Ovum found that if all the Tier 1** UK ISPs2 launched bundled digital music services in 2010, this market could be worth £103 million (about R1.120 billion) by 2013 in a medium adoption scenario, equivalent to 41% of the total retail value of the UK digital music market in 2009. Ovum also calculates that an accelerated service-adoption scenario could push the bundled digital music services market to as much as £203 million (about R2.208 billion) in 2013.
Additionally, Ovum found that bundled music services would help reduce the cost of ISP subscriber churn. A big ISP with around 3.5 million customers would generate indirect value of more than £20 million (about R218 million) per year if its bundled music service cuts churn by just 10%.
Ovum interviewed several digital music service providers, content platform producers and ISPs offering digital music services today to examine the economic case for the provision of on-demand digital services by ISPs. Their report concluded that ISPs are a critical channel for the provision of future digital music services.
The revenue prospects for bundled ISP music services would be substantially increased if services were offered to consumers in tandem with meaningful action to tackle illegal music downloading.
Geoff Taylor, BPI chief executive, welcomed the report: "It's increasingly clear that it isn't smart to be a 'dumb pipe'. This report shows that the revenue potential of digital music services alone makes sound economic sense for ISPs.
"UK music companies want to innovate and develop exciting new digital offerings. ISPs such as Virgin Media have recognised that legal digital music services offer a more exciting and profitable future than continued widespread piracy."
UK broadband access services are reaching saturation and the market is maturing, according to Ovum. At the same time, competition and service bundling are driving down broadband retail prices and consumer demand for rich internet content such as video is increasing wholesale network costs.
Against this challenging backdrop, legislative changes and the growth of connected rich-media devices alongside new licensing frameworks present a strong case for ISPs to leverage their brand and billing relationships to deliver digital music services.
Ovum considers the blueprint for success is for ISPs to pursue a strategy based around a subscription streaming service incorporating bundled download-to-own tracks and additional recommendation-driven retail. This would fulfil a strategic objective for ISPs - implementing value-added services to their product portfolios, creating a sustainable way to participate in the demand for rich digital media.
Adrian Drury, the report's co-author and Ovum's principal analyst, said: "With the right service platform, user experience and merchandising strategy, ISPs have an opportunity to reach a green-field digital music market that mainstream download-to-own services such as iTunes do not reach today.
"The opportunity in revenue terms for the leading UK ISPs is compelling, and in a crowded, increasingly mature broadband market, ISPs can differentiate their value-added offerings with innovative music services."
*The study by Ovum is entitled Is There A Commercial Argument For ISP Music Services?. Ovum interviewed more than a dozen ISPs, platform enablers and web-based operators providing digital music services in the European markets, with the full range of revenue and costs models for the provision of digital music services represented in the sample. This includes advertising-funded, premium subscription streaming and hybrid streaming and download-to-own services. The revenue forecasts assume adoption of a recommended best-practice strategy of a low cost, £6.49 per month (about R70,60) service, delivering premium streaming with limited download allocation, and a defined additional retail target per user per month. It is a medium-level service adoption scenario. It is assumed that the music offerings themselves would be 'tethered' to the broadband service as part of a bundle. The revenue forecasts do not include income from standalone music download or subscription services already in the marketplace, which Ovum estimate to be around £250m (about R2.720 billion). This study was commissioned from Ovum by Universal Music, on behalf of the BPI.
** Tier 1 UK ISPs are Virgin Media, Sky, BT, O2, Orange and TalkTalk.
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