Music and Streaming, Part I: Strategy
The business fundamentals behind DSP's and what this means for Music.
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At the end of the last decade, digital streaming appeared to be music’s salvation. Today’s view of streaming goes from ambivalent to antagonistic. From streaming’s prioritisation of old music at the expense of new, to the economics of royalty payments, so-called “digital service providers” - DSP’s - are referenced as enemies as often as they are as friends.
To address this ambivalence, in this article and those that follow, I examine the fundamentals of DSP’s – both in their business strategy and in how they attract and retain users. Part explainer and part analysis, I aim to answer a question posed some time ago in the London Review of Books article, What Does Spotify Want? - and to give food for thought for those of us who care about the medium and artform of music about streaming’s place in our culture.
What is a DSP?
The DSP’s we use today are internet technology platforms that serve their customers a conglomeration of different media. In these articles we’re mostly talking about subscription services that have a basis in music (but offer other audio and video content). While iTunes or other download stores are, strictly speaking, DSP’s, they’re not covered in this article.
Product
In Internet and app-based businesses, product refers to the consumer technology offering. It’s the basic set of features and functionalities on offer. For DSP’s, this tends to be split by customer type. Those on a trial get a limited set of features; often a shuffle-based experience with reduced search functionality and no ability to download content for offline playback. This is designed to differentiate the premium experience for subscribers: search, skips, ability to build libraries and create sharable playlists, offline playback etc. The idea is that the friction in the free experience encourages conversion to premium.
DSP product is largely undifferentiated; whatever app you choose, the experience is more or less the same.
Business Strategy
Streaming services exist to deliver different media to end users, monetising the delivery through subscriptions or advertising.
Some services are offered by larger corporations and may have a dual function – not only for the business unit producing them to be commercially successful (as defined by the parent company) but also for the DSP to support another part of the business strategy (e.g. proprietary devices, Prime, distributing owned content, etc.)
Other DSP’s seek profitability and free cash flow from a standalone product– and have business strategies designed to achieve these goals. Spotify is the most successful and best known incumbent that isn't part of a bigger corporation.
Many surviving smaller DSP’s burn investor cash as they attempt to grow at speed so that they can generate profit in the future. They’re in survival mode, trying to balance investments with what may be structural unprofitability and an insecure cashflow trajectory. You’ll often see these services “pivot” their strategy as new investors come in, put new teams in place and look for different ways to differentiate and achieve scale.
To grow, subscription services need to acquire new customers, through trial, repeat engagement and conversion; and to retain existing customers by driving repeat visit and providing a good customer experience. The more often a customer uses the service, the more likely they’ll convert from a free trial or the more they’ll feel like they get value for money and carry on with the subscription. The commercial strategy determines the marketing strategy, which is all about generating these two activities, which support the obsession of consumer tech firms: scale.
