An interesting couple of days in the online subscription music space. First, we have Rhapsody announcing that it was purchasing the (legal) Napster service which was most recently owned by Best Buy, Inc. (The legal Napster’s history is more tortured than the original file-sharing version. The legal Napster’s gone through multiple owners, none of which seemed able to crack the code to success. The original version only upended the music industry and, had the music industry bought into the vision of VC Hank Barry, might have moved it forward, but we’ll never know.)
While terms of the deal weren’t disclosed, it seems apparent that the Best Buy iteration of Napster completely missed the momentum created by the “content-as-app” movement that pushed competitors (Spotify, MOG, Rdio) and near-neighbor competitors (Pandora, Slacker) forward.
Getting paying subscribers at what one assumes to be a close-out price makes sense for Rhapsody. (No official subscriber numbers are available but some industry estimates put Napster’s subs at somewhere between 175,000-200,000.) Not only are paying subs the objective of any subscriber-based model, we all know that labels, artists and music publishers will always be demanding more. If they don’t see the growth, I believe they’ll be more than happy to see more consolidation of services that aren’t generating subscriber and revenue growth.
And there’s this whole “free” thing that seems to bedevil these online services.
For online music subscription services, as with any subscription service, the core business challenges are lowering customer acquisition costs and reducing churn. We’ve seen the industry try “free” trial offers of 14-days, 30 days and, even Rhapsody’s sonsidered longer trials. (Rhapsody’s maintains a 30-day trial period that let’s “free” users access all the features of the service.) However, as we all know, it’s only free to the consumers. These services have to pay for every single “free” stream. Period.
Another recent example of the challenges posed by the freemium model, especially for online music, comes from the spate of news stories (like this one) out of Europe stating that while Spotify’s user base has grown and its revenue to just over $100 million, five times over 2009’s revenue of $18 million, the company generated a $41 million dollar loss.
Can Facebook integration help? Perhaps. At the recent Facebook F8 conference, Spotify, MOG, Rdio and other services announced various partnerships with the social networking giant. They’re all playing the same card here: how to use Facebook’s massive reach and staggering engagement numbers (what was the recent stat, something like half the time U.S. online consumers spend online is with Facebook?) to cheaply acquire new users and then convert those users into paying subscribers.
What’s really interesting to me is that while each has a slightly different tactic, they’re all playing a variation on the same theme: “free” access to the services – they just don’t tell the user how long that free period lasts. (Except as I mentioned before, Rhapsody’s maintains a 30-day trial period.)
And I think that’s just awesome. There are free-riders and there are people who want to make a good-faith effort to try a service before throwing down $4.99/month or $9.99/month (if they want access on their smartphone or tablet). If lowering customer-acquisition costs and reducing churn are the objectives, these services need to be able to turn the dials and adjust the offer to more quickly get rid of the free-riders and get the potential paying customers to make a decision.
Without some way to get the consumer committed (to paying), no amount of advertising subsidization is going to make the online music model work. Beyond radio that is.
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