2015 Digital Music Predictions

The past year was a doozy for digital music. We saw Beats Music come and go with a rush, Spotify grow significantly and digital track sales hit the skids as streaming continued to grow in popularity.

And for everything that happened, 2014 probably will be remembered as a transitional year. Big players like Apple and YouTube have yet to really show their cards. The impact of Spotify as a worldwide music platform has yet to really take hold. Many existing services still continue to solider on, despite significant changes that have impacted the marketplace.

The next 12 months will see a significant reshuffling of the deck of existing companies and new entries. We might also start to see the outlines of the future as the next generation of music companies start to debut. Because one thing that remains constant: there’s always someone who will invest in digital music, regardless of the financial results or past performance.

My picks for the top stories for 2015:

Say Goodbye: At Least Two Services Will Consolidate

We are moving quickly from a startup world into one where the big boys are playing. Apple and YouTube will join Amazon and Google Music Play All Access as the giants. While I have grave misgivings if their product offerings will be very good, it might not matter. With access to their digital stores, consumers might just activate the AppleStream or Music Key apps just because it’s simple.

Other companies will find themselves at risk, especially those who are forced to market their services directly to consumers. Rdio, Deezer, Wimp (Tidal in the US), Rhapsody, Slacker and a host of others will come under pressure to find alternative ways to market to customers, band together or go the way of other failed services.

YouTube Music Key Will Deliver A Flat Note

YouTube has the biggest opportunity to grow paid streaming products. YouTube has a massive audience, which is great. But their audience has been conditioned to consider the service free. There are signs that Spotify has already cannibalized YouTube’s consumers who want to pay for music, which might make it even more difficult for the company to get people to pay.

Because of this, YouTube’s paid subscribers will disappoint the industry during 2014. It might take a year or two for the company to perfect the product and find those who really want to pay for the service.

Apple’s streaming service will be a mess, and it won’t matter

The Cupertino geniuses do many things well. Streaming music has not been one of them. While it has the team from Beats Music to rely on, the company is known to ignore new talent acquired and turn it over to their internal team.

It wouldn’t be surprising to see their streaming service follow the iTunes Radio, which was supposed to be a Pandora killer, but just attracted those who use it because it’s already installed on their device. The company will get it right eventually, but streaming services are a completely different beast than anything it has tried. So expect some serious growing pains.

But because the service will be pre-installed on so many phones, it will sign up loads of customers through in-app purchase. Apple is also pressuring labels to lower the monthly cost of streaming, which could lead to solid growth.

Spotify Will IPO and More Artists Will Window

It is really difficult to judge how the public market operates and many things could happen that could affect Daniel Ek’s IPO prospects. We could see a downturn in the economy. Tech stocks could hit the skids again. The market might not like the prospects of the company’s future when it starts releasing business performance and data. But if Spotify overcomes all these hurdles, it will get its IPO out.

And regardless the stock price, a successful IPO will make many of its employees and early investors a lot of money. Expect to see a backlash from artists after this event, with more and more holding back new music on the service to give retail channels first shot at making money.

Pandora Will Become Musicians’ Most Hated Digital Service

Of all the companies in digital music today, none shows the most contempt for musicians and songwriters as Pandora. While the company has had some outreach, it also has tried to bend itself into a broadcast service to get a lower rate, decided to not pay a single dime for any song released before 1972 (as did XM Sirius), and then had the balls to countersue the ‘60s era group Turtles for violating its first amendment rights.

Pandora is already facing a firestorm for its exceptionally low payments to songwriters, but continues to aggressively lower royalty costs, regardless of how it affects its relationship with artists. While much of the money Pandora is trying to save goes to big corporate conglomerates, it’s the independent artists that always come to the forefront in these stories. Expect the hate to expand in 2015.

Amazon Will Continue To Play Its Game

Seattle’s commerce behemoth will focus on what it always does: keeping its customers buying more stuff. Many expected Amazon to offer a premium service in 2014, but instead the company created a back-catalog offering that kept customers in its Prime service longer.

The company had a rough 2014 with its failed Fire phone launch. While its nose is bloody from that setback, don’t expect that Jeff Bezos’ company will change its game plan. Focus on the customer buying: regardless if it’s a digital download, diapers or dishrags.

2014 In Review: Some of the best stories from the past year.

The Elephant In The Room: Another Cultural Landslide’s very complex and very loooong analysis of streaming music, discovery and the listener.

Streaming Report Card: Music industry analyst Mark Mulligan gives us a rundown on how streaming did in 2014.

Stop Blaming The Internet: Gang of Four’s Dave Allen gives a deep dive into the issues surrounding streaming and artists.

The Streaming Price Bible: David Lowrey’s in depth look at who’s paying what. While I might quibble with Lowrey about why those numbers are so low, the streaming rates on this post is illuminating and depressing.

The Album Cycle: Consequence Of Sound News Editor Chris Coplan looks at the nature of music promotion as the industry is changing.

Five Reasons The Music Industry Hates Pandora The Most: Music lawyer and blogger Jake London lays it out.

Spotify Has Six Years Of My Music Data, But Does It Understand My Tastes: Stuart Dredge digs into the taste profile.

Taylor Swift Announces A World Tour And Pulls Her Music From Spotify: Ben Sisario on everyone’s favorite spatting couple.

Liars Poker: Why can’t anyone write a fair assessment of streaming music

I think we know the answer.
I think we know the answer to this one already.

Streaming music has been a huge topic in the music industry for good reason. It’s been the subject of many articles, occasionally one will accurately understand the issues surrounding these hot companies, but most that have no idea of how the music business works. A couple of stories I’ve seen recently made me want to wretch. Interestingly enough, they are on the opposite sides of the debate.

First, there’s this terribly reported and, in some points, just plain wrong article in Take Part by Kathleen Sharp and Scott Timberg with the click-bait title, “Is Spotify Killing Music?” The authors comingle the loss of publishing rights by the heirs of John Steinbeck and Woody Guthrie (who are in a band together – naturally) with the way that artists are getting hosed by big bad streaming companies. Not only do these two topics not belong together, they also weaken the main points of the article (which likely stemmed from a PR pitch promoting the aforementioned band).

The streaming portion of the article is a retread of the greatest hits from anti-streaming voices like David Lowery, Thom Yorke and David Byrne. The evidence it cites is flimsy, even including Lowery’s disputed $16 payment for 1.5 million plays of the Cracker song “Low” on Pandora. The authors even recruit streaming supporters for its purposes, posting a big photo of Billy Bragg with the caption:

British singer-songwriter Billy Bragg has spoken out against royalty rates and structures established by music-streaming companies.

This may indeed be true. But what Billy Bragg said was actually very supportive of streaming.

“I’ve long felt that artists railing against Spotify is about as helpful to their cause as campaigning against the Sony Walkman would have been in the early 80s. Music fans are increasingly streaming their music and, as artists, we have to adapt ourselves to their behavior, rather than try to hold the line on a particular mode of listening to music.”

Bragg went on to cite the problem is really with record labels that are paying streaming rates based legacy deals with artist that only paid a fraction of royalties on sales because of physical production and distribution costs.

“If the (streaming) rates were really so bad, the rights holders – the major record companies – would be complaining. The fact that they’re continuing to sign up means they must be making good money.”

Interestingly enough these comments from Billy don’t even up in the article. Instead we get that streaming is eating into CD sales, without even a slight mention of illegal MP3 downloads, which last time I checked, was the main reason why CD purchases are getting killed.

The next sensationally wretch-worthy item is a guest post in Billboard and his site, Tom McAlevey, CEO of Radical.FM, says this whole discussion is silly because streaming music is already profitable! His evidence? Well, Pandora could be profitable tomorrow if they pumped up the ad load to broadcast radio levels and Spotify was profitable in Sweden before they expanded around the world.

Those seem like factors why streaming music is not profitable rather than proving it is profitable today. Based on everything we know, streaming companies are struggling with profitability and the path to get there is uncertain. Pandora desperately needs growth of users to sell more ads and they must do so while keeping their listeners and investors happy with its progress. Without ad sales growth, the company will not survive. But the answer isn’t increasing the number of ads per hour, which Tom suggests. With too many ads, they’ll bleed customers.

Meanwhile, it is true that Spotify had a great deal of success in Scandinavia, but there are factors that have made the company successful–starting with the fact that digital music sales never took off there because of P2P’s popularity in that part of the world. Spotify became the hometown replacement that was so much easier to use that P2P services.

Tom also mentions that his experience negotiating with major labels back in the nineties allowed him to see the secret numbers that reporters do not have access, as a way of proving his bona fides.

I too have seen these numbers, and my assessment is that major label deals make it extremely challenging to find a way to profitability. There are many veterans in digital music who believe that no company can be profitable, ever. I disagree. There is a path forward, but it’s no easy task.

Both Spotify and Pandora are focused on growth, as Tom mentions. But there’s a reason for it. Their current size and offering aren’t profitable. Period. Both need significant growth and are pursuing it all-out. Spotify needs a worldwide audience to build an advertising channel to attract worldwide brands, as well as take advantage of its worldwide infrastructure for streaming. Pandora desperately needs to be bigger in the US and scale around the world.

Scale is another factor. For all the headlines written about Pandora and Spotify, streaming music is still a fraction of all music consumption and revenue. Spotify’s estimated 25 million free users is a rounding error of YouTube’s massive audience. Pandora is only estimated to be 11 percent of all radio listening in the US. Because all the buzz the companies generate, most people believe that both companies, especially inside the music industry, are much bigger than they are. Both are early stage and must prove themselves as mass-market products to be viable.

Granted, you could say such aggressive growth strategies are required to tap the public markets to create a massive payday for investors, and that’s fair criticism. But this doesn’t mean these companies don’t need to grow. They must grow. Or die.

Look, I understand Tom’s motivations for writing the piece and I agree with it. Digital music has great promise and streaming has attracted throngs of people who love the convenience. Many have chosen streaming as the way they’d like to listen to music. The industry needs to find a way to make the economics for all those who’d rather access music than purchase, rip and organize digital files.

But we need to focus on what’s actually happening, and not create spin and counter-spin. There are real serious issues that must be solved, like ensuring every single artist gets compensated fairly as well as creating experiences that customers find valuable enough to pull out their credit cards. Let’s focus on these instead of trying to demonize startups and misrepresent the facts.

The Good, The Bad, and The Ugly Digital Music Coverage

Take Part: Is Spotify Killing Music?

RadicalFM: Streaming Music Already Profitable

The Trichordist: My Song Got Played On Pandora and All I Got Was $16.98

The Understatement: Pandora Paid $1300 for A Million Plays, Not $16.89

MichaelRobertson.com: Why Spotify Will Never Be Profitable

Yahoo News: Roseanne Cash to Congress: Streaming Killing Music

Consequence of Sound: The Elephant In The Music Room

Pandora’s Paradox

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The chart above shows a great deal of optimism for Pandora, the internet radio giant. The company has once again defied the skeptics that prognosticate its demise with nearly every move in the digital music. Let’s face it, there’ve been several “Pandora Killers” that have come and gone, and none has slowed the company’s momentum. And now even Goldman Sacks is a believer. Analyst Heath Terry said the company’s shares can top $60 if it achieve some of its bigger business goals.

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Ouch! Not quite the coverage Pandora wanted?

Which makes the troubles the company encountered with rights holders even more strange. As it has been reported to death, Pandora has run into a buzzsaw of awful PR as it has tried to keep its royalty rates low. First the company sponsored legislation to lower its costs paid for sound recordings. The Internet Radio Fairness Act was designed to lower the cost of those royalties to the level that broadcasters and satellite radio operators pay. When legislation stalled the company attempted to purchase a small radio station in South Dakota so that they would qualify for the lower broadcaster rate. Neither of these efforts created anything but ill will. Pandora *does* pay much more in royalty costs than broadcast or satellite, and that doesn’t seem quite fair. But there is a process available for recourse during their next negotiation.

The problem is that Pandora does pays significantly less in publishing costs than many other services (more than half the 10% of revenue streaming services pay). And while the company is correct in stating that they do pay a significant portion of their revenue overall to all rightholders, their offensive on songwriters and composers just seems bizarre.

Pandora has a much more to do to grow the business. It must sell many more local ads. The service still isn’t readily available in a majority of cars like Sirius/XM. It still needs to convert a huge portion of broadcast radio listeners to using the service.  With all these goals, why would the company go directly against songwriters, especially since Pandora founder Tim Westergren talks about how he’s an artist himself? It has led to hard feelings, despite signing direct deals with the major publishing companies after all legal hopes were extinguished.

Pandora, like all companies in digital music, have two stakeholders they must keep happy: customers who use the product and rightsholders who supply the content. Walmart can squeeze the suppliers for every dime and face little blowback. But the company must convince those people who create music that Pandora streams are good for their careers, which becomes challenging when you involve lawyers and lobbyists.

Read On

Pandora Hits Record High as Goldman Says Shares May Double
Pandora faces FCC setback in bid for South Dakota FM radio station
Pandora’s Tom Conrad talks CES, car radios, and the road ahead
Pandora Stops Internet Radio Fairness Act Legislation Efforts, To Focus on CRB