More Winner Takes All
The goal of the rights holders is to create competition. They believe leverage is greatest when you can play one retailer off another. This is true, but it’s a complete misunderstanding of the digital landscape.
Please read this article:
At the end of last week, stats were revealed showing that MOG was the fastest growing music service on Facebook:
The only problem was, the numbers were in percentages.
And when you go from one to two, that’s a 100% increase. Whereas when you go from 1000 to 1100, that’s only a 10% increase.
The devil is in the details. And the story, as told in the TechCrunch article linked first, is that Spotify is killing its competitors on Facebook.
Spotify has 2.4 million daily users and 7.4 million monthly users.
MOG has 10,000 daily users and 170,000 monthly users.
Rdio has 4,000 daily users and 60,000 monthly users, but just 6.6% of its users return each day, as opposed to 32% at Spotify.
So what did we learn here?
1. There’s an early mover advantage. It pays to be first. Spotify pioneered free streaming of millions of tracks and built up a critical mass that cannot be undercut by me-too products. Spotify won this war, it can only lose if someone comes up with something better. In other words, Bing can’t compete with Google unless it’s superior by a huge margin, which it is not. Most of Bing’s market share has been purchased, by deals with Yahoo and mobile carriers. And Bing has hemorrhaged billions and profitability is nowhere on the horizon. It’s not only record labels that are ignorant, even Steve Ballmer couldn’t see that only one site wins online. Sure, scraps are left for iconoclasts, but those scraps don’t generate huge profits.
2. Network effects. Once everybody starts using something, it makes it damn near impossible for a competitor to enter the market and win. There’s word of mouth, everybody wants to play with the cool people. But most importantly, this is where social comes in. When other systems are incompatible, everybody gravitates to the winner, because that’s where everybody is.
3. Online is not like brick and mortar. All shops are right next door to each other, a click away, online. You might have overpaid for convenience at your local record shop, not wanting to drive further, but this is not an issue online. Notice that Spotify, MOG and Rdio don’t differentiate on catalog, they’ve all got essentially the same tracks. And functionality is good enough with Spotify that no competitor can win on that basis. We saw this with Palm, supposedly functionality was a bit better than the iPhone. Didn’t make a difference, Apple had already won. As for Android… It has triumphed because of costs. The software is free and so are some of the handsets. Apple might be able to stop the juggernaut with lawsuits, but if not, this is Windows versus Mac. But in online music services…you can’t get any cheaper than free! It’s impossible to compete on price!
4. Facebook trumpets the percentage increases of Spotify’s competitors because just like the record labels, it wants competition, if one company wins, it has the leverage. If Spotify gets big enough, it dictates to Facebook.
5. Spotify has traction. So much of what gets hyped online is a fad, like turntable.fm. Heard anybody talk about that lately? You must separate the fads from those with sticking power. But just because a site is a winner today, that does not mean it will be a winner tomorrow. Either Apple has an all you can eat streaming service in the wings or it’s going to lose out in music. Purchase is in decline. Because it’s hard to rationalize paying for a little when you can get a lot for free. As for the sunset of all you can eat for free, cheapies won’t gravitate to purchase, they’ll just keep their money off the table. Either people will pay for mobile access or music will end up being baked into other services and will feel like free.
These are tectonic changes. And when they happen, they create instant winners and instant losers. The computer triumphed and the typewriter died. AOL burst open the online world but didn’t change fast enough, was married to a dialup walled garden for too long, and the World Wide Web and cable/DSL killed it. Just because you win today, that does not mean you win tomorrow.
Moore’s Law tells us that computing power doubles every two years. This increased power allows unforeseen innovation the same way broadband adoption ultimately begat YouTube. The more innovation enabled by technology, the more the old world is shaken up. Sure, you can make music the same old way, but how it reaches the marketplace and what the compensation is is totally up for grabs.
That’s fact. And you can’t argue with facts.
You can lament the passing of the past, or try to ride the new wave into the future.
And it’s just like surfing. It’s easier to watch from the beach. Catching a wave ain’t that easy and riding it in can be even more difficult. But you can’t win unless you wade into the water.
Music is no longer separate from the online world, it’s fully integrated. To think you can keep people from mashing up music with other media is to believe you can stop people from having sex. Your best bet is to try to figure out where it’s all going and instead of complaining, ride along.
CONCLUSION
It doesn’t matter what Spotify pays. The power has shifted from the creator to the consumer. If every rights holder pulled his music from Spotify the service might die, but the public would remember it, the same way it remembered Napster after it was shut down. You lead the public, you don’t take away from people. If you take away, people get pissed, no matter what your rationalization. They no longer believe you’re on their side, they steal and negatively impact your business.
If you’re planning a music distribution site, know that only one wins, there’s only one iTunes and one Spotify. If those odds appeal to you, go for it.
If you do compete, you can’t be a little bit better than the winner, you’ve got to be a lot better. Otherwise, people won’t switch.
The rights holders believe that’s what they’ve got, the rights, that they hold the ultimate trump card. Didn’t work so well in the P2P world and there’s a whole generation of musicians who’ve grown up tech-savvy and oppose restrictions, they see the benefit of sharing. This speaks negatively to those playing by old rules.
We’re gonna continue to have winners and losers. Many of these companies will appear to rise out of nowhere. People laughed at Amazon, Facebook went from nothing to everything. Facebook could kill MySpace because MySpace was an inferior product. Spotify is not lame, you can only improve on it a little, that’s not enough to differentiate yourself. So, to all the other streaming services…good luck!
