Virgin: Join in the Disruption – A crumbled attempt at formulating a new business plan and providing an entertaining key word for a blog post title…

 

“Join in the disruption

Take part in the debate

 —————————————————————————————————

I found this post in our Berklee Master’s Class 2013 Facebook Group and after finding a general lack of inspiration on a particular topic, I thought this popular set of issues would be interesting to discuss.  Bring on the discourse.

(Yes, Virgin Marketing/R&D team, this is the part where you thank me for completing the survey you so eloquently put together.)

Are you a music fan? Are you a musician? Do you work in the industry?

Well, I’m here aren’t I? Therefore, there must be some sort of degree or level or resonance I have to this grouping of questions or perhaps I’m just trying to kill time while I polish of this Starbucks venti drip coffee (note, comparable large coffee cup sizes are extremely difficult to find in Valencia, and I do miss home. So this experience is killing two birds with one stone – I dislike using colloquialisms, but in this case the caffeine buzz is wearing off and I’m frantically looking at my word count).

Also, to satisfy the needs of those who are looking for immediate gratification, I’ve included my responses in a more ‘traditional survey form’

Key : (Y)es / (N)o
Are you a music fan? (Y)
Are you a musician? (Y)
Do you work in the industry? (Question Unclear  -- In which industry 
are you referring? I'm going to go out on a limb and say that you mean 
the Entertainment Industry, because people haven't worked in the 
Music Industry in sometime [if ever]) – (N)o, but maybe one day.

Do you stream? Do you buy? Do you bypass the official routes and download for free?

I enjoy accessibility. I stream music, I purchase music and believe it or not, you do not have to bypass ‘”the official routes” to obtain music for free.  It’s actually a great tool for exposure and building conversation. See applications like NoiseTrade, Souncloud and Topspin.

**Please Note: If you too also plan on answering this survey or any other of this kind, it would probably prove beneficial not to make an admission of guilt to a corporate entity who will probably seek legal action against you – boo for entrapment and yay for Catherine Zeta Jones.

and again for some of you…

Do you stream? (Y)
Do you buy? (Y)
Do you bypass the official routes and download for free? (N)

Do you think music fans have a responsibility to support the artists whose music they consume by paying a fair price to listen to their output?

Whether you believe it or not, chances are at some point you are supporting an artist (e.g. live music, merchandizing, sharing and starting conversation). Although the recording sector is down, live music is up. The money has moved, but it’s still there. It’s similar to the transition from the Blockbuster to the Television screen. If you’re really asking this question, then you probably didn’t sign your artist to a 360 deal, although this is highly unlikely). So perhaps a more relevant question is: Do you support the record company who owns the artist’s copyright?

Do you think music fans have a responsibility to support the artists 
whose music they consume by paying a fair price to listen to their 
output?  (N) The only responsibility you have is to pay your 
taxes and that's only assuming you don't get caught otherwise.

Do you think music streaming services are damaging the music industry?

If you believe so, you’re foolish. You probably also went to the seventh Eagles’ “Farewell Tour.” Nothing against the Eagles, but you might also believe that records are making a comeback. Sure vinyl sales are up, but it’s not saying much if they’re coming from the basement (not to be confused with a literal basement, although I guess they come from there too). There was also a brief rise in yo-yo sales in the late nineties (I know, I had one, along with a small box of Slammers and Pokemon cards) but where are they now?

See, Nostalgia …

Music Streaming is Accessibility. Accessibility is Mobility and the Heat will probably win the Larry O’Brian trophy again this year.

The days of measuring an artist’s success over SoundScan is over.  Applications like Spotify and Youtube are all about social discovery. It’s the traditional non-GAAP sources that are more accurate measures of “success” rather than units sold. It’s how you provide additional value and monetize this success that will make you truly successful.

Do you think music streaming services are damaging the music 
industry?(N)

If you’ve made it this far, cheers! Thanks for your time and consideration.

Business Matters: Spotify UK Shows That the Freemium Model Is Not ‘Unsustainable’

ottobre 09, 2012   |   By Glenn Peoples (@BillboardGlenn), Nashville

A business model that pays rights holders nearly every dollar, euro or pound generated is clearly not sustainable. This fact is obvious to Billboard readers as well as a digital service’s management and the company’s investors.

Last week I wrote about Spotify’s financial statements posted at PrivCo, a website that posts the financial statements of privately held firms. My first impression was that PrivCo’s numbers looked off. After PrivCo’s CEO sent me a link to the full financials and walked me through the numbers, I better understand how the numbers line up — but I don’t agree with his negative assessment.

Spotify is indeed losing money, but I don’t think its business model is unsustainable.

The difficult with assessing Spotify’s prospects is that its financial statements tell many stories at once instead of one single story. Because the service operates in many different markets and launched at different times, Spotify is effectively many companies within a company. And each of those companies has a business model that apparently needs time to develop.

Spotify operates a freemium business model that offers free, ad-supported listening in the hopes of luring paid subscribers. The model is a leap of faith. Spotify is on the hook for the free streams whether or not it monetizes them. It hopes people will sign up for the paid subscriptions. Labels and publishers hope, too.

But the model has attracted investors in spite of its critics. According to the financials posted at PrivCo, Spotify ended 2011 with cash and cash equivalents of €104,271,498 ($135 million), up from €47,251,972 ($62.6 million) in 2010 and €2,083,601 ($2.99 million) in 2009.

More money is reportedly on its way. The company is said to be near a $400 million round of funding that would value the company at $4 billion.

Paris-based Deezer, which operates the same freemium business model, just raised $130 million in a round led by Access Industries, the owner of Warner Music Group. Deezer now has 2 million subscribers to Spotify’s 4 million subscribers.

There should be a natural lag time in the success of a freemium business model. When Spotify enters a new market, it has a relatively high number of free listeners, a relatively low number of marketing partnerships and a relatively immature advertising sales force.

The model itself suggests a lag will occur. Free listening is used to encourage people to try the service before becoming subscriber. The more people use the Spotify, the more people share listening on social media, the more likely they are to eventually subscribe.

If we could see Spotify’s financial results from just one country, we could isolate its business model and reduce the noise from other markets. Financial results from one country might show this lag. Financial results for the entire company show more than a dozen lags happening at different times.

Indeed, proof of the lag time can be seen in the UK. As Billboard.biz reported in September,Spotify reported a net loss of only £2.1 million in the UK in 2011. Clearly the launch in the U.S. in the summer of 2011 weighed heavily on the financials of the company.

Financial statements for 2011 found online show Spotify Ltd., the UK subsidiary, posted a £2.06 million loss in 2011 after posting a net operating loss of £26.5 million in 2010. Revenue grew 51.1% to £95.5 million from £63.2 million. (Due to an intracompany sale of intangible property, Spotify Ltd. actually turned a net profit in 2011.)

The key evidence of the freemium model’s lag time appears to be Spotify Ltd’s improved cost of sales, which represents royalties paid to rights holders. The UK subsidiary’s cost of sales dropped to 85.7% in 2011 from 102.6% in 2010. In other words, Spotify Ltd. paid rights holders about 1.03 for every pound it generated in 2010 but paid out only 85 pence from every pound it generated in 2011.

Another key factor was the improvement in subscriber growth. Subscriptions accounted for 84.8% of revenue growth in 2011 and grew as a percent of revenue from 71.3% in 2010 to 75.9% in 2011. The company obviously got better at converting free listening into paid listening and using partners – such as Virgin Media – to bundle the Spotify with broadband service.

These two factors show the freemium model has potential but will experience a lag as cost of sales becomes manageable and the lure of the freemium model takes time to positively impact subscriber counts.

The key is cost of sales. When Spotify Ltd improved cost of sales by 16.9 percentage points in 2011, it gave itself an additional £16.1 million to cover costs. By lowering costs of sales again in 2012 – through better monetization of free users and better conversion to subscribers – Spotify Ltd. will generate even more gross margin. At its current pace, Spotify Ltd. should be able to turn an operating profit in 2012.

When Spotify US will turn an operating profit is another story. It goes without saying that the Spotify launched in 2008 in the U.K. would have a far better cost of sales last year than the service that launched in the U.S. in July. A large market such as the U.S. will require years of hard work.

Every market is different. In Sweden, for example, Spotify helped streaming services account for 89% of all digital revenue in the first half of 2012, according to the Swedish Recording Industry Association. But nothing is mentioned about Spotify’s inability to resuscitate a moribund Spanish digital recorded music market that ranked five places behind Sweden — #9 vs. #14 – even though Spain has population five times greater.

The freemium model might not work in Spain right now. Not much is working in Spain right now. Even a workable business model has to deal with difficult exogenous factors such as social norms and economic malaise. But the 2011 financials for Spotify UK show that a freemium model can work over time.