The Global Implications of VKontakte’s New Music Licenses

Last week’s most important music business news could well be the deal struck between Russian social network VKontakte (VK), and all 3 major labels. It follows a long history of conflict between VK, sometimes referred to as Russia’s Facebook, and the music industry. It seems like the music will stay freely available to VK users, and the service will start testing various monetisation models through new functionality aimed at its music listeners.

Two major implications of this deal:

  1. VK was like a Napster meets Facebook. Anyone could upload music (and other types of media) to it and anyone else could retrieve and access that music. For free. Now, suddenly, this behaviour has become monetized.
  2. There is a global ecosystem of unlicensed music apps that rely on VK’s huge music database to source their content. I assume the majors were not willing to license that, so we should start seeing some of these apps struggle to maintain catalogue.

In Russia, music is social

To understand the significance locally, you should know a couple of things about Russia’s online music landscape. Due to the presence of basically every song you can think of on the country’s most popular social network, people have grown up consuming music inside a social layer. This has made the online music landscape in Russia inherently more social than in many other countries.

Facebook has Pages, VK has communities

A few years ago, the battle between VK and the music industry looked more like a war. It was threatening to destroy an important pillar in Russia’s live music business: the VK communities centered around music.

Moderators of these communities regularly post music to the groups, so for many of the groups’ followers it’s a way to get fresh playlists, find new songs, or connect to familiar tunes. There are groups for well-known superstars, like Drake, for local pop singers, like Dima Bilan, but also for lesser-known niche artist like the Dutch producer Boaz, who has worked with artists ranging from Major Lazer to Yellow Claw and has largely remained in the background.

When promoters are organising shows, they reach out to communities like these to connect to audiences of tens of thousands of people. Sometimes they pay moderators to promote a show, or just offer some free tickets. These communities have been instrumental in driving audiences to shows in Russia & other CIS countries. The fact that these groups can now survive is a big win for VK and the wider music business. Not only do they drive audiences to shows; they also provide valuable data that helps to identify tastemakers & influencers, and potential hits.

What should VK do next?

The presence of a vast music and video catalogue on VK has given it a good competitive advantage over Facebook. VK is the 3rd most popular site in Russia, way ahead of Facebook, which is number 8. It trails Yandex, Russia’s Google, which is reportedly discussing a partnership with Facebook.

VK must leverage its unique advantage to stay ahead of Facebook, and offer a unique, competing experience, that could also appeal to users outside of Russia. These users would already be locked into the Facebook ecosystem and will thus not be interested in joining VK as just another social network. Even if they would be, it’s unlikely VK as a classic social network can attain the critical mass it needs in new, Facebook-dominated markets.

Another threat is the rise of messengers including Telegram, which was founded by Pavel Durov, who also founded VK, but parted on complicated terms. Messengers have been an expected threat to social networks for years, which is why Facebook spent $21.8 Billion on acquiring WhatsApp and offered $3 Billion for Snapchat in 2013. More recently, Facebook has invested heavily in Messenger, launching a bot platform in April this year, which is now host to over 11,000 bots, like the DJ Hardwell bot.

VK is not well-equipped to compete with messengers, yet, and should start making efforts to maintain relevance in a mobile-first landscape, which in emerging economies may also mean mobile-only for big parts of its audience.

This means 3 things:

  1. VK is in dire need of a clear, focused mobile strategy;
  2. VK can use its licensed music & media offering as a competitive advantage;
  3. VK should consider unbundling in similar vein to what Facebook has done with Messenger, Instagram and WhatsApp, so that they can make products that will appeal to Facebook users, too.

Sidenote: VK is partly owned by Mail.ru, which also owns Russia’s second most popular social network Odnoklassniki. Both are included in this licensing deal. The latter has an older user base, so VK will have to target demographics below 35 years old.

Monetization

With all major licensed music services reporting losses, it’s unlikely that music on its own will be profitable for VK. It should consider it a loss lead for the foreseeable future and use it to strengthen its market position. This is not to say they shouldn’t start experimenting with monetization, they definitely should.

Key strategic points for VK:

  1. Stay away from subscription models for now — it is really complicated to convince people to start paying for something they’re used to getting for free. It’s something big parts of the music industry have struggled with for decades now — don’t let this thinking infect your business model.
  2. Carefully study the social data behind VK music communities — what drives interaction, what makes things go viral, what excites people, etc. VK, like Facebook, is in the ads business. These factors are not just crucial for developing new products, but also for their core business model.
  3. Focus on building a new social product for mobile that would fare well in today’s messenger landscape. One of its most important ingredients should be music.
  4. Add mictrotransactions. It’s the easiest way to get people to pay for digital goods in emerging markets. People are not used to recurring subscriptions, many people have pay-as-you-go mobile plans, and microtransactions play nice with mobile wallets, which reduces friction around payments.
  5. Do NOT connect the microtransactions directly to music. Get people to pay for things other than music, but use the music to drive those purchases. For example, imagine if musical.ly were to charge users for video filters. Creating the association of paying for music will kill your business before starting. First, let people get used to making payments around music. VK already has experience in selling virtual goods, like avatars, virtual flowers, etc.

I believe microtransactions, in VK’s case, are more likely to bring repeat revenue from users, at a larger scale, than subscriptions can. If they must do subscription — offer new functionality instead of pay-gating what users already had for free. Make it different from established players like Zvooq or Yandex.Music, or from Spotify which tried to launch in Russia and then withdrew. Bear in mind Soundcloud’s and YouTube’s difficulties in converting free users to subscribers. It’s notoriously difficult to convert users from unlimited free to paid. Price for impulse decisions, so people pay before doing the math that they can do workarounds to get the music they want without paying.

VK, now licensed, is probably the largest social music service. Where music services have always struggled to create a functional social layer, VK has managed to blend music and social networking seamlessly. It will be interesting to see what’s next.