by : Business, March 2013

Bundle It and They Will Come

Bundle It and They Will Come

Spotify recently signed a bundling deal with Orange-Switzerland’s “Orange Young” line of cell phones offered to customers under the age of twenty-eight.  The Swiss deal is important because it could be a harbinger of things to come. It also reveals that Spotify is banking on bundling services with telephone carriers to build a momentum that it may not yet have on its own.

The “Orange Young” campaign offers three-tiered non-binding mobile plans equivalent to U.S. $32, $72, and $87. Bundled into them is a twelve-month, unlimited subscription to Spotify Premium.1  While this deal targets the mobile market, customers will also have access to the Spotify premium service on their desktop and get some exemptions in monthly data usage.

If Spotify Premium normally costs about $14, arguably the new plan is being subsidized on both sides of the transaction. Spotify gains access to Orange’s large distribution network and will acquire customers effortlessly. In turn, Orange can use Spotify as a sweetener for potentially new lifelong customers.

Spotify’s strategy uses a free, ad-based service to attract new users and create a large customer base. Over time, and after building a large customer base, Spotify may attempt to taper its free service so that users are compelled to switch to the premium service. Bundling, therefore, can be an effective way to gain paying customers.

This is working well outside of the United States. Twenty-five percent of Spotify’s premium subscribers in Sweden are a result of its bundling deal with Telia, which offers TV, mobile, and landline bundles. In fact, Mark Little, an analyst at Ovum, a branch of Informa Telecoms and Media, predicts that bundling deals will be one of the major factors pushing the emerging unlimited-music subscription segment to nearly 50 per cent growth annually. Yet, given current global music sales of about $15 billion, it is hard to imagine the $22.5 billion market that Little does for 2017; if, as he also claims, bundling will boost digital music revenue by 15% annually,2 the recording industry would truly emerge from its Dark Age into its Renaissance.

Things are still slow. The 2012 Digital Music Report3, put out by the International Federation of the Phonographic Industry (IFPI), gave the number of paying Spotify subscribers at 2.5 million worldwide—not yet a critical mass. Artists still receive more royalties from streams by paid subscribers and, in Sweden, ninety percent of Spotify’s user base has upgraded to Premium (even though Swedish singer Jonathan Johansson recently broke through Spotify’s streaming’s limitations and made $20K in the first week of his album release).4

Bundling would help the carriers too. In recent years, the U.S. mobile market has experienced a loss in customer loyalty, according to David Goldman of CNN Money. 5  It may be a sign of a healthy and competitive marketplace, but it also forces mobile carriers to reinvent their very best offers. This sometimes means subsidizing new products. But the verdict is still mixed:  Spotify’s deal with Deutsche Telecom in Germany helped up-sell smart phones but did little for customer retention.6

Deezer, a French music streaming service and competitor to Spotify, is also involved with Orange. Orange is an investor in Deezer and has partnered with it for other bundling deals around the world. However, while Deezer may outdo Spotify in sheer numbers countries, i.e. 215 vs 17, Spotify is still winning in terms of key locations, and, notably, in the United States, the largest music market in the world. Spotify is integrated there with Facebook, a huge obstacle to any rival.  

Inevitably, the question arises as to why Spotify’s bundling strategy is not yet workable in the United States–although a precedent exists: mobile service provider Sprint teamed with Boku, a mobile payment company, to offer Spotify subscriptions billable to Sprint’s monthly bills; Boku also has partnerships with other service providers including AT&T, Verizon and T-Mobile.7

The reasons might be technical. Nationally, there is a bottleneck of bandwidth access. As the Federal Trade Commission puts it,  “despite significant investment in networks and advances in wireless efficiency, demand for mobile broadband service is likely to outstrip spectrum capacity in the near-term; without action to address this spectrum crunch, service quality is likely to suffer and prices are likely to rise.”8

Reactions to the so-called “spectrum crunch” are mixed among carriers and analysts.  Many major service providers in the U.S. appear to be satisfied with the amount of spectrum available to them.9 Cisco, nevertheless, predicts that mobile Internet data traffic will grow by a factor of eighteen in three years,10 which would of course exacerbate any current problems. On the other hand, a 2012 study by the mobile intelligence company Validas implies that throttling data usage, or charging in tiers for data allowances, has no effect on data usage by mobile users.11

Still, like the U.S., the U.K. seems to be facing much of the same issues: its government recently announced a plan to invest £11.6 million in 5G technology12; the U.S. on the other hand, has not even seen 4G-LTE become ubiquitous among mobile service providers.

None of this seems to deter the telecoms or the online music providers. Orange, for instance, is expanding into the U.S. with three Android phone models: Orange San Francisco, Orange San Francisco 2, and the newest Orange San Diego came onto the market starting in 2012 as a low-cost smartphone option.13 If Orange is positioning Deezer here, it should have the advantage of lower transactions costs than Spotify over licensing issues. After all, Spotify provided the model’s proof of concept among recorded music sellers.

By Troy Church

 

Endnotes

1. Fingas, Jon. “Spotify Signs Deal with Orange Switzerland to Bundle Music with Youth Plans.” Engadget. AOL Inc., 21 Jan. 2013. Web. 20 Feb. 2013.

2. Little, Mark. “Music feels the benefit of bundling as Ovum predicts subscriptions to drive 15% growth in digital.” Ovum. Ovum, 27 Aug. 2012.

3. Ifpi. Digital Music Report 2012.

4. Sydell, Laura. “How Musicians Make Money (By The Fraction Of A Cent) On Spotify.” NPR. NPR, 26 Sept. 2012. Web. 20 Feb. 2013.

5. Goldman, David. “Cell Phone Customers No Longer Loyal to Their Carriers.” CNNMoney. Cable News Network, 26 Mar. 2012. Web. 20 Feb. 2013.

6. Andrews, Robert. “Spotify Gets a Leg-up in Germany from Deutsche Telekom Bundling.” PaidContent. GigaOM, 31 Aug. 2012. Web. 20 Feb. 2013.

7. Rao, Leena. “Mobile Payments Startup Boku Launches Billing Partnership With Sprint.” TechCrunch RSS. AOL Inc., 3 May 2012. Web. 20 Feb. 2013.

8. Federal Communications Commision. “Spectrum Crunch: The Cell Phone Industry Hits Its Limits.” Spectrum Crunch. Federal Communications Commision, 3 Mar. 2011. Web. 20 Feb. 2013.

9. Goldstein, Phil. “What Happened to the ‘spectrum Crunch?’” FierceWireless. FierceMarkets, 28 Sept. 2012. Web. 20 Feb. 2013.

10. ”Cisco Visual Networking Index: Global Mobile Data Traffic Forecast Update, 2012–2017.” Cisco. Cisco, 6 Feb. 2013. Web. 20 Feb. 2013.

11. Chen, Brian X. “Is Throttling Smartphones Pointless? Study Suggests So.” Bits. The New York Times Company, 23 Feb. 2012. Web. 20 Feb. 2013.

12. HM Treasury. Department for Business Innovation & Skills. Government Investment Secures £1 Billion for University and Private Research. HM Treasury. Government of the United Kingdom, 8 Oct. 2012. Web. 20 Feb. 2013.

13. McCann, John. “Orange San Diego Review.” TechRadar. Future US, Inc., 18 Oct. 2012. Web. 20 Feb. 2013.

 

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