Ed Peto talks China, music downloads and streaming

The following is an extract from Music Ally's upcoming final report of 2016, released tomorrow at 6pm.

Thanks to a combination of government action to tackle piracy and continued innovation from digital services, China as a music market is attracting more optimism from the industry than at any point in recent history.

That optimism is something that Ed Peto, MD of China music industry services company Outdustry, recognises when he looks at some of the key trends in 2016, although he also thinks the market has created some new, thorny challenges for itself.

“We are slowly seeing the end of the 'Chinese consumers will never pay for music' dogma and are now firmly in the era of 'how quickly can we make it happen?’,” he says.

The transition has had surprises along the way. Peto notes that after the initial introduction in 2013 of freemium models, 2015 was expected to be “the year the penny dropped in terms of more content/value being pushed behind the paywall and more restrictions placed on the free tier” in order to drive subscriptions.

“2016 has seen those efforts stalling to a degree, mainly due to two quirks. Firstly, the market-wide effort never achieved full market-wideness - largely due to a difference of opinions between Tencent and Ali Music Group - the result of which is a Mexican stand-off in which services have been reluctant to throttle their free tier for fear of losing users to rivals non-throttled offerings,” says Peto.

“Secondly, we have seen an increasingly-wide adoption of a paid-download model for major releases. In this model the album is windowed as an exclusive paid download, normally for three months, frequently as a full album only, at a price point of roughly US$2/album.”

“While the overwhelming majority of fans will simply find the album for free via some other illegitimate source, enough people – occasionally breaking the million barrier – will now pay to make the endeavour worthwhile, certainly when when you set these download price points against the low per-stream minima available in the market.”

These paid-download album releases can provide mini-windfalls for labels, which may represent “a kind of win” in the march to change consumer habits in China. However, Peto thinks there may be a downside to the strategy too.

“It actually represents a huge distraction from the wider aim of converting fans into long-term subscribers. These frontline releases are not available for premium streaming during the download window unless you have paid for the download and are a premium subscriber, thereby devaluing the premium tier,” he says.

“Also, when the window is over and the album moves into the streaming free/paid structure, the hardcore fans have already bought the album and the overwhelming majority of casual fans have skipped the whole shooting match and turned back to illegitimate sources of some form. Both cases seriously undermine the premium subscription funnel.”

It’s a dynamic that’s particular to China in 2016: Adele aside, few albums in the west now make their debuts purely for sale rather than for stream. Peto says the issue is not enough to make him gloomy about the prospects for paid subscriptions in China though.

“While free tiers of freemium services are seen as being on-ramps for the hard-to-impress digital consumer in the west - involving a good deal of user acquisition heavy lifting - the vast majority of Chinese digital consumers are already on the free tier via one or more of the local freemium behemoths,” he says.

“All that remains is to convert this audience into premium subscribers within their existing ecosystems of choice. Easier said than done, but, in a sense, China has a head start on the west in this respect.”