It really should be a great day for streaming music. After all Nielsen released a report that showed unbelievable growth for the listening format. In the first half of this year streams have increased by 50 percent over the past year. But these numbers also are leading to discomfort for the streaming industry. Because along with the streaming increases are massive declines in all retail formats. CDs, digital tracks and digital albums are all down around 15 percent in the same period.

Mmmm, junk data.

Mmmm, easily consumable streaming music junk data.

Today’s numbers clearly demonstrate that consumers greatly favor access to their music over purchasing tracks. What isn’t clear is what this means for the music industry. While the revenue model for a purchase is well understood, we have no clarity on streaming’s value.  This is partly because a stream really can’t be equated to a purchase. After all a listen can’t really be compared to a retail event. But the real problem is that streaming services that make up the Nielsen numbers are vastly diverse.

Look, nobody in their right mind is going to compare YouTube and Spotify. But today’s numbers jams several different services with a variety of business models into a single number. It leads us to a question: should we really accept these numbers that don’t tell us anything about the business value?

Discerning A Difference

There are several different streaming products and each one has a different method of providing revenue for the rights holder. Unfortunately, the streaming number Nielsen posted was a single all-in number designed to show huge gains, but not to create clarity. These numbers would actually be revelatory if Nielsen would start tracking and reporting on each of these metrics separately.

As they say at the old ball yard, you can’t keep score without a scorecard. Same with streaming music. And since nobody else is doing it, I thought I’d describe the main streaming sectors and how revenues are generated by each. I’ve also included a few metrics that would help the industry understand the real value of each of these services.

Ad-Supported Streaming

The biggest contributor to Nielsen’s streaming number is ad-supported streams, which is dominated by YouTube’s massive reach and nearly unlimited catalog of music. While it doesn’t have the hype of Spotify or Beats Music, when we in the industry talk about streaming, we’re mostly talking about YouTube. YouTube is free and only generates revenue from advertising that is sold against the plays. Unfortunately, very little of the content on YouTube is monetized and the amount of money it generates per play is unbelievably tiny. Because of YouTube’s scale, a tiny increase in ad sales could vastly increase overall streaming revenues. But it requires significant growth in sales staffing and performance from Google.

Metrics We’d Like to See

-Active users
-Plays per active
-Revenue per play rate

Internet Radio

Comprised of non-interactive services and direct licensed radio, Internet radio includes services like Pandora, IHeartRadio and Slacker. A majority of these pay a stream rate or a percentage of revenue depending if the listener is free or is paying a subscription fee. In the US, Internet radio has performed very nicely. While YouTube can be described as a sampling platform, Internet radio is sticky, with listeners in droves using the services month after month for free, and some even paying to remove ads. The rates are wildly different depending on the deals for both recording and publishing rights. There has been major kerfuffle with this, primarily as Pandora has sought to keep publishing costs at their (nearly unjustifiably) low rate. But it remains a fact that every Internet radio play produces revenue for both rights holders, something that broadcast radio doesn’t do.

Metrics We’d Like to See

-Plays per user
-Number of plays per user
-Number of subscribers
-Lifetime duration of subscribers
-Revenue per play rate for free streams

On-Demand Streaming

When people refer to streaming, many times they’re talking about this bucket, which is dominated around the globe by Spotify, but includes Deezer and Rhapsody amongst others. However there are two different types of on-demand streams. Spotify has found that by having a free tier of the service, the company can build a pipeline of potential customers that it can monetize with advertising and convert into the paid tier. A vast majority of users in Spotify don’t pay a dime for the service. Spotify does pay for every free play, but it’s significantly less than the amount of revenue generated by the premium subscribers. That rate is confidential and differs based on the deal with rights holders. However many artists have seen it on their statements as low as one third of a premium play. It is worth noting that others have followed Spotify into the free racket, like Rdio, but services like Beats Music have stayed away from free.  It’s also worth noting that the number of people who use an on-demand service pales in comparison to Internet radio or ad supported streaming.

Metrics We’d Like to See

-Free users
-Free plays
-Revenue per free play
-Subscribers
-Subscriber plays
-Revenue per subscriber play
-Lifetime duration of subscribers

It’s A Trap

It’s easy to fall into the trap of pointing the finger at streaming services for the loss of retail sales in music. And there’s probably a whole lot of truth that many consumers who previously purchased music now just access it either for free or paying. But since customers are voting strongly for streaming and we’re committed to building new revenue models as opposed to suing upstarts out of existence, we should be asking much better questions about the streaming business.  That’s not only the suit who have their hands on the controls of the business, but also reporters, analysts and industry insiders. We should demand that Nielsen and other market research firms create better metrics that illuminate business value, when instead we get sensationalist reports that deliver big headlines. Good data is good for everybody—especially Nielsen, when we all start obsessing over these metrics like we used to with SoundScan every Wednesday.

Join the conversation! 3 Comments

  1. […] While equating plays for a sale does serve those people who are supporting the old model, it’s utterly empty of any value to streaming companies. I wrote in depth about some of these issues in Junk Food Data. […]

    Reply
  2. Hello Jon, good thinking here on some critical and rarely-discussed numbers. Can you share any estimates of on-demand streaming subscriber LTV (and/or lifetime duration of subscribers) from your time in the business?

    Reply
    • Well, I’d rather not get into any specifics here on the internets. And frankly, whatever I saw was from a different time. All of these services are much bigger than they were in my day. I will say that the subscribers who remain active hardly ever leave the service. There’s many, many factors that go into understanding the lifetime duration of subscribers. If I were running one today here’s what I’d try to understand:

      -Can we create smart profiles of customers and measure them based on their specific behaviors that differentiate them? For example, the Active Sharer, the Connected Hipster, the Lullaby Player, the Active Exerciser. Let’s face it, a single lifetime duration number, while perhaps a good barometer of health of the base, won’t do squat for you in understanding 1) what a good subscriber looks like and 2) how can I got get (or make) more of those. Building these cohorts will also make it easier for you to make better marketing bets. Based on the terrible marketing I’ve seen from all the services (Hey! Music! You like music!), I’m pretty sure nobody does this yet.

      -Can we figure out where the subscriber falls off? I will bet a million bucks that the number one reason for quitting is ‘I just don’t use the service enough to justify it.’ But are there other behaviors that determine if someone is going to quit the service? And is there something we can do about it?

      And that’s really just the tip of the iceberg of what is possible. Digital music services give us an ability to understand the music fan in ways that we’ve never been able to do. It does require investing in that understanding, though. Something that we have yet to really do yet.

      Reply

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Beats Music, business value, Digital Music, Music, Nielsen, Spotify, subscription services, YouTube