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Does Streaming Cannibalise A-La-Carte Sales?

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In Europe, particularly the UK, uptake of music streaming services has been explosive. The two services driving this explosion are we7.com and Spotify. Almost each week you hear media reports of one being larger than the other in terms of the number of consumers using their “free” ad-funded services. Yet if the service is free to consumers and with paid subscriptions increasing via mobile apps increasing, what are the effects on a-la-carte download sales?

One thing is for sure consumers paying for a premium service to avoid advertisements have been depressingly low. Whilst yes iPhone apps have generated excitement and services like Pandora, Spotify and now Rhapsody have seen impressive uptake of apps, which allow portability of streaming services, how long before the consumer tires of their subscription fee? Going further, what happens when they move to a different handset the current apps do not work with the new handset operating system?

TMV have had “off the record” discussions with a number of key global aggregators, one of whom disclosed that they see a direct correlation between an increase in a-la-carte sales when an exclusive stream is secured a week prior to the actual songs release. This should go some way to dispel industry fears that free streaming music services are having a negative effect on a-la-carte download sales.

However, INgrooves CEO and Founder Robb McDaniels does have a valid point when discussing cash advances for catalogue. Robb explains it like this via his Billboard op-ed: “Here’s the issue with streaming from the perspective of a content owner: It takes 150-200 plays of a song before the content owner earns royalties on par with one download. Content owners typically get paid 70 cents per download and half a penny per stream. How long does it take the average fan to stream a song 150 times—six months? Twelve months? Longer? There’s the cash-flow issue.” Rob goes on to validly outline that the speed growth of streaming threatens to cut of cash-flow based around advances.

The economic impact of streaming on a-la-carte download sales in terms of revenue reaching content owners is still currently un-tested. Albeit TMV has heard from numerous labels that ad-funded streaming revenue is particularly poor. So if the process of up-selling from free ad-funded streaming to premium paid-for subscription is not successful, does the argument that streaming services are converting people from piracy have any weight?

If revenues from ad-funded services are as minuscule as Rob McDaniels outlines above then surely in the medium to long-term, we will start to witness serious cash-flow problems at many labels? This cannot in anyone’s view be a good thing for the growth of the industry as a whole.

Yet as an industry we cannot forget that uptake of these streaming services has been phenomenal and that should be taken as an endorsement from consumers. Generally, the user experience is exceptional and does make streaming music a viable option in many music fans’ books. If consumers are engaging with these music streaming services then surely it must be a good thing, right?

According to the Times newspaper, Spotify is streaming billions of tracks per month. Which taken at face value is good news right? The fact consumers are streaming so many tracks should be positive for the industry. However, when one drills down and examines the financials it has to be wondered whether given the current phenomenal growth rate, Spotify can sustain royalty payments to content owners and publishers with such sparseness of advertisements currently within its service?

Billboard undertook a great analysis of the numbers (albeit based only on US rates) by using a combined 90% interactive and 10% non-interactive web streaming rates coming up with a figure of 0.6843 cents per stream. Now if Spotify streamed 2 billion tracks last month that would mean $13.7 million due in royalty payments to content owners. That would necessitate more than $164 million in royalty payments per year, if growth were to stay stagnant. However, with an imminent launch’s planned in China and the US monthly royalty payments can be expected to increase significantly.

Billboard’s analysis also goes further to outline that to receive that level of payments and make a decent return Spotify would need to sell an incredible number of ads at a very high CPM rate of $20 for over 13 billion audio ads. Already, that is highly non-probable, as we all know advertisers will not pay such a high CPM. Yet the plot thickens because even pushing through so many ads would necessitate an audio advertisement every 1.75 songs. TMV believes that if such an advertisement rate were introduced consumers would leave such streaming services in droves.

A comment on the Music Ally blog asking the question of whether any Performing Rights Society has confirmation of a $13.7 million payment from Spotify hits the nail on the head. Obviously, such a payment would leak after last week’s trepidations about Spotify and it has not. Subsequently it is TMVs view that such a payment has not been received by any rights society.

Looking at it from a UK instead of a US perspective leads to an even higher monthly royalty rate based around the new PRS streaming rate of £0.0085 per stream. This leaves a monthly royalty bill of £17 million pounds per month based around 2 billion streams per month or a yearly total of £204 million pounds sterling. To make any of this viable Spotify would have to secure 1.52 million paying subscribers each willing to fork out $15 USD per month. We know from the UK scenario this is unachievable considering it has been widely reported that less than 2% of its 2.7 million UK users are premium subscribers paying £9.95 per month.

The scaling for advertisers and brands works well, but it is clear it does not for Spotify or content owners alike. Until streaming services manage to achieve higher CPM advertising rates it is TMVs view that at its current level streaming services are unsustainable over the medium to long-term – even with the recent PRS rate drop.

So does all of the above clearly illustrate that streaming services cannibalize a-la-carte download sales. NO. However it does clearly outline a feeling of unease. If so many monthly streams are being announced but no confirmation from a rights society of any royalty payment being made, clearly there is an issue. On a final note, requiring 150 – 200 streams per customer to make the same revenue as from one a-la-carte sale is unsustainable from the content industries point of view over the medium to long-term.

 

 

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