US personalized online radio provider Slacker has thrown its hat into the on-demand music ring by launching a $9.99 a month on-demand streaming music service with offline playlists. Yes, that is indeed akin to launching Spotify in the US before Spotify does. You can just imagine the grin on some of the faces on both sides of the negotiating table when Slacker tied up this deal with rights owners . . .

So, would-be US music subscription customers are now spoilt for choice, with the top-tier options including stalwarts Rhapsody and Napster, newcomers MOG and rdio, and now Slacker. The only problem is that US consumers are lukewarm about subscriptions. No US service has broken the 1 million paying subscribers mark, despite years of trying, and others have simply given up completely, including the heavily funded Yahoo Music service.

Slacker will rightly argue that it is entering the market with a differentiated mix of complementary tiers: its free, ad-supported Pandora-esque personalized radio tier is a genuine complement to a premium on-demand tier in the way that a free, ad-supported, on-demand tier a-la-Spotify is not. The former helps drive discovery and meets different usage needs, while the latter is just a watered-down version of the premium tier.

But that still won’t be enough. The premium subscription market hasn’t failed to break through to the mainstream for all these years through a lack of availability or the quality of services (Rhapsody still makes a pretty good claim for being the best programmed music service out there). The reason consumers have held back is simple:

$9.99 subscription rentals are not a mass-market value proposition. 

Worse still, the value proposition hasn’t changed in years. (Offline streaming is a nice innovation, but it is essentially only an improvement to Napster’s years-old portable rentals.)

Music subscription services are stuck with the Innovator's Dilemma, but an unusual flavor of it. They are a sustaining technology that is forced to improve through modest sustaining improvements because of the restrictions inherent in the agreements with rights owners. In any other fast-moving technology market, locking a product’s feature sets down five years ago and refusing to significantly change them would result in the inevitable demise of the product. Imagine if Apple had stuck with the first-generation iPod and not introduced touchscreen technology, the App Store etc. . . . . A disruptive challenger would have quickly usurped Apple’s market lead with a disruptive alternative. (Of course, Apple does so well in this regard because it does such a good job of being its own disruption, but that’s another story.)

Music rights owners have a monopoly of control of content, and the net effect is a closed market not subject to normal laws of free market competition. And because rights owners are inherently conservative (some less so than others), they are inclined to license to sustaining technologies rather than disruptive ones. Their priority is — totally understandably — protecting against revenue decline, rather than technology innovation. They argue that both are important, but in a world where consumer demand is  shaped by disruptive (unlicensed) technology such as Rapidshare and BitTorrent, dual-prioritization is a luxury they cannot afford.

And so, what happens is that the main licensed products fail to break through to the mainstream despite the best efforts of the innovative startups doing all they can within the constraints of their licenses. They have the benefit of knowing that their competitors are chained with the same manacles, but it is cold comfort because the net result is overall market stagnation. Sure, there will be some market share achievements, but the overall market will be continually outperformed by the disruptive alternatives that aren’t shackled by rights owner conservatism: the illegal free sector.

Unless rights owners start to license to truly disruptive alternatives (e.g., subsidized $3.99 unlimited MP3), the market will continue to fail to compete effectively with free.  Lots of choice of the same service isn’t choice at all. There are c.300 download stores in Europe, but they are all very minor variants of the same basic offering. Hence, the market has stalled.

It is time for dramatic music product innovation. It is time for the record labels and publishers to become their own disruption, whilst they still can.