Streaming Like a Firework
Streaming Like a Firework
Tidal, Spotify, HiFi and Product Differentiation in Digital Music
Tidal, Spotify, HiFi and Product Differentiation in Digital Music
Bottom line: Hifi streaming works as a differentiator if you charge enough to avoid signing on binge listeners. Spotify was never about niche audiences so it is unlikely it can successfully counterattack as long as infrastructure costs are a bottleneck.
Tidal is a streaming service much like Spotify that offers a premium, high-fidelity music experience. The sound really does appear clearer than Spotify through a decent pair of headphones. Part of it could well be a placebo effect since Fireworks by Katy Perry might not be the best song to contrast bitrate on.
Perception aside, Tidal made me wonder about how a new entrant into the industry could differentiate successfully, if at all. Here are my back of the envelope thoughts — feedback is of course much appreciated since I flagrantly invented my research on most of the below.
What do people look for in digital music streaming?
What are all of the potential features a music streaming service could potentially differentiate on?
The major features consumers look for in a music streaming service are likely to be some of the following:
The most important features today would probably be a combination of music rights and technical performance. We can discard features such as ‘no lag’, good streaming speed and so forth since any music service without these features would not continue to be a music service for long.
A strong brand is probably less appealing than good technology for this product category. Part of 7digital’s business model rests on licensing technology for streaming and sales to partners who leverage it along with their own brand. Not unlike an OEM or private label for that matter. It’s the technology that has value in the deal, not the brand using it.
This leaves differentiation possible on music rights, song fidelity, quality and quantity of access points, possibility to do account sharing or simultaneous playback, sharing and discovery features.
Music rights is a depth and breadth tradeoff question. Imagine a music streaming company that wants to launch with a good music catalog but it only has a fixed budget for, say, 100 songs, regardless of genre. Let’s idealise by supposing there are only two genres in the whole world and that there are more people who prefer the middle/Top 40 area than there are people who prefer either extreme exclusively.
Any given music streaming service will then likely maximise its reach and adoption by buying rights to 50 songs of one genre and 50 of another. In other words, breadth over depth will get any music streaming service more of any consumer even if it thinks about being a niche service. If you bought all 100 songs of Genre A and 0 in Genre B you’d pick up a few diehards but even niche audiences will tend to drift towards broader choice over exclusive choice. Genre A fanatics might think “this service has all of the artists in my favourite genre but the other one has most of the ones I know plus a few others from a different genre”.
On desktop and mobile apps there is a fine line between an excellent experience and a good enough experience. Since both Tidal and Spotify offer very good apps and other players like Soundcloud appear to be perfectly competent it looks like a recipe that requires 1x fixed costs, 1x good UX person and 1x good programmer. Ditto for playback functions like Spotify Connect — on most of the Hifi speakers you can use Spotify Connect, other competing services are likely to be available as well.
So if you can’t really differentiate on music selection or access points/apps, that really does just leave song fidelity, account sharing, music discovery and whatever else I may have overlooked.
Hifi for the masses
Can offering high fidelity music streaming provide a sustainable competitive advantage to Tidal?
Let’s suppose every time you play Fireworks by Kate Perry on Spotify, it gets streamed to you at 320 kbps. If you receive a hose 320 kbps wide for 3:54 you should see about 9–10 MB — probably a bit less if the bitrate varies throughout the song*.
*The amazingness of WolframAlpha tells us this is the equivalent of 6.5 3.5" floppy disks which weighs as much as 1/4 of an NFL regulation football
If you stream the same song on Tidal, we’re told you’re getting a tune sampled at 44.1 kHz at 16-bits over two channels which means an incredible 1411 kbps. The same 3:54 song will end up taking up 41 MB or 4x* as much as the Spotify version (logical since the data rate is 4x larger).
* In floppy disk mass, 41 MB weighs as much as 1 pint of water. Useful!
The next part is speculative for me — I don’t know the marginal cost of 1 MB for either Spotify or Tidal. Let’s assume it’s linear for simplicity and say that it costs Spotify 0.10 kr. to stream about 10 MB. It should therefore cost the same provider 0.40 kr. to stream 40 MB. If the variable cost of one song is 4x higher, the break even point is 4x further away.
We hear that Spotify is creaking under the weight of royalty payments [citation needed] so it doesn’t appear to be a viable business decision to offer high fidelity streaming at no incremental cost to the user. Tidal offers one streaming plan and no free tier for twice the price of a Spotify subscription. The average Tidal user probably [citation needed] doesn’t binge listen like a Spotify user but instead plays it consciously when he’s most likely to appreciate the higher fidelity. Through the magic of science we can estimate by saying if he is half as much of a binge listener as an average Spotify user and pays twice as much then Tidal has a value proposition that works out [citation needed].
Let’s imagine Spotify tries to compete on the same grounds and offers a new, Platinum tier with high fidelity streaming. If existing Spotify users switch when they hear about it, they probably take their binge listening habits with them [citation needed] so Spotify’s variable cost increases fourfold for this tier of users. They only get back to where they started if they charge four times as much which is already twice as much as Tidal*.
* In particular since Tidal apparently pays “twice as much” in royalties. http://www.bloomberg.com/video/tidal-the-streaming-service-taylor-swift-wants-to-be-on-BAsZp4BSQu~pGGEpu_925w.html
Can Tidal build a wider moat?
Is it all in music fidelity?
There were a handful of other features I identified for differentiation such as offering account sharing, radio services or editorial content. I am also not clever enough to come up with new ones although the sky’s the limit. Tidal could ship one freshly baked cookie to each subscriber per month. It could leverage likely higher royalty rates to extract things like tickets to concerts for subscribers or discounts on t-shirts and merchandise.
Today, Tidal claims to offer a personalised curation and editorial experience. This certainly raises the variable cost per song to other competitors and build a wider moat around its value proposition, but it’s comforting to know there could well be more around the corner. I’m personally partial to the cookie idea.
Will I sign up for Tidal?
If they start sending cookies then yes
I will certainly follow it with keen interest for doing something different. I’m not enough of a music fidelity hipster to want to spend 20 bucks on it. But that’s exactly the point and that’s why the back of my envelope thinks Tidal has a workable business model.
Bottom line: Hifi streaming works as a differentiator if you charge enough to avoid signing on binge listeners. Spotify was never about niche audiences so it is unlikely it can successfully counterattack as long as infrastructure costs are a bottleneck.