Creative Destruction In the Music Industry

I am a very happy Spotify Premium customer.

Everyone talks about Spotify  like it’s some type of new social media driven discovery engine, spreading new music through our networks like a happy virus of connectedness. I think that description hurts them because that’s not what makes Spotify great and it’s not what’s innovative.

I keep my account unhooked from my social profiles and I pay them ten bucks a month.  In exchange, I get cross-platform access to almost every song I want to hear, whenever I want to hear it.  As my friend Aaron Mandelbaum will confirm, I’ve been searching for this product for years but the previous attempts never quite got it right.  There’s not really any secret sauce here – what makes Spotify great is the same thing that makes Dropbox and Evernote great.  It just works every time across every device.

People talk about how the iPod and iTunes changed the music industry forever.  That’s true, but I believe that Spotify is the future of the music industry – the newly connected consumer doesn’t even think about ‘buying’ music.  The game is over, and ubiquitous access [and maybe curation] is the product when it comes to recorded music, the rest is just window dressing.

I started my career in the music industry and I can say that the oligopoly of record companies, despite having every opportunity to do so, could never have created Spotify. It’s almost tragic. On demand, cloud-based music’s inevitable success can be explained with Clayton Christesen’s framework in The Innovator’s Dilema.

The industry machine  was able to keep up with sustaining technologies.  For the changes from the vinyl record -> the 8-track -> the cassette tape -> CD, the industry  had no problem keeping up because the product and the economics were still the same: a bundle of tracks [and a small market for singles], delivered as a compliment to a device [e.g. a record player].   Sure, there was a little shakeup with cassette tapes because you could record with them, but that was a little bump in the road.  For the most part, the same players were able to keep up and drove innovation that improved the quality of the listening experience.

The first bullet wound came in the form of the iPod. MP3 players had been around for a while before the iPod [I had an Archos Jukebox in college], but it was a fringe market because they all sucked.  They truly sucked. The main market was still rocking CDs, buying them at Tower Records and playing them in their Sony CD players and discmen.

The iPod took MP3 player technology to the next level and it captured the market, but the really disruptive  innovation of the iPod was the integrated delivery system.  There was an ecosystem in place before Apple came into the picture.  There were record labels [content creators and marketers], cd manufacturers, distributors, retailers and device manufacturers.  Apple wiped everyone off the map with the iPod /iTunes system except the labels, who had to play ball or risk being shut out of the consumer market.  Only an outsider could have done this.

The second bullet, cloud-based music delivery systems, came in a similar fashion, albeit faster.  For a few years, there were products like LaLa and Rhapsody, but all of these services were a pain to use or lacked content.  The tipping point, in my opinion, came with the penetration of mobile smartphones. As soon as we had phones that acted like computers, we started to want to access our content across devices and Spotify built a great product to do it.  They beat out Apple for the U.S. market and they’re continuing to innovate [their iPad app is just awesome].   I can’t envision another disruption in the recorded music part of the industry, but who knows?

It’s been interesting thinking about how the music industry has evolved.  When I read Mary Meeker’s 2012 Internet Trends Report, I became inspired to think about how other disruptions are going to play out, and which companies are at the greatest risk.  I’m going to try to post a few predictions in the coming weeks.

Five Predictions for 2011

I started to write a retrospective on 2010, but  decided that we all lived through the year and there are some great photo essays that are much more interesting than my thoughts.  Instead,  I’m going to make  five predictions on tech, social and digital media trends in 2011.

1. Exponential growth in the U.S. smartphone market

Mobile is my current fascination, and the growth that we’ll see in 2011 in the U.S. market promises to make it the rest of the country’s fascination as well.  I wrote a post about this recently, and recognize that people have been predicting the year of mobile for a long time. But looking at the current environment makes it easy to see, from my perspective, that 2011 (or 2012 at the latest) will be the year that mobile will start to compete with the web for most relevant technological innovation (read Fred Wilson’s post to get the pro’s perspective) in the world.

Right now the early adoption is complete.  The iPhone skimmed the market for the high-end tech enthusiasts and the coastal hipsters.  The people who want the next thing have it, but they had to buy AT&T contracts in order to get it and, overall, the iPhone is an expensive investment when you start looking at the data plans.  Broader market penetration will happen with the growth of the Android platform; which will become the device- and service provider-agnostic operating system that will allow low-cost producers to offer smartphones to the price-sensitive consumer.   The increase in availability of these phones, I predict,  will actually lower the cost of data plans as well.  This is a  trend that is bound to continue as the fixed costs of building data delivery infrastructure is recouped and competition brings the supply of data networks up and the cost of the service down.

2. An increase in mobile gaming, but a decrease in pay-for-app models

Angry Birds was worth $20 million to EA, and for good reason.  Electronic Arts currently owns over half of the top 10 spots in the itunes App store and Angry Birds alone has sold over 6.5 million copies.  Mobile gaming is going to continue to grow, and it’s going to pull in a much broader audience in 2011 (see prediction #1).  With the growth of the category, however, I’m not confident that we will continue to see the pay model that currently exists in the itunes store , and I’m not entirely convinced that social currency will support the marketplace either.  I’ve been in the app marketplace for a while now and I’m surprised at how few apps have really embraced the ad-supported model that has driven the web economy for so many years now.  It’s possible that mobile advertising simply hasn’t developed enough to sell performance, but on a CPM level, I’m surprised that more advertisers aren’t clamoring to get into people’s smartphones.  If this changes with the broadening of the market, I think we’ll start to see more social gaming on mobile devices, and gaming publishers similar to Zynga and RockYou on mobile devices.

3. Continued adoption of web-based productivity apps by businesses

Google is going to take a few more swipes at Microsoft in 2011, and they will continue to pull share from the leader with the improvement of Google Apps for business and education.  Cloud-based apps just make sense for most people, who really don’t use much processing power to accomplish the majority of their tasks.  It’s also far easier to synchronize email, calendar, contacts and documents when they’re in the cloud.  Based on prediction #1 (above), it makes sense that more and more companies will move to the cloud for their business application needs because people are going to increase the number of screens that they use, and hence have a greater demand for easily synched solutions. Google Apps are the best cloud-based productivity applications in the market. Microsoft Live is a few years too late and a few features too underwhelming to be particularly useful.

4. Fragmented social networks

Facebook is now the place where you have the most connections that have the highest variance in value (mom, girlfriend, junior high-school acquaintance).  Facebook is now sort of a mashed up wall of brands, bands, friends, frenemies, places and games.  While Facebook continues to do a amazing job at delivering a platform that can be customized and controlled by its users,  I believe 2011 will be the year that people start signing up for smaller communities and networks that are relevant to a particular passion or activity.  Path is trying to fill this gap with a social network that only allows you to share photos with 50 people , and Instagr.am is filling in a void for hipsters and the visually curious to filter their photos with lo-fi effects.  These communities are built on top of the Facebook platform, but a different a slightly different value proposition and will start to syphon off some user attention.

I believe that music isn’t getting a fair shake in Facebook and that money is being left on the table in that space.   We’re going to be releasing a product in 2011 that will try to fill in some of the holes that Facebook misses in the music business and I’m looking forward to seeing entrepreneurs take on similar strategies.

5. Flat adoption of mobile coupons, despite the inevitable heavyweight user war.

Mobile coupons seem to be the trend that just won’t stick…yet.  I believe it’s going to take a little more time than people are hoping for consumers to start really using mobile coupon offers.  Media agencies are starting to experiment with QR codes and companies like Foursquare continue to make the push for location-based discounts (although I’ve struggled to  find a relevant advertisement in my experiences with the platform thus far).  Facebook PlacesHotpot and  Google Places are also diving into this space head first.  While Google, Facebook and Foursquare will trade punches like heavyweights in a royal rumble this year, I suspect that users will be decidedly absent from the fight.  2012 will be the year of mobile coupons, 2011 will still be the year of the Groupon.

Mobile Coupons

I’ve been talking to some friends in the CPG and beauty verticals recently about coupons and the adoption of mobile as a viable distribution channel for them.  The short story is that we’re nowhere near  replacing traditional coupons with digital ones, but it’s going to happen very quickly when someone solves a few problems that dont seem particularly complicated to me.  I think the opportunity is going to be exploited by a strong, simple application that’s available on multiple mobile platforms, and a website site that will drive a critical adoption rate from  the right consumer base.  The business model, in my opinion, hasn’t been clearly defined yet.

I found these statistics on gorumors.com , which project future growth of mobile coupon spending.  While I think some of these statistics won’t scale (like redemption rates),  it paints a pretty clear picture of what could potentially happen to the mobile coupon business. Here’s some info from gorumors:

According to a recent study by Borrel Associates, Mobile coupons have a much higher redemption rates than those from newspapers or mail – as much as 10x times.  Here is the projected total spending from mobile coupons as studied by Borrell Associates:

2006 : $3.3 million
2007 : $7.2 million
2008 : $7.15 million
2009 : $86.4 million
2010 : $373.7 million
2011 : $1055.3 million
2012 : $2242.4 million
2013 : $4101.6 million
2014 : $6598.5 million

The biggest hurdle that this industry faces is the adoption of smartphones by the core coupon-using crowd.  Right now in the United States, there are about 50 million smartphone users.  My guess is that the number of smartphone users who download applications is significantly smaller, because Blackberry users don’t really download apps and they control over 40% of the smartphone market.  So let’s put the market at 25 million U.S. users; that’s about 9% of the country’s population. When this number gets closer to 25%-30%, I think you’ll start to see major traction.

In terms of a coupon application design,  it needs to stay incredibly simple so that the normal, everyday user can find what they need and easily redeem the coupon.   Another consideration is the branded app versus general consumer app solution.  I believe that publishers should try to get a piece of this market and there’s room for a technology to help them do it.

Regardless,the growth is there and the demand would be there for the right experience.  Someone just needs to figure it out and wait.

Driving Value In Social Media

My friend Tim Freestone reminded me of something recently that is so fundamental and simple, yet often forgotten in the world of community building and social media marketing.  He said “If you can drive value you can write your own checks”. Tim works in direct marketing for B2B clients and has a very clear path to revenue contribution.  It’s measurable.  It’s obvious.  You either generate transactions or you don’t.   In Tim’s world, value is measured by a clear increase in revenue that is greater than the cost of the marketing services he offers.  Tim generates value.

Social media, depending on how you define it, works differently.  Marketers often analyze what they’ve invested in social media and don’t see lift in revenue, or they may see a lift in revenue but it’s impossible to correlate with their social media efforts.  Social media tends to look ineffective when measured directly against revenue growth (this is very similar to the Public Relations industry issue- but that’s a different post.  For this post, I’m talking about social networks and blogger outreach).

Today I want to play with the equation up top.  ROI is calculated by measuring what you made, subtracting what you’ve invested, and then dividing that sum by what you’ve invested (expressed as a percentage).   So, if you spend $1, and you make $2, then your ROI will be [(2-1)/1= 1]  = 1.00 = 100%.

I believe social media generates a lot of value for brands, but I believe it shows up in strange places on a financial statement.  Here are a few examples of why it’s difficult to measure:

Most of social’s revenue contribution is credited to other channels

A lot of consumers who engage with brands in social do not take a revenue-driving action directly from Facebook, or blog, or any other social network.  Some do, but a lot don’t.   Most of them consume some type of content, maybe interact, and then go about their day.  In the digital space, it’s often insightful to look for correlations between increases in direct traffic and search volume against social media efforts (try this and let me know what you find).
Just because a consumer doesn’t click out of a Facebook status update does not mean that they haven’t been impacted.  On the contrary, getting “into the stream” is far more effective than being on the periphery (in a digital ad).  Marketers who think of streams as ads are often missing the point, or not looking closely enough at their digital presence.

Most of the value in social media comes from cost savings and increased customer lifetime value

If you are a consumer brand and someone has an axe to grind, you really need to be in social media.  Consumers are fickle and tend to drag brands into a very public conversation when they feel wronged.  On the other side, people use social platforms to evangelize brands and you’ll probably want to be around for that, too.

Creating a platform for customer engagement decreases customer service costs (as less people lodge complaints through other channels), but more importantly decreases the cost of having to acquire new customers (to replace the ones you lose by not being respondent).  These metrics go into the “what you made” section of the ROI equation, but they don’t directly affect revenue growth, they affect profit by lowering operating costs.  New customer acquisition costs are usually the highest marketing expense a company has.  I can’t understand why more brands don’t measure the customers they keep.

Increasing intangible asset value isn’t necessarily a revenue driver…

By extension of the point above, maintaining brand awareness, increasing customer lifetime value and increasing brand affinity also show up in intangible assets (brand value). This isn’t something that marketers with short and mid-term goals look at, but it’s definitely something CEOs want to look at.  Again, contribution from social media to brand value is difficult to measure, but it’s certainly one of the biggest pieces of value offered.

Social media can increase lifetime customer value, decrease your customer service costs, and make a significant long-term contribution to revenue through the viral nature of word-of-mouth marketing.   But I think marketers need to stop looking at their social media efforts with the same microscope that they measure their SEM campaigns- it just doesn’t make sense.