Digital Music Services Called Plagued by Confusing Subscription Models

Rhapsody, which was bought by RealNetworks and re-emerged on its own last year, has transitioned through several subscription models as it seeks one that sticks. The $12.95 plan it had with Rhapsody, with a separate fee for downloads, morphed to the current $10 a month plan for unlimited use. And it can be cheaper for savvy shoppers. One user on the retailmenot coupon site told community members they could subscribe for the $10 plan and then if they choose to quit, Rhapsody would offer a subscription for half price if they agreed to continue with the service.

According to McGarvey, when Rhapsody spun off from RealNetworks last April, it had 640,000 subscribers. Last month, due to a marketing push and attention to churn rate, the company added 100,000 subscribers, he said, bringing the total to “north of 750,000.” The recent boost also has “a lot due to the bet we made on mobile,” McGarvey said. McGarvey said the most loyal customers are the ones that signed up through their Sonos music systems. “They don’t ever leave,” he said. The company has been trying to feed subscriptions through broadcast and satellite radio services, he said. Rhapsody is available on 75 devices including PCs, mobile phones and tablets, he said.

Panelists spoke of “fragmentation” in the digital music space that makes it difficult for consumers to experience the kind of “anytime, anywhere” access that’s being promised today. Different encoding systems, formats and platforms all make it impossible for a seamless experience for consumers who want to search for and play back music regardless of device or content source.

Adam Powers, senior director of technology for Rovi, concurred on the “fragmented ecosystem” for digital music. Some parts are “far along,” he said, citing Rhapsody and Pandora being available on smartphones and tablets. Automotive presents a challenge to the “anytime anywhere” concept because of the long design cycle, he said. “It’s going to be three years before consumers can start getting Rhapsody in cars,” Powers said. Each of the automotive platforms has different vendors, different capabilities, he said. Companies like Rhapsody, Gracenote and Rovi have to “figure out how we get an app on each of these platforms,” he said. “Do we go iPhone first, Android” or other options, he said.

It’s not just the automotive market that’s challenging for the digital music market. Small distributed audio companies that offer relatively little volume potential are being left out of the subscription model because they can’t deliver a return on investment. Citing a conversation with Michael Stein, senior director of research and technology at Russound, Powers said those companies “don’t have the volume to attract a lot of app developers” whose sales model calls for millions to offset development costs. “And that’s too bad,” Powers said, “because they have the clients who are really focused on music. Their little corner of the world is being left out.”

Powers sees a lot of opportunity for consolidation among app developers over the next couple of years which will ultimately lead to “getting music to a lot more consumers over a wide variety of devices.”

Stephen Dupont, director of sales for Gracenote, referred to a “series of content cul-de-sacs” in the digital music market today with consumers accessing content from internet radio, satellite music services, hard drives and devices. “None of it relates to one another,” he said. “Data is great, content is great, services are great, and devices are great, but if they can’t talk to each other -- if Rhapsody cannot understand what I already own -- they can’t pitch content that’s meaningful to me."

Sonos customers, who can access a variety of music services through the wireless multi-room system, “don’t want to dig down,” said Thomas Meyer, marketing director. “They just want music and the skin,” he said. For now, consumers are going to find the music they want from the device side, Meyer said, “because the services don’t want to work together.” Within the Sonos customer base, more than 40 percent of customers use a streaming service and 50 percent of those use two of them, he said. Meyer credits the iPhone with fueling the popularity of streaming services. “They showed people what it’s like to access music using a phone,” he said. “People now get what streaming is."

Meyer noted that the industry is still in its infancy and has a way to go before providing a cohesive user experience. “Sonos and Rhapsody first took music out of the PC in 2007,” he said. Next, he said, “We'd like to see uniformity around an API for companies in the home audio space, like Russound, so that devices can speak to music services, content metadata management, discovery tools and everything else. Unfortunately there’s nothing like that right now."

Fast-paced technology changes are making it difficult for content sites to keep up, McGarvey of Rhapsody said. “Every day we're posting new content, addressing licensing changes, and encoding in as many as seven different formats” he said. “It’s a lot of work and makes it difficult,” he said. Powers of Rovi said the tech side of digital music delivery “is still largely lacking.” Royalties “are their own nightmare” and one that’s not likely to sort out for another three years when companies like Rovi and Rhapsody can get content “from the same people in the same way with the same rights and handle it the same way for all the different platforms.” One of the things preventing you from getting onto all these different platforms quickly is being able to transcode content to 30 different formats at all different bit rates and delivery protocols,” he said.

While music services try to keep pace with encoding formats that become increasingly efficient, network capacity is growing on the mobile side, where smartphones are gaining significant momentum as music playback devices. “A year ago all the carriers wanted really small files, and now they have 4G and they're asking how big we can get,” said Rhapsody’s McGarvey. “Now they want 192 [kilobits per second] and 320. How do you adopt all the different formats and bit rates?” he said. “Where are we going to settle?”