1  

Music Service Monetization 2.0 “The lesson learned from strategic partnerships in media channel we see in Europe and US market today can be reference to others.. especially Indonesia, as one of the largest mobile internet markets, after massive termination of premium SMS directed by regulator last year.”

Service Model The digital music mainly has been segmented into 2 types of consumption model. Both of these models are part of broad shift in the current digital music industry, from the analogue to the digital consumption, as result of development in the cloud service and network quality, as below: • The “Access model”, provided by

the Streaming-core service • The “Ownership model”, provided

by the Download-core service Although the Music download continue to grow to 17% worldwide, nowadays we can also see the market demands to accessing the music is toward across multiple channels, platforms, and spawn to diverse models. Thus the music alone should not longer just seen as product, but the experiences built around that are the leading to way into new era: interactive, social and profitable. It is reported the paid-subscription to Streaming-core service has increased 65 % worldwide, reached total 13.4 million users. In the strategic alliance point of view, the Streaming-core service itself has more ability impact to the Access provider’s core business, compare to the Download-core service. This happens because music is actually beyond as just commodity for the Access provider. Music is inherently emotional for people, and by using the Streaming-core service; user spends more time with it (“stickiness” aspect). The revenue from this type service is also generated via repeatable billing cycles, so the Access provider keeps the revenue from the flow data traffic as customer naturally accept the bundling with monthly-billed concept (“recur” aspect). Thus, the quality of experiences, and satisfaction of the service features become huge matter; create genuine bond between customer and the service. These are some of the keys to reduce the churn rate, because the service turn as factor that make customer stay with their Access provider. The fact that the Streaming-core service is delivered in high-end mobile device

and can be bundled with data plan is a significant point for the Access provider to gain more customers, and because this is the “Access type” consumption model, thus it is natural for the user to get access to it across different devices (“up-selling” aspect). These are important to stabilize or even increase the ARPU by using data plan adoption over range of combinations products, expands the Access provider’s position in the supply chains, from PC, mobile phone, IP TV to Audio system. Indeed, Access provider can compete for customers not mainly based on the low price of the offerings, but due to the attractiveness of the bundled service itself (“cross-promotional” aspect). In contrast, in the Download-core case, the price competitiveness is highly important, and user just download the track then can choose to experience the music in offline mode and/or elsewhere via other devices. Thus, they have fewer bonds with the service, and loyalty with their Access provider.

Partnership Model Nowadays, more and more we see the collaboration between the Music industry players with different industries. It started decade ago by the collaboration with the Internet industry, and then recently expanded to the collaboration with several other players, range from the Mobile device, Consumer Electronic provider, as well as Access provider (ISP, Telecom, IP-TV operator). All of these bring music closer to the consumer, become key route to the global mass-market distribution.

The real value of music has potential as game-changer for Access providers, as it can keep them competitive in the market, increase market share and ARPU, reduce churn rate. Even it is too early to conclude this type of service would be the killer answer of the new revenue source that the players in the Internet, Music and Telco industry have been searching for, it is theoretically form mutual benefit for parties involved. Sweden can be example of the successful of the recent collaboration. It was reported that during 2009, 60% of the

file sharing activities was reduced, where 49 % of those had moved to access the music streaming service. The total revenue of the Label Record companies increased 12%, where the revenue from digital grew 84% in 2011. The “Direct model” This partnership can be seen as the early model that is run in the digital music industry, the Partnership 1.0 model. It is set up directly by the main players in the Music industry (Record Label/Collecting Society and/or Aggregator) and other industry fields. Some examples variance: a) Partnership with Access provider,

e.g. TDC in Denmark, SK Telecom in South Korea, Telefonica Group in Brazil, Telecom Italia in Italy, etc.

b) Partnership with Consumer Electronic Provider, e.g. Nokia (Nokia Music App), Sony (Sony Music Unlimited in Sony PlayStation and TV), etc.

The “Bridge model” This partnership can be seen as the Partnership 2.0 model, the current model that is run in the digital music industry. It involves the “bridge” (Service provider) in setting up the link between the Music industry and players in different industry fields. Some examples variance: a) Partnership with Access provider,

e.g. Spotify with TeliaSonera in Sweden and Finland, Deezer with Orange in UK and France; Muve Music with Cricket in US; Wimp with Telenor in Norway, and Canal Digital in Portugal, etc

b) Partnership with Consumer Electronic Provider, e.g. Rara.com with HP in Europe market, Spotify with Sonos, etc.

c) Partnership with Consumer Retail, e.g. Muve Music with Walmart and Best Buy in US; WiMP with Platekompaniet in Norway; JUKE with Media Markt in Germany, etc

In general, the Music industry actor can see both of these models as powerful alternative to reduce the piracy access, taking advantage over billing structure and commercial network footprint as

2  

“Spotify and its partnerships have several final touches..makes it different and more successful compare to other prominent competitors”

digital data delivery channel from the Access provider. While in return, the Access provider can use this as opportunity to make differentiation over tight competition in their market, as well as dealing with Internet player’s data hungry Over-the-Top (OTT) services. Meanwhile, for the Service providers (in the “Bridge model”), which are mostly new/small company running new type of business, its tie up with big players would significantly add value to gain more customers and competitiveness over hundred competitors, and offers strong bargain in dealing with giant Music industry players.

TDC and SK Telecom are some Access providers that were successful in delivering the “Direct model”. The data shows that TDC has reduce churn rate ~50% and by November 2010 have recorded 250 million downloads from its Download-core music service since launching in 2008, YouSee PLAY. Meanwhile, SK Telecom has ~ 30% grow in mobile data revenue, far ahead from its competitors due to its Music streaming service, MelOn. The fundamental reason of these successes was due their value proposition that could not match with their local competitors. In TDC’s case, its free download offer was huge attractive to Danish market as result of successful setting up agreement with all Major record labels and Danish Indies. While in SK Telecom’s case, the fact that it has subsidiary company that is the largest Record Label in South Korea (Loen Entertainment), significantly remove the agreement complexity with Music industry players and reduce cost to simultaneously operate the service with appropriate update contents. However, there are prohibitive up-front costs and significant complexities that prevent others to follow, as these success factors above are not easy to be replicated. First, there are huge efforts has to put in releasing the music in the product that has enough affordability, quality, constant content, etc. Second, there is significant time and cost consuming for the marketing, branding, and high complication in setting up agreement with the Music industry. Third, the music as whole (including

ring tones, ring back tones, etc) is Value-added service (VAS), not core of the Access provider revenue, contributes small proportion to the annual non-voice revenue (globally around ~5% by 2013). Fourth, using this model the Access provider has to directly struggle to compete with Digital retail store from Internet players (e.g. Apple with iTunes and its iPod products). It reaches global consumer, creates trend, and puts off the Access provider’s customer from their retail channel. There are several fails example of “Direct model” that we can see, delivered by range types of access provider worldwide, e.g. Virgin Media direct partnership with Universal Music in UK, France and Australia market back at 2009, as they were unable to secure deal with other 3 Major labels. Or, BSkyB music service fail in UK market even tough it had direct backing of all 4 Major and various Indies record labels, due to unable to reach large enough customer, etc Moreover, the “Bridge model” model theoretically has similar effect with the “Direct model” on its potential in gaining the market share, increases smart phone up-selling with bundled data plan, as well as reduces the churn rate. However, it more makes sense for the Access provider to use this model, instead of creating their own (the “Direct model”), as it offers the opportunity to the similarly compelling the service, but with opportunity to gain it quickly and in simpler way, as well as at reasonable cost. By using this partnership model, the Access provider can significantly shares the effort on marketing and branding cost, as well as saves time on delivering the service to the market. This kind of partnership gives the Access provider an already established and well-known music platform that crucially has had existing deals with the Major record labels, compare to the fail using the “Direct model” that have been faced by some of the Access providers worldwide. While in return, the Service provider can expand its customer base very efficiently. Indeed, partnering with the well-known and right Service provider would bring extraordinary impacts on the core business of the

Access provider, expands the values beyond the traditional boundaries of a network into wide range of areas.

The lesson learned and dynamicization from media channel we see in European and US market today can be reference to others, e.g. APAC market, especially Indonesia, as one of the largest mobile Internet, after the massive termination of premium SMS directed by regulator last year.

Spotify Spotify is a digital music service founded in Sweden and commercially released in 2008. Spotify business works through 2 key customer segments, the User/Music listener that is divided into several groups and the Advertiser. Spotify forms this business by facilitating its supplier segments and customer segments into multi-side platform.

Value Proposition Spotify actually does not offer new type of business in the music industry, as there are already lot of music retails and music service providers that also have the same main offers. However, Spotify and its partnerships have several final touches apart from main offers that make it different and more successful compare to other prominent competitors. Using its platform and strategic alliances with players in the range of industry, Spotify combines the excellence of seamless streaming experience, music catalogue size, social music feature, service availability in several devices, product bundling, customer and developer community, etc.

Unlike iTunes and other music services that forms the business based on Download-core, Spotify does not just sell product (music retail selling unit), but also provides service (on-demand and radio streaming), and as local player. Spotify closely resembles the Radio model, iTunes model as well as the original Napster model, by recognizes the validity of copyright and conducts its business accordingly. Apart from those, Spotify provides access to both the major record labels and unknown Artists, whom are not yet commercially viable (Indies), by maintaining

3  

“Spotify works differently compare to other similar services as it relies on several way, makse the music delivered seamlessly to client” searchable presence from its catalogue, covers 15 million licensed music (globally, size and availability varies in each country). From those aspects above, Spotify able to build 2 key resources: • The music delivery as intellectual

property using “Value mix” model (music as product and music as service),

• The information it has about it users, used for specific target on marketing purposes.  

Convergence of the service across range of devices is one of major themes in digital music business. It Spotify is delivered as downloaded client application with proprietary protocol, makes it has much control over the network protocol as opposed to service develop as web-based. The application is built in several platforms, makes it available in range of devices: the Desktop clients (Windows, OS X, Linux), mobile devices (Android, iOS, Palm, Symbian, Windows Mobile, Blackberry, WebOS) and consumer electronics (iPod products, home stereos). Spotify has device integration feature between these devices, so user can manage and sync all the music contained in the Spotify play lists to/from iPod, mobile and tablet devices (iPad), and access those “cloud tracks” offline, as well as doing download purchase through several bundle options. Moreover, for the audio bit rate, Spotify uses different rates of OggVorbis, the Variable-bit rate (VBR) audio compression format that is unpatented, make it a well-suited replacement for proprietary audio formats. The standard rate used in the desktop is ~ 160 kbps (OggVorbis q5), and in the mobile device is ~96 kbps (OggVorbis q3). Spotify offers feature to its Premium users to access limited tracks with higher quality in their desktop up to ~320 kbps (OggVorbis q9) and up to ~160 kbps in the mobile device (~320 kbps for Premium user using iOS device). Spotify works differently compare to other similar services as it relies on several way, makes the music delivered seamlessly to the client (median playback latency ~265 ms). Spotify

uses TCP-based communication that guarantee each bit of media stream is correctly delivered. However, TCP is accomplished with timeout and retries mechanism. Thus, Spotify is implemented using peer-assisted streaming per track (P2P), not per torrent as used in BitTorrent (only implemented in desktop version). It uses 3 data sources combination: the CDN/core streaming servers, P2P and cache, where 8.8% data comes from servers, 35.8% from P2P, 55.4% from user local caches. Using this, Spotify recommends 256 kbps bandwidth and some caching space. Revenue Model Spotify’s cost structure are mainly to address the Copyright usages of its music delivery to the Music Industry players, apart from software

development and maintenance. These costs are funded trough several streams, as below: 1. Streaming subscription

Since its commercial launching in 2008, Spotify has made several price scheme changes; with the last was November 2010. It only offers 3 tiers for its Streaming service since then, as shown in Table 1. User that has signed before November 1, 2010 is allowed play maximum 10-hour monthly with 5 times / track, and new user was exempt from these changes for the first 6 months. Spotify recently confirm that it has plan to launch premium family plan, which is incentive offering for more members of the same household to get access on multiple basis and to prevent password sharing among them.

4  

“This makes Spotify as largest paid-based subscribers worldwide, the second largest source of digital music revenue in Europe.”

2. Download purchase

Spotify also build its own music store with bulk discounts, as shown in Table 2. Its platform in range of devices allows user to synch their music collection, so they can enjoy it in several devices using same account. 3. Advertisement

Spotify offers free subscription plan (“Spotify Free”) that is supported based on audio and graphic advertisement (banners, page takeovers, etc) and sets partnership with several brands, e.g. Coca-Cola, Chevrolet, Motorola, Reebok, The Daily, etc. Using the information that it has about its user e.g. demographics, location, music genre preference, etc), Spotify able to deliver this advertisement in specific targeting pinpoints, detail tracking and reporting. From the discussions above, it can be conclude Spotify revenue streams are

build based on 2 prising models: • The “Freemium Subscription” model, which is implemented to subscription bundles: the “Advertising-support” (“Spotify Free”) and “premium” bundles (“Spotify Unlimited” and “Spotify Premium”) • The “Pay-as-you-go” model, which is implemented to its download feature Spotify implement these pricing models using the “Demand-based pricing” strategy, where it adjust the price between countries, follows the perceived value as the central element to set the price. Even tough the exact Spotify annual revenue comes from these streams is not reported clearly, the 20% conversion rate is far away compare to other Internet players, and impressive to secure cash flow in long run. The introducing of mobile device feature was one of key factors that significantly

boost Spotify paid-subscriptions user, as shown in Graph 1, and also revenue. The success factor of this conversion rate is clearly mainly supported by the features differentiation arrangement that Spotify put in its bundling subscription (mobile version, max time-access limit, max similar-track limit, offline access, etc). Based on its pricing scheme and its subscriber based above, this revenue is analyzed to come ~ 23 % from adverting-supported users and ~ 77 % from paid-subscriptions users (mainly “Spotify Premium”), as shown in Graph 2. It is reported that Spotify annual revenue during 2008 to 2010 was boosted from ~ $380 thousand to ~ $63 million, with total loss ~ $316 thousand to ~ $26 million, mainly to cover the licence payment to the Music industry players. Market Segment The expansion strategies that Spotify resembles are mainly targeted to the early adopter user, which potentially drives more benefits in long-term engagement. Spotify use geographic segmentation, as same as what Facebook did in its early years. Its first commercial launching was in Sweden, and since then it has been available other 13 countries across the globe (Spain, UK, France, Netherlands, US, Denmark, Faroe Islands, Austria, Belgium, Switzerland, Germany). Spotify also has variation offer in some market, e.g. the implementation of “Private beta” launching model for unknown period of time. User only can get access to the “Spotify Free” with invitation, but keeps the paid-subscriptions opens. Spotify keeps changing the offers it puts to its bundling tiers, which also might be different in several countries, e.g. radio service available for Free-based users in US, or no 5-track cap for Free-based users in several European countries. All of these strategies are not just mainly due to copyright settlement with the Music industry players that work differently between countries, but also to help on making the product exclusive and attractive to its early adopter users. It happens, as they are exposed to the service, but unable and/or has limited access on using it for period of time.

5  

“Spotify has strategic alliances in other industries, builds channels to deliver its service closer to user.” Spotify reports to currently have total 10 million registered users (3 million are using paid-subscriptions/ 15 % conversion rate). This makes Spotify as the Streaming-core music provider with the largest paid-based subscribers worldwide, as well as the second largest source of digital music revenue in Europe. Value Network and Competitive Strategy  In order to legalize its business, Spotify mainly deal with players in the Music Industry. Apart from that, it also has strategic alliances in other industries, builds channels to deliver its service closer to user. 1. Music Industry Spotify opens its service channel not just for Major labels, but also for independent/Self-published Artist (individual or unsigned), and small labels that do not have delivery partner or platform. They can make deliveries through several Aggregators or Collecting societies that already have an agreement with Spotify. Thus, it can be conclude that basically Spotify mainly deals with Record label, Music publisher, Collecting society, and/or Aggregator, not with the Artist. There is no clear statement on how the financial arrangements work, as it is set up with the Non Disclosure Agreement (NDA). But the payment is basically calculated based on function of total number of streams and revenue of that particular month, result the payout per stream. When the total stream grows more than the total revenue, the payment per stream might be less. Thus, there is no fix price in Spotify system, difference with “iTunes” model, and some of the deals might have discount arrangements. 2. Retail and Online Payment

Industry In order to leverage its availability, Spotify launched partnership with Paypal for user in UK, broad its online payment channels. It then set partnership with other players in the retail business, makes its payment models expanded not just using online payments, but also cash payment. Since September 2009, Spotify

users able to purchase several months subscription of “Spotify Premium” plan in retail stores in the Nordic countries e.g. Pressbyrån, 7-Eleven, Narvesen, ICA, Rimi, and Coop, just like toping-up mobile or buy train ticket, and introduces the “Gift card” concept. 3. Consumer Electronic Industry Spotify key activities also to develop its platform to range of products, extends its capabilities and values. Apart from availability in the computer desktop and mobile phone, Spotify widen its service to other devices, mainly home stereo (require user to have ‘Spotify Premium” plan). It is partnering with several Players in this industry, e.g. Oknyo, Sonos, Logitech, Western Digital, Boxee, and Phillips. 4. Internet Industry Spotify partnership with Internet industry range with other proprietary service providers. This offer is inline with vision to be the “OS of the music”, by making it available in range of devices, as platform of embedded applications. This means it allows third parties to create discovery application based on collection of music, images and video, integrated with its platform. However, there is currently no way for these third parties to monetize this channel. Spotify also built social feature in cooperation with Facebook, using the “Open Graph”, that bridges between Facebook’s platform with other third-party services. This is actually significant moving point where the music industry becomes closer to the social network, after MySpace made music as social entertainment. Using this, Spotify user can automatically share and discover music each other in the Facebook page, event if they use different Service providers that interact with Facebook different way. This partnership boosts Spotify user, as it was reported, Spotify generates ~ 83 thousands new users/day since Facebook f8 conference. While in Facebook point of view, this partnership would potentially make their user increase amount of time they spend in its environment, supporting its ads-core business.

5. Partnership with Access provider

Apart from strategic alliance mentioned above, Spotify also set up partnership with several access providers, both the Service Provider (ISP) and MNO. Spotify started its first agreement with TeliaSonera in Sweden and Finland. It then also broad this in November 2009 with Hutchison Whampoa (3UK) using tariff with inclusive “Spotify Premium” subscription bundled with 3UK’s first Android handset, HTC Hero. The offer comes with £35/month over 24 months contract, plus upfront fee £99 for the mobile phone, where the package includes: Unlimited “Spotify Premium” for mobile and PC during the contract period (worth £240), 750 minutes to other mobiles, unlimited texts and 3-to-3 calls, unlimited internet access, and free Skype-to–Skype call. Spotify also launched another partnership in that region, with Virgin Media in 2011, for broadband, mobile and set-top box IP TV users, where the offers are only available for new or re-contracting customer. Following the expiry of the free offer period (6 months at no data charge for fixed broadband customer, and 3 months for mobile), Virgin Media’s customers can continue subscription to several Spotify’s services through Virgin Media’s network. During the same period at that year, Spotify sign agreement with KPN, the Dutch’s incumbent. The agreement allows KPN to offer Spotify Premium bundled to its top-tier triple play broadband customer that connected with Extra or Premium (copper DSL) and Silver or Gold (FTTH) package, €55/month.

Spotify-TeliaSonera Partnership TeliaSonera is a merger company between Swedish incumbent, Telia and Finish incumbent, Sonera at 2002. TeliaSonera telecom services operation are splinted into 3 business areas (Mobility Services, Broadband Services, and Eurasia), and operates in range of countries in Nordic, Baltic, and Eurasia region (Azerbaijan, Denmark, Estonia, Finland, Georgia, Kazakhstan, Latvia,

6  

“Spotify subscriptions increased by ~ 300 %, acquired ~ 25 % Premium subscription, and TeliaSonera also cited this as one of 3 reasons of its strong performance.“

Lithuania, Moldova, Nepal, Norway, Russia, Spain, Sweden, Tajikistan, Turkey and Uzbekistan.). It is now the 5th largest telecom company in Europe by revenue and customer based. TeliaSonera Net sales amounted to SEK ~ 105 million, where the market share of its business areas are 49%, 35%, 16% respectively, with 170 million total subscribers by Q4 2011. In Sweden, TeliaSonera operates under Telia, Halebop, Skanova Access and Cygate brand. In the country with 9.4 million populations, the mobile penetration has reached 139%, followed by fixed telephony 54%, and Broadband 32%. TeliaSonera serves mobile communications, broadband, fixed voice (incl. VoIP) and data communication services and claims to occupy as the first in the market position except for data communication, 4th position. Moreover, TeliaSonera operates under Sonera, Tele Finland, Data Info and Cygate brand in Finland. This country has 5.4 million populations, with mobile penetration has reached 142%, followed by fixed telephony 48%, Broadband 39%. TeliaSonera claims to occupy as the second in this market, except for data communication, 3rd position. Strategic Alliance Model Spotify started its 2-years exclusive agreement with TeliaSonera in 2009, which makes TeliaSonera as sole exclusive operator in Sweden to use Spotify within its products branding and marketing. They boarded it to Finnish market in 2010, and then renewed it in 2011 for the next 2-years forward. The partnership enables “Spotify Premium” plan to be bundled with TeliaSonera’s mobile, broadband, and IP TV service. The access to IPTV Set-Top-Box’s was activated in June 2010. Spotify bundling in TeliaSonera products has more attractiveness for the user rather than if they access it trough other Access provider due to several reasons. First, TeliaSonera offers free access for “Spotify premium” plan up to 6 months in several packages of mobile phone contract. Customer under that contract also gets access to “Spotify premium” using the same account in broadband connection and IP TV.

Second, the data connection used during the streaming is counted toward the bucket consumption billing. However, once the customer reached over the limit, it still can get access to Spotify streaming service and other OTT services (Speed Throttling). TeliaSonera implements the “Volume-based” data plans (caped based on bandwidth volume) and does not do packet inspection to differentiate Spotify’s traffic with other OTT’s. Values Exchange There is no exact addressable market mentioned in the campaign marketing of the alliance. However, it is clear that this partnership strengthen both TeliaSonera and Spotify brand by associating each other, as the offer opens possibility to both parties to expand their market and tight the bond with their customer. Spotify type of service mostly suit the young customer, means this offers will have strong attraction to the first-time broadband and TV subscribers. And as same as several other Network operators, TeliaSonera previously has its own music service, “Telia Musikbutiken”, but failed to unlock the Music business through its telecom ecosystem business. Even tough the Revenue sharing model is not officially announced to the public, it is confirmed TeliaSonera takes some part of the slice and leaves there rest to Spotify to be splinted with the Music industry. So basically, there is no direct arrangement between TeliaSonera and the Music industry (as how the “Bridge model” works). Although it is confirmed that TeliaSonera also involve in bargaining discussions to help on releasing the product to the market under the agreement model. TeliaSonera able to offer the free “Spotify premium” access during early months promotion with no “Hard cap” policy, as there is also specific discount arrangement exist. This is the offer that other Access providers could not afford and they are not allowed to use any Spotify brand included in their own packages. TeliaSonera has to made step toward differentiation among prominent competitors in broadband and especially in the IP TV product, as its position in these markets is not as strong as in Mobile product and the significant

competition both in Sweden in Finland pushes the price and ARPU down. In the Nordic market itself, TeliaSonera main competitor also has launched the similar service, which is Telenor and WiMP partnership, started in Norway and went toward Sweden. Using this agreement, TeliaSonera has built at least 3 Strategic objectives: opportunity to reduce the churn rate, up-selling subscription to higher value packages, and increasing ARPU. In Spotify side, this partnership significantly increases its customer base, and more importantly drives these customers directly to higher-value based subscription (“Spotify premium”), which is still the core business among Spotify Revenue streams. Moreover, at the time when the agreement was launched, Spotify was still young brand and small market segment. Partnering with incumbent would definitely leverage its position, helping toward bargaining with the Music industry players, who are taking control over the business ecosystem. During the first term of agreement, Spotify subscriptions through TeliaSonera has increased by ~ 300 %, acquired up to ~ 25 % of “Spotify Premium” in Sweden, and TeliaSonera also cited this partnership as one of 3 key reasons of its strong performance at that year. It is reported, TeliaSonera at least got direct revenue benefit ~ €77 billion during its first year partnership with Spotify (signing up new users; up selling data plans in smart phone bundling, and revenue saved from decreased churn). Author

LAILI AIDI is master student at KTH, currently doing final thesis research at Ericsson, title

”Business Models for Mobile-broadband Media Services-Case Study Indonesia Telecom Market”. The research is under supervision of Jan Markendahl at Wireless@KTH and Greger Blennerud at Ericsson Business Unit Networks. This manuscript is shortening version from some of the preliminary findings and analisys. (aidi@kth.se / laili.aidi@ericsson.com)