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Spotify and Monetizing What Can be Accessed for Free

September 2015 Pricing, Product

The music industry has struggled to find new ways of monetizing its offerings ever since illegal downloading took a strong bite out of CD sales. The ease of downloading was unmatched, and it was only the advent of Apple’s iTunes service that captured such convenience in a legal, paying form.

Spotify, a music streaming service, has demonstrated in the last several years that music ownership is not as important as it used to be. It currently boasts around 45 million free ad-supported subscriptions as well as 15 million premium subscribers. The premium level costs $10 a month, which gets you an ad-free and higher bitrate streaming experience.

While $10 a month for unlimited access seems paltry compared to $15 for a single CD, it has offset illegal downloading streaming services to represent a real win for the music industry. Subscription pricing has other benefits for the industry, such as lowering transaction costs, improving revenue forecasting, and increasing customer lock-in. Customers, on the other hand, enjoy fewer purchase decisions, access to an enormous selection, and ease of use. Clearly, Spotify has successfully segmented their customers and is able to capture different levels of revenue from each. People are willing to pay for music, if the product is right.

Google and Apple, among others, are getting in on the action too with their own streaming services. All are priced at around the same level, which suggests that the industry believes there is not much pricing wiggle room in the current market. At a certain level, the method of accessing a certain music track should be a commodity — it is the track that matters, not the delivery mechanism. Instead of differentiating on price, platforms are trying to do so with exclusive artist agreements and various extras for the consumer, as well as additional marketing support for the artist.

Streaming services receive criticism for paying out too little to the artist. In fact, they pay out a large portion of what they collect to the industry as a whole. An analysis by Techdirt shows that while the payouts are substantial, the majority is captured by traditional labels:

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The line between labels and content distributors, such as Spotify or Apple, is blurring. Many of the functions once provided by labels, such as distribution and marketing, are increasingly the purview of digital platforms. As artists sign exclusive agreements with certain companies, we see the battle for influence moving into the legal sphere as well, with platforms dictating how their artists can perform.

Categories are shifting, and services that used to be offered by one type of player are transitioning to others. A similar change is occurring in television and film. Netflix used to be simply a platform to distribute others’ video content, but now it has its own very successful production arm. The small screen used to be a clear second-class medium to film, but innovative content providers such as Netflix are attracting top-tier writers, directors, and actors, with the audience following in droves.

The music industry is changing in other ways, too. Whereas concerts used to be at best a break-even endeavor for most musicians, they are now one of the few green shoots. Ticket sales have been robust. Consumers are still willing to pay for the high quality sound and immersive experience that you can only get live. Therefore musicians and concert venues are still able to set a high price on live performances. To take advantage of this in-demand premium product, they must look for ways to differentiate even further the concert experience from the commoditization of streaming services.

By experimenting with opportunities such as interacting with the musician, social media tie-in, and special access to content post-concert, musicians can defend touring as a premium experience at a premium price. This lends itself to creative product and pricing structures that are best aligned with where customers see the most value. For example, some artists may not even need to keep releasing their music:

“Imagine for a moment that you’re Kanye West. For months, you’ve been working on your new album. Because you’re Kanye, you know that millions of people will want to hear your record as soon as it’s released. However, instead of just releasing your album via the traditional venues, you decide to take your master tapes out on the road and charge people $50 to hear your album in a large theater or arena.”

Granted, this may not be a possibility for many artists, but it is this type of experimentation and innovation that will lead the industry forward. Whether that includes labels or technology platforms depends on their ability to adapt to offering a good product at the right price. Such transitional times within an industry make it even more important to be customer-centric and creative with pricing structures to best address changing customer value.

What challenges to traditional structures is your industry facing? How best can you offer creative value propositions to existing customers in a changing landscape? Which segments may have been overlooked in the past but now could be a source of value?



About the author

Kyle Thompson-Westra is a Consultant at Wiglaf Pricing. His background includes digital strategy, marketing analytics, and international relations. He holds a BA from Tufts University and an MBA from DePaul University.

Kyle Thompson-Westra
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