ABIresearch ®

Research Report

Mobile Cloud Music Services

On-Demand, Internet Radio, Discovery, and
Digital Locker Services

Aapo Markkanen
Industry Analyst, Consumer Mobility

Neil Strother
Practice Director,
Mobile Marketing Strategies and Mobile Services

NEW YORK LONDON SINGAPORE SCOTTSDALE

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Mobile Cloud Music Services

3.2.1 Smartphone Penetration

Rapidly increasing smartphone penetration is a notable market driver for cloud music
services. First, the better computing capabilities of these devices in comparison with feature
phones allow music service providers to deploy more advanced and feature-rich playback
apps. Second, smartphones benefit from faster and more user-friendly and reliable mobile
internet access, which obviously provides cloud music services with greater coverage; their
use is no longer limited to the desktop environment.

These improvements in usability and accessibility lower the threshold for consumers to sign up
for paid-for subscriptions that enable mobile usage. The other main advantage that premium
subscriptions have over free offerings is the lack of advertising, but for users, this incentive is
seldom great enough to justify the upgrade.

Meanwhile, Pandora and other internet radio providers are also benefiting from smartphone
growth. In their business models, paid-for subscriptions are likely to remain a relatively minor
source of revenue, but at the same time, mobile usage can increase the total time consumers
spend listening to their content. Furthermore, mobile listening makes it possible for internet
radio stations to add location-based and personalized features to their campaigns, thus
making them more relevant to advertisers.

3.2.2 Cross-Platform Usage

While ABI Research expects smartphone listening, either via headphones or by connecting the
handset to another output medium like a loudspeaker system or car stereo, to be the core driver
of cloud music services, use cases for other platforms should not be overlooked. The desktop
computer will remain an important hub to access music, and IP-connected televisions will also
play a role in bringing music streams to living rooms. Often the right approach is therefore to
offer a service that allows listening on all different types of devices.

3.2.3 Social Networking

Features that allow users to share playlists, recommend tracks, and discuss their recent
discoveries make services more engaging and facilitate the creation of communities. Most
subscription players offer elements of such social networking in-house, and increasingly many
have also integrated their applications with external sites, most significantly Facebook and
Twitter. Both sites offer a relatively advanced set of APIs to leverage on. The social aspect is
still much more common in the desktop environment, but companies are also developing these
features for their mobile applications.

Besides transforming the actual listening experience, the addition of this new social layer will also
increase the stickiness of the subscriptions since many users may grow attached to the
communities they are involved in. Leaving these communities and “falling out of the loop” would
then be regarded as a social transaction cost of ceasing the underlying subscription. At the same
time, the social layer is impacting the creative side of the music industry by providing previously
unknown artists with a whole new way to bring their content to the market. Emerging artists can
distribute their songs to a global audience on a very minimal investment and without many of the
traditional middlemen, such as labels and producers.

SoundCloud, a German start-up, has taken the idea of combining music and social networking
perhaps the farthest. Not dissimilar to what Flickr has done in photography, the site’s model is to
act as a platform for users to store and collaborate on audio, as well as to explore and comment
on the content made accessible by others. Typical users are artists collaborating on songs and
releasing them to audiences. At the same time, SoundCloud has also attracted more casual

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Mobile Cloud Music Services

3.3 Market Inhibitors for Mobile Cloud Music Services

The most serious market inhibitor for mobile cloud music is the general reluctance among
consumers to pay for virtually any type of content, no matter how good of a bargain the offered
service is. Paid-for music offerings will always compete with other forms of entertainment, so the
value proposition must be strong enough to justify the subscription fee. Another major inhibitor is
licensing fees paid to record firms and collecting societies, which in most markets are still
unrealistically high. For example, in Germany, streams still command the same royalty fees as
downloads. Other inhibitors include the deeply local nature of music, gaps in broadband and 3G
coverage, as well as the limited battery life of mobile phones. Also, compromised fidelity is an
inhibitor, although this does not fully apply to the mass market audience.

3.3.1 Consumer Spend and Pricing

Music is not a utility, but rather a form of entertainment, and therefore music services that require
a regular financial contribution are always competing with other takers of the consumer’s limited
entertainment budget: pay TV, concerts, sports, going out, and so forth. Given this background,
as well as the fact that music can be enjoyed free of charge (by using free but more restricted
legal options, or simply by resorting to illegal copies), price will always remain an issue for
consumers who are contemplating a subscription. The early adopters of subscription-based
music are generally heavy consumers of music, since the value proposition of such services is
greatest for them. Average consumers often listen to music more irregularly and especially from
a much more limited pool of songs, so it is obvious that they will find less value in something that
they would be typically paying for every month.

3.3.2 Royalty Payments and Revenue-Sharing

Record companies own the master copy of the song and are entitled to recording royalties for its
distribution, whereas collecting societies basically represent artists in collecting royalties for the
creation and performance of songs; importantly, these two types of copyright are separate. For
instance, Japan is a good example of a market which has a high smartphone penetration, high
levels of disposable income, and a large population. There should be a strong market for legal
music streaming services, but there is not due to unwillingness among the labels and collecting
societies to license tracks for such distribution.

Globally speaking, the copyright system is very fragmented; each country has its own royalty
regime. There are typically different rates for physical music sales, download sales,
broadcast radio, interactive radio, and on-demand streaming. In many cases, the rates for
interactive radio or on-demand streaming are too high to allow subscription prices that would
be appealing to the mass market. Similarly, even if service providers would have the
commercial scope to set their subscription fees lower, copyright holders often require them to
keep prices at a certain level on the grounds that reduction would undermine the sales
delivered through other distribution channels.

The current standard for royalty payments is pay-per-stream, which requires the service provider
to pay the labels and collecting societies a set amount for every stream delivered. This means
that the cost of operating a streaming service will grow in direct relation to the number of
customers. Hence, from the service providers’ point of view, a revenue-sharing model – under
which royalty fees are calculated as a percentage of the generated subscription revenue – is
preferable. Going forward, ABI Research expects that the negotiating power of streaming service
providers versus copyright-holders will increase as streaming services become more of a mass-
market offering and traditional music sales continue declining.

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Mobile Cloud Music Services

encoding patent liabilities altogether. The technology’s legal standing against other encoding
formats has simply not been tested in court yet, presumably because so far no major firm (unless
Spotify counts as one) has taken the risk of building software on it, and Xiph.Org itself is a not-for-
profit player and thus an unattractive target for damage claims.

4.3 Recommendation Engines

Recommendation engines used for generating automated playlists and helping users to discover
new songs and artists fall into several categories: manual tagging, statistical analysis, signal
processing, and mood recognition. These approaches can, and increasingly often are, deployed
as hybrid solutions that combine elements from more than one of them. In the future,
recommendation processes that draw on social networks are likely to become another significant
means of discovery, probably by complementing other available methods.

4.3.1 Manual Tagging

Music can be tagged manually by artist, track, or individual album. The most well-known example
of this method is Pandora with its Music Genome Project database. In this system, all songs have
been tagged individually according to 400 or so different music attributes which act as “genes” of
the music; each gene is given a value between 1 and 5. Actual recommendations are then pulled
from the database by a mathematical algorithm which groups songs with similar genomes together.

4.3.2 Statistical Analysis

In engines based on statistical analysis, songs are recommended according to the listening
behavior of the users and the tendency in which tracks are statistically requested during the
same session. This is the method used, for example, by Last.fm and The Filter, a UK white-
label recommendation engine.

4.3.3 Signal Processing

Recommendation by signal processing works by analyzing the waveform of the track and
comparing the shapes of identified sound waves to other songs. This is the most scalable form of
recommendation, but it is still fairly rare as a stand-alone solution because technologically it is not
developed enough to always distinguish, e.g., Wagner from Metallica.

4.3.4 Mood Recognition

In mood-based recognition, the focus is on each song’s emotional elements; tracks with similar
stages of mood count as part of the same emotionally cohesive genre. This approach has been
pioneered by Danish application developer Syntonetic, of which the Moodagent mobile app
allows users to generate automatic playlists from their own music libraries.

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Mobile Cloud Music Services

Section 7.
COMPANY DIRECTORY
Apple Inc Pandora
www.apple.com www.pandora.com

Aspiro Rdio
www.aspiro.com www.rdio.com

Catch Media Rhapsody

www.catchmedia.com www.rhapsody.com

Deezer Shazam
www.deezer.com/en www.shazam.com

Deutsche Telekom Sony Electronics, Inc

www.telekom.de www.sonystyle.com

Dropbox SoundCloud
www.dropbox.com/ www.soundcloud.com

eMusic Spotify
www.emusic.com www.spotify.com
SugarSync
Groovershark www.maestro.fm
www.grooveshark.com/about
TDC
Last.fm www.tdc.com
www.last.fm
Telenor Group (HC)
Microsoft Corporation www.telenor.com
www.microsoft.com
TeliaSonera
MOG www.teliasonera.com
www.mog.com
Thumbplay, Inc
MP3tunes www.thumbplay.com
www.mp3tunes.com/cb/about
Universal Music Group
mSpot new.umusic.com
www.mspot.com
Vodafone Group Public Ltd Company (HC)
MySpace www.vodafone.com
www.myspace.com
we7
Napster www.we7.com
www.napster.com
YouTube
Nokia www.youtube.com/t/about
www.nokia.com

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The material contained herein is for the individual use of the purchasing Licensee and may not be distributed to any other person or entity by such
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Mobile Cloud Music Services

Published February 2, 2011

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