Crossing The Chasm: Segmenting Demand, Optimising ‘Freemium’ and

Minimising the ‘Value Gap’

Robert Steven Hunt BA (Hons) Music Business and Innovation

Academy of Contemporary Music, University of Middlesex July 2015

Word Count: 6,236

 

ABSTRACT      This comprehensive mixed-method research study investigates the current music subscription marketplace, utilising interviews, conference observations and consumer surveys (n = 1,590) through a sequential triangulation research process. As the recorded music industry continues to transition from ownership to access, a cannibalisation of physical sales and digital downloads will continue to influence global recorded music industry revenues. However, in order to ensure a robust recorded music ecosystem and ‘cross the chasm’ to mainstream subscription adoption, results indicate that subscription services must minimise the ‘value’ gap between revenues generated by music subscribers and advertising-supported consumers. Results clearly suggest that a large segment of even the most ‘casual’ music listeners are willing to pay for music, demonstrating that the monetisation of the largest consumer demand segment remains underdeveloped. Ultimately, research indicates that subscription services should implement tiered price points differentiated by service features across all consumer demand segments.    

 

TABLE OF CONTENTS

 ABSTRACT   2  

TABLE OF CONTENTS   3  

LIST OF ILLUSTRATIONS   4  

ACKNOWLEDGEMENTS   5  

ABBREVIATIONS   6  

INTRODUCTION   8  

BACKGROUND   10  Literature Review   10  

Underlying Perceptions of Value   10  The ‘Freemium Wars’   10  Willingness to Pay   11  Elasticity   11  

Framework & Research Objectives   12  ‘The Chasm’   12  The ‘Value Gap’   13  

METHODOLOGY   14  Research Design Rationale   14  Sampling   14  Research Procedures   14  

Qualitative Methods   14  Quantitative Methods   15  

Data Analysis   15  

RESULTS   16  Sample Overview   16  Initial Findings   17  

Quantitative Results   17  Qualitative Results   19  

DISCUSSION   22  The ‘Freemium Wars’   22  Elasticity & Demand Segmentation   24  

‘The Mainstream Market’ vs. ‘The Early Market’   24  Average Revenue Per Subscriber vs. Average Revenue Per User   25  Telecommunications Bundling, Student Discounts and Family Subscriptions   26  

CONCLUSIONS   27  Limitations   28  Recommendation of Further Study   28  

REFERENCES   29  

APPENDICES   35  Appendix I: Streaming Pricing Strategy Is Out Of Step With Consumer Spending Patterns   35  Appendix II: Literature Review - Shifting Value Constructs   35  Appendix III: Literature Review – ‘The Freemium Wars’   36  Appendix IV: Literature Review - Willingness to Pay   36  Appendix V: Literature Review - British Music Rights, Monmouth University & WiMP Studies   36  Appendix VI: Elasticity and Music Subscription Services   37  Appendix VII: ‘The Chasm’ and Music Subscriptions   39  Appendix VIII: Semi-Structured Interview Questions & Transcripts   39  Appendix IX: MIDEM 2015 Observation Transcripts & Notes   43  Appendix X: Music Subscription Survey Questionnaire Design Issues   46  Appendix XI: Qualitative Survey Results Chart   47  Appendix XII: Quantitative Survey Results   47  Appendix XIII: Ad-Supported Limitations and Revenue Recovery (Spotify Revenues in Spain)   53  Appendix XIV: Sweden: The First Mature Streaming Market   54  Appendix XV: Digital Music Streaming and Downloading Revenue, year-on-year growth (%) 2014-2019   55  Appendix XVI: The Impact of ‘Telco’ Bundles and Family Subscriptions   55  Appendix XVII: Spotify Record December Growth Hints at Pricing Elasticity   56  Appendix XVIII: Spotify: Average Revenue Per Subscriber (ARPS)   56  

BIBLIOGRAPHY   57    

 

LIST OF ILLUSTRATIONS      Graphs, Charts & Illustrations:

Page Number(s):

Figure I: ‘The Chasm’ 12 Figure II: Age Distribution 16 Figure III: Consumption Categories - Male vs. Female 17 Figure IV: Consumption Rate vs. Willingness to Pay 18 Figure V: Age vs. Willingness To Pay 19 Figure VI: Current Pricing Strategy & Consumer Spending Patterns 35 Figures VII - X: David Touve Analysis (I) – (IV) 37-38 Figure XI: Alvarez & Marshal Study 38 Figure VII: Questionnaire Design Issue 46

Figures VIII - XXVIII: Quantitative Results (I) – (XVI) 47-52 Figures XXIX - XXX: Spotify Revenues in Spain (I) – (II) 53 Figures XXXI - XXXII: The First Mature Streaming Market (I) – (II) 54 Figure XXXIII: Streaming & Downloading Revenue (2014-2019) 55 Figure XXXIV: Spotify December Growth & Elasticity 56 Figure XXXV: Spotify Average Revenue Per Subscriber 56    

 

ACKNOWLEDGEMENTS  

I would like to take this opportunity to thank my wife Rebekah and my parents for their continued support. Thank you for always supporting me in the pursuit of my passions.

Without you, none of this would have been possible.

In addition, I would like to thank my dissertation supervisor Oliver Sussat and interviewees Simon Wheeler and Dick Huey.

 

ABBREVIATIONS  

Advertising-Supported Ad-Supported Average Revenue Per Subscriber ARPS Average Revenue Per User ARPU Compact Disc CD International Federation of the Phonographic Industry IFPI Peer-to-Peer P2P Price Waterhouse Cooper PWC Telecommunications Company ‘Telco’ Willingness to Pay WTP

 

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INTRODUCTION Global recorded music revenues continue to fall year on year, from $26.6bn at the height of

the recorded music industry in 1999, to $14.97bn in 2014 (Ingham, 2015a). Driven largely by

underlying technologically and socially deterministic factors, the recorded music industry

continues to shift from high value, low volume purchasing, to low value high volume

accessing (Wheeler, 2015). Moreover, a number of advertising supported (ad-supported)

listening services continue to operate in the streaming marketplace, providing consumers with

free on-demand consumption alternatives, subsequently turning recorded music purchasing

into a lifestyle choice (Mulligan, 2015a). As such, recorded music has, for many artists,

become a loss leader for alternative and profitable revenue streams, leading to the constantly

and publically debated low royalty payments received by record labels and artists, most

notably, Taylor Swift (Resnikoff 2013; Ellis-Petersen 2014; McAlevey 2014; Mulligan

2015b). However, a significant moment for the recorded music industry may be on the

horizon, with shifting consumption patterns and the continued adoption of streaming services

leading to a potential ‘tipping point’ (Gladwell 2001; Morris 2015).

While streaming giants SoundCloud have recently announced tiered subscription plans,

existing standalone music subscription services such as Spotify, Deezer, Rdio and Tidal are

preparing themselves for two heavyweight entrants (Kaye, 2015). As Google betas the

unreleased YouTube Music Key subscription service, Apple has recently launched the

‘mainstream friendly’ Apple Music service (Regnier 2015; Schneider 2015). Although the

marketplace remains volatile, streaming clearly is the future of music consumption, as

consumer preference continues to shift from ownership to access (Moore 2015; as cited by

IFPI 2015a, p. 5).

Subscription services have continued to consciously prioritise user-base and market share

growth over profitability (McAlevey, 2014). However, scale necessitates heightened

revenues. As ‘music aficionado’ consumption methods shift from the purchasing of physical

formats and digital downloads to ad-supported and subscription streaming, a cannibalisation

of recorded music revenues will continue to occur on a global scale (Mulligan, 2015b). While

the impact of transitioning consumer preference has significantly altered the recorded music

industry landscape, a 2014 study conducted by Midia Research (2014a) indicates only 15% of

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music streamers reported using a subscription service, illustrating that the majority of music

streaming consumption is happening on free ad-supported services such as YouTube (Kafka,

2014). More importantly, the study finds that 22% of music streamers reported a willingness

to pay (WTP) for a music subscription service at £9.99 a month, highlighting the two most

significant issues facing the recorded music industry of the future (Midia Research, 2014b).

First, the existence of free ad-supported services, most notably YouTube, continues to satisfy

the majority of mainstream music listeners, leading to a decreased WTP for premium music

subscriptions. Second, while the decline of digital download and physical sales should slow

following the initial migration of ‘music aficionados’ from ownership to access, the

underlying necessity for the ‘casual’ and ‘passive’ music consumer market to adopt premium

music subscriptions for £9.99 a month remains limited.

In 1999, the average global spend on recorded music was $64 annually, during the height of

the compact-disc (CD) era (Pakman, 2014). However, this figure drops substantially when

non-music consumers are taken into consideration, to an average spend of just $28 (Pakman,

2014). Fast forward to 2015, and music subscription services such as Spotify, Deezer, and the

recently launched Apple Music, are charging a staggering $120 for consumers to access

music annually, double the average spend of music consumers at the height of the recorded

music industry. According to former Spotify vice-president Faisal Galaria (2014, as cited by

Cookson, 2014), “people will pay for streaming music, but at the moment they’re being given

a choice between £120, or free, so most people are choosing free”. Whilst £9.99 may be

viewed as an unbeatable offering for ‘music aficionados’ and active music consumers, current

music subscription price points do not adequately incentivise lower segments of consumer

demand, subsequently encouraging the mainstream and ‘casual’ music listener to adopt free,

ad-supported consumption methods (Galaria 2014, as cited by Cookson 2014; Maples, 2015;

Mulligan, 2014) (See Appendix I).

       

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BACKGROUND Literature Review

Underlying Perceptions of Value  While piracy and peer-to-peer (P2P) file-sharing services will not be discussed in detail in this

study, it is important to highlight the significant impact of these services on underlying

consumer perceptions of value (See Appendix II). According to Styven (2010), value

attributed to digital music does not match the heightened value consumer’s place on physical

formats. Moreover, the proliferation of digital services has altered traditional exchange

values that underpinned the music industry in the CD era, whereby one value unit was

exchanged for another (Bagozzi 1975; as cited by Parry et al. 2012: p.2). For more

information on altered value constructs, see Appendix II.

The ‘Freemium Wars’

In 2005, futurists and industry commentators Gerd Leonhard and David Kusek (pp.1-19)

famously coined the phrase ‘music like water’, relating ‘always on’ music and media and the

future of music consumption to common monthly utilities. However, in 2003, Zhu and

MacQuarrie (pp.264-269) preceded the ‘music like water’ theory, as the authors identified the

opportunities and potential of large bundling in relation to the ‘highly heterogeneous demand’

of recorded music. Whilst Zhu and MacQuarrie (2003; pp. 264-269) were clearly referencing

digital downloads, the ability to maximise revenues by targeting a large variety of consumer

demand levels applies directly to ‘freemium’ models today. For more information, see

Appendix III.

Unlimited ad-supported services such as Spotify continue to come under fire from rights

holders, however, as Waelbroeck (2013; pp.1-20) acknowledges, the most successful business

models address a wide spectrum of demand segments, including consumers with a

significantly low WTP for music. As the ‘freemium wars’ rage on, a Papies et al. (2011)

study highlighted a significant issue facing the recorded music industry. While ad-supported

services have the ability to monetise consumers that do not participate in commercial

downloading, the current market pricing of music subscription services remains unattractive

to the majority of consumers (Papies et al. 2011).

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Willingness to Pay According to a Lin et al. (2013) study, underlying ‘free mentality’ is projected onto online

services and results in a lowered WTP. In addition, Lin et al. (2013, p.329) urge online music

services to suppress the consumer’s ‘free mentality’ by ‘reducing direct costs’ and ‘cultivating

an online community’. Similarly, Oestreicher-Singer and Zalmanson (2013; pp.591-616)

identified a strong association between heightened community participation and the WTP for

a premium service. Ultimately, the authors claim that ‘freemium’ services must implement a

segmentation scheme maximising social functionality, heightening perceptions of value whilst

encouraging users to ‘climb the ladder of participation’ (Oestreicher-Singer and Zalmanson

2013; pp.591-616). For further information on WTP, see Appendix IV & the ‘discussion’

section of this paper. While existing literature highlights a wide range of variables influencing

consumer WTP for premium music services, studies relating to the consumer’s WTP for a

service that can be accessed for free remain limited (See Appendix V).

Elasticity  A significant number of studies indicate a substantial increase in quantity demanded at a

lowered price point, illustrating the elastic nature of subscription services (Touve 2011, 2015;

Alvarez & Marsal 2014 as cited by Pakinkis 2014; Bloom.fm 2013 as cited by Resnikoff

2014; Harris Interactive 2013 as cited by Resnikoff 2014) (See Appendix VI). However,

Economist David Touve’s (2011; 2015) analyses of a New Media Age study, provides the

most conclusive evidence of a heightened consumer demand at a lowered price point. For

more information, see Appendix VI and the ‘discussion’ section of this paper.

In summary, the proliferation of digital music has altered consumer value constructs,

underpinned by the shift from product to service and ownership to access, however, an

underlying WTP for digitalised music remains. As the emergence of free music consumption

methods continue to influence year-on-year recorded music revenue decline, music

subscription services provide consumers with two main offerings: listen to music for free on

ad-supported services, or adopt paid subscription for a substantial annual fee of £120. While

existing literature indicates that a decrease in price would lead to a significant increase in

revenues, it remains to be seen if a reduced monthly price point would outweigh the

attractiveness of free ad-supported consumption methods to ‘mainstream’ and ‘casual’ music

consumers.

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Framework & Research Objectives ‘The Chasm’ In 1991, author Geoffrey Moore (xi) aptly named “the gulf between two distinct marketplaces

for technology products,” or the moment between early and mainstream adoption, as ‘the

chasm’. Figure I illustrates ‘the chasm’, heralded by Moore (1991) as the most significant

obstacle facing new businesses and new technologies. According to the author: “The first, an early market dominated by early adopters and insiders who are quick to appreciate the nature and benefits of new development, and the second a mainstream market representing ‘the rest of us’, people who want the benefits of new technology but who do not want to ‘experience’ it in all its gory details” (Moore, 1991; xi).

These characteristics can be directly applied to the challenges facing the music industry,

notably, the emergence of music subscription services (See Appendix VII). Figure I: ‘The Chasm’

Source: Moore, G. (2015) Crossing The Chasm: Marketing And Selling High-Tech Products To Mainstream Customers. In: Huey, D (2015a) Building A Bigger Boat: Per-User Streaming And Selling To The Edges. [Midem Conference 2015]. 7th June 2015. As Figure I clearly illustrates, if streaming and subscription services can successfully traverse

‘the chasm’ and reach the ‘mainstream market’, a significantly larger market awaits (Moore

1991, as cited by Huey, 2015a).

   

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The ‘Value Gap’  According to IFPI (2015a; p.23) estimates, 41 million paying subscribers and over 100

million ad-supported ‘freemium’ users generated $1.6 billion in record label revenues in

2014. However, while adoption and consumption of streaming continues to grow year-on-

year, overall streaming revenues account for just 15% of global recorded music revenues

(IFPI 2015a: p.23; Ingham 2015a). As YouTube alone continues to claim over one billion

unique monthly users, and on-demand ad-supported listening services dominate music

consumption and discovery methods, a significant ‘value gap’ becomes apparent, with free

ad-supported listening generating less than half of their subscription counterparts in revenues

due to licensing imbalances (IFPI, 2015a: p.23).

While the licensing agreements surrounding YouTube and other ‘neutral hosting services’

will not be discussed in detail within this paper, the significant difference in average revenue

per user (ARPU) between ad-supported listeners and paying subscribers on ‘freemium’

services will be scrutinised in order to unequivocally address the internal ‘value gap’ existing

within subscription services (Ingham, 2015b; 2015c). As ‘music aficionados’ move to adopt

premium music subscriptions, physical sales and digital downloads will continue to decline

(Mulligan, 2015a). As such, it becomes increasingly important for the recorded music

industry to maximise the revenues from the growing streaming sector. ‘Freemium’ services

must ‘cross the chasm’ to the mainstream marketplace by incentivising ad-supported

consumers to adopt paid subscriptions. The primary focus of this study investigates two central questions: I. Are music subscription services adequately monetising the ‘casual’ music listener? II. Are ‘casual’ ad-supported music consumers willing to pay for services that can be accessed for free?

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METHODOLOGY Research Design Rationale

 Initially, qualitative semi-structured interviews and observations from the 2015 Midem

conferences were considered. While the qualitative methods produced valuable results, the

research design was reconfigured, and a sequential data gathering method was implemented

in order to retrieve quantitative data further illustrating consumer preferences, perceptions of

value, and variables affecting WTP for subscription services (Creswell, 2009: p.110).

Moreover, a mixed method approach and the sequential triangulation of qualitative responses

and quantitative data provided a comprehensive analysis of the complex research question

(Creswell, 2009: p.115).

Online survey methods generate heightened response rates whilst providing a cost and time

effective solution to sampling issues (Rosenbaum and Lidz 2007). Furthermore, online

surveying tools have significant advantages ranging from automated data collection to ease of

participation. Moreover, decreasing social desirability bias by providing anonymity and

privacy were significant factors in the decision to utilise online surveying methods (Bryman,

2008).

Sampling  Preferable probability-sampling methods were unattainable due to lack of resources and time

limitations. Instead, convenience-sampling methods were utilised in both the qualitative

semi-structured interviews and conference observations and the quantitative survey research

methods in order to achieve a desirable sample size (Davies, 2007). While this non-

probability sampling method provided an entirely voluntary and larger sample size, it is

important to acknowledge the limitations of the study and report that the resulting data should

be applied to the wider population cautiously (Davies, 2007).

Research Procedures Qualitative Methods Initially, email and Twitter were used to target potential interview candidates. While a

significant candidate list was compiled, ultimately separate individual interviews with Simon

Wheeler, Director of Strategy at Beggars Group, and Dick Huey, Founder of Toolshed Inc.,

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were conducted and recorded on June 7th 2015, during the Midem conferences (See Appendix

VIII). Six questions were prepared, however due to the semi-structured nature, deviations and

time restrictions altered the qualitative research design (See Appendix VIII). Coupled with

recorded Midem presentations from key industry commentators and leaders Alexander Ljung,

Mark Mulligan, Vania Schlogel, Doug Morris, Hans-Holger Albrecht and Ty Roberts, the

semi-structured interviews and observations provided a valuable industry-focused framework

from which to develop consumer-focused survey questionnaires (See Appendix IX).

Quantitative Methods  The initial ‘Music Subscription Services’ survey was administered on June 21st 2015, using

the popular online service SurveyMonkey. The survey invitation link was posted across

social networks Facebook and Twitter, and online community and ‘bulletin board system’

Reddit. Ultimately, this pilot survey was designed to gauge response methods and rates, and

trial the overall questionnaire design. As a result of the significant response rates recorded

with invitation links on Reddit subcategories r/samplesize, r/music and r/letstalkmusic,

Facebook and Twitter were disregarded as invitation platforms, and the subsequent survey

was conducted solely on the aforementioned Reddit subcategories. The initial pilot survey

produced significant response rates, reporting 999 unique participants, however, the survey

highlighted a significant questionnaire design issue (See Appendix X). The subsequent

‘Music Subscription Services: Why Don’t You Pay?’ survey was administered on Google

Forms on June 22nd 2015 as a result of SurveyMonkey participation limits, and closed on June

23rd 2015, when the target of 1,000 unique participants was reached. Ultimately, 409

participants from the initial survey identifying as music subscribers were excluded from the

final sample size of N=1,590 unique and anonymous ad-supported streaming users.

Data Analysis  As part of the subsequent triangulation and mixed method approach, qualitative research

results were utilised in an attempt to target and identify a valuable subset of industry issues

relating directly to the overarching research questions and objectives. In addition, the semi-

structured interviews and conference observation results were formulated into a chart in order

to analyse the data for key concepts and common trends (See Appendix XI). Moreover,

individual quantitative data sets were broken down and examined using filtering systems

within ‘Survey Monkey’ and ‘Google Sheets’ respectively, leading to the creation of a

number of charts and graphs (See Appendix XII).

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RESULTS  

Initially, the sample overview section provides a general summary of the sample size

(N=1,590). Following this overview, data findings and results will be discussed and analysed,

providing a further comparison between resulting qualitative research, previously discussed

existing literature, and a wider range of current industry trends and topics.

Sample Overview Overall, 2,030 individuals participated in the questionnaires. However, following the removal

of the 409 participants identifying as music subscribers and subsequent data cleansing, 31

additional incomplete responses were removed from the sample size, leaving a total sample

size of N=1,590 unique participants. While participant location remained anonymous, the

sample size consisted of 72.6% males and 27.4% females. Figure II illustrates the

distribution of age, ranging from under 17 to over 60. More importantly, nearly half of

respondents (48.7%) reported listening to 0-1 hours of music on a daily basis, indicating a

sample size consisting of a large number of ‘casual’ or ‘passive’ music consumers. Figure III

highlights heightened streaming service usage amongst males across all consumption

categories, with the exception of the 4 to 5 hour consumption tier.

Figure II: Age Distribution (N=1,590)

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Figure III: Consumption Categories: Male vs. Female (N=1,590)

Importantly, Figure III demonstrates that nearly half of respondents, both male (48.8%) and

female (48.4%), reported listening to 0-1 hours of music on a daily basis, indicating a sample

size consisting of a large number of ‘casual’ music consumers.

Initial Findings Quantitative Results Ad-Supported vs. Pricing  Data analysis reveals that 51.8% of participants choose not to pay for a music subscription

service due to the presence of ‘free’ ad-supported models of consumption. However, the

remaining 48.2% of participants identified the high monthly price point (£9.99) as the

fundamental reason behind continued ad-supported consumption.

Additional Content vs. Pricing  Further analysis indicates 3.6% of participants would switch from ad-supported consumption

to paid subscription if subscription services improved their service offerings (video,

photography, live streaming, heightened artist to fan engagement, improved social and

shareable content). While 19.4% of the ad-supported users claimed that improved offerings

would potentially influence a decision to switch to paid subscription, an overwhelming 77%

of participants indicated that added content would have no impact on their willingness to

adopt paid subscription. Conversely, when referencing perceptions of value in terms of

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pricing, 43.2% of the ad-supported users surveyed indicated pricing would have no affect on

their WTP. However, 56.8% of participants acknowledged that a decrease in monthly pricing

would directly influence their decision to switch from ad-supported users to paying

subscribers. Coupled with the previous and nearly proportional (48.2%) response rate

revealing pricing as the primary reason behind continued ad-supported consumption, the

result suggests a significant segment of ad-supported consumers would switch to paid tiers for

a reduced monthly price point. Moreover, as 77% of the ad-supported users definitively

disregarded additional features and content as a consumption-altering variable, the research

clearly identifies pricing as the leading influencer of increased WTP for music subscription

services amongst ‘casual’ ad-supported listeners.

Consumption Rate vs. Willingness to Pay

Quantitative data was utilised in order to determine the relationships between consumption

rates and WTP. While consumers reporting an average of two to three hours of music

listening per day ultimately demonstrated the highest WTP at 65.3%, Figure IV illustrates a

significant finding, as 49.5% of the most ‘casual’ music listeners indicated a WTP for music

subscription service at a lowered price point. While this subset of passive ad-supported users

demonstrated the highest levels of apathy towards the alteration of personal consumption

methods, the research pertinently identifies that a substantial percentage of the most passive

music consumers are willing to adopt paid subscription models.

Figure IV: Consumption Rate vs. Willingness to Pay (N=1,590)

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Age vs. Willingness to Pay  Research indicates that 58.2% of 21-29 year olds would potentially adopt paid subscriptions

at a lower price point, followed closely by 30-39 year olds (57.1%) and participants 20 or

younger (56.8%). However, the research also identifies lowered levels of WTP for music

subscription services for participants over forty, with 49.3% of 40-49 year olds and 47.8% of

participants 50 or older reporting a WTP (see Figure V).

Figure V: Age vs. Willingness To Pay (N=1,590)

 

Qualitative Results

Educating the ‘Mainstream Market’  According to Wheeler,

“I think it’s just really hard for people to put their money down on the table for anything, whether that is music or anything else… there is a real battle in terms of marketing and educating the subscription model. Spotify has advertised their product as part of ‘telco’ bundling, but I do not think they have really educated the masses” (Wheeler, 2015).

In addition, the education process, largely driven by Apple’s entrance into the marketplace, is

“the beginning of an amazing moment for our industry” claims Sony Music Entertainment

CEO Doug Morris (2015). Moreover, as Albrecht (2015) noted, Apple’s entrance solidifies

streaming as the preferred consumption method of the future, Ljung (2015), Morris (2015)

and Wheeler (2015) highlighted Apple’s ability to advertise streaming to the mainstream

market. While Apple’s entrance may boost mainstream music streaming adoption, Wheeler

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(2015) states, “the potential is now converting the real casual music users into paying

subscribers”, further demonstrating the importance and potential of minimising ‘the value

gap’.

Monetisation Issues  Wheeler (2015) specifically identified the growing impact of streaming to record label

revenues, however, each interview and observation process commonly highlighted streaming

as the most important revenue stream for the future of the recorded music industry globally

(See Appendix VIII, IX & XI). Although Wheeler (2015) remains optimistic about the future

of the ‘freemium’ model, the Beggars Group executive cited YouTube’s unlimited on-demand

servicing and lack of effort to convert free users to paying monthly subscribers as a

significant challenge for subscription services charging £9.99 a month. Throughout the

research observations, YouTube and alternative free ad-supported services were commonly

heralded as the significant obstacle to mainstream subscription adoption.

The ‘Freemium Wars’  Huey (2015b) Mulligan (2015a), Albrecht (2015), Morris (2015) and Roberts (2015) all

directly identified the streaming giant as an obstacle to music subscription providers and

weighed in on the current ‘freemium wars’ debate by declaring their continued support for

free ad-supported tiers, provided they are utilised as a promotion tool instead of an on-

demand platform. While SoundCloud Founder Alexander Ljung (2015) claimed, “I am not

choosing ad-supported or subscription, I’m choosing both of them, because music is for

everyone”, specifically, Albrecht (2015) and Huey (2015b) warned of the damaging effect the

removal of ad-supported streaming tiers from ‘freemium’ services would have on the

recorded music industry. Shortly after confirming the recent deal with global music rights

agency Merlin, SoundCloud Founder Alexander Ljung (2015) further elaborated on the

platform’s move into the ‘freemium’ sector, and discussed in detail, the undeveloped

marketplace for ‘freemium’ services offering diverse and dynamic tiers driven by consumer

demand segments. According to Ljung:

“Instead of having a debate around advertising vs. subscription, the big question for the music industry is: how do you segment the market into the right place?” (Ljung, 2015).

Ljung highlights the importance of optimising ‘freemium’ models, across all segments of

demand, from ad-supported users to the most active music aficionados, a stance echoed by a

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number of the industry leaders and commentators (Albrecht 2015; Huey 2015b; Mulligan

2015a; Roberts 2015; Schlogel 2015).

Demand Segmentation  Continually, industry leaders referenced student discounts, family subscriptions and

telecommunication (‘telco’) bundling as successful conversion tools (Albrecht 2015; Huey

2015b; Wheeler 2015). In reference to a lowered monthly price point, Wheeler (2015) stated,

“the offering of £9.99 for the world’s music cannot be improved”, however Albrecht (2015),

Huey (2015b), Ljung (2015) and Schlogel (2015) openly acknowledged the potential of

optimised pricing and demand segmentation, with Huey (2015b) specifically citing

subscription service Rdio’s introduction of an ‘intermediate’ tier (£3.99/month) as a step in

the right direction.

At the other end of the spectrum, Mulligan (2015a) continually heralded add-on ‘music

aficionado spending’ as a key aspect of revenue maximisation in ‘freemium’ services.

Similarly, Roberts (2015) identified the potential of an “enhanced set of offerings for the

super-fan”, highlighting photography, exclusive and live tracks, hi-fi audio, and ultimately the

artist-fan relationship as strategies encouraging heightened ‘super-fan’ spending on

‘freemium’ services. Whilst Mulligan (2015a) and Roberts (2015) acknowledged ‘freemium’

optimisation through add-on servicing, Huey (2015b) specifically identified the need for

services to incorporate interfaces with compelling social features, promoting the shareable

nature of music content.

Overall, industry-focused qualitative research exposed additional underlying topics

necessitating further investigation. As ad-supported streaming continues to come under fire

from rights holders, the qualitative processes commonly reported the continued importance of

ad-supported tiers, the potential of demand segmentation and optimised ‘freemium’ as key

factors in minimising the ‘value gap’ as the music industry continues to educate the

mainstream on the benefits of music streaming and subscription services (Albrecht 2015;

Huey 2015b; Ljung 2015; Morris 2015; Mulligan 2015a; Roberts 2015; Schlogel 2015;

Wheeler 2015).

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DISCUSSION The ‘Freemium Wars’

The majority of the major music subscription services offer limited trial periods; however,

Spotify, Rdio and more recently, Google Play continue to provide unlimited ad-supported

tiers (Mitroff 2015; Houghton 2015). While the aforementioned Wagner et al. (2012; 2013)

studies conclude that services should implement a time-limited free option, Waelbroeck

(2013; pp.1-20) clearly argues that successful ‘freemium’ business models must find ways to

service a wide range of demand segments, even those with the lowest WTP, a stance echoed

by the qualitative results of this study (Albrecht 2015; Huey 2015b; Ljung 2015; Morris 2015;

Mulligan 2015a; Roberts 2015; Schlogel 2015; Wheeler 2015) (See Appendix VIII, IX & XI).

In April 2011, Spotify placed a number of limitations on free ad-supported listening in

Finland, Norway, Sweden, the Netherlands and Spain at the request of rights holders (Pope,

2015). Ultimately, it proved to be a disastrous move, resulting in a serious revenue drop,

particularly the Spanish territory, where consumers are not accustomed to subscription

payments, once again illustrating the importance of music subscription education (Pope 2015;

Morris 2015; Wheeler 2015) (See Appendix XIII). Revenues returned to growth following a

twelve-month recovery period, however this remains a valuable lesson for rights holders

currently fighting for limited free tiers (Dredge 2015a; Pope 2015).

No relationship can be identified between the quantitative research results and the Wagner et

al. (2012; pp.2928-2937) findings, whereby continued ad-supported consumption leads to

decreased WTP for premium services (Albrecht 2015; Morris 2015). While consumer

perceptions of value have been altered by the dematerialisation of music; instead of limiting

ad-supported consumption, research indicates that ‘freemium’ services must suppress ‘free

mentality’ by sufficiently differentiating ad-supported tiers and premium service features,

reducing ‘direct costs’ and incentivising the consumer to ‘climb the ladder of participation’

(Styven 2010; Lin et al. 2013; Oestreicher-Singer and Zalmanson 2013; Wagner et al. 2013;

Dredge 2015a; Pope, 2015).

Free consumption methods such as YouTube will continue to exist, and inevitably, consumers

will choose to utilise these services. However, according to Huey (2015b), the key to a

healthy and robust recorded music ecosystem is minimising the attractiveness of these

  23  

services by providing the “licensing ability and the framework so that services like Spotify

can go out and attract these consumers”. Rights holders cannot be short sighted, instead they

must recognise that ad-supported tiers provide revenue that simply did not exist before

(Albrecht 2015; Pope 2015). Currently, YouTube remains the largest and most used

streaming service, offering consumers unlimited, on-demand music for free (Mulligan 2015a;

Wheeler 2015). Until Apple proves otherwise, or licensing agreements level the playing field,

music subscription services must maintain on-demand and unlimited ad-supported tiers,

matching YouTube’s offering, encouraging ‘value through usage’ and a ‘mainstream market’

migration from the low royalty generating video-based streaming services to the heightened

royalty paying ‘freemium’ music services (Dredge, 2015c; Spotify 2013).

Importantly, Morris (2015) heralded Sweden’s market growth and the mainstream adoption of

‘freemium’ services as a benchmark for the future. Driven largely by ‘telco’ bundling and the

entrance of Swedish platform Spotify in 2008, recorded music revenue reached a significant

$194.2 million in 2013, higher revenues than the country had seen in over eight years (IFPI,

2015b; Ingham, 2015d) (See Appendix XIV). In 2014, streaming revenues accounted for 80%

of overall recorded music revenues in the worlds first ‘mature streaming market’, highlighting

two significant findings (Morris, 2015). First, universal streaming adoption can provide

sustainable revenues through download and physical cannibalisation. Second, ‘freemium’

models utilising unlimited ad-supported tiers have the ability to provide substantial revenue

growth if the service manages to ‘cross the chasm’ and achieve mainstream adoption.

Ultimately, through research it becomes clear that ad-supported tiers are an integral part of

consumer education and conversion to premium services. As rights holders continue to

question the on-demand nature of ad-supported listening, a number of industry leaders and

commentators have echoed a stance highlighted by the qualitative results of this study;

simply, free tiers must continue to exist in music subscription models, however services must

work harder to differentiate premium subscription offerings from ad-supported tiers (Albrecht

2015; Cooper 2015 as cited by Dredge 2015b; Cooper 2015 as cited by Ingham 2015f; Huey

2015b; Ljung 2015; Mills 2015 as cited by Ingham 2015f; Mulligan 2015a; Pope 2015;

Roberts 2015; Wells 2015 as cited by Ingham 2015g; Wheeler 2015).

  24  

Elasticity & Demand Segmentation ‘The Mainstream Market’ vs. ‘The Early Market’  According to Mulligan (2015c), a significant obstacle facing subscription services is the

impending ‘demand ceiling’ for their niche products aimed at music aficionados.

Furthermore, Mulligan (2015c) claims the issue lies not with the business model, but that

premium subscription value-propositions are not built for mass-market adoption. In order to

‘cross the chasm’ to mainstream adoption, subscription services must adjust their value

proposition by lowering their price points and adopt tiered price points based on demand

segments and pay as you go payment systems (Mulligan, 2014). Mulligan (2014; 2015a;

2015b; 2015c), a consistent advocate for the lowering of subscription price points and tiered

pricing, is not alone. In the aforementioned study conducted by Touve (2011; 2015), the

economist demonstrated that a 50% decrease in subscription pricing would result in a 400%

revenue increase, suggesting significant price elasticity, a topic that has been heavily

supported by entrepreneur and venture capitalist David Pakman (2010) (See Appendix V).

According to Touve (2011; 2015), a £3.99 price point would increase revenues nearly ten-

fold, while increasing quantity of demand by 300%, illustrating that “maximising the total

value of music could mean significantly lowering prices” (See Appendix V). Touve’s (2011,

2015) results correlate with a number of other studies, whereby a decrease in pricing leads to

substantial demand and revenue increases (Alvarez & Marsal 2014 as cited by Pakinkis 2014;

Bloom.fm 2013 as cited by Resnikoff 2014; Harris Interactive 2013 as cited by Resnikoff

2014) (See Appendix V). Although this study does not address specific pricing and quantity

demanded, 56.8% of participants indicated a WTP for a lowered price point, demonstrating a

correlation between existing findings and the quantitative research results (Touve 2011,

2015; Alvarez & Marsal 2014 as cited by Pakinkis 2014; Bloom.fm 2013 as cited by

Resnikoff 2014; Harris Interactive 2013 as cited by Resnikoff 2014). In addition, results

indicate that instead of continuing ad-supported consumption, a significant percentage of

‘casual’ consumers (48.2%) would prefer to adopt paid subscriptions, however high monthly

price points remain the key obstacle.

Quantitative data suggests that added service features are not of interest to a significant

portion of ‘passive’ listeners, with 77% of participants reporting no interest in these

‘enhanced offerings’. The results of this study correlate directly with existing literature,

indicating that mainstream music consumers’ initial perceptions of value are highly

  25  

influenced by price (Wagner et al. 2013; pp.1-8). In addition, whilst a relationship between

the quantitative results of this study and existing literature cannot be seen, qualitative results

clearly correlate with existing literature, illustrating enhanced social and community

participation as a key value proposition for music consumers (Moore 1991; Lee et al. 2013;

Lin et al. 2013; Oestreicher-Singer and Zalmanson 2013; Huey 2015b; Mulligan 2015a).

Moreover, until the recent introduction of Apple Music’s social ‘Connect’ feature, consumers

have been unable to attribute value to increased social participation within ‘freemium’ music

services (Parry et al. 2012; Rogers, 2015) (See Appendix II).

It is important to note however, that these perceptions of value may not apply to ‘early

adopters’ and ‘music aficionados’, as the opportunity for ‘freemium’ services to target ‘music

aficionados’ and ‘super fans’ through the incorporation of additional recorded-music-related

offerings has been widely identified as a potential revenue stream for music subscription

platforms (Mulligan 2015a; Roberts 2015). While Zhu and MacQuarrie (2003; pp.264-269)

identified the difficulty to justify add-on purchasing, qualitative results indicate that

subscription services should seek to remove the current ‘cap’ placed on ‘music aficionado

spending’ by implementing ‘auxiliary’ add-ons differentiating ‘commoditised’ music product

from ‘luxury’ product (Yaffe 2013; Mulligan 2015a; Roberts 2015).

Average Revenue Per Subscriber vs. Average Revenue Per User  Price Waterhouse Cooper (PWC) (2015) clearly states, “access services need to introduce

more paid-for tiers to drive consumer spending on subscription,” further propagating the

importance of demand segmentation. In addition, PWC (2015) claims, “the introduction of a

range of access tiers is essential in order to boost ARPU and consumer spending”. As early

adopter subscriber growth inevitably slows, it is imperative that ‘freemium’ services minimise

the ‘value gap’ by increasing conversion rates and ARPU (See Appendix XV).

According to Ingham (2015b), ARPU remains the key to future profitability. As subscription

service costs continue to outweigh revenue growth, closing the ‘value gap’ between ARPS

and ad-supported ARPU is essential to future recorded music industry revenues (Ingham,

2015b). Furthermore, recently released Spotify figures indicated ARPS in 2014 equated to

$73 per annum, while the annual ad-supported ARPU equalled $2.44, sufficiently illustrating

the disproportionate nature of the ‘value gap’ existing between paying subscribers and free

ad-supported listeners (Ingham, 2015b).

  26  

Telecommunications Bundling, Student Discounts and Family Subscriptions  In an attempt to increase conversion rates and ARPU, subscription services have implemented

half-price student discounts, providing cost-effective options for the most active streaming

demographic (Ingham, 2015c). Coupled with a significant number of promotional campaigns,

such as Spotify and Deezer’s ‘three months premium for £0.99’ offering, subscription

services have clearly identified the need for dynamic access models incentivising adoption of

paid subscription across even the lowest demand segments, an insight backed by the

qualitative and quantitative research results of this study (Ingham, 2015e). For more

information on the impact of ‘telco’ and family subscriptions, see Appendix XVI.

Between November 2014 and January 2015, Spotify acquired 2.5 million paying subscribers

(Mulligan, 2015d) (See Appendix XVII). This unprecedented growth highlights a valuable

insight into subscription pricing, driven largely by discounted student plans and family

bundling priced at £4.99/month, and £0.99 holiday promotions (Mulligan, 2015d). This not

only illustrates an underlying WTP for a lowered price point, supporting the quantitative

results of this study, but it highlights a paradigm underpinning the continued success of the

CD, the gifting market (Midia Research, 2014b).

‘Telco’ packages, student discounts, family bundling and holiday promotions have increased

subscriber growth and conversion rates significantly; however, these deals have directly

influenced declining ARPS figures (Ingham, 2015c) (See Appendix XVIII). Although

Spotify’s ARPS decreased overall, subscription income increased dramatically, from €678.7m

in 2013, to €982.9m in 2014, illustrating not only the positive impact of cost-effective

promotions and elasticity, but also an underlying consumer WTP at a lowered price point

(Ingham, 2015c). Moreover, according to Spotify figures (2015, as cited by Ingham, 2015c),

ARPS in 2014 equalled $73, an average monthly spend of $6.80, aligning directly with the

$64 average monthly spend of consumers during the height of the CD era in 1999, once again

fuelling the argument for a pricing re-evaluation.

  27  

CONCLUSIONS

Results indicate a significant drop in WTP in consumers over forty; however, no relationship

can be seen between increased consumption rates and WTP for premium subscriptions.

While a relationship can be seen between qualitative findings and a number of studies

highlighting increased social participation and ‘co-production’ as the key influence on

consumer perceptions of value and WTP, quantitative data indicates that pricing is the most

influential value proposition for ‘the mainstream market’. ‘Telco’ bundling, student discounts,

family subscriptions and holiday promotions have successfully driven contninued

subscription growth and conversion rates, illustrating the elastic nature of music subscription

offerings. Current music subscription pricing continues to encourage ‘casual’ consumers to

adopt ad-supported consumption methods; nonetheless, existing research suggests that a

decrease in price (<£5) would lead to a substantial increase in quantity demanded and overall

service revenues, a significant finding that correlates directly with the quantitative results of

this study. As such, it becomes unequivocally clear that the monetisation of the ‘mainstream

market’ remains underdeveloped.

The ‘value gap’ existing between ARPS and ARPU generated by ad-supported consumers

remains a significant issue for the future success of the recorded music industry globally.

However, Sweden’s market growth and continued success illustrates the potential of

mainstream adoption, regardless of large ad-supported market share. As YouTube, the largest

music streaming platform, continues to provide consumers with unlimited and on-demand

music for free, qualitative research suggests that music subscription services must continue to

utilise ad-supported tiers as conversion and subscription education tools. Moreover,

quantitative data suggests that while free on-demand services continue to exist, a large

segment of even the most ‘passive’ ad-supported music listeners are willing to pay for

premium subscriptions at a lower monthly price point. In order to minimise the ‘value gap’

between ARPS and ARPU, it is imperative that subscription services achieve mainstream

subscription adoption; ‘crossing the chasm’ through the implementation of pay-as-you go

tiers and lowered monthly price points. Furthermore, in order to maximise future recorded

music revenues, ensuring a healthy and robust ecosystem for artists and rights holders,

services must develop tiered price points differentiated by service features, targeting all

segments of consumer demand from ad-supported ‘passive’ listeners to ‘super-fans’.

  28  

Limitations

Due to non-probability convenience sampling, the quantitative results of this study should be

applied to the general population with caution. The study was administered across the music-

related r/letstalkmusic and r/music pages of Reddit; forums used by potentially more ‘active’

music consumers. While it is impossible to estimate the percentage of responses from these

music-specific forums, it is important to note that the responses from this group of ‘active’

music consumers may have influenced the quantitative results.

Recommendation of Further Study

Based on existing research and the results found within this study, further research must be

conducted on the WTP for a specified range of price points. In addition, further research

should be conducted in order to gauge subscriber and ‘music aficionados’ WTP for add-on

bundling on top of the monthly premium price and identify underlying consumer demand for

add-on ‘luxury’ and ‘auxiliary’ recorded-music-related goods.

Final Word Count: 6,236

  29  

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Schlogel, V (2015). Keynote Speaker. Observations the 2015 Midem Conferences on 6th June 2015. See Appendix IX for transcript. Schneider, M. (2015). YouTube CEO Gives Update on Music Key, Talks How It Will Differ From Spotify, Apple. (Online). Available: http://www.billboard.com/articles/business/6633466/youtube-ceo-music-key-susan-wojcicki. Last accessed 21st July 2015.

Spotify. (2013). Spotify Explained. (Online). Available: http://www.spotifyartists.com/spotify-explained/#royalties-in-detail. Last accessed 13th July 2015.

Styven, M. (2010). The Need to Touch: Exploring the Link Between Music Involvement and Tangibility Preference. Journal of Business Research. [Online]. 63 (9), pp.1088-1094. [Online].

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Available at: http://www.econbiz.de/Record/the-need-to-touch-exploring-the-link-between-music-involvement-and-tangibility-preference-styvén-maria/10008652773. [Accessed 4th July 2015].

Sweney, M. (2009). A third of young people would not pay for music online, says EC report. (Online). Available: http://www.theguardian.com/media/2009/aug/04/third-young-people-pay-music-online. Last Accessed 5th July 2015.

Touve, D. (2011). Carrots, Sticks and Buggy Whips. (Online). Available: https://vimeo.com/25154049. Last Accessed 15th July 2015.

Touve, D. (2015). Why Music Service Prices Are Falling And Can't Get Back Up. (Online). Available: http://www.hypebot.com/hypebot/2015/02/why-music-service-prices-are-falling-and-cant-get-back-up.html. Last Accessed 9th July 2015.

Waelbroeck, P. (2013). Digital Music: Economic Perspectives. Handbook of the Digital Creative Economy, Forthcoming. 1.(1). pp.1-20. [Online]. Available at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2249690. [Accessed 2nd July 2015].

Wagner et al.. (2012). The Advertising Effect of Free – Do Free Basic Versions Promote Premium Versions within the Freemium Business Model of Music Services?. 46th Hawaii International Conference on System Sciences. 1 (1), pp. 2928-2937. [Online]. Available at: http://www.computer.org/csdl/proceedings/hicss/2013/4892/00/4892c928.pdf. [Accessed 3rd July 2014].

Wagner et al. (2013). What Drives Users to Pay for Freemium Services? Examining People’s Willingness to Pay for Music Services. Proceedings of the Nineteenth Americas Conference on Information Systems. 1.(1).1-8. [Online]. Available at: http://aisel.aisnet.org/cgi/viewcontent.cgi?article=1160&context=amcis2013. [Accessed 3rd July 2015].

Welch, C. (2015). Tidal now has a family plan, but it's more expensive than Apple Music. (Online). Available: http://www.theverge.com/2015/7/8/8911359/tidal-music-family-plan-announced. Last accessed 9th July 2015.

Wheeler, S (2015). Dissertation Interview. Conducted at 2015 Midem Conferences on June 7th 2015. See Appendix VIII for Transcript. Williams-Grut, O. (2014). Spotify subscriptions soar thanks to students and Vodafone deal. (Online). Available: http://www.independent.co.uk/news/business/news/spotify-subscriptions-soar-thanks-to-students-and-vodafone-deal-9779759.html. Last accessed 13th July 2015.

Yaffe, A. (2013). How To Make The Freemium World Pay. (Online). Available: http://www.hypebot.com/hypebot/2013/03/how-to-make-the-freemium-world-pay.html. Last accessed 13th July 2015.

Zhu, K and MacQuarrie, B. (2003). The Economics of Digital Bundling: The Impact of Digitization and Bundling on the Music Industry. Communications of The ACM. 46 (9), 264-269. [Online]. Available at: http://rady.ucsd.edu/faculty/directory/zhu/pub/docs/papers/paper13_cacm_digitalbundling_p264-zhu_published.pdf. [Last Accessed: 13th July 2015].

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APPENDICES

Appendix I: Streaming Pricing Strategy Is Out Of Step With Consumer Spending Patterns  Figure VI: Current Pricing Strategy & Consumer Spending Patterns

Source: (Mulligan, 2014)

Appendix II: Literature Review - Shifting Value Constructs  Piracy rates have clearly slowed due to the emergence of alternative legal streaming

platforms, however, altered perceptions of value have underpinned the shift from physical to

digital and continue to affect the global recorded music industry today (Couts 2011; Curtis

2013; Knapp 2013).    The shift from product to service and the dematerialisation of music has

altered fundamental notions of value. The presence of intangible and ubiquitous digital music

has created an entirely new construct, value in usage, with value attributed during the process

of participation, co-production and consumption (Parry et al., 2012). Furthermore, a

significant number of consumers possess a strong belief that online music should be free and

report no intention of paying for these services (Vlachos et al. 2003 as cited by Lin et al.

2013; Chyi 2005 as cited by Lin et al. 2013).  

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Appendix III: Literature Review – ‘The Freemium Wars’

Although the ‘freemium’ model has been successfully implemented across the creative

industries and beyond, the business model often relies on the revenue contributions of a small

group of premium subscribers to maintain a substantial free user base and continued scaling

(Lee et al. 2013). However, according to Lee et al. (2013; p.39), free users still offer value to

‘freemium’ services, by eventually converting to paid premium users. Furthermore, the Lee

et al. (2013; p.39) study clearly states, “consumers convert to premium product because of

increasing usage of social features”, illustrating the importance of social service features in

relation to paid adoption. While Wagner et al. (2012; pp.2928-2937) identifies the

importance of ad-supported tiers for conversion, the study ultimately finds that continued ad-

supported listening elicits a negative attitude toward premium tiers and increases user

satisfaction with ad-supported listening.

Appendix IV: Literature Review - Willingness to Pay While Oestreicher-Singer and Zalmanson (2013; pp.591-616) highlighted community

participation as the key value proposition, a Dörr et al. (2010; pp.1-9) study found contract

length and sound quality as the most significant factors influencing a consumer’s readiness to

pay for premium services. Wagner et al. (2013; pp.1-8) identified a heightened willingness to

utilise a free ad-supported tier leads to a reluctance to pay for premium services. More

importantly, the study identified that a high value to price ratio had a significant impact on

initial inclination to pay for premium services, which led in turn to the most influential

intention, a positive consumer attitude toward a service (Wagner et al. 2013; pp. 1-8).

Appendix V: Literature Review - British Music Rights, Monmouth University & WiMP Studies In a study conducted by British Music Rights (2008, as cited by Anderson 2008) of

consumers aged fourteen to twenty-four, researchers found that 80% of the P2P users would

pay for a legalised music service. Similarly, a recent Monmouth University study (2015, as

cited by Crupnick 2015) indicates that 77% of university students surveyed acknowledged a

WTP for a music subscription service, while only 46% of the general population indicated a

WTP. Although the studies debunk the myths surrounding young people’s inclination to pay

for music, the studies do not indicate the influence of pricing on underlying WTP. Moreover,

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it is impossible to determine whether heightened willingness reported by students in the

Monmouth University study were due to discounted student price points.

A study conducted by Tidal predecessor WiMP (2013, as cited by Peoples 2013), reported

75% of survey participants expressed a WTP for streaming services. The study, conducted

across a number of European markets, find that on average, 25% of consumers expressed no

interest in paying for these services (WiMP 2013, as cited by Peoples 2013). Although a

significant number of participants indicated an underlying WTP, the study fails to address the

price for which participants were willing to subscribe (Peoples, 2013).

Appendix VI: Elasticity and Music Subscription Services  New Media Age Survey (2011) - David Touve Analysis: According to Touve (2011; 2015), only 5% of respondents reported a WTP for a premium service at current market price between £8 and £10.99, compared to 28% of respondents, the largest demand segment, indicating a WTP for a premium subscription for a monthly price between £1 and £3.99. Figure VII: David Touve Analysis (I) – (IV)

Source: (Touve, 2011; 2015)

Source: (Touve, 2011; 2015)

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Source: (Touve, 2011; 2015)

Source: (Touve, 2011; 2015) Alvarez & Marsal (2014) Study – Cited by Resnikoff (2014) Figure XI: Alvarez & Marshal Study

Source: (Alvarez & Marsal 2014, as cited by Resnikoff 2014)

     

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Appendix VII: ‘The Chasm’ and Music Subscriptions

Streaming has been widely adopted by the mainstream consumer as a method of consumption,

however, industry leaders and commentators are sceptical about the position of music

subscriptions on ‘the technology adoption life cycle’, claiming that ‘freemium’ services are

facing another looming chasm, between the ‘early’ and ‘mainstream market’ (Moore 1991;

Geiger 2014; Albrecht 2015; Huey 2015a).

Appendix VIII: Semi-Structured Interview Questions & Transcripts Midem 2015: Interviewees and Questions –  Sunday 7th June: Dick Huey 3:30 PM (Music Business Stage: Riviera 7) Sunday 7th June: Simon Wheeler 11:00 AM (UK Music Stand) • Do you think music subscription models are the future of music consumption? Why?

• A number of the subscription platforms acknowledge the importance of the ‘free’ tier as a

‘conversion’ tool. Do you think ad-supported ‘free’ tiers are necessary?

• Streaming has been widely adopted by consumers (this is undeniable), however

subscription model acceptance is growing slowly. Is battling with ‘free’ (i.e. YouTube)

still the main obstacle? What other obstacles are there?

• A number of industry commentators advocate ‘tiered’ price points targeting more

mainstream and casual music listeners. Do you think £9.99 is the correct price point?

Should ‘tiered’ subscriptions be introduced?

• With their latest announcement, it seems Spotify have chosen to add additional 3rd party

content to their service, do you think this is what consumers want? Will this make free

listeners jump to a £9.99 price point?

• From a record label perspective, are the current subscription models working for you and

your artists?

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Dick Huey – Midem Interview Transcript – Interview Conducted June 7th 2015. Do you think music subscription models are the future of music consumption and why? I think that music subscription models will be a part of the future of music consumption, and probably a big part. I think the music business needs to refine their offerings. I’m pretty convinced were not anywhere near the mass market at this point. To begin with, Spotify has 20m subscribers. That’s a drop in the bucket for the potential subscribers in the US. It’s a drop in the bucket compared to something like Netflix, which has arguably achieved real penetration. Similarly to Netflix, Pandora has a price point of $4.99/month; do you think the adoption of Pandora is down to that lower price point? I have to admit to being slightly puzzled by Pandora’s monetisation efforts. I haven’t heard any ads for hours on their service. Going back to your original point... The power users and early adopters will all buy full price subscriptions. People like you and I are in from the get go. Other people that are interested in background music, that don’t actively listen to what just came on the radio, are looking for a different experience. Those of us on the label side of the business and the sound recording side of the business, have to provide the licensing ability and the framework so that services like Spotify can go out and attract those consumers. I’m concerned that we believe we are further along than we actually are (in terms of mainstream adoption) and that we may cut too deeply into freemium. A lot of labels are discussing the removal of free ad-supported tiers from subscription services; do you think that would be a mistake? Yes I do think it would be a massive mistake for them to get rid of it. However, there should be a reason to go beyond the free tier, something YouTube need to work on. Spotify in particular has played around with giving users a reason, but I am worried that they haven’t tried hard enough. The more free users they have, the more CPM’s (Cost per thousand impressions), so it’s a bit of a catch 22 for them. Other services use a limited trial period, is that better? Not necessarily, I like the idea of an ad-funded layer, but the upgrade needs to be more compelling. Not only that, who is on that free tier? Is it a power user or early adopter? Rdio introduced an intermediate step. I applaud them for coming out with an intermediate level. Its similar to a student plan, some people just don’t have the £9.99 a month to spend. Do you think £9.99 is the correct price point, if not do you think tiers should be introduced? I think £9.99 is the correct price point, for some people. The students are an interesting example. That is an example of giving the exact same functionality to someone in a different financial situation, but that feels ok. On the other hand, it wouldn’t feel right to say “you didn’t feel like paying 10 dollars so pay 5”. It works with students and may work with other sub sectors, but it wont work with all of them. What will work, is that they get something a little less, maybe it’s a limited amount of music… The other thing that’s important with existing services is specialty presentation of music. All of the services are focused on all of the music they can possibly fit into one system. I do think there are opportunities around not giving everybody the entire universe of music, and helping them cut that

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down. I’m a fan of the 8track service; I’m also consulting them just to be upfront about it. There you have user playlists driving engagement, even more so than Spotify. I saw Spotify just added a lot of third party content, whom personally I did not care about as a consumer, do you think that is the right direction for them? I subscribe to Tidal and I was in their high-def. audio subscription. I got a lot of emails from them saying, “there’s an exclusive Jack White event” and I went and looked at it. I think the addition of video is fantastic for these services, and wasn’t as negative about Tidal as everyone else was. Do you think exclusives will cause problems? I’m not a fan of services offering exclusives. However, I do think there is something there in terms of segmented services that only have reggae music, or classical music or Christian music, whatever it is. I think there will be more of that; there should be more of that. Spotify has worked hard on this. I think every service really needs to enhance their social features… I do too. It has gotten kind of stale. I don’t think it is compelling as it could be. I don’t share music much anymore. I don’t feel like the Spotify interface promotes me to share music with friends. Simon  Wheeler  –  Midem  Interview  Transcript  –  Interview  Conducted  7th  June  2015.      Do you think music subscription models are the future of music consumption? Why? It seems that premium music subscriptions will be a very important part, if not the major part of music consumption going forward. I think the idea that you get a huge mass of people putting money in every month is something that can drive a lot of revenues. It is not so much that it will be the future; already streaming income is already our (Beggars Group) major strand of recorded music income, bigger than downloads, bigger than physical products, bigger than synchronisation by quite a long way. Streaming is already here, in terms of its importance, but the potential is now converting the real casual music users into paying subscribers. Music streaming has been widely adopted, but paying £9.99 a month has not been adopted widely yet by the mainstream, is YouTube the real obstacle here? Is ‘free’ the real obstacle? I think it’s just really hard for people to put their money down on the table for anything, whether that is music or anything else. It is not trivial to get people to commit to paying for something every month that they want to use. Also, there is a real battle in terms of marketing and educating the subscription model. Spotify has advertised their product in the States and as part of telecom bundling, but I do not think they have really educated the masses. Do you think that bundling into telco packages continues to devalue music as an individual product? I think the main reason those packages exist is to get people in the door, get them using the service, and then to roll them onto paying for a premium subscription. These bundles have been very successful in getting people to move to premium subscriptions; somewhere around 60-70% of people that sign up to these bundles become premium subscribers. So while ad-supported seems to be a good way of consumer acquisition, you really have more money coming in from the telco bundles. The value proposition for people that consume music regularly, or for people that buy music regularly is very obvious. Separate discussion:

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It is very interesting, within music connoisseurs, this consumption pattern of paying for a subscription service but then purchasing albums on vinyl that they’re really into. We never saw that consumption pattern coming. Do you advocate for free tiers of music? Is the freemium model working for you as a group of labels? Personally we don’t think you can get rid of freemium, in terms of a tier that is there to drive subscribers. I think the free ad-supported models like YouTube are the problem. At the moment there is no real upsell from them. It’s free on every platform at an unlimited rate. YouTube as a music product isn’t the greatest experience, it does deliver all of the music you want, but it is not the most sophisticated experience. I imagine for the casual music listener, YouTube is sufficient… Yes I think it is. Do you think that £9.99 is the correct price point? A number of industry commentators advocate a tiered system with lower price points in an attempt to target that casual listener. I don’t think a lower priced tier will be the end product. In our (Beggars Group) mind at the moment, the price point needs to be driving towards that £9.99 price point for premium subscriptions. Now is that £9.99 price point the right price point? Well, I think that’s really difficult to answer but I don’t think were looking at the market right now and saying “lets drop the price”, because actually I don’t think that’s the best business strategy anyway. I do not think the offering of £9.99 for the world’s music can really be improved. It is fine for people that are not in the business, that don’t have skin in the game, to say, “drop the price and you’ll get more subscribers”. Well, put your money on the table. If they dropped the price point any further, I don’t think there is a business model there. Do you think it is just a matter of time then? Now is a very good time to be discussing this. Apple will be releasing their product on Monday, and that could have significant impact. Equally, Spotify are adding over a million new paying subscribers every month at the moment. That kind of number is extraordinary. Once upon a time we were asking, “can we get over 1m subscribers?” Now were asking, “can we get over 1m new subscribers a month?” Those numbers are staggering. So I’m pretty positive about how things are running at the moment. The market is very exciting. If YouTube get things together that could be very exciting, and Soundcloud has announced they will be introducing a subscription model as well. Is that the general feeling you get when you talk with other labels? Is everyone optimistic about the direction subscription services are heading? It really depends on whom you talk to. If you talk to people on the digital side of the business, most people are feeling pretty good. If you’re looking at the top level, at board level, you may see a different perspective. Universal’s digital revenues went down last year, so it really depends. The market is in transition from high value low volume purchasing to low value high volume transactions. From our perspective, it’s very hard to sell music now. The market is constantly changing; we’re seeing a massive difference in the market from how it was even a few years ago. There is a lot of caution around the optimism.

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Spotify recently announced a partnership with a number of third party content providers, do you think that is what the consumer wants, extra 3rd party content? I was very confused by that to tell the truth. I think they are working on the basis that people are consuming lots of video, generally, but I think it dilutes what they’re offering and confuses the message a bit. Are current subscription models working for you (Beggars Group) and your artists? I think if you asked anyone, they would like more money. What were seeing now though, is 30%-40% of our artist’s total royalties are coming from streaming, including synchronisation, sales etc. Up to the very biggest artists on the roster. There is a transparency issue, of people understanding what they’re getting. There’s an issue with the pipes; of money flowing through from the service. You can’t do it on a spreadsheet, so you need pretty sophisticated tools. We are investing significant sums of money in systems, not for the data we’re seeing now, but for the future.

Appendix IX: MIDEM 2015 Observation Transcripts & Notes Mark Mulligan (Founder - Midia Research) Streaming is a way of getting music onto people’s devices. It is not a business model, its not a product, its simply the technology that enables modern music behaviour. It has taken us fifteen years to license the business model. It does mean that music buying has become a lifestyle choice; nobody needs to pay for music anymore. CEO of Pledge Music: “People have been given lots of ways to pay for music, but not a lot of reasons to pay for music.” We need to give people more reasons to pay. The one thing that is becoming a major issue is the role of YouTube. YouTube is, without doubt, the worlds biggest, most successful, most sophisticated, most engaging digital music service that there is. It is also the one that is priced at 0 cents to the user. That is the major challenge for anybody trying to sell a £9.99 service. YouTube is probably the best digital music discovery channel. The world is changing, 4-5 years ago music fans went out and bought music after they discovered it. Now, people are discovering music and that’s it. Instead of streaming music and then buying the download, consumers will continue to stream. The music discovery journey has also become the destination. We are the only industry capping our most active consumer’s spending at £9.99. Additional Notes: How artists and fans interact and how money is made.

1. The Impact of Streaming 2. The Music Aficionado 3. Finding the Gold Dust

Nobody needs to pay for music anymore. The major challenge for anyone trying to sell 9.99 music services, YouTube is the best discovery platform. The discovery journey has also become the destination. P2P was dying anyway; this was successful when people wanted to put music on their devices (ownership). The availability of 30m+ on demand tracks changes the way people consume music. No other industry caps their best customers (i.e. 9.99 a month subscribers). Scale has to compete with the main issue of more people listening to music less frequently. Lots of people are listening to a lot more music, but developing shallower relationships with albums and artists. Operating margins of about 3%. It is a business model that only works if you’re selling other stuff. In 3-5 years Apple will be the biggest music

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subscription service. As long as these free mobile services exist, it will be very hard to engage with music fans and convince them to pay. The music aficionado: Buying fewer albums and downloads due to streaming. The world isn’t changing; the music aficionado’s consumptions patterns are changing. Massive amounts of mainstream people are interested in artists and engagement, but very few want to pay. Gold Dust: Connections, Curation and Engagement The next generation of music product: Dynamic, Interactive, Social, Curated Alexander Ljung (Founder - SoundCloud) If we’re framing the discussion as ad-supported vs. subscription, for me it is very clear that it’s a combination of both. And there are a few simple reasons for it. One is that, music has an incredible power to connect every person on the planet. Music is something that is emotionally relevant and really powerful for every single person on the planet, and part of it is about how you share that experience around music. There must be openness about it and share ability around it, and advertising supports that. There are 3 billion people online; you’re never going to get 3 billion people into subscriptions, its not going to happen. That means, if you’re only doing subscription, I think you’re missing out on a lot of people. If you’re only doing ad-supported, its pretty clear that there are a lot of people willing to pay for a subscription, and they are worth more on the average revenue per user basis than an ad-supported user. So if you’re only doing ad-supported, you’re leaving a lot of money on the table. Instead of having a debate around advertising vs. subscription, the big question for the music industry is: how do you segment the market into the right place? It is really about how you draw a line between the two. For us, were interested in having all 3billion people online, on SoundCloud. I am not choosing Ad-Supported or Subscription; I’m choosing both of them, because music is for everyone. Doug Morris (CEO - Sony Music Entertainment) Pay is good. Unless there’s a conversion factor into a paid service, ad-supported is not so good. I do think this change to streaming signifies a tipping point for the music industry. Over the last ten years, the industry has halved. It was a $30bn dollar business, now it is a $15bn business. Now what caused this? It was the disruption of a lot of other business, probably Internet, Piracy, and I do think ad-supported will continue to hurt the industry. But I think this tipping point will bring it back to where it was before. The first really mature streaming country was Sweden, and Sweden is back to where it was ten years ago. My guess is that slowly, Europe and the United States will go the same way, and we will have an industry that is healthy, robust and powerful. You can’t have a streaming service without music. We are in a really good position. What does Apple have in their advantage? Well, they have about $178bn dollars in the bank, they have 800m credit cards, and Spotify has never really advertised because they’re still not profitable. My guess is that Apple will advertise and make a big splash. Apple will advertise and make a big splash. I think it will have a halo-effect on the entire streaming business, all of the companies will benefit; a rising tide lifts all shifts. I think it is the beginning of an amazing moment for our industry. In the future, most of the consumption will be done through streaming. In my opinion, it’s coming and it’s coming fast.

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Hans-Holger Albrecht (CEO - Deezer) Streaming is a winning formula going forward. The fundamental lesson we learned in the TV and film industry is that free model is completely different than paid subscription model. Trying to convince the consumer to pay for something they can get for free is very difficult. The music consumer is still learning about the subscription model pricing. We have a free service everywhere, other than the US. The free ‘price point’ is a way of converting and attracting customers. The backbone of our business has been our telecom bundling and vertical partnerships with companies like Sonos. There is not just one market; there are many different markets. Streaming services in Tanzania for example are very different than France or Germany. You have to be flexible and need to adapt the model to different markets. Price is always relative, and this is something we must learn from other industries. It is not about the price point itself; it is about the value for money consumer proposition. We need to be better at offering a value proposition to the consumer and we have to be better at communicating. Maybe we have to optimise ‘freemium’, but before we stop something that is working, we need something that can replace it. Lets be cautious and not kill something too early. If you want to talk about free, let’s talk about all the other free music. You have YouTube and radio, you cannot look at streaming and subscription services as the only free services. The ambition has to be putting everyone on a level playing field (YouTube). It sets a condition in the consumer’s head that on demand music is free. That is the key point. There always will be a portion of free. I do not think people should get rid of free completely. We shouldn’t make free so attractive that no one wants to pay for subscriptions. If Apple is moving into a subscription and streaming model, it is proven that this is the model of the future. The biggest problem for us is the learning curve of the consumer. Apple will help us educate the market. If you penetrate the market and the market grows, there is a huge opportunity. We are just at the beginning of finding ways for artists to promote themselves on our service. In a subscription model, you are in a constant dialogue with the consumer. Once you establish a trust with the consumer, you can start to upsell things. Vania Schlogel (Chief Investment Officer - Tidal) 93% of people consume music weekly. There are very few industries where you see demand and consumption skyrocket while the value of the underlying industry decreases. The only time you see this, is when the underlying product is commoditised. Our job as a music industry, is to inspire fans and connect fans to the artists they love. Within the industry, we have to have a baseline belief that music is valuable. Artists need to be encouraged to participate directly, and suddenly fans feel closer. Why aren’t we as an industry talking about optimal pricing? Fans get more + artists are empowered Revenues down – Demand of music is UP! Music is the number 1 entertainment medium we engage in Ty Roberts – (CO-Founder – GraceNote)  There  has  been  a  paradigm  shift  from  ownership  to  access.    YouTube  remains  the  problem.  New  Growth:      Artist-­‐Fan  Premium  Offerings  and  experiences,  Live  Music  Video,  Tiered  Services,  Collectables  and  Merch  

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How  to  raise  recorded  music  revenues:      Enhanced  set  of  offerings  for  the  super  fan  Premium  offerings  and  experiences  (BandPage  and  Rhapsody)  Photography  Exclusive  tracks/live  music  tracks  High  Fidelity  Audio  Created  a  tiered  offering  that  gives  all  this  a  higher  price  point  or  your  own  app  until  the  services  have  features  Wean  the  public  off  free  music    Nurture  the  artist  fan  relationship    

Appendix X: Music Subscription Survey Questionnaire Design Issues  Question four of the initial survey asked participants to identify as either a paying music

subscriber or an ad-supported listener. Participants identifying as music subscribers were

unable to continue the following questions of the survey specifically relating to reasons for

not subscribing. As the survey was limited to 1,000 participants, the questionnaire design

limited the participation and responses of ad-supported listeners to 590, as 409 respondents

identified as music subscribers. This question was removed from the following survey in

order to maximise the responses of ad-supported music consumers. Following the mixed

method approach, question five of the pilot survey provided a text-box enabling participants

to elaborate on their response. This qualitative process was removed from the subsequent

survey design, as the six responses ultimately fit into the multiple-choice categories provided. Figure VII: Questionnaire Design Issue

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Appendix XI: Qualitative Survey Results Chart  PLEASE SEE ATTACHED

Appendix XII: Quantitative Survey Results Figures VIII – XXVIII: Quantitative Results (I) – (XVI)

(N=1,590)

(N=1,590)

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(N=1,590)

(N=1,590)

(N=1,590)

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(N=1,590)

(n=774)

(n=573)

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(n=162)

(n=45)

(n=36)

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(n=584)

(n=677)

(n=233)

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(n=73)

 

   

 

   

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Appendix XIII: Ad-Supported Limitations and Revenue Recovery (Spotify Revenues in Spain)  Ad-supported users were limited to five plays of an individual track, and ten hours of ad-funded streaming per month (Pope, 2015).  Figures XXIX – XXX: Spotify Revenues in Spain (I) – (II)  

Source: (Pope, 2015)

Source: (Pope, 2015)

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Appendix XIV: Sweden: The First Mature Streaming Market Figures XXXI – XXXII: The First Mature Streaming Market (I) – (II)

Source: (IFPI 2015b; as cited by Ingham, 2015d)

Source: (IFPI 2015b; as cited by Ingham, 2015d)

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Appendix XV: Digital Music Streaming and Downloading Revenue, year-on-year growth (%) 2014-2019  Figure XXXIII: Streaming & Downloading Revenue (2014-2019)

Source: Global Entertainment and Media Outlook 2015–2019, PwC, Ovum (PWC, 2015)

Appendix XVI: The Impact of ‘Telco’ Bundles and Family Subscriptions  In 2013, the introduction of student discounts and bundling deal with the UK’s Vodafone saw

Spotify subscription revenues rise significantly from £64.7 million to £91.9 million (Spotify

2014, as cited by Williams-Grut 2014). The boost from the newly introduced bundles led to a

40% increase in total revenue at Spotify UK in 2013, illustrating a heightened consumer

demand and the elasticity surrounding the product (Spotify 2014, as cited by Williams-Grut

2014). The majority of subscription services have implemented family plan bundling,

however, Apple has undercut the competition, offering a premium subscription for up to six

family members at just $2.50 per subscriber per month, illustrating that the technology giant

has identified the elasticity of their service offerings (Popper, 2015; Welch, 2015).  

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Appendix XVII: Spotify Record December Growth Hints at Pricing Elasticity  Figure XXXIV: Spotify December Growth & Elasticity

Source: (Spotify Figures 2015, as cited by Mulligan 2015d)

Appendix XVIII: Spotify: Average Revenue Per Subscriber (ARPS)  Figure XXXV: Spotify Average Revenue Per Subscriber

Source: (Ingham, 2015c)

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