Growing Concerns: Does Music Subscriber Growth Cripple Profitability?

I recently wrote about how Rhapsody is facing issues as it expands to a worldwide audience and partners with cellphone carriers in Europe, Latin America and the United States. Part of my analysis centered on shrinking margins from signing up new customers on services and how difficult it becomes to manage the business when you don’t control the customer base. I also pointed out how relying on other companies to do your marketing erodes your brand, leading to a limited retail funnel.

Disclosure: I worked for Rhapsody for nine years before leaving in September 2013.

Rhapsody’s 2014 results were recently released in a RealNetworks’ regulatory filing and there are two conclusions that are easy to draw from the report. (Note: RealNetworks owns 43 percent of Rhapsody and includes the company’s financials in its own 10K SEC filing.)

  1. The growth strategy is working. Outside of the reported two million worldwide customers Rhapsody recently trumpeted, the company also increased revenues by 23 percent in 2014 over the previous year. Rhapsody’s revenues are at $173 million a year, which are rumored to be much larger than those of Deezer, the France-based music service.
  2. The growth is coming at a cost to Rhapsody. The company lost $21.3 million in 2014, up from 14.6 million in 2013. And it’s just not overall losses that are mounting. Rhapsody losses are continuing even when factoring in subscriber growth. Based on its 2014 losses and its reported subscribers, Rhapsody lost $8.53 per subscriber last year, although the company has cut its loss per customer in the past two years.

Growth and Losses

Rhapsody’s losses are a drop in the bucket when compared to Spotify. In 2013 the company reported operating losses of $128 million. While the company didn’t report subscribers, it has been suggested the company had around nine million paying subscribers at the end of 2013, leading to a $14 loss per sub in that year.

Screen Shot 2015-03-03 at 12.38.58 PMIt should be pointed out that Spotify’s paying subs are supporting all the free users who generate very small amounts of money for the company through adverting sales. Spotify says that its average active user (a combination of paid and free) generates $41 per year in 2013, while Rhapsody generated $93 per sub for the same year.

To grow, Rhapsody not only saw losses per sub drift slightly upwards, it also had to eat into its margin. In 2014 revenue per sub sunk to $69. And Rhapsody’s growth isn’t coming anywhere near Spotify. In fact, the Stockholm based streaming giant’s growth is outpacing every company in the industry by a wide margin. It now has over 15 million paying subs and 60 million worldwide users. Spotify picked up six million paying subs to Rhapsody’s one million in 2014.

So what does all this mean? A few conclusions.

  1. Brand Matters: In the excellent MusicREDEF newsletter, my friend Matty Karas recently mused, why when people talk about streaming music, they only refer to Spotify. There are scores of companies with offerings, many of them in business for a long time. But Spotify has broken through and is on-demand streaming’s only household name. Its brand has fueled incredible subscriber and free user growth for the company.
  2. The Model Matters: What makes this so intriguing is the three distinct approaches these companies have taken for on-demand streaming.Rhapsody traditionally focused on all paid customers, utilizing their own retail channel, before pivoting to distribution partners for growth. It has achieved modest growth, but at a significant operational cost.Deezer only operated in territories with carrier partners. The results? Deezer had significant subscriber growth, but the revenues are below Rhapsody. So to the outside world, Deezer looks like a much bigger deal than within the industry. Deezer also is facing competition for carrier deals. In a shift of its model, Deezer launched a high-bitrate service in the US for $20 a month, although the company has not been strongly marketing the product. Despite the massive amount of money raised and worldwide operations, could Deezer be the first huge causality in on-demand streaming?Spotify built its own customer funnel by giving away expensive free music and has found a way to significantly grow free users, paying customers and revenues. The costs have been astronomical, but Spotify is dominating streaming music, dwarfing all its direct competitors and–maybe even more importantly–reaching mass consumer appeal.
  3. Distribution Eats Margin: My last piece on Rhapsody suggested the company’s margins face significant downward pressure because of its cellphone distribution scheme. And now we see the numbers showing that erosion. Rhapsody will have to hope that a) it can sustain or even amplify its growth rate through partners and b) retain its own higher margin customer funnel. If not, Rhapsody’s revenue per sub will continue downward.
  4. The Economics Are The Economics: Regardless of approach or business model, on-demand streaming music is an expensive business to launch and operate. There’s no way around losing millions of dollars just to be one of few who survive. All left standing will require a huge war chest, access to raise even more money and the intestinal fortitude spend a fortune in content, distribution and marketing costs.
  5. More Pain Coming: Apple and YouTube are expected to roll out on-demand music services in 2015. The pressure to grow–and raise more money to pay for the growth–will increase on every company in the market. As the old adage goes: let the beatings continue until the morale improves.

More Growing Problems

Geekwire Filing Reveals $21M Loss for Rhapsody, Despite Jump in Revenue and Subscribers

NY Times As Music Streaming Grows, Spotify Reports Rising Revenue and a Loss

Bloomberg Spotify Hits 10 Million Paid Users. Now Can It Make Money? The Roaring Mouse: Rhapsody Faces Its Future

11 thoughts on “Growing Concerns: Does Music Subscriber Growth Cripple Profitability?

    1. Three huge simplifications: 1) mass adoption. Like 25 million paid 2) managing sub acquisition costs. For spotify cutting off the free user 3) cutting content costs. It costs too much for the catalog. Either smaller catalog or less expensive.

      1. Good question Michael. Jon, if you were CEO of Rhapsody and wanted to steer them in the right direction, what would you do?

      2. Thanks for asking Karen. The smart-ass answer is to find someone who’d buy it. Hahahaha. Okay, I won’t cop out. Thematically, the company needs to shore up so it doesn’t become shell with lots of inactive subs and little revenue (see: Deezer). My list:

        -Commit to a brand. Either Napster or Rhapsody. Pick one and get your worldwide muscle behind it. Two brands makes it seem like the company can’t make up its mind about what it is.

        -Build the brand. The company needs to stand for something and it should be easily identifiable through its brand. Right now the brand doesn’t stand for anything except ‘music’ and that’s not good enough. Rhapsody let Beats walk in and replicate nearly the same thing it has done for a decade and take away its only defendable value proposition of a music experience brought to you by people who know music. Maybe that’s not the answer, but the company needs to figure out what it is and go for it.

        -Reengage the core. Rhapsody still has a good number of US listeners. Figure out a way to grow more of those. No other market can deliver the revenue per user that the US can.

        -Figure out freemium. Rhapsody deal with Twitter is a good thing. It created a freemium offering it can afford. But the company needs to dramatically increase ways people can listen for free for a limited amount of time. It’s time to sunset the 7 or 14-day trial. That’s failed. It’s time for something else. And that’s a way for people to listen and share before subscribing so that the member don’t feel they’re trapped on a desert island of streaming.

        -Address the Experience Gap. Karen, last year at Bandwidth you smartly pointed out that all the services were missing something. I believe that there’s an Experience Gap between what the listener wants and what we’re delivering. Most of the services are just search engines attached to warehouses of music. If I were running one of these companies I’d start with what I’d want the listener to say about me. It’d go something like “I love my streaming service because it knows what music I like and it gives me more of it.”

        -Utilize forward momentum to raise money. Rhapsody had a good year last year. They should tap that to raise at least a $100m round. Outside of a firm strategic plan, Rhapsody will need a war chest to hold its own against Spotify, Apple and YouTube. Also none of these items are cheap. Granted. But it’s obvious that it can be done.

        What do you think?


  1. Great article Jon. You mentioned Rhapsody’s loss per sub increasing from $8.17 to $11.71 from 2012 to 2014. But dividing Loss by Paid Users on the “Streaming Music Grows And So Do Losses” table suggests Rhapsody’s loss per sub decreased from $10.19 to $8.53 over that time frame. What am I missing? Which is right?

      1. Thanks Jon. Just FYI, I believe the 2013 number in the text needs to be updated too. By my math from the table, 2013 loss was $9.78 per subscriber, not $8.44.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s