that when I’m wrong, I have no problem admitting it and in this instance, I may have been wrong in my judgment towards my ex-Major label exec friend. Actually glad that I paid for the coffee that day!
I still think it’s a bit too early to know for sure what is to come with regards to current developments, but definitely worthwhile to monitor closely. I’ll know better if I start to see other FUGA customers experiencing the same difficulties. Is more than just a growing pain? I don’t know yet, but I do know that either way, labels must begin to develop a product life-cycle strategy that is built around the release of a digital product, IMHO I think it should look something like this:
1. New Release Introduction
A new album, EP, track, bundle or whatever product configuration based on the artistic efforts of the musicians is introduced in the Marketplace, on a very exclusive basis in partnership with one or more Digital Music Services. In return the product is featured, advertised and a “buzz” is created for the right target audiences. This period is not aimed at profit and may even cause losses, but fully aimed at getting the right people to “hear” and “like” what is being released. From this point the “buzz” is created, with no guarantees of whether or not it will work, just the possibility that it may and if it does will generate a huge profit.
2. Sales Growth
The product distribution is ramped up, but still not available everywhere. Advertising/promotion efforts start to pay off and the products gain traction. As a result sales increase, the margins are still high (exclusive product) and the product becomes more and more popular as the demand grows.
This is the time when you can broaden distribution even more, ramp up promotion to the max and your product becomes fully established. At this stage competition of other products will become more fierce and pricing becomes an issue, margins get smaller, but volumes are higher, so there still is a good business.
Sales start to decline, as other products become more popular and saturation has taken place. This is the time to release the product on subscription based music services/clubs. Revenue and profits drop as a result of the low ARPL (Average Revenue Per Listener) advertising is only done on these services and the product becomes a true back catalog item. (This will be true if these streaming services actually cannibalize a la carte revenues).
5. Back Catalog Usage
Now it’s time to license your product or the individual tracks to compilation creators and other businesses aimed at (inexpensive) mass usage of your music. This is where the “long-tail” promise may materialize.
Unlike any other products, the music product life-cycle never really ends. Changes may occur as the urge to listen to a particular product or song slowly fades away, eventually being replaced by new music.
When people are in a certain mood or want to (re)create a mood, they usually want to listen to the same music again. By having a subscription to Rdio, Spotify or any other streaming service provider with the “we have everything” concept will allow that customer the ability to play that song over and over again in order to recreate that mood, earning money for the song owner(s) every time they do.
Is the industry still too fixated on unit sales and fear the shift to a model based on access? Are the streaming services indeed not more then a subscription club and should they be treated as such?
After speaking to a few of my other clients over the last couple of days on this subject, we all agree there is still a lot to learn. For instance, in the territories where Spotify has matured a bit more (like Sweden, for example), the revenue derived from Spotify is becoming extremely significant.
So on the one hand I have clients who believe Spotify is cannibalizing their iTunes and a la carte revenue; yet, on the other hand clients who also admit experiencing no downfall whatsoever in their iTunes sales. In some cases arguing that Spotify has actually boosted their iTunes sales substantially.
I guess in the end what is truly important when entering into unknown territory like the digital music space is that we share our experiences good or bad with each other. The beauty of the internet is that we can share information on a global scale and by doing so drive growth based on facts, instead of blocking growth based on fear.”