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HomeArchiveThe Streaming Music Business - Is It Sustainable? Part Two

The Streaming Music Business – Is It Sustainable? Part Two

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This week we analyze the sustainability of the music streaming business from the perspective of the streaming services themselves. Next week we examine whether there really is enough advertising money from brands and their associated agencies to sustain all the streaming services currently in the marketplace.

With the hype surrounding Spotify and its recent $50 million investment to boot, investors certainly view streaming music services as viable. It seems labels do as well consider the level of praise directed at Spotify in particular. Last week we examined the low revenues generated for content owners and artists alike from streaming services.

So if artists, publishers and some labels are still complaining about the share they receive, how do the streaming services fare?

However Steve Purdham CEO and Co-Founder of UK based streaming service We7 had some interesting thoughts around consumption of music and he believes that “Going forward this will be critical with Always-On networks and access to unlimited On-line Jukeboxes. Part of this is then in context, are [consumers] listening via, PC, Mobile where the principle is the same but context different. So streaming is the music delivery technology of the future regardless of everything else”.

The vast majority of streaming services, Pandora, Last.fm, We7 and numerous others are based around an advertising funded model where a brand purchases advertising to be associated with music. It is important that we examine the costs to the streaming service in terms of operational costs they bare so consumers can access music for free. First up in most cases the services have to “purchase” licenses from the copyright owners to be able to stream their music. Depending on your streaming businesses territories, this could amount to a few million before you’ve even started.

You also need to add the back-end infrastructure and technical setup along with the maintenance and upgrades that go along with that. Then there are marketing costs associated with building your brand in what TMV believes to be an over-crowded marketplace. Oh, and all this before you’ve even managed to secure advertisers to spend their marketing budgets with their respective service…

This is where it gets interesting as there are some streaming services that only display banner ads, and others like we7 or Spotify that actually also embed audio ads into their streaming services. Some like YouTube and Muzu.tv insert pre-role and post role audio-visual ads into the music content that fans/consumers watch and listen to as well.

The key incoming revenue that these services receive is from advertising and how much an advertiser is prepared to pay for it. Between services it seems to differ quite substantially. Some large services like YouTube only receive around £4.50 per thousand views whilst other services are able to attract anywhere between £15 – £25 per thousand views.

But let’s examine the breakdown of what that advertising spend covers. Well obviously, the aforementioned costs as well as the performing rights society %, which differs from country to country but is around the rate of £0.0085 per stream in the UK. So, if you as a streaming service receive a median of around £9 per thousand CPM (which BTW is being rather generous), and your service manages to display four ads per streaming song this would mean that £2.13 from every 1000 ads displayed would have to be paid to the publishing side of the music business. This does not include the record companies being paid as there is a different right associated with the recorded piece of music, probably equating to around the same figure or a little higher than £2.13 per 250 songs streamed from a streaming music service.

These streaming services also have all of the aforementioned cost as well, so imagine the above breakdown if the number I used, as a median CPM was closer to the £3 per thousand YouTube generally receive. Not pretty in TMVs view!

All in all these advertising splits which are generally around the fifty percent mark sound pretty fair, right? So why do these streaming music businesses still believe streaming rates are two high – as illustrated in last week’s TMV by Tim Westergren, Founder of Pandora?

Perhaps these streaming services have not leveraged the fact that being associated with giving away music for free needs to have a higher value to normal online advertising? Going further perhaps advertisers and their associated brands need to be educated of the value difference. For a start TMV would advocate streaming services (al la YouTube) refrain from diluting premium music content with UGC content. Separating the two is essential. Going further, have as some streaming services believe content owners over-valued their content? TMV would like to think not, but market realities seem to be proving this point valid.

Can advertising funded models be sustainable? “Absolutely, but the cost base has to be corrected. The PRS reduction recognized this and the labels need to follow suit, not because they should reduce prices in isolation but by reducing costs then this allows ad-funded to work as the value proposition makes sense and this allows scale to work positively so everyone wins. Advertising funded …. can generate much higher ARPU values for the music world than piracy can and give a audience which is targetable for sales and subscriptions”.

Moving on, let’s examine the terrestrial radio segment, as being truthful radio is a lot like these streaming services. The only real difference being that you cannot stream the songs you want on demand. Yet different radio stations have different rates they pay per song broadcast on their networks. For example, if an artist was to receive one play of their music on BBC Radio 2 they could expect to see around £53 (before publishers take their cut etc.).

Yet Radio 2 has an audience of around 3 million at any one time. In effect BBC Radio 2 is paying the equivalent of £0.000017666 per listener (or stream of music). Streaming music services do rightly point to a significant disparity between their services and that of traditional radio. This disparity gets even worse if we are talking about radio stations such as Virgin Radio (UK) who only pay the equivalent of around £14 per song broadcast.

According to a statement from Steve Purdham CEO of streaming service We7 “…the economics are slightly different between On-Demand or ‘Radio’ style, which is one of the reasons disparity and confusion arise. Yet the main focus is On-demand, ie the ability to listen to what you want when you want. The costs of around 1p per song means that you have to generate more than that to make it sustainable. Subscription models can achieve this but only apply to a small percentage of the population and can work if the value proposition is right. For the vast majority of the music listening public, you need alternatives to ensure they don’t follow the pirates and this is where the ad funded model still has issue”.

So, have streaming services wrongly bore the brunt of artist, label and publisher complaints? In certain circumstances TMV would have to say yes, they have. However, the comments made by Daniel Ek in terms of an article Heleinne Lindvall wrote for the Guardian on Monday 17th August, where Daniel stated that an unsigned artist could not actually get on the service and all they had to do was get a record deal displays a total ignorance of how hard it is to get a deal these days. Most definitely not very DiY friendly.

The fact that competitor services like We7.com offer access to all artists know-matter how small or large, really displays the differing USP’s of different services. In a press release last week Clive Gardner, Senior Vice President at We7.com stated:

“We7 understands that businesses based upon advertising revenues take years to build, and that artist and labels need some security in the early days of a service before the advertising revenue shares emerge. A founding principal of we7 is that every song played on we7 is paid for, regardless of whether it comes from an artists signed to a major, and indie or from an unsigned artist who has uploaded their music directly to we7. The service pays a minimum on every track, regardless of advertising revenue on the service”.

The majority of these new streaming services have strived to offer stripped-down free ad-funded proposition with different incentives to upgrade to premium monthly subscription options. However, these moves have generally failed to date. One only has look at the fact from over 2 million users of its free service, Spotify has only converted just over 17,000 to its premium £9.95 per month service. At less than 1% that is not impressive at all.

Perhaps this is why labels prefer services like Spotify because they let them become equity shareholders of the business unlike we7, which has clearly stated “No music company has equity in we7”. However, the fact Merlin represents the independent sector which makes up close to 30% of recorded music and yet only receives 1% of equity in Spotify whilst the major labels receive 17% between them really beggars belief. Do not get me wrong, congratulations on Merlin for securing an equity stake. Yet it does reinforce the issue of parity, which still clearly is not being taken seriously by many digital music services.

Going further, services like Rhapsody in the US started off with a decent level of paying subscriber numbers to their streaming service. Yet the last year or so has witnessed quite a dramatic drop in their subscriber numbers. Could this have anything to do with these new advertising-funded services offering free access? TMV certainly believes so.

So focusing on the question of whether streaming music services are sustainable in the medium to long-term only time will tell. It is clear that all will also have to incorporate other income sources like tickets and full downloads into their propositions to survive in this quickly changing landscape (some have already made such moves). TMV does believe we are very close to a “shakedown” which will see a number of these services flounder in the next 12 months or so. However, the services that remain will in TMVs view be stronger, and be able to look forward to a sustained presence for years to come.

 

Author

  • Wayne Rosso

    Wayne Rosso has worked in music and technology for decades. He has worked with such artists as Aerosmith, Bee Gees, Crosby, Stills & Nash, Public Image LTD., Beach Boys, Phillip Glass, Fkeetwood Mac, Rick James, New Kids on the Block, Slash, Evanescence and scores of others.

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