18 May 2014

Implementation of the streaming business model: add-supported or subscription?

In recent informal meetings with IFPI, the music industry federation, I received a hard copy of their last report on the global industry (Link). This contains valuable information for those interested in producing research about creative industries and new digital business models. The aim of this post is not to present a detailed summary of the report. Instead, I only pretend to highlight an interesting finding, which reflects the idiosyncrasies and differences of European consumers.

The music industry needs to explore further the economic exploitation of digital business models (Link and Link). In this regard, the streaming seems one of the main solutions in terms of revenues. The streaming payment model is radically different from download sales in the way it generates revenues. A download is paid just once, regardless of how times it is listened to. With streamed services, a track may be listened to by an individual hundreds of times, each generating a micropayment. Streamed services can be commercialized with add-supported or premium subscriptions – monthly fee. Let’s see how streaming business models have been implemented in Spain and Germany. 

Spain is one of the countries with the highest piracy rates in Europe (in our previous work estimated in 44%) and the industry needed to offer “free” and “legitimate” alternatives to seduce the Spanish consumers to stop downloading files from not-licensed sites. This fact can explain why the add-supported revenues grew from 19% to 39% of total digital sales from 2009 to 2011. During that period subscriptions grew from 13% to 22%. But the main change was produced after 2011 when huge proportion of music consumers engaged with streamed music. The add-supported sales in 2013 decreased to 24%, while subscriptions increased and generated up to 43% of digital sales. 

Germany is quite a different case. It is one of the countries in Europe with the lowest piracy (in our previous work estimated in 14%, three times less than the Spanish one). Consumers has been significantly more engaged with legitimate digital formats, and that is probably the reason why that add-supported business model had a marginal presence in digital sales, and subscriptions have moved from 39% of digital sales in 2009 to 48% in 2013. 

Subscriptions are the main source of digital revenue in the music industry in Spain and Germany (43% vs. 48%) but the cost of the implementation has been significantly different. It is interesting to see how the pattern is quite consistent in those countries with high (Netherlands or Italy) or low (United Kingdom or Switzerland) piracy rates. The fact that in all those European countries subscriptions-pay monthly is the dominant digital format is also relevant, as it gives a clear indication about the transition of the sector towards a service dominant logic. 

Final note for those interested in piracy rates provided above. Details on the methodology and piracy rates for ten different countries were published in Industrial Management and Data Systems and can be downloaded for free at the webpage of the journal (Link). The article has been downloaded 1691 times in 2013 and awarded as the outstanding paper of the journal that year.

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