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The Rise of Digital Music Subscriptions

|Mar 13|magazine14 min read

 

Written by: Jeff Hughes, CEO, Omnifone

 

It’s no secret that the music industry has undergone huge growing pains over the last decade in the shift from analog to digital. The record labels and publishers have struggled to protect their catalogs and properly compensate their artists, without alienating the fans who got used to downloading music for free. As a result, the rights owners have had to find new revenue streams in order to adequately monetize their creative assets.

Right now, digital revenues are the fastest growing part of the music industry. CD sales continue to fall as more and more consumers look to cloud-based services for their music. 

The number of music tracks streamed increased 700 percent in 2012 with 7.5 billion tracks streamed in the UK alone, according to Universal Music[1].

Analyst Mark Mulligan’s recent Insight Data Report found that 32 percent of consumers around the world are now using streaming services to access music. This opens up a whole new revenue stream as streaming gains popularity.

Subscriber growth

While Apple still dominates download sales, more and more users are moving towards subscription-based cloud music services such as Spotify, Sony Music Unlimited, Rdio and rara.com, all offering vast catalogs and different experiences.  

Gartner predicts subscription revenues will be the fastest growing part of digital music revenues over the next four years, increasing from $532.1m to $2,218.4m by 2015. This points to an enormous opportunity for streaming services. However, providers must strike a balance between the needs of the rights holders, consumers and device partners in order to build, license and run services which are both profitable and appealing.

Music consumption

The rise of mobile devices globally means that there are more channels for streaming music than ever.

A key to yielding profits from music streaming services lie in a captivating experience. Consumers now expect to easily access media anytime, from any device. For subscription service providers, income will be generated from a platform that is all-encompassing, allowing users to curate their own playlists whilst discovering and rediscovering music via innovative recommendation tools. Higher quality audio is also becoming a staple with a growing number of streaming services. These tools will not only enable users to navigate vast catalogs offering millions of tracks but will also enable service providers to stand out in an increasingly crowded market.

The value of the enhanced experience will ultimately convert users to paid subscriptions. 

Licensing

Music service providers are highly selective with the partners they work with. This is to ensure they gain the support of the music industry and that the end product is feature-rich and appealing to target markets. Service providers must also consider the potential of the offering in light of the needs of the rights holders and the device partners.  

By engaging directly with the rights holders and demonstrating value, providers can ensure that the industry can thrive with a series of legal and compelling services that are profitable, while meeting consumer demand. 

The procedure for securing licensing is a notoriously complex procedure, especially for new service providers. Fortunately, the creation of the Global Repertoire Database is making great strides towards a more streamlined process, making it easier to license music on a global scale.

Business model

In the last year many digital music services have expanded into multiple territories as consumer demand increases globally. While the benefits of expansion are clear due to increased user numbers, it doesn’t come without its challenges. Brands must navigate the intricacies of licensing in different regions, each with their own complex rules and requirements, before settling on a business model most likely to succeed. It is equally vital to offer both local and international content to appeal the new global audience. 

While the focus of many subscription models has been based on the “freemium” experience, it can be counterproductive financially, even as it gains users. This is largely due to fluctuating advertising revenues. Pure ad-funded, on-demand music services have not proven to be economically viable in the long-term, forcing some service providers to adopt subscription tiers in order to generate revenue. 

If the end-game for digital music services is paying subscribers gained directly or indirectly via a bundling partner, then how are providers attracting them?

Some brands entice new users with promotions and marketing campaigns which can be costly but ultimately profitable. Others attract them with extended free trials, such as (Sony Music Unlimited), or via heavily discounted gateway tariffs (rara.com), before upselling with additional features and a premium experience.

Ultimately, the marketplace will be better served with a variety of choices. The record industry is increasingly showing a desire to foster innovation and will be more inclined to license and support differentiated services which target varied consumer groups, not just early adopters. Mark Mulligan’s research shows that 55 to 64 year olds represent a credible 23 percent share of global music streaming penetration, proof that demographics are changing. This will provide more regular income for the entire value chain, so they can focus on giving the consumer what they want – unlimited access to the music they love.

About Omnifone

Omnifone is a leading B2B digital music company which develops, licenses and manages cloud-based digital music services, enabling customers to deliver music across virtually all connected devices, globally. Omnifone offers a growing catalog of 22 million tracks across 33 countries.


[1]http://www.techradar.com/news/internet/music-streaming-up-700-per-cent-in-2012-says-universal-uk-boss-1112606