Google Play Music Introduces Ads – no surprise there

google-play-music-1Yesterday, Google Play Music quietly announced an ad-supported, free listening tier. This complements the $9.99 monthly subscription service offered since 2013. Most of the media chatter of late has focused on subscription-based models because of their greater per-user revenue generation and support among musicians. This move runs in the opposite direction. Why?

Before its purchase by Apple in 2014, Beats Music launched as a subscription only service. More recently, Jay Z’s Tidal re-launched as both subscription-only and openly hostile to ad-supported services with claims of unfairness to artists. Apple Music’s announcement in early June highlighted the subscription service and never mentioned advertising despite the fact that iTunes Radio has been ad-supported since debuting in late 2013. Advertising isn’t in fashion right now when it comes to music streaming.

The Unlikely Champion of Ad-Supported Listening

spotify-logo-primary-vertical-light-background-rgbThe great defender of ad-supported listening is actually the most successful worldwide streaming music subscription service. Spotify announced this month that it had more than 20 million subscribers each paying roughly $9.99 per month. That number has doubled over the previous year. At the same time, Spotify maintains what is likely the world’s second largest ad-supported listening audience of 55 million.

How did Spotify become the poster child for the defense of ad-supported streaming? Taylor Swift pulled her catalog of music from Spotify because it refused her demand to only play her music to subscribers. By contract, she received higher royalties from song plays to subscribers than ad-supported listeners. She only wanted the higher paying listeners to have access to her music and force everyone else to purchase songs. Spotify rightly saw that providing Swift with special treatment would be unfair to other musicians so refused her demands and they parted ways. Since that time, Spotify’s audience growth has actually accelerated.

Ad-supported Listening Feeds Subscriptions

Why did Spotify hold its ground? This could be construed as a risky move given Swift’s global popularity. However, the streaming service also faced another risk. If Spotify capitulated to Swift, it might face a barrage of other musicians asking for similar treatment. This would rapidly erode the catalog available to ad-supported listeners and could stifle user growth for that service.

Aside from the fairness issue, Spotify had a strong interest in maintaining ad-supported listening because 80% of its subscribers started as ad-supported listeners. Spotify has proven that an ad-supported “freemium” model is the most effective onramp to a healthy subscriber base.

Google Play Music Wants Audience Growth

Screen Shot 2015-06-24 at 2.34.49 PMFrom the beginning, Google executives have been frustrated by a lack of traction in the music industry. Google Music was slow to grow song sales and the subscription-based Google Play Music is not considered to have a significant number of customers according to MiDIA Research’s Mark Mulligan. With Apple Music launching next week, competition for subscribers is once again intensifying. It is not surprising that Google wanted to get out in front of the Apple Music launch when many users will be test-driving new streaming services.

The ad-supported model presents Google Play Music with two key benefits. First, adopting the Spotify model for customer acquisition could drive higher subscriber growth as ad-supported users transition to subscriptions over time. Second, the service gets an opportunity to grow a much larger user base since nearly 90% of consumers today choose ad-supported listening and that trend is expected to continue.

The Wall Street Journal’s Alistair Barr reports that Google Play Music “is offering free streaming to entice more people to sign up for the paid monthly subscription service.” However, the article goes on to quote Nomura analyst, Anthony DiClemente as saying:

“Google’s digital ad lead and its targeting capabilities mean it can leverage this music inventory to serve ads that are either superior or better formatted than rivals and therefore monetize better than other companies.”

Ad-supported listening should actually play into Google’s competitive advantage. In the subscription world it has the Android platform as a distribution channel, but all of its rivals are also available on Android devices. By contrast, no streaming service has Google’s advertising experience or assets.

Advertising Models are for the Mass Market of Streaming Audio

GoogleAudioAdsIf anyone knows how to monetize ad-supported services it is Google. Granted, its foray into audio ads a decade ago was not successful, but providing a subscription-only service always seemed off tune for the company that lives on advertising to mass audiences. It’s hard to believe this will put a big dent into Apple Music’s launch, but Google is taking a logical step to improve both its subscription and advertising revenue opportunities.

Subscriptions for music streaming make sense, but only for a small segment of the market. According to Strategy Analytics, the largest consumer segment by far will choose ad-supported listening. Spotify and Pandora have proven you can build large ad-supported audiences that brands want to reach and also generate hundreds of millions of ad dollars. This approach is good for advertisers, good for the Internet radio streaming services and good for consumers that either don’t have $120 dollars for music listening or simply prefer listening to ads over making monthly payments.

Adopting an ad-supported model should be easy for Google given that it already has the technology infrastructure and ad sales network in place. If it gains traction, maybe Google will become the de facto champion of ad-supported listening.