Executive Turntable: Can Classic Label Talent Transition to Digital Formats?

Warner Music Group Grammy Celebration Hosted By InStyle
Lyor Cohen knows all about how to rub elbows with artists like Elvis Costello and Diana Krall, but how will that rub off on YouTube?

Old-school record executives seem to be joining new-school digital music companies in increased intensity.  In the past few years WMG’s Stephen Bryan (Soundcloud), Interscope’s Jimmy Iovine (Apple), UMG’s Amanda Marks (Apple), super-manager Troy Carter (Spotify) have all been wooed to some of the most prestigious companies.  Last week, the big kahuna Lyor Cohen, former CEO of WMG and founder of Def Jam, joined YouTube as head of music for the company. And  it isn’t some honorary title, where he deals with artist and industry relations. He’s running the whole thing!

What’s going on here? Obviously these companies all know they need to beef up their ranks with people who know the ins and outs of the music business. After all, a good relationship with your content supplier is extremely important. But it’s only one factor in building a successful music company. There are other essential skills that being a good label executive doesn’t necessarily provide the appropriate experience.

First let’s get something straight. All these label execs are eminently talented. You don’t get to the top of  label orgs without a herculean work ethic, serious business chops, and massive brain power. But getting to that level doesn’t  necessarily mean you can run other complex companies. After all, CBS Records’ Svengali Walter Yetnikoff might have built the company into a powerhouse, but it doesn’t mean he was qualified to do Russ Solomon’s job at Tower Records.

Record companies do many things; but at its core is scouting, locating, and developing talented artists. It’s a tough job we discount too often. You have to have a great understanding of art and a finely tuned ear to what people will respond to. But digital music companies have different needs: product development, technical acumen, and a keen understanding of what users will find compelling enough to open their pocketbooks. You also must know how to lead tech teams and understand how people use and adopt new products.

While there obviously is some overlap between these two diverse core skills, there’s a lot that doesn’t fit. We’ve seen this manifest when companies try to move into the other’s turf. Labels time and time again have failed at direct to consumer offerings. The efforts have gotten considerably more ham fisted as technology has played a larger role in the  industry. From its inability to secure files on CD and all the way up to the ridiculous Now! subscription service that rolled out just last week, nearly every label’s tech initiative  or direct-to-consumer offering has underperformed or been an outright disaster (Pressplay, anyone?). Likewise, digital music services struggle with artist relations, leading  to wary feelings between artists and digital services, or straight-up hostility.

DNA Mismatch

Both labels and digital services struggle to meld because they’re so different. At their essence, labels are about artists. Everything is built around finding and developing great artists. Talent is also the core talent of most senior execs at labels. Sure, there are probably great dealmakers, technologists, and marketing whizzes working at UMG, but ultimately, it all serves the artist. Meanwhile the digital services are all about the customer. And yes, artists are vital for services, but if push comes to shove, product development, not artist development, wins.

So when labels end up going directly to consumers, they’re on unfamiliar turf. Likewise, when Tim Westergren says something that sounds awfully stilted to the artist community, it’s because he’s not capable of fully serving both sides. Ultimately, he must side with his listener. You can bring in label talent to the music services to help co-mingle the two sides. But it won’t change the DNA of the company.

Free Advice

Look, I’m not telling you that digital music services are the model of how to build the modern company. Spotify isn’t Jack Welch’s GE or even Reed Hastings elite-level Netflix.  There’s a tendency to rely too much on technical solutions and not enough focus on customer problems, which leads to a functional–but not a very warm–product.

So if I were to give advice to say, a new executive at, say, the world’s largest free music listening service, I’d suggest following a few axioms about how to build his or her new team.

  1. Empower Product Leaders
    Too often we end up hiring product development professionals but don’t empower them to make decisions. Product is the core of what these companies do and to fully take advantage of this, you need great product talent in leadership positions. When you don’t own the content, you have to win on product, full stop. And yeah, I’m a product guy, so I’m biased. But I’ve seen what happens when you don’t prioritize the right talent in the right roles, and it’s not pretty.
  2. Practice Design Thinking
    Although tech products are much better today than even five years ago, we have a long way to go in building out thoughtfully designed products. You can tell a massive difference in Spotify versus a company where design is front and center like Airbnb. If you start with design solutions, rather than technology ones, it will resonate a lot more with your users. Cool tech is just that. Cool. Solve problems first and foremost, my friends.
  3. Different Analytics For Different Goals
    Labels have invested in analytics teams in varying levels. Most of these  efforts– including UMG’s exceptional data analytics team and Lyor’s start-up The 300– used data to identify artists that will perform best, which is just an evolution of what labels always have done. Spotify and YouTube have both invested heavily in solutions to solve ‘what to play next.’ While YouTube’s recommendation products are good, they don’t have the sheen of Spotify’s Release Radar, Daily Mix, and Discover Weekly, perhaps the best of all the technology centric recommendations. The lesson here: using data science and machine learning to create superior user experiences is the foundation of any successful digital music product.
  4. Market Like A Retailer
    If there’s been one element missing from most services, it’s figuring out how to sell them to mass audiences. At its core, the pitch seems to be “Hey, you like music. Well we’ve got lots of music. Come get some!” Okay then! The services need to get better. While it’s clear that music services are different than retail, the attention to detail and stronger relevance to the customer’s life would help the services define a) what they are and b) who they are for. Without that kind of definition, mass consumers will continue to pass.

None of this stuff is surprising. Let’s just file it under ‘doing the basics really well.’ But the labels, and the people who built their careers with them, still seem like they are steeped in another era. Digital is different, and building an elite team that can navigate this competitive market requires a different skill set. A phenomenal product team is today’s A&R. Invest wisely.

Billboard: Lyor Cohen’s Move to YouTube: Good Or Bad For The Music Industry

Hypebot: Music Industry Uncharacteristically Silent about Lyor Cohen to YouTube

Bobby Owsinski: YouTube Misses The Point With Lyor Cohen Hire

Consumerless Recovery: Music Revenues Are Up But Is More Pain Coming?

News this week, for once, was positive for the music business. The RIAA released its report for the first half of this year and there was an eight percent growth in revenues over the same time 2015, thanks to subscription streaming. At long last, after years and years of losses, we’re finally on the other side of the decline and now we’re going to see a huge run up of revenues as the industry continues to grow like gangbusters. At least that’s what you’d think from the headlines. I agree: it’s a good result. But there are also troubling signs in the numbers.

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Source: Recording Industry Association of America

You see, while revenues are up, the number of people who buy music has steadily fallen for the past decade. According to MusicWatch, a music industry research firm, the number of people buying rebounded a bit in 2015 to 85 million, it’s still significantly down from the buying population 10 years previous.

Not all consumers are created equally. Over the years the average consumer spent around $50 a year on music. Sounds pretty good, right? Well, the average consumer only about about 1.5 CDs a year. So how is that possible. Well, there was small number of consumers who bought 10 or 20 times what most consumers did. I used to see this all the time in line at my local record store. I’d be wondering if I should be buying the 10 CDs in my hand on my meager first job salary (the answer was no). Meanwhile, the woman in front of me was buying the Debbie Gibson CD for her daughter. It most likely was the only CD she’d buy all year.

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Sources: MusicWatch and U.S. Census Bureau                     Music Buyers in Millions

This has all changed in the subscription era.  We’ve flattened that curve between the casual buyer, who only bought Adele’s 25 last year, and that obsessive-compulsive music nut who happily subscribes to Spotify. Sure, the nut is still spending much more than casual fan. But at $10 a month, it’s capped at $120. And yes, the music nut might also purchase vinyl, buy up posters at Flatstock, and attend music festivals, but they don’t have to pay more for all that music. Many super fans I interviewed to while working at a streaming service thought they were getting away with something by only paying $10 a month.

The theory of the streaming era is that we’ll produce so many more subscribers, that we’ll make up the difference in revenue. But thinking that casual fan will pay twice as much as the average consumer spends is fairly flawed logic.

Especially when one considers how people are listening today.

 

Based on MusicWatch’s recent audiocensus report, more than 70% of all listening today is on services that are free, like Pandora, YouTube, Spotify’s free service and iHeartRadio. Because when faced with the choice of $10 a month for something they use rarely or free, casual fans choose free. Duh. Hence the massive decrease in the percentage of buyers.

Much like how the U.S. economy recovered in the years after the housing market collapse, but only with many fewer jobs, the music industry is recovering. But with many fewer customers. And the pain is just coming. Compact discs may only be a shadow of its former self, but there were still 38 million CDs shipped in the first half of this year. Question: when was the last year you bought a device that can even play a CD? While vinyl and even downloads have a purpose and will maintain some attractiveness, my contention is that CDs will go to zero. This, my friends, is a problem.

So what can be done?

Perhaps address the product itself. Streaming services main use case is access to all the music. While it’s great for the fan that knows what she or he wants to play, it causes more problem than it solves for the casual fan. After all, how many times do you sit at your computer and not know what to play next. Even with 30 million songs only a seconds from a search.

Considering after all these years peddling subscriptions to consumers, we now have a total of  18 million subscribers in the U.S., I’m sure it’s safe to say that the $10 all you can eat music subscription isn’t the product for anything but the super fan. Will there be more growth? Yeah, sure, no doubt. Can it grow to 50 million? Doubtful.

So what about lowering the price, which has been bandied about as a cure all? Beyond the fact that rights holders won’t budge on price, it probably is the wrong product for those who like to listen occasionally. “Casual fans have different needs than super fans and may be fine with a more basic experience,” Russ Crupnick, managing partner of MusicWatch, told me via email. “So converting them to paid requires a different set of strategies and tactics. Lowering price alone won’t automatically convert them into super fans.”

Last week Pandora announced improvements to its free service as well as Pandora Plus, a product that merges a few on demand features, like more skips and the ability to save tracks to the phone for offline use, to its core experience. Can the new product as well as Amazon’s planned subscription service, which apparently will share Pandora Plus’s $5 price, help? Perhaps.

But those are just two ideas. In the world of product development, it takes many attempts to find the perfect product market fit that people are willing to pay for. Licensing two and saying ‘okay, we’re done,’ is not going to cut it. It took 15 years, a handful of flopped companies and at least a couple hundred million in funding before AYCE streaming services finally produced a billion dollars in revenue. My guess is that it will take years to attract the casual fan. Fact is, we’re going to need wave after wave of ideas to grow customers again.

Variety: Music Streaming Wars: Consolidation Looms as Lower Prices Kick In

Music Industry Blog: Have Spotify and Apple Music Just Won The Streaming Wars?

 

 

Don’t Look Back: The Return of Napster Highlights a Company Running Out of Options

Oh Rhapsody! Or should I say, oh Napster! The pioneering Seattle-based streaming music company yesterday finally announced a long-planned rebranding of its service to Napster. While it certainly got some attention, it wasn’t exactly the kind of attention one craves.

Basic RGB

[Disclosure: I argued about which brand to support while serving as VP of Product for Rhapsody International until 2013]

Rhapsody acquired the Napster brand when it bought the assets of the company from Best Buy in 2011. Instead of rebranding the service Rhapsody in Germany and the UK, the company has operated two brands since—Rhapsody in the States and Napster internationally.

So it would make sense that the company would need to unite under a single name. We can all agree that Rhapsody hasn’t been a powerful brand. It’s better known as your Dad’s first streaming service, back from the days when you had to listen to on the computer or on a weirdo MP3 player (Philips Go Gear or SanDisk Sansa, anyone?) but definitely, absolutely NOT the iPod. When we did surveys on the brand back in the day, the overwhelming consensus from music fans was, ‘meh.’

While the company Rhapsody International has had some success growing recently, it’s all about Napster. All of the company’s expansion in past few years in Europe and Latin America has been under the Napster brand. Meanwhile, Rhapsody has failed to find traction.

As I have written about before, Rhapsody’s strategy is to focus on cell carriers to market and sign up users, as it does with e-Plus in Germany, Telefonica in Latin America, and Metro PCS in the United States.

Rhapsody has a loyal core of high margin subscribers who have been with the service for years. But those numbers dwindle each year as new products come into the marketplace that are aimed directly at the music fan. I’m sure the execs in Seattle had a number in mind when the company could roll out a new brand without risking a mass loss of revenue. So, now they have nothing to lose.

Napster is a powerful brand, bringing back a strong sense of nostalgia for many music fans. So I can understand the temptation to want to utilize that asset. However in the United States, Napster’s negatives are huge. Most consumers still associate Napster with stealing music. And it’s just not potential consumers. Sources tell me that at least one major label is not very happy with the return of the brand.

Look, the world has changed. Does it make sense to continue to look back to an era when people (again, your dad, if you’re a young Millennial) stole mass amounts of music, or should the company look ahead and come up with a new name that is associated with something else than the early days of digital music? I mean, if the problem is that Rhapsody is an old tired brand, why do you go back further in the past and pick a name that has more baggage than Samsonite? And no, ‘just because we had this brand laying around’ is not a good answer.

My personal favorite would have been the original proposed name for Rhapsody, Aladdin. Equally difficult to spell, but somehow apt. You just rub the magic lamp and watch money disappear.

 

 

Accordion Games: Why Spotify’s Free Service Should Constantly Grow And Contract

Here we go again.

Spotify is running into trouble with someone else in music. This time it’s the behemoth Universal Music Group. UMG’s CEO Lucian Grande woke up one day and figured out that Spotify was giving away too much music and it was impacting digital sales, which have slumped considerably. The company controls a considerable amount of popular music throughout the world. In some markets it’s as much as 40 percent of all music sales, so when it doesn’t like something, you can be assured that something’s gonna change. Outside of the absurdity of all this, there is a point here. And it comes down to the funnel.

You see Spotify uses free music as a customer acquisition funnel. By getting the largest number of people possible playing music, Spotify believes that it can convert a significant number of them into the paid products. Spotify has pushed to create the biggest funnel possible by giving unlimited free music on the desktop, and allowing shuffle play listening for free on mobile phones.

All information has shown that Spotify has had a great year. Its growth numbers in free and paid listeners has grown tremendously. Early data signals are showing that Spotify ate into other free services, like YouTube. And while the company wheels out data points that claims it hasn’t eaten into iTunes sales, it bends credulity to believe that Spotify hasn’t eaten into track sales.

Think Accordion, Not Funnel

The main point of Spotify’s troubles  comes down to how it considers free playback. The company would have much more success in identifying those who would pay by considering free as an accordion that expands and contracts from time to time. Instead of 100 percent free plays all the time, the company could limit free playback occasionally, or better yet, carve up its user base into intelligent cohorts based on their playback behavior and value to the company.

So if listener creates awesome playlists that gets tons of followers, that person gets as much free music they want. If someone shares more playlists than most, free music. If one has more active friends, give ’em free. The company could even create scores based on user’s future possibility that they might subscribe and keep them around. Others should see a wall when they get to a certain number of plays. And when Spotify’s funnel starts to collapse, open it up again. Free music for everyone.

It has been my contention that sooner or later, Spotify will have to have a system like this in place. Right now, the content costs are crushing to the company, and eventually, playtime will be over. Time to get the books right. But right now in its run-up to an initial public offering the company is 100 percent focused on growth. Therefore, it must keep the funnel as big as possible.

And finally, it’s absurd to think that the major labels are going to do anything to jeopardize Spotify’s IPO. All the labels own a chunk in Spotify and will benefit from the IPO. It could be big money. Just last year UMG made hundreds of millions on Beat Electronics sale to Apple. So free music might be more limited sooner or later. But let’s not pretend free music is going anywhere before Spotify makes labels millions.

Jonmaples.com: Major Label Are Truly Home of the Free (Music)

FT: Universal Takes On Spotify’s Free Model

Free Expansion: Rhapsody Joins Spotify in Giving Away Music

Wiz on Rhapsody on Twitter
Can Wiz Khalifa help deliver his Twitter followers to Rhapsody.

Today Rhapsody announced that it is launching free playback through an integration with Twitter’s audio cards. It works this way: if you are a subscriber and share a song, album or playlist on Twitter, anyone following you can play it for free in the Twitter mobile app.

It’s a pretty smart integration that solves a few problems for the service:

  • It encourages Rhapsody’s users to share music with all their friends. This is something that Spotify has done very successfully with its social tools baked into the app.
  • It gives artists an opportunity to drive potential customers to Rhapsody from their social channels, which could create an additional revenue stream for artists.
  • It is focused on mobile plays, which is where a majority of listening has migrated to and where Rhapsody’s potential customers hang out.
  • It limits the amount of free music by pegging the free playback to someone with an account and followers on Twitter. You can only listen on Twitter, which is very different than the all-free, all-the-time Spotify offerings.
  • It gets Rhapsody in the news, as you can see by all the press the company has generated by announcing the integration at SXSW today.

Social Mores

Chief Financial Officer Ethan Rudin says that the project is an experiment in the US. He had a couple press quotes that seemed a bit off target.

“It’s going to be a huge experiment in how we make music social again,” Rudin told Geekwire’s Todd Bishop.

“Music has been a bit of red-headed stepchild” on social, Rudin told CNET’s Joan Solsman.

I think he forgot to add the phrase ‘on Rhapsody’ to both of those points.

One could argue that Spotify’s ability fuel enormous grow is because of its very slick social functions coupled with the a mass number of users. Meanwhile, Rhapsody’s loyal and active customers listen to tons of music in the service, but without sharing of that playback it’s locked in a vacuum. It’s been a weakness that the service has yet to address in its decade plus existence.

The integration looks nice. But it still requires Rhapsody user to do the work to help the company mine Twitter for customers. What has made Spotify so damn sticky is that its social features are automatic and on by default. On its service, you have to opt out to not share. Meanwhile Rhapsody requires that you tweet your heart out about your favorite songs to let everyone know what you’re listening to.

About Face

I must point out that Rhapsody has been extremely critical of free music over the years. As Spotify has grown enormously over the past couple of years Rhapsody has ratcheted up the attacks on free music.

When the Taylor Swift vs Spotify controversy was at its peak, Rhapsody Board of Directors Co-Chairmen Rob Glaser and Jason Epstein authored an opinion piece in Billboard that called free music “throwing out the baby with the bath water.” Ethan Rudin last summer told Buzzfeed that free streaming services send the wrong message to potential customers. “If you continually offer somebody the perpetually free model, they’re always going to opt not to pay for it,” is the way Rudin put it.

It should also be noted that today you cannot play on-demand tracks for free on Spotify’s mobile app, but you can play anything on the Rhapsody catalog for free on Twitter. So what happened to aligning around 100 percent paid music?

Look, I get it. A company can change its mind. Business conditions always change and if you don’t adapt, you have a good chance at being swept away. But what is equally important is that we believe in what you say. Consistency is extremely important in the music business, as it has a checkered past.

Scoring points on your competitors for giving away music while planning your own free music offering does smack a bit of talking out of both sides of ones mouth. To say the least.

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

More Free Advice

Billboard: Why Streaming (Done Right) Will Save the Music Business

Buzzfeed: Rhapsody CFO: Taylor Swift Is Right — Free Streaming Is Bad For Music

CNET: Twitter rocks! Rhapsody kicks off free songs through tweets

Geekwire: Rhapsody launches music sharing on Twitter: Full-track playback without subscription

Fake Fight: As Apple Preps Streaming, Labels Sing The Same Song

BillboardFight Between Apple and Spotify Could Change Digital Music

This is amazing! First, we hear there’s a lack of comfort with free music and how Spotify should have so many more than 15 million paid subscribers. Then Apple marches in, provides market research evidence to the labels how many more customers (and therefore, revenue) the industry could garner with a lower price point and labels say ‘no way.’

Why? Well, then labels would have to offer lower pricing to the entire industry so to not advantage Apple. Glen Peoples‘ source at the end of the piece is absolute right: labels are deathly afraid of Apple becoming the entire music industry. A strong Spotify is required to counter Apple. Freemium isn’t going anywhere, though a listening cap could come back for a brief time, as it did a couple years ago.

No matter what others in the media absurdly suggest, the reason Apple isn’t interested in freemium is because it doesn’t need it. The main goal of freemium is to attract listeners and then slowly convert them over time into a paid tier. Listeners won’t be a problem for Apple as the streaming app will be pre-loaded on every iOS device and most likely baked into iTunes.

Free Music Lives

Trust me, Apple will feature free music in the streaming product. But instead of paying for freemium, the company will offer labels promotional opportunities. Nobody can bundle the power of the iTunes store with free streaming for a week or month. That’s a killer combination for labels, even with paid downloads falling.

And converting those listeners into subscribers? Apple already has an enormous amount of valid credit cards, so it’s just a matter of signing in to subscribing. So why would Apple pay hundreds of millions of dollars to major labels for freemium when it already has distribution and payment covered?

Price Fixating

Eddy Cue, Jimmy Iovine and the Apple team have been harping on labels to consider lower the price of streaming. There’s been more and more data analysis showing a lower price of streaming will lead to many more customers signing up, more than making up for the loss of revenue. And I’m sure that Apple presented significant market research and bulletproof data that proved the point.

Despite overwhelming evidence, the labels stuck to their guns, and said if you want to charge less, you can pay for it. Meanwhile the largest streaming service in the world, YouTube, continues to give away free music at a scale the dwarfs Spotify and Pandora combined.

And you wonder why the music industry can’t grow. Not that we needed more evidence.

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?

Jonmaples.com The Roaring Mouse: Rhapsody Faces Its Future

Sweet and Lowedown

Will Apple’s Tastemaker Test Win The Streaming Music Challenge?

Apple made big news last week by hiring one of the music’s best tastemakers, Zane Lowe, the preeminent DJ on BBC Radio 1 who has introduced the world to artists like Arctic Monkeys, Gnarls Barkley, Adele and Sam Smith.

With Zane’s hiring and the reported tapping of other music journalism talents, Apple is betting big on the ‘human curation’ chestnut that Jimmy Iovine used to sell the service to music fans, and more importantly, to Apple last spring.

Curation is believed to be a solution for streaming music’s problem of what to play next. All-you-can-eat music services like Spotify and Beats provide access to tens of millions of songs, but listeners consistently run into the issue of figuring out what they want to hear next. So by creating recommendations, radio stations and playlists that the music fan might like, curation helps alleviate the problem.

Except it isn’t that easy.

Why? First, is there’s a lot of music. Millions and millions of songs are available on these services and figuring out everything about the music is rather difficult. And then there’s the user expectation. A broadcast radio tastemaker like Zane is pretty adept at talking to a lot of people at once, but streaming the music customer expects—if not demands—a unique music experience based on their taste and listening habits.

The Beats Formula

Curation solutions have come in two flavors. Companies either use automated technology solutions, like Pandora’s ‘music genome’ and the Echo Nest’s taste profile. Or you hire a staff of music experts to pick music.

Beats’ Co-CEO Jimmy Iovine and Chief Creative Officer Trent Reznor rightfully pointed out that most services have the soul of a hard drive and that music fans craved more in a music experience.

Beats preferred playlists selected by humans, experts on music who understood what the listener needed music for, like cooking dinner, exercising or studying. The startup went on a spending spree, hiring a team of music programmers to build playlists and pick the perfect song. While others, like Rhapsody and Emusic, had staffs of curation experts long before Beats, Jimmy was the first to make human curation the main selling point.

When it launched, Beats had subscribers  select their favorite style of music. Afterwards, the service would feature playlists built by their staff of music experts who hailed from the radio industry and music blogs. Beats playlists were indeed compelling but the depth of the lists appeared to be light and the curation stale. After all, how many times can you listen to the same 15 tracks on the Indie Breakup or 2006 Hip Hop Gems playlist? Fact is hand curation requires a lot of hands to consistently churn out new lists, something the service didn’t quite get right.

Emotional Math

Beats management objected to algorithms that automatically choose the next song based on a set of rules. “The promise of algorithms that we’ve all bought into over the past few years, that you enter a band and you are going to hear a ton of music that’s all based on that seed,” Trent Reznor told USA Today last year. “I think we’ve all realized the reality of that is that it’s a shallow puddle, it immediately kind of sounds good and then you realize the limitations and you start to hear the machine in there.”

“(With an algorithm) you are using math to solve an emotional problem,” is the way Jimmy Iovine put it. He is partially correct. When the catalog is tens of millions of songs and you have millions of customers, picking what song comes next can only be tackled by math.

It’s impossible for a service to function without any algorithms. There’s just too much data and you need to rely on something with automated rules to do some of the heavy lifting. Even Beats, despite its marketing message of ‘the music service with music experts’ had several different algorithms that were used in the service or under development.

So marketing pitch or not, everyone (in one way or another) must use math to solve these problems. The success or failure of algorithms and curation depends on how companies employ the products and who’s in charge.

It’s far from me to tell Apple what to do, but hey, that’s never stopped me from dispensing advice of questionable value. Here are my guiding principles for building curation and algorithms in streaming services.

  1. The Right Tool for the Right Job

As much as I have a problem with Pandora and their marketing of the ‘music genome,’ the company sure went about solving the right problem with their algorithm. Simply put, Pandora is designed to serve up around 40 solid minutes of songs for the person who likes to listen to music. It doesn’t do more than that and that’s a good thing.

Technology products get unwieldy because they are designed like a Swiss Army Knife. My general rule is that technology solutions need to be designed to nail one solid use case at a time. Expansion beyond that gets to be tricky.

A good example: I recently spoke to David Porter, CEO of 8tracks, a radio service that features playlists curated primarily by the service’s pro DJ community. David mentioned that 8tracks had recently hired a data scientist to match his listeners to playlists that they might enjoy.

An algorithm must be very good to nail this use case, but it doesn’t rise to the level of a playlisting algorithm, where a user will think you don’t know music nor them if a Coldplay song ends up in a Jose Gonzalez playlist.

Defining what your algorithms are meant to do and sticking closely to those use cases is vital for success.

  1. Man Guides The Machine

An algorithm must be built as a tool for curators and not simply a technology product. Therefore it must be tunable and adaptable. There is no such thing as ‘code lock’ on an algorithm.

In my experience, this is not the way many algorithms have been built. Machine learning–the ability for algorithms to improve based on usage–is a big topic right now for many technology companies, but I have yet to see one example of a music algorithm that gets smarter with time. Ensuring curators have input and a modicum of control of algorithms is extremely important.

  1. Playing Your Position

What makes managing a music algorithm so absurdly challenging is that no single person is qualified to manage it. You must posses a full understanding of music composition as well as its place in culture. You should have the knowledge of how a data scientist goes about their work. And you have to have a keen observation about how consumers behave in the system.

Without any leg of this stool, the product will end up hamstrung. It cannot be managed by one human, unless you have a consumer driven, musicologist, data scientist on staff (not bloody likely), therefore it requires a team of experts to tackle the problem.

Each will bring an expertise and needs to trust other members of the team. Success should be judged on results and data; not taste or perfect code.

  1. Match Curation to the Taste of Your Listeners

This one is easy to say and hard to pull off. Curation should closely mimic the usage in your system. While a marketing approach will influence who your listeners are, good old data and analytics should be fastidiously monitored and results fully understood by the team.

A curatorial staff must adapt their approach to what the listener is doing, and what brings more value to their experience. And above all, it’s about your listeners’ tastes. Not your own.

Tim Quirk, my former boss at Rhapsody and formerly Google’s global content programming head, authored the objective approach to editorial that we practiced heartily at the service. He recently posted a series of tweets that questioned the practice of tastemakers being the lead programmers at services and believes that curators should function more like ‘park rangers than gatekeepers.’ “Yay curation. But boo anyone who thinks he or she knows better than you what you should listen to,” Tim summed up.

  1. There Is No Finish Line

The algorithm will constantly need to adapt to the music, the customer usage and the technology. Likewise music trends change over time. After all, few could have predicted the amazing rise (and the fall) of EDM? As long as you have music, you must have a team who lives and dies to have the perfect music catalog, the algorithm and the curation to fully create a great music experience.

The promise

The first generation of streaming services focused closely on catalog and access. We’re nearing the end of this era, as pretty much everyone has the same catalog and the apps are very similar. The next phase will focus on the music experience of the services. Curation, whether lovingly hand-crafted by humans, or processing massive amounts of data crunched down by an algorithm, will be the battlefield all the services will vie on over the next couple years.

We can already see this battle taking form as ‘the humans’ vs. ‘the geeks.’ That’s a mistake. A company needs to seamlessly blend these talents together to build curation that listeners will enjoy and create true value.

More Curation on Curation

Billboard What Apple’s Hiring of Zane Lowe Signals for the Company’s Music Strategy

Hypebot Zane Lowe Could Do More For Discovery At Apple Than Echonest’s $25.6 Million Does For Spotify

Music Ally Apple Hiring for iTunes Role with ‘Specific Expertise in Music Journalism’

Business Insider What We’re Hearing About The New Music Streaming Service Apple is Developing in Secret

The Roaring Mouse: Rhapsody Faces Its Future

Mark Mulligan recently commented on an announcement from Rhapsody that trumpeted the Seattle-based granddaddy of streaming music’s impressive growth over the past couple years.

His analysis:

Enter investment firm Columbus Nova who acquired an undisclosed stake in Rhapsody in September 2013. A reorg and a repositioning process followed paving the way for strong subscriber growth. Rhapsody had 1.5 million subscribers one year ago. If it continues to grow at its present rate it should hit 3 million by July this year. And if it sustains that growth into the start of 2016 it could find itself the second biggest subscription service globally. Current number two Deezer appears to be slowing so 2nd place could be a realistic target for next year. Quite a turn around for a service that looked like it was falling by the wayside 5 years ago. 

Surprisingly, Mark’s blog piece was extremely thin on the particulars about Rhapsody’s turnaround. I was surprised as he is one of the sharpest analysts in digital music.

Rhapsody’s growth is impressive. But the seeds of Rhapsody’s recent growth were sown years before Columbus Nova showed up to the party. When the company spun out as a standalone entity from its parent, Real Networks, it was given a few on-air marketing dollars from its other owner, Viacom Networks. Previously Viacom had poured hundreds of millions of dollars in advertising credits to Rhapsody, which it used to advertise the service on MTV, Comedy Central and other on-air properties. The efficacy of those dollars was questionable, as the company had around 800,000 paying subscribers. It was just too early to market on-demand music to a mass audience.

After the spin-out, Rhapsody was left without a sizable marketing budget nor the money to invest in a free tier like Spotify or Pandora. So the company was forced creatively figure out how to attract customers. One of the hardest things streaming services faced then–just like now–is getting consumers to plop down their credit card to pay to them. The president at the time, Jon Irwin. opted to partner with companies who already had access to credit cards—cellular carriers.

Precarious Partners
Before we get into that, here’s a little bit about the economics and goals of partnerships between carriers and music services. These kinds of deals have been seen by the music industry as the answer to building mass audiences of subscribers. Customers might ask themselves why they are paying $10 a month for Rhapsody, but if the charge is included in their cellphone bill, they might never see it. It’s always considered better to tap someone else’s customers than build your own.

Deals like these are extremely difficult to navigate. Labels are terrified of offering discounts for the service, which is a requirement to get carriers to agree to the deal. Carriers are reticent to pay for content that customers may or may not use. And everyone wants someone else to take a margin hit. It’s up to the streaming service to get everyone on board and craft a deal that will be successful.

The best deals are ones where all parties–and the consumer–are happy.

Sometimes it works, sometimes it doesn’t. A couple terrible examples: Deezer has built a massive worldwide audience of paying subscribers, and yet the rate of people who actually use the service is pathetic. Mark Mulligan reported that it could be as low as 20 percent. A low active rate infuriates subscribers and, therefore, carriers. While there will always be some level of inactives in a service, when it becomes huge, you aren’t building a distinct brand and service. Muve Music, which previously was offered through the Cricket pre-paid cellphone service, also had massive inactive users and really awful economics due to licensing deals it signed with music labels.

It’s critically important to build the right offering when selling the service. Music services on carriers come in two varieties: a bundled offering and a bolt-on service. In a bundle the consumer is buying a tiered plan that includes the music service. So for $70 a month, you subscribe to the Cellphone + Music and a bunch of other services. The bolt-on is much simpler and cleaner: add music for $5 or $10 a month. As a product guy, I much prefer the bolt-on. Why? Most of the inactives reside in the bundle and all those people represent a time bomb just waiting to blow up. Customers who quit in droves are expensive for everyone, but it tolls the death knell for the service.

And that’s the weakness with the marketing and distribution partnership through carriers. Specifically:

  • Sure the music service gets the massive benefit of not having to capture the credit card, but it also cedes control of the relationship with the customer.
  • With two parties involved, the company’s already thin margins selling music get deeply eroded, requiring the music service to rely on its own retail customers to prop up the distribution costs.
  • The service is completely reliant on the carrier to market to their customers, and the carrier may not be very motivated to do so.
  • The service can quickly lose brand equity, as the carrier might just call the service ‘Comes With Music’ instead of promoting its brand. If the customer is just subscribing to a generic music service this is a very bad thing, as the carrier could replace it at any time.

So the music services must walk a fine line:

  • Build and hold onto a strong brand presence that will motivate the carrier to do the deal in the first place.
  • Make sure the carrier does the right thing in selling the service and focus on the brand.

Do it wrong, and you end up like Muve Music, which AT&T sold to Deezer at auction prices earlier this year after acquiring what was left of the struggling Cricket Wireless. Do it right, and hockey stick growth follows.

A former colleague thought the relationship between the powerful carriers and little music services reminded him of a blend between Aesop’s fable about the lion and the mouse and the Roald Dahl story about the crocodile and the dentist mouse. In my colleague’s telling of it, the powerful and hungry lion wants to eat the mouse, but to do so will ruin his only hope for repairing the tooth. So the mouse has to convince the lion to not eat him before he can fix the tooth. I’m sure you can imagine who is the lion and who is the mouse.

Dialing Up Deals
After months of negotiations, Rhapsody announced its first partnership with the pre-paid carrier MetroPCS in 2011. In the next few years the company announced deals with European carriers, followed by a global deal with Telefonica and then T-Mobile’s offering.

So far, so good. Solid growth. But it’s an open secret that Rhapsody’s brand has been fading for quite some time now. And the partnership strategy isn’t helping develop a strong brand identity. In their thirst to make the deal, the company is making their brand look more like a quilt than something unified. The service is known as Rhapsody on MetroPCS, Unradio on T-Mobile, MTV in Germany, Napster in Greece, Spain, Sonora in Latin America.

It’s an open question if it will be able to maintain its presence with Spotify taking up all the oxygen in the room with customers while YouTube Music Key and Apple’s iStreaming launches. The company has faced issues before and has been written off time and time again. It remains to be seen if it can grow, in particular in the U.S.

As the partnerships ramp, expect the company to face downward margin pressure. Those thin margins will start to eat into the overall revenue of the company. Growth is fantastic, but it could also harm the company’s bottom line.

Maybe even more important, the company needs to answer the hard question about what position it seeks to occupy in the marketplace. There probably is room for a white label music service that works well with big distribution partners like carriers and cable companies. But without a solid brand and a strong direct retail subscriber base, the company could start to see more pressure to deliver meaningful value. It’s far from clear if a mousy little Rhapsody can roar in a den full of lions.

Disclosure: I worked at Rhapsody for nine long rewarding, frustrating, awesome and ridiculous years before last year’s layoff.

More Rhapsodizing

Music Industry Blog: How Rhapsody Became A Top Tier Player Again

Music Ally Rhapsody’s Napster expands across Europe and plots ‘laddered’ pricing strategy

Billboard Why Streaming (Done Right) Will Save The Music Industry

GeekWire Rhapsody Tops 2.5M Subscribers, Up 60% From Last Year

Taylor Swift

Taylor Swift Vs Spotify: Fact or Fiction

Well, that was fun. The spin was hot and heavy last week after Taylor Swift said goodbye to Spotify. You had Taylor describing why she left, her label president, Scott Borchetta, offering some facts and figures, Daniel Ek giving his side of the controversy, and a myriad of opinions on what the deal really was about (including mine). So what’s really going on? Let’s take a look at a few of the issues and see if there’s truth or not to the claims.

Number 1: Taylor Swift made a rash decision to leave Spotify

Fiction

Taylor Swift and Big Machine made a rationale decision based on the numbers and what they considered real value and what Spotify is actually paying out. Or at least what they saw in their pocketbooks. Nobody is in a better position in the industry to make that decision than Team Taylor and I’m sure it wasn’t without some deep consideration.

However, the timing of the decision appeared to be made to milk the maximum value out of Spotify in terms of promotion. When an artist is releasing an album, he or she is looking for the largest number of people to know it and hear it. YouTube, Late Night With Jimmy Kimmel, covers of magazines, tv ads, and yes, even Spotify plays its part. Shake It Off was one of the most popular tracks on the service until it disappeared. It also should be noted that Taylor’s catalog didn’t get yanked until a full week after release of 1989, allowing her fans to listen to her old releases before removal Monday, providing lots more headlines and curiosity of her albums.

Number 2: Spotify is not paying Taylor Swift for her music

Fiction

Spotify does have a free-to-the-listener tier. However every spin of her music generates some revenue. But how much? It’s actually a fact that most of the revenue Spotify pays comes from its paid service. But the company doesn’t pay per stream from subscribers. The formula divides up all of its revenue by the popularity of artists/catalog and then cuts a check.

It is unknown how the free plays are paid, but artists have noticed a difference between free plays and paid plays, which could mean that there is indeed a micropayment for every play. Or there could be a much lower active rate per listener.

Spotify says it needs the free service to drive more listeners into the paid tier. Daniel Ek claims that 80 percent of paid subscribers were once free listeners. And Spotify has had great success scaling its business with the free tier. At 12.5 million worldwide subscribers, Spotify paid subs has made all the other services currently in the market an afterthought.

Taylor’s camp also made a pretty strong point about how she doesn’t believe in free music, and had asked to be removed from Spotify’s free tier. Citing how vital free is to its acquisition strategy, the company refused to do so. It might also be pointed out that besides P2P and semi-pirate services like Grooveshark, several of Taylor’s new songs, including Shake It Off remains free on the world’s largest streaming service, YouTube.

Number 3: Spotify Pays Much Less Than Other Services

Fiction

Earlier this week The Trichordist posted a chart of all the per-play “rates” from services and asked if Nokia Music was paying a much higher rate, then why can’t Spotify. Unfortunately, that formula didn’t include the most important number: revenue.

Nokia doesn’t pay more than Spotify. In fact, it pays less. Much less. Yes, the per-play rate might seem bigger. But Nokia’s service is so unpopular and content costs are so high that it appears they are paying much more per play. In terms of real dollars, Spotify is the labels’ number two or three account in every territory worldwide behind Walmart and iTunes. They will probably pay out a billion in revenue in 2014. And remember: this is a company that didn’t exist six years ago.

Number 4: Spotify pays artists

Fiction

For the most part, Spotify has an agreement with and pays the rights holder, generally a major label or aggregator, like Tunecore. The rights holder distributes the money to the artist based on their deal with that entity.

Number 5: Artists have no idea what Spotify pays

Fact

This is where Spotify really gets into really deep doodoo. It is far from clear what Spotify contributes to artists. There’s a ton of reasons for this. Bear with me as we go through it:

  • Spotify has an agreement with a rights holder for the license to the catalog. It can include a bunch of fees due to the label, like a minimum revenue guarantee, an advance, or an equity stake. It’s unclear where these buckets of revenue would show up in a royalty calculation for an artist (most likely, these fees would go to the rights holder’s bottom line and not into a revenue shared bucket).
  • The artist has an agreement with a label. There’s generally a split of revenue, which has traditionally meant CD, LPs and digital track sales. There are also some deductions from the artist’s revenue pool before money is dispersed. Most of these expenses are from a time when the labels made tons of money by egregiously marking up physical distribution and marketing costs. For some reason, some of these deductions at some labels remain in the digital world. There have been some tragically hilarious lawsuits where legacy acts, like the Temptations, have sued their major label for continuing to charge deductions on iTunes downloads when the company clearly didn’t incur any costs. There are also deductions from negotiations with streaming services. As a rule the deductions cover bandwidth, credit card processing costs, and any type of deal the streaming service gets for, say, a discount on the royalty as the label is sharing on the costs to get billing from a cellular carrier.
  • The artist gets an incomplete, indecipherable royalty report from their major labels that shows plays divided by revenue, but nothing else.

A transparent royalty statement doesn’t need to be complicated. It could be pretty simple, but it should detail where all the money went.

At a minimum a streaming royalty report should include this:

  • How many plays I had on Spotify: XXXXXXX
  • How much revenue that generated: XXXXXXXX
  • Itemized deductions from my revenue: XXXXXXX

Spotify’s position on transparency has been tone deaf. I’ve heard representatives say ‘go ask your label’ when lack of transparency is brought up. Without any clarity to what the artist is generating from Spotify and what deductions came out of the revenue bucket, it’s impossible for anyone to make a decision about 1) what’s the value of Spotify and 2) how badly an artist is getting ripped off.

I’m sure there are cases, maybe an overwhelming number of them, where Spotify isn’t actually creating revenue for the artist. But arcane royalty reporting is making it hard for an artist to make an informed decision about streaming’s value. It may be unfair, but Spotify needs to help solve this problem. It’s also clear that the company has zero leverage in changing the way business is done. It makes the company’s mission to change the way fans listen to music seem easy in comparison. At the end of the day, though, Spotify will need to make it much simpler for artists to understand their value and revenue in the service.

Number 6: Spotify Believes That Scaling The Business Will Create Enough Money For Everyone

Fact(ish)

Nobody has grown like Spotify in the streaming. Its revenue growth is phenomenal and they’ve done something that company after company has failed at: getting a mass number of people to pay for music subscription. Daniel Ek claimed 12.5 million subs and 50 million users worldwide. The company did a roadshow recently for artists and showed what kind of monies it’ll contribute when it reaches 40 million subs.

I’ve written about how Spotify’s goal is to be the biggest media channel dedicated to music, but that requires rolling out services around the world. Spotify is still not in some massive markets, like, Russia, India, and China. But it must be pointed out that piracy is so rampant in those countries that there isn’t even a thought about paying for content. The company claims that it has wiped out P2P services in some territories it has launched in. It’s a huge gamble to believe if Ek will be able to convince residence in Shanghai to change their behaviors and start paying for music.

If Ek can accomplish this feat, it could well see a couple hundred million active listeners and 80-100 million paying fans. But it’s not a given that the company will do so.

Number 7: Spotify Is Killing Digital Music Sales

Fiction

First Napster andP2P maimed CDs and then iTunes tore its heart out as it lay dying. Now here comes Spotify that will turn $1 downloads into micropennies for artists. This is the theme you hear from people in the industry. It’s undeniable what P2P did to CD sales.

But it’s questionable that the death of iTunes sales is solely Spotify’s fault. It probably has more to do with consumers having always connected devices with a variety of apps in their pockets. iPod sales have fallen through the floor as the iPhone has taken over. And instead of buying tracks, consumers use Pandora, YouTube, Soundhound, Spotify, Rhapsody, iHeartRadio, Stitcher, Deezer and a flood of other services to fulfill their streaming music needs. Customers have changed their behavior as the technology changed. It’s hard to blame it on one service.

Number 8: Spotify Is Killing The Album Buyer

Fact (with a caveat)

It is true that music fans (like me and probably most people in the music industry) that used to end up with a stack of CDs at the Tower Records checkout line are now getting awesome value. For the monthly price of one CD, that fan now gets hundreds of thousands of releases, available whenever they want. And say you want to keep it for your subway ride to Williamsburg? No problem, just download it as part of your subscription.

But here’s the deal: if someone subscribes continuously to Spotify, they are paying more than double what the average music customer bought during the heyday of CD buying ($65 a year). Spotify’s bet is that it’ll signup enough subscribers to the service and stay with the service long-term that it’ll far outstrip the CD sales. Others believe that even if Spotify scales the business, it will completely obliterate CD and digital sales, further shrinking the global music business.

You can’t blame skeptics for seeing the world as half empty rather than half full, but even in a Spotify-free world, those big customers aren’t coming back any time soon.

Number 9: Spotify is only exists because they’re full of greedy technologists and venture capitalists who want to get rich off musician’s lifework.

Fiction(ish)

Spotify is preparing an initial public offering so that they can fund the expansion of their business. It is true that many employees who work at Spotify will get rich off the IPO and start buying houses, boats, horses and other trappings of the nouveau rich. Investors in the company will also see a payday, including the major labels. But that’s what happens in venture funding.

And it’s also not a given that Spotify will have a successful IPO. Many investors and analysts are extremely skeptical. There is much we do not know about the company. The good thing about the march to an IPO is that Spotify will be compelled to disclose a treasure trove of facts about the business and the risk factors in investing in its stock. It will make it easier to ascertain the company’s long-term prospects. An IPO, an acquisition or even bankruptcy and liquidation all seem possible at this point.

It’s necessary to point out that the big payday is amazingly rare in digital music. You can count successful companies on one hand. More common is the experience of (the legal) Napster, which lost tens of millions for a couple companies before selling to Rhapsody for pretty much nothing. The digital music graveyard is filled with corpses of great ideas, and every day there are new companies popping up that will undoubtedly join the lost souls.

Digital music seems like a good way to turn billions of venture financing into nothing. I hold the overwhelming majority of people (but not all) who start digital music businesses aren’t motivated by the payday. They do so because they love it.

Number 10: Spotify is a good bet for investing

Fiction

Good god, no. This isn’t Joe Montana with the ball and 2 minutes left in Super Bowl XXIII against the Cincinnati Bengals. This is Joe Montana against a coliseum filled with unfed, angry Bengal Tigers (who have a much stouter defense). Okay, maybe that’s a bit much. But Spotify faces huge challenges even if Taylor Swift and Daniel Ek make up.

Outside of the previously mentioned leap of trying to get a majority of the world’s population to pay for content for the first time ever, Spotify’s free service is extremely expensive to run. Some believe too expensive to allow profitability. Additionally, subscription businesses are extremely tricky to get right, in particular if you aren’t a quasi-utility that requires a monthly fee, like a cell phone or cable bill.

In the words of my former boss, Mike Lunsford, this calls for the ‘what would it take for you to believe’ test. Meaning what assumptions will have to become true if you believe that a company like Spotify will succeed.

Here’s my list of assumptions:

  • Spotify will succeed in rolling out around the world and make most of their markets successful, but in particular the big ones, like Russia, China and India.
  • Spotify can build a worldwide channel of music listening that international brands will pay top dollar to be part of, and therefore defer free listening costs.
  • Spotify can convert enough free listeners to paying customers and (maybe even more importantly) keep them paying for a long time.
  • Spotify can keep the cost of acquiring customers (mainly in free music costs) to a minimum.
  • Spotify can pay artists enough money that they won’t follow Taylor Swift and leave in droves, eating into its value proposition and watch customers quit because there’s no music in the service.
  • Spotify can continue its hockey stick growth chart as YouTube’s Music Key and Apple’s iStream launch.
  • Spotify can fix search, which sucks.

Okay, I threw that last one in there. But a misstep in any one of the above could deeply harm the company. Missing on two could potentially add Spotify to the Digital Music Graveyard. Use extreme caution when considering its future.

More Spins Than A Record

JonMaples.com: Following Their Own Beat: Spotify’s Ambitions Outsize Anyone In Digital Music

Time.com: Taylor Swift on 1989, Spotify, Her Next Tour and Female Role Models

The Guardian: Spotify Paid Out $300k To Stream Shake It Off

NY Times: Billboard Changes Charts, Will Count Streaming

Digital Spy: Dave Grohl on Taylor Swift and Spotify “I don’t f**king care”

Spotify Blog: Two billion and Counting