This year, in 2016, we’re going to see an interesting trend play out — video streaming services and music streaming services making moves to hybrid-ize their businesses by offering one mega streaming platform that services the audio-first crowd with the visual-hungry fan. Last year, music-first services Spotify, Tidal, Pandora and video-first platform YouTube each announced plans or launched products that merge video and music streaming into one subscription or ad-supported offering. With Spotify and YouTube leading the charge, Tidal, which made a surprise slate announcement in the Fall of 2015, is third in line to make the move from music streaming to music and video hybrid.
But the timing of these businesses’ various announcements begs the questions — why now and what’s the upside for owing both video programming and music streaming under one roof?
1. The Financial Upside is Better
Today’s consumer is flooded with options and platforms for viewing, listening to and buying content. And being competitive in a music licensing business can be difficult given the multiples and complications of music rights and copyrights. Licensing music isn’t cheap, and the margins — 70% at the top end according to a music industry insider — can make scaling a music streaming business difficult, leaving a business with about 30% of its capital left to grow and scale. For a company like Spotify that has 20 million subscribers, that business can grow. But it’s clearly an issue for a company like Tidal, that has a million subs. While reaching profitability as a music streaming service can seem daunting given the licensing fees, video is a different game altogether. With CPMs for video topping out at around $50, viewing trends continuing to climb and a licensing and IP infrastructure that is much more scaleable than music, video is an attractive path towards bigger profit margins. On the subscription side, $9.99 for video and music streaming is an attractive offer for the consumer and a reasonable cost (only $120/annually). Both Spotify and YouTube Red are at this price point, while Tidal is a $19.99 subscription fee. All are ad-supported free services, for non-subscribers. If these services are able to competitively double, or even triple their audiences paying the subscription and subsidize the free tier, the profit margins around higher CPMs on video and subscriber revenue become substantial.
2. Aside from Revenue, Retention is Key
For the companies looking to build a hybrid streaming business model, it’s not only about revenue. It’s about retention. These services want to be the place for the moments that pepper the user’s day — from morning news, to afternoon entertainment, to train ride wifi-free audio entertainment. Video is simply an extended mechanism for retaining the user and keeping him active and engaged across various contextual needs.
When the initial news was announced that Spotify would take on video, Daniel Ek, Founder and CEO at Spotify said“We want Spotify to help soundtrack your life by offering an even wider world of entertainment with an awesome mix of the best music, podcasts and video delivered to you throughout your day.” And similarly, Tim Riley, Tidal’s SVP of Artist and Label Relations, told VideoInk: “We haven’t made any decisions on content because we thought it’s going to be profitable. It’s more of a creative approach.”
Curious to know more on Spotify’s strategy? Peep it here.
So, while exclusive content can be a driver for user acquisition, the main goal is to enrich the user experience and to give people a reason to engage with the service for their various entertainment needs throughout the day.
“We designed YouTube Red to deliver on the breadth of content that YouTube fans enjoy today,” said YouTube’s Head of Music Products T. Jay Fowler. And that experience is not just the ad-free environment but “the ability to watch new, original content from top creators, and an incredibly rich music experience.”
3. The market is cluttered, but ripe and the opportunity is global
If there ever was a time to make a move in video, now is that time. Roughly 200 million people tuned in to online video in 2015, according to Statista, and further, 75% of internet users are watching video. Advertisers spent upwards of $6 billion in advertising in online video. Netflix generated over $6 million in revenue. In short, the video business is, good — very good. And it’s not expected to decline. If a platform can hit the market with the right market positioning to consumers, a solid offer of the right video and music content, and ancillary revenue in merchandising or live events, well, that’s no small business. And even better, the viewer is ready. 24% of global internet users — that’s 760 million people — are watching online video daily. When looking at the number of services vying for that 760 million piece of the global pie, there are no doubt redundancies in subscribers who have over one service. However, this presents a ripe opportunity for services like Tidal and Spotify to differentiate only enough to entice a user to pay $9.99 for one and $19.99 for the other. With video viewing projected to continue its climb, this is a bet worth making with a high upside for market share. On the creative side, content producers are now equipped to produce and deliver formats to emerging platforms like go90 or Spotify Shows. So far, the popular categories for these streaming services have been trending towards comedy, music, food and news.
“Now that we have done a little press around comedy and sports and Money and Violence and things like that, the amount of emails I am getting from people I never would have talked to asking us if we are interested in licensing content has been overwhelming to be honest,” said Riley.
4. It’s a natural extension to flow between audio and video products.
As VideoInk reported on Spotify, the business of being a music and video streaming hybrid ultimately relies on content that is both audio and visual. Aside from the hurdle of overcoming a user’s expectation that a music streaming service is a lean back experience, moving into video is a natural product evolution. Users often enjoy listening to podcasts, individual songs or comedy skits while commuting, whereas other times they may want to watch the video interviews, or music videos that accompany those tracks. According to Fowler, “The goal [for YouTube Red] was to make sure we stayed true to our roots — video. We have an expansive catalog that covers a wide range of video types — live, covers, tributes — all in a visual medium. We also know that music is something that is a companion to people’s lives and that an audio mode is key to portability. Taking those two opportunities, we built an experience that meets a user’s needs — draws them in when they want to watch and sound tracks their life when they are on the go.”
So who will win? It’s going to come down to user experience.
Consumers want it all, and frankly, there are too many options. Frequent VideoInk readers and those in the industry can probably name at least a dozen streaming platforms competing for content right now. But it’s likely the consumer is not aware of half of these, so the biggest differentiators for users will be ease of use, and, of course, content offering.
“The priority is: ‘what makes Tidal the best it can be and makes the people who are on it enjoy it, talk about and tell other people about it to drive the word of mouth and building subscriber one a time,” added Riley.
And Spotify has put significant resource into its own product and user experience, using a beta test over the last year to learn about user expectations and behavior around video. Similarly, YouTube Red was precious about the user experience and how the user flows between music and video streaming. “What we have been doing is trying to figure out what user experience works best. So we actually had tons of tests out there, and just collected this data. One of the key approaches was largely about saying ‘Let’s get a breath of different content, so we can learn on the big spectrum of different things and so we can learn about what to double down on.’ What we have done is incorporated those UI learnings,” said Shiva Rajaraman, Spotify’s product head.
It will be fun to watch these various services play out their move to become the one-stop, and maybe only stop, for consumers looking for entertainment, whether that’s music or video, or both. The big question to be answered is whether YouTube Red, Spotify, Tidal, Pandora and some of the other streaming sites can be everything to almost everyone? Or if segmentation is better for the consumer.
What do you think will play out and who will win the music and video streaming game? Tell us in the comments below!