Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

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Decoding the Digital Consumer An Analysis of the Digital Music Behaviour of UK Consumers Mark Mulligan December 2013

MIDiA Research

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

 

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Analysis, Advice, Data

About MIDiA Research MIDiA Research is a unique digital content and music industry focussed syndicated research and analysis service. Brought to you by MIDiA Consulting, MIDiA Research leverages proprietary consumer data, market forecasts and indices, to provide unrivalled insight into the rapidly changing global digital content and music markets. MIDiA Research clients get online access to our research database as well as a regular series of research reports that give you the critical insight into the issues that will shape your business and give your company the strategic edge over the competition. Clients can also subscribe to get access to excel files of complete consumer datasets, market forecast models and other proprietary data tools. Research inquiry support and multiple site user packages are also available. For more details visit our website: www.midiaconsulting.com/research Or email us at [email protected]  

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

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The 20,000 Foot View 10 years after the launch of the iTunes Store and 5 years after the launch of Spotify, digital music remains a largely niche sector, with the notable exception of YouTube. Despite a decade of contraction the CD remains the most pervasive music product while radio is the dominant consumption platform. Subscriptions are making some headway but churn looks set to become an important part of the digital landscape.

Key Findings •

Radio and CD still outshine all digital music activities other than online music video



10 years after the launch of the iTunes Store music download buyer penetration is just 14%, though album purchasing is now just as widespread as single track buying



Streaming adoption is still relatively niche and paid subscriptions stand at just 4% penetration



Pricing, commitment issues and trepidation all act as barriers to consumer adoption of subscription services



The CD still reigns even for digital consumers, with 55% of digital music buyers and 45% of music subscribers buying CDs at least monthly



Non-Network Piracy is replacing P2P as the music sharing choice of Digital Natives, with Digital Immigrants still clinging to P2P



A quarter of music subscribers are also pirates



There is a music subscriber gender divide: 63% of subscribers are male



Subscription service churn is going to become a major component of the digital market: 46% of the entire subscriber audience have either churned or plan to churn

 

     

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

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The UK Music Consumer

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

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Figure 1: After All These Digital Years, Music Video Is The Only Digital Activity TO Have Broken Through To The Mainstream Top Regular Music Activities Of UK Consumers, 2013

The music industry is in a peculiar spot: digital is where all the momentum is and yet it remains but a small part of the equation. Across the globe digital accounted for just 25% of recorded music revenues outside of the UK and US in 20121 but even in the UK, one of the most digital markets, traditional consumption modes still dominate. Despite more than a decade of countless disruptions and challenges, radio remains by far the most pervasive of music formats with 70% of UK consumers listening at least monthly. Radio is thus still the best tool for reaching mainstream consumers at scale while at the same time gaining contemporary relevance through innovation such as the BBC’s iPlayer Radio. All but one other of the top five most common music activities in the UK are also traditional options, with the CD the most widely purchased premium music product with 35% penetration. The fact that the CD still holds its own in quite such dominant style is as much testament to the continuing pull of the format as it is to the narrower appeal of paid downloads and streaming. Ten years after the launch of the iTunes Store CD buying is twice as widespread as digital buying. Just 14% of UK consumers pay to download tracks and albums on a monthly basis and though the rate rises to the high teens in the US it is at similar and lower rates across most other key European markets. The fact that two thirds of this small base of regular music downloaders are iOS consumers illustrates the difficulty the paid download market has had breaking out of the iTunes beachhead. Although streaming will make some of the concerns moot, for now downloads are the most

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proven way of generating meaningful revenue from relatively mainstream consumers. Downloads are showing signs of maturity however, with the share of consumers that buy album downloads now the same as those that buy singles. Although the frequency of single purchasing is higher, it is nonetheless a reflection of download buyers becoming more comfortable with the channel. Also it suggests, for now at least, relative health for the album as a format. In the long run the album will face stiffer competition from new emerging formats. Right now labels and artists alike have in the whole shown little appetite for experimenting with breaking free of the album straight jacket, even though music fans have been busy atomizing their content across all forms of digital consumption. Streaming Subscriptions Still a Niche Download buyer penetration may be far lower than CD buyer penetration but it looks positively mainstream in comparison to the 4% of consumers that pay for streaming subscriptions. As a share of the UK adult population of 50 million this translates into approximately 2 million paying subscribers in the UK, compared to 7 million download buyers. Streaming subscriptions have so far failed to break out of the music aficionado, tech savvy niche. 77% of subscribers spend more than average on music, 76% have a smartphone and 47% have a tablet. These are anything but mainstream consumers. However with total free streaming penetration at 18% the upside of the equation is that paying subscribers thus represent a fifth of all streaming users, a highly credible conversion ratio. There are three key reasons subscriptions have not yet taken off: •





Pricing: Pricing remains the core barrier to entry. 9.99 is simply not a mass market pricing point, it is in fact the entirety of what the top 10% of UK music buyers spend each month across all recorded music products.2 9.99 is fantastic value for unlimited access to all the music in the world but it is more than mainstream consumers want to spend on music. That is the circle that needs squaring. Commitment: Most consumers are not frequent music buyers. Instead they buy the occasional album and / or single when they hear something they like somewhere or an artist they like has a new release. It is a big leap to go from getting occasional bite-sized chunks of music to paying every month for unlimited access to all of the music in the world. Trepidation: Having access to 30 million songs might seem like a core value proposition but digital catalogues have become so bloated that this supposed user benefit has become a user-journey-stumbling-block. There is so much choice that there is effectively no choice at all. This is the tyranny of choice. But what is an inconvenience for savvy music fans is a barrier to adoption for mass market consumers. The accelerating contagion of music spam (sound alikes etc.) only compounds matters.

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All three factors must be addressed before the subscription market can start to function at capacity. With free streaming penetration at just 17% it is clear that the proposition has not yet gained significant enough consumer mindshare. If labels and services work on the fixes, a more fundamental process of growing consumer awareness and sophistication will further drive adoption. A key strategic solution for the first two factors is Pay As You Go (PAYG) pricing, with consumers paying in advance for access with a broad range of top-up pricing options. In doing so consumers would pay for access based experiences as if they were a la carte products. As such PAYG pricing addresses the issues of both pricing and fear of commitment. The mobile industry used the strategy to great effect in order to help consumers come to terms with mobile phone subscriptions, now it is time for the music industry to apply the same principles to music subscriptions. Segmenting the Audience Digital music buyers as a group are in a transition phase, with many still buying CDs. Consequently the change process still feels like cannibalization as they progressively halt buying CDs, and this effect will only stop when the rate they stop buying CDs is outstripped by the rate new people start to buying digital products. The fact that CD revenues have fallen more quickly than digital revenues have grown since the turn of the century indicates that the shift is currently happening too slowly. The installed bases of download buyers and music subscribers both have to get bigger, faster. That is no small ask. To better understand how digital is impacting music consumption patterns we created three key music consumer segments: • • •

Music buyers: Those that buy any music product at least monthly, physical, digital or subscription Streaming music consumers: Those that listen to streaming music, free or paid, at least monthly Music subscribers: Those that pay a monthly fee for a music subscription service

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

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Figure 2: The CD Is Still The Product Of Choice Among Music Buyers Music Buying Behaviour Of UK Consumers By Segment, 2013

A number of key trends are apparent when looking at music activity across these three segments: •





CD reigns: More than three quarters of music buyers buy CDs at least monthly, while 55% of digital music buyers and 45% of music subscribers also buy CDs. Thus even for the engaged digital music consumers, the CD retains a compelling allure. In part this reflects inertia, a gradual transition from physical to digital. But it also hints at something more fundamental: that digital music products and services do not yet offer enough to the majority of digital music consumers to persuade them to call time on the CD. The old physical product thus still offers something more, something that digital alternatives do not. YouTube rocks: Over two thirds of streamers and subscribers regularly watch music videos on YouTube. This points both to the ubiquitous nature of the world’s most popular music app and to the fact that music video is a really important part of the digital music map. Streaming audio services need to integrate video posthaste. Music video plays to the strengths of the digital age devices such as smartphones and tablets in a way that the static audio file simply cannot. Add in lyrics, social interactivity and collaborative filtering and you have the killer music product. Of course that product already exists, it is called YouTube, utterly free, fully on demand on mobile devices and totally pervasive. YouTube leaves a far from a level competitive playing field for the paid for music services. Subscribers like albums: The fact that half of subscribers pay to download albums is as intriguing as it is important. On the one hand it indicates that subscribers will happily, and regularly, buy albums by their favourite artists, most likely after having sampled them on subscription services. But on the

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other it present cause for longer term concern. This behavior has an inherently finite life span: if a subscription service is doing its job well enough then there should be no reason for a subscriber to additionally buy albums to own. Which means that an important slice of current digital music album sales will disappear as these album buying subscribers end their transition phase. 60% of music subscribers are iOS users which means that subscriptions are competing directly for the spend of iTunes music buyers. The good news is that this shift will not happen over night, that there will be at least two, perhaps three or four years’ grace before this speed bump is hit. By which stage a much larger installed base of subscribers will be generating subscription revenue, as long as the aforementioned pricing and positioning issues are fixed. Figure 3: Music Subscribers Buy Single Downloads Less Frequently But Still Buy Album Downloads Regularly Music Download Purchasing Behavior Of Subscribers, UK

The relationship between subscribers and albums on the surface appears solid enough with streaming correlated with album sales, both CDs and downloads. But streaming’s impact on purchasing is in fact less straight forward as hinted at by the fact that the rate of subscribers that buy singles infrequently - 46% - drops to 26% for those that buy monthly. Streaming subscriptions are an immediate direct replacement for single tracks because this is the impulse and casual engagement end of the spectrum where a consumer that would have once tried out an artist with a single is now content to stream it a few times instead. The album buying habit dies a little harder but when it does, subscriptions can turn a £30 a month digital album buyer into a 9.99 subscriber. This is what happened in the US in 2013, dragging download spending down by 2%. Download growth held up in the UK, but expect them to decline in 2014 if subscriptions continue to grow.

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers

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The Role of Piracy One of the great hopes pinned on streaming music was its ability to combat piracy. There is sound logic in the strategy of fighting free with free and there is a growing body of evidence that the rise of streaming music services has accompanied a decline in the number of music files downloaded from file sharing sites. Figure 4: Many Consumers Do Not Use Streaming Instead Of Piracy, But Alongside It Music Piracy Behavior Of Digital Music Consumers, UK

There is also compelling evidence that suggests streaming has a causal effect on the number of music files downloaded. However when we look at the piracy activity of the three music consumer segments, two trends stand out: •

Music subscribers are the most ardent pirates. More than a quarter of music subscribers are regular P2P users, making the segment most likely to pirate music. This is not evidence that streaming drives piracy, rather that some of the most engaged music subscribers are also engaged pirates. This apparent contradiction is a long-standing feature of the digital music marketplace. Lobbyists on both sides of the piracy debate have long grappled with how to interpret the fact that a significant share of pirates are also digital music buyers. The arguments over whether piracy drives sales or reduces sales continue to run but the simple answer is that there is a non-causal overlap. File sharing, buying downloads, and now subscriptions are all activities of engaged digital music consumers. Drawing definitive conclusions about which part of equation benefits most is an exercise way beyond the scope of this report. What we can conclude with some degree of certainty though is that the continued

Decoding the Digital Consumer: The Digital Music Behaviour of UK Consumers



 

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reliance on P2P by a quarter of subscribers can be explained in the same way as the lingering embrace of the CD: namely that streaming subscriptions still do not do quite enough to persuade them to stop file sharing. Whether that be a craving to own that just won’t subside, or the ability to make copies of files and play them on multiple devices. P2P is not the only piracy game in town: Music piracy has always been a rapidly evolving space, continually evolving to keep one step ahead of industry enforcement and counter measures. As that battle waged it became increasingly clear that evasion was far easier off network, which led to the rise of Non-Network Piracy. As we can see this now stands on a par with P2P, with almost identical adoption levels across all three music segments. The bad news for music industry anti-piracy activities is that Non-Network Piracy is far harder to police because most often it is a oneto-one activity rather than one-to-many. For example bluetoothing tracks from phone to phone, swapping hard drives etc.

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The Digital Gender Divide The common denominator trend of consumer adoption of new technology is that tech savvy younger males are the first to adopt. Whether it be digital cameras, smartphones or tablets, males over index in the first wave of adopters. Music is no different: CDs are the most established music product with the longest history and the most mainstream reach, consequently the split between males and females is almost even. At the other end of the sophistication spectrum are P2P and music subscriptions, both of which have strongly male skewed user bases. In the case of P2P the technology appears to be slipping back to the tech enthusiast margins, in part because of industry countermeasures, but also because downloading files is gradually becoming less relevant in the context of cloud based experiences. Non-Network Piracy is much more evenly split across genders and when this is considered along with the fact that twice as many Non-Network users are 18-24 compared to P2P users it becomes clear that this is the piracy option of the Digital Natives. P2P meanwhile is becoming the out-dated mode of the now 30 something Digital Immigrants that drove the first wave of digital music but that are now passing the baton to the Digital Natives. Figure 5: Both Music Subscribers and P-to-P Users Skew Male Gender Split Of Key Digital Music Behaviours, UK

The strong male skew of both subscriptions and paid downloads underscores the degree to which the digital music market is underserving females. The CD split shows us that music buying’s natural equilibrium is an equal gender balance, but most digital products are still too technology heavy, focused on shiny new widgets and big numbers rather than the basics of meeting consumer needs and solving user problems. The immediate outlook looks set to be a

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continuation of the status quo: just 1% of females say they plan to subscribe to a music service. Granted the rate for males is not exactly sky high at just 3%, but the 3-to-1 ratio points to a prolongation of the current music subscriber gender divide. Figure 6: The Post-Subscription Music Consumer Distribution Of The Music Subscriber Audience, UK

Every subscription business is about managing churn and music subscriptions are no exception to the rule. In fact they face an even harder task of retaining their customers than many other subscription offerings because their core product is not a scarce commodity. If a consumer opts to stop paying for a TV subscription he will lose access to specific programming such as live sports; if a consumer cancels her mobile phone contract she will no longer be able to easily communicate with her friends on the go. But cancel a music subscription and all the music in the world is still immediately available – for free - on YouTube and on Torrents, as well as countless radio stations, TV channels, music TV shows, without even considering the ex-subscriber’s own music collection. Cancelling a music subscription simply turns off the tap on convenience, not on the content itself, and the share of people that are willing to pay 9.99 a month for convenience is not exactly vast. This is why music subscription services need to up the innovation ante, to the extent of considering their current propositions as little more than the fuel for the engine. Right now though, churn remains a major issue: looking at the entire base of consumers that have either previously been subscribers, currently are subscribers or plan to become one, 44% have either already churned or plan to do so. Just 32% are current subscribers that intend to remain so.

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This base of churned music subscribers poses a key challenge for the digital marketplace: these consumers have tasted unlimited on-demand music without ads, on their phones, but are now going cold turkey. The question is where they will get their next fix? If it is not from subscribing to another service then the illegal sector beckons. This is the challenge that the music industry must meet over the next couple of years. It must ensure that these consumers either reengage with full fat music services or instead are nudged towards lower price point alternatives. On a positive note, the fact that 56% of the entire base are either current subscribers or plan to become one suggests modest growth. But even this ‘glass half full’ spin cannot distract from the fact that there is scant evidence of dynamic growth ahead. Subscriptions have reached an initial saturation point and require that something extra to kick them onto the next level. Once subscription services start delivering truly next generation experiences, cheaper pricing tiers, compelling programming and curation then consumers will have plenty more reasons not to churn. Until then do not expect subscription service penetration to suddenly start rivaling that of the download, let alone the CD.

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