Streaming: A Financial Failure.Why Streaming Music Models

Arent Working Out.paul resnikoffpublisher, digital music newsvienna music business research daysoctober 2, 2014

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Streaming Is Currently Exploding.Track-by-track, more people consume music via streaming than any other recorded music format.

US-based Revenues, 2003-2013. Source: Recording Industry Association of America (RIAA)

The Secret to Streamings Current Explosion: Mobile Broadband Ubiquity Just imagineAn inexpensive instrument, not bigger than a watch, will enable its bearer to hear anywhere, on sea or land, music or song, the speech of a political leader, the address of an eminent man of science, or the sermon of an eloquent clergyman, delivered in some other place, however distant. In the same manner any picture, character, drawing, or print can be transferred from one to another place.

Millions of such instruments can be operated from but one plant

More important than all of this, however, will be the transmission of power, without wires, which will be shown on a scale large enough to carry conviction. These few indications will be sufficient to show that the wireless art offers greater possibilities than any invention or discovery heretofore made, and if the conditions are favorable, we can expect with certitude that in the next few years wonders will be wrought by its application.

from The Future of the Wireless Art, Wireless Telegraphy and Telephony: Popularly Explained (p.67) by Nikola Tesla, 1908.

Streaming Is Transforming Markets Like Sweden...Source: IFPI Svenska Gruppen

...and NorwaySource: Norwaco

The Only Problem:Streaming Music Is Financially Unstable and Unsustainable.

In 2014, streaming music:(a) is not financially viable for artists(b) is not a viable, sustainable business model overall (c) is driven by mega-acquisition and Wall Street interests(d) offers only a short-term financial solution for major rights owners(e) has a speculative path towards long-term scalability

Streaming Music: DefinitionsNot physical, not a download, not discretely owned music, or traditional broadcast radio.

Streaming Music: Definitions(a) internet radio(b) on-demand track streaming(c) on-demand video streaming(d) satellite radio(e) internet-based broadcast streaming(f) other variants: i.e., cached content for offline streaming

Streaming Music: Dominant Players(a) internet radioPandora (US, Aus/NZ), Spotify Radio (Americas, Europe, Aus/NZ, parts of Asia), iTunes Radio

(b) on-demand track streamingSpotify, Deezer

(c) on-demand video streamingYouTube

(d) satellite radioSirius XM Radio (US)

(e) internet-based broadcast streamingie, Radio 1 online, iHeartMedia, Inc. (formerly Clear Channel Communications), most other radio stations

Streaming Music: Dominant Players

streaming is not financially viable for artistsSpotify claims per-stream payouts reach $0.05 (half-a-penny), though this is considered exaggerated (YouTube pays far less).

If I tried to make my albums with what Spotify pays me, I wouldn

t make them. I couldnt hire other musicians or someone to

master it; Id have to do everything myself.

- Beck

streaming is not financially viable for artistsMajor labels are notorious for not paying artists streaming revenues.

streaming is not financially viable for artistsStreaming platforms do not reinvest in content; major labels hardly perform that function anymore.And one weird thing is that iTunes, Apple, Spotify, Google, whatever, all of the people who are profiting [and]

YouTube who are profiting off the artists from the small level to the huge levels arent really feeding very much back

into the creation of new content. But wouldnt it seem that the place that is making the lions share of the profit should

actually also be putting money back into the creation of content to make a healthy ecosystem?

- Amanda Palmer

streaming is not financially viable for artistsStreaming is cannibalizing other formats, but pays fractionally less.At the moment, people need to listen to my song on Spotify

about two thousand times before Ive earned about the same as

one sold CD.

- Anssi Kela

streaming is not financially viable for artists

streaming is not a viable, sustainable business model overall(i) Low percentage of paid vs. free (ad-supported) users.(ii) High, variable, and unpredictable cost of goods (content licenses)(iii) Low per-stream advertising rates(iv) Preponderance of attractive, free options(v) Reluctant participation from top artists(vi) Elevated churn ratio.

Low percentage of paid vs. free (ad-supported) users.Total paying streaming music subscribers, WW: 28 million*Total paying streaming music subscribers, US: 7.8 million**Spotify total paying subscribers: 11+ million***YouTube total paying subscribers: 0Sources: *IFPI; **RIAA; ***Spotify

Preponderance of free, attractive options.YouTube total paying subscribers: 0Advantages over paid Spotify:

Larger content availability worldwide.Greater viral sharing capabilities.Richer video content.Extremely large selection of mash-ups, covers, and unauthorized content.

High, variable, and unpredictable cost of goods (content licenses)

High, variable, and unpredictable cost of goods (content licenses)

"...while Spotify's revenue growth is impressive, its overall financial results are alarming.

"In fact, virtually every new dollar of revenue went directly to music companies as royalty payments, evidencing the fact that the more members Spotify adds, the more money the company loses. In almost a one-for-one scenario, every dollar Spotify is generating immediately exits the company due to licensing fees..."

"No matter how we slice the math, it is patently clear that something's gotta change soon on Spotify's business model if the company is to survive."

PrivCo Financial Assessment of Spotify.

Elevated churn ratio.

Elevated churn ratio.

"Again, this is not a Spotify problem, it is a fundamental issue with the freemium music model: many more people decide it's not for them than continue using the service."Mark Mulligan, MiDIA Research

driven by mega-acquisition and Wall Street interestsIn the absence of a fundamentally sound business model, the focus shifts towards exit events like acquisitions and IPOs.(1) Spotify preparing for IPO currently (Goldman Sachs a lead investor)(2) Universal Music Group earned $400 million on a 13 percent stake in Beats by Dr. Dre

(acquired by Apple)(3) Major labels pushing for a sale of Spotify at north of $10 billion.(4) Labels aggressively negotiating equity shares in streaming companies.

The major label business model in 2014

Image adapted from a photo by Alejandro Hernandez, licensed and modified under Creative Commons Attribution 2.0 Generic (CC BY 2.0).

Major labels have really given up on selling music, it seems. Pushing Spotify to an IPO is what most of the senior executives at the major labels are concerned with.

BitTorrent chief content officer Matt Mason

False economics? more subscribers = sustainabilityCNN: At what point can an artist survive on a Spotify income?Daniel Ek, Spotify CEO: Well, I mean, the interesting thing here is that were just in its infancy when it comes to streaming. And we just last week had an artist announcement where we basically said if there would be 40 million subscribers paying for a service like Spotify, it would be more than anything else in the entire music industry, including iTunes.And were not too far away from that number, which is the interesting thing. So, Im absolutely sure that artists will make a decent living, and actually the industry will be larger than its ever been, in the next few years.

Who Will Save Streaming?

Who Will Save Streaming?

One billion users is 1/7 of the earths population. If 1/10 of those people were to be part of a subscription service like Spotify has, and Im a huge Spotify fan, at $10 a month Do the math. Thats a billion a month. Thats $12 billion dollars. Thats bigger than the entire music business coming out of one company.Even if it was 5%, now musicians are suddenly in a game that people are ready to pay for, their lives are changed.Bono.

The Impact on the RecordingIs Marked. But Can We Really Blame Streaming?

The Impact on the RecordingIs Marked. But Can We Really Blame Streaming?

Streaming: A Financial Failure.