It’s All About Bundling Music

We believe the most significant shift in the mobile music market will come in the form of bundled music or, as it is more commonly known, subscriptions. We believe this to be the case for a number of reasons:

Cultural shift to rent vs. own. As digital content of all forms has become commonplace and as bandwidth had facilitated near real-time delivery, the physical hardware that was the vehicle for providing content (newspapers, VHS tapes, records, CDs, etc.) is becoming increasingly obsolete. Similarly, consumers are becoming conditioned to accept that virtual digital content is the norm and therefore physical ownership is no longer seen as necessary. This devaluation of ownership means that models offering access to vast digital libraries on a rental basis are in many ways more compelling than just having access to content that is purchased. The downside is that the library is only accessible while a subscription is current, but for many people this is a small price to pay for the opportunity of nearly infinite content discovery.

Moreover, there is a generational shift underway; the digital content consumers of tomorrow will have grown up with no recollection of physical content at all. As today’s children inevitably come to own mobile handsets, the delivery of music and any other form of digital content will be over a broadband connection rather than via physical media. For these consumers, the difference between owning an MP3 and renting an MP3 will have little meaning.

Subscription models are a better revenue proposition. The Apple business model, as previously outlined, is so significantly different than that of mobile operators that MNOs stand to gain little from competing head-to-head with Apple. While operators are reluctant to divulge any operating metrics relating to mobile music consumption patterns, third parties have indicated that the average number of mobile music tracks downloaded per 3G subscriber is approximately six per year.

If we take a hypothetical MNO 1m 3G subscribers selling OTA full- track downloads at US$1.99, this would generate just under US$12m per year. If just 25% of these 3G subscribers could be convinced to shift to a subscription- based model of US$1.99 per week for access to an unlimited library of content, this would generate more than double the revenue over the same period (see Exhibit). More importantly for the operator, not only are the margins better in the sale of subscriptions than with individual track sales, but there is an increased propensity for subscribers to upgrade devices and peripherals to accommodate an increased reliance on the handset as the center of the subscriber’s music experience.

The average number of mobile music tracks downloaded per 3G subscriber is approximately six.

Exhibit: Subscriptions vs. a la carte Downloads—Revenue Generation Scenarios

Source: Pyramid Research, Sprint.