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.

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

Separation Disagreement: Why Taylor Swift and Spotify Is Not (Just) About The Music

News yesterday shined a light on the new queen of popular music, Taylor Swift. After selling 1.3 million copies of her shiny new pop release, 1989, she made the decision to remove her whole catalog of music from Spotify. It’s hard to overstate the effect this decision has on Spotify. “Shake It Off” was the most popular song in the service. The company said that Taylor’s music was included in 19 million playlists. Obviously losing the most popular artists on the service is a huge loss for Daniel Ek’s company.

Taylor has been a critic of streaming services and strongly believes that album sales are still the way most artists should make a living. In a Wall Street Journal article this July she mentioned that some major artists have given their albums away as promotion and believes this is a mistake. As she put it:

“Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for. It’s my opinion that music should not be free, and my prediction is that individual artists and their labels will someday decide what an album’s price point is. I hope they don’t underestimate themselves or undervalue their art.”

But is this really about free? After all, streaming services pay for the right to play the music, as do Internet radio services like Pandora. And if we’re going to really discuss about free, shouldn’t we discuss YouTube, which provides so little money back for playing music that it might as well be free? No artist in the world, even Taylor, would release music without a YouTube strategy. It’s reach and power is enormous. And as of today, YouTube is the only place users can stream the three biggest songs from 1989. For free.

With 1989 Taylor decided to hold the release back from streaming services to help increase retail sales, just like she did for the previous release, Red. Windowing to streaming services is an emerging tactic for artists, as it limits access to fans only to retail to experience the entire record. After the retail window closes, the record becomes available on streaming outlets.

While 1989 is windowed on all services, Spotify was singled out for elimination of Taylor’s music. Her catalog remains available for play on streaming services like Beats Music, Rhapsody and Rdio, and on the world’s biggest streaming service, YouTube.

So what’s going on here? Why would Taylor stiff one of the largest music listening platforms in the world, one that is providing the third most revenue in the music industry, while leaving her music up on other services that are smaller, but pay nearly the same on a per-play basis as Spotify, and on YouTube–which pays diddly squat compared to streaming services?

It’s all about participation.

That is, participation in financial events, like initial public offerings and acquisitions. In this day and age of frothy music startups, there are those who get a stake and those that are left looking in from the outside. Can you take a guess which respective side of the line artists and major labels fall?

In August, Vivendi reported that Universal Music Group closed the sale of Beats Electronics to Apple and gained a nice tidy sum of $404 million. Granted UMG was an early investor in Beats. Nevertheless, UMG cleaning up on these kinds of investment strikes artists as unfair. Without music, would there be any company to sell to Apple?

It’s also been widely reported that all the major labels have sizable investments in Spotify. As the company prepares its IPO, the major labels have a huge stake at stake at making it successful, as they’ll get a big chunk of change that won’t be shared with artists.

When you are most popular artist in the world, you probably believe that you should participate in an event where the label gets paid. After all, labels are compensated for providing a catalog. And the catalog is woefully incomplete without Taylor Swift. In fact, Taylor’s decision to withhold her music from Spotify will have a fairly sizable impact on UMG’s topline revenue.

UMG is the distribution partner for Taylor’s label, the independent Big Machine. All their music rolls up into UMG revenue for streaming services. Sure, UMG still must pay Big Machine for the plays, but artists and even labels have long been unhappy with unfavorable streaming deals and sloppy (or worse) accounting practices of major labels.

Even without knowledge about Big Machine’s deal with UMG, it’s easy to speculate that the label is unhappy–or at least unimpressed–with their revenue from Spotify. And as an added extra, news broke yesterday that the label–along with Taylor as its flagship artist—is for sale. And one of the leading suitors for the Nashville-based firm? UMG.

With all this information, it leads to these questions:

-Did Taylor’s catalog suddenly come out of Spotify to pump the price of Big Machine’s acquisition by UMG? Nothing would show the power of Big Machine like pulling one of the most popular artists at the top of her game. It will also have a material impact on UMG’s revenues. How much? Just my meatball math based on Spotify’s reported revenue and Taylor’s probable popularity, removing the catalog could decrease UMG’s share by a full percentage, meaning at least $13 million less.

-Was Big Machine negotiating a relationship directly with Spotify and hit an impasse? Spotify has come to agreements with holdout artists like Led Zeppelin, The Red Hot Chili Peppers and Metallica. But all those are legacy acts  that have all made tons of cash on their deep catalogs. These acts got a big check were ready to  move on.

Spotify has never done a deal with a premier active artist, and I’m sure it is very reticent to start, as Rihanna, Beyonce, Jay-Z and other big acts will line up for their own deals. Big Machine also would be looking for participation points above and beyond any compensation for plays, such as equity and potentially advances.

Also, Spotify will correctly claim that it already is paying top dollar for the catalog. Why should the company have to pay twice for the same content?

Answer: because that’s the way business is done.

More Breakup News

NY Times: Taylor Swift Announces World Tour and Pulls Her Music From Spotify

Wall Street Journal ($$): For Taylor Swift, the Future of Music Is a Love Story

Bill Werde: An Open Letter To Spotify About Taylor Swift And Why I’m Unsubscribing

NY Post: Taylor Swift’s Label On The Block For $200 million

Vivendi/Universal Music Group: Closing Of The Interest Sale In Beats

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

Following Their Own Beat: Spotify’s Ambitions Outsize Anyone in Digital Music

In December of last year Spotify held a press conference to announce the service had finally bagged a big one: longtime-streaming holdout Led Zeppelin. The service now had the band’s legendary catalog of albums, clearing one of the last major artists not on streaming services. The press fell all over themselves raving about what a big deal it was to finally woo the elusive holdout.

Image
Spotify Founder and CEO Daniel Ek has global ambitions.

In the same press conference Daniel Ek announced something even more important to those involved in digital music. After months, if not years, of negotiations with labels, Spotify announced shuffle play—the ability to play any artist in the Spotify catalog for free on mobile devices. Shuffle play is exactly what it sounds like: a customer can play songs from an artist’s catalog only randomly instead of on-demand. But it does mark the first time that rights holders had allowed a free product on mobile after years of insisting that mobile access was, and always would remain, a paid product.

Spotify was not about to take no for an answer. Daniel Ek clearly has seen the trends in mobile and knows that the world is increasingly connected through their phones. Maybe you can reach scale with free on desktop in Europe and the US. But most of the world only has mobile access. The company had to have a free mobile offering to execute the company’s overall strategy. So Spotify cajoled, threatened, begged, and–most assuredly–wrote a big freaking check, to get free access on mobile.

It’s not the first time that Spotify has done something very difficult that other streaming companies couldn’t get done. It actually has made a habit of it. When Spotify was ready to come to the US, it won over execs nervous that free music would wipe out the world’s richest music market. After a couple years of trying in vain to best The Echo Nest in recommendations, the company bought it outright.  When Spotify couldn’t gain label okay for their bundled Sprint deal, it went ahead and launched without all the agreements in place.

Nobody in digital music has the determination, guile, brass and—maybe most importantly—the ability to raise money by the boatload to execute their vision.  And on the heels of Apple’s rumored purchase of Beats Electronics, it’s I’m important to understand the difference between a me-too streaming service and a firm as disruptive as Spotify.

A Global Media Channel

Spotify isn’t comparing itself to other music services, or even other digital media companies. Ek sees the company as a worldwide channel of music listening.  If someone is listening to music, from Beijing to Auckland to Los Angeles to Nairobi to Stockholm to Rio, Spotify wants to be the customer’s solution.

To execute that strategy the company has created two offerings–a free and a subscription service. Both are extremely challenging businesses build and manage, but just like overcoming label qualms, Spotify is undeterred. Imagine a company deciding to build both Pandora and Beats Music from scratch at the same time and rolling it out around the world.

The services work in tandem.  Spotify needs a huge base of free users in order to identify those customers to pay for music and build an audience for advertising. And once a customer uses the product for a fair amount of time, they are hooked. So if they are paying, or just convert into the free tier for a while, it just means another impression for brand advertising.

The company believes in this double-barreled approach to revenue and users will make it the dominant channel of music playback around the world. After rumors the Beats/Apple news floated last week, some in the media wondered if Google would now acquire Spotify. Spotify doesn’t see it that way. The company believes that their main competition is YouTube, the only other global digital media channel.

Faith In Free

Of the two services, the one that requires more of a leap of faith is the free service. Spotify believes that a worldwide audience of music lovers will loosen the pocketbook of global brands who will pay a premium to advertise to the audience. Spotify has already had some success in this arena with a global Coke deal. While most advertising businesses in music focus on local ads, Spotify is different. The company intends to continue to carve off a certain number of customers into the paid tier. And it will need to because the costs of the free service are astronomical.

Why so expensive? It’s all about the content rights. To launch in the United States, Spotify had to work on the labels for a long time, nearly a year, to get the licenses for music. In the end, Spotify agreed to pay for every free play and paid a significant advance—rumors had it around $200 million—to launch in the US. Compare this to YouTube, who has virtually no content costs. But Spotify believes the blend of converting a number of free users to paid, along with the advertising revenue will cover the costs.

Here’s where it gets tricky. While it might make good sense to spread the costs of the free service with paid customers, most folks running subscription music businesses have had a hard time making the model work, due to massive subscriber acquisition costs (SAC) and, maybe most importantly, the rate at which customers leave a service, otherwise known as churn. While Spotify’s SAC is covered in the free product, Spotify will, eventually, have to get their churn to a reasonable level.

But that’s for another day. Today the market is strongly favoring those who can show growth. And Spotify’s growth, in particular with its paid subscribers, has been astounding. The company is privately saying it’s at 10 million subs, though not  officially announcing that number.

IPO, Belly-Up or Bailout?

Even with the company’s great vision and uncompromising execution, it’s not clear that Spotify will succeed.  The company has raised nearly $600 million in venture funding and remains nowhere near profitable. Spotify is readying an IPO for later this year which will be required as it will need to make more investments to launch into Russia, India and China, territories that are necessary to be a worldwide music channel. But getting an IPO out later this year looks suspect, as there is growing concern that we’re in another tech bubble. If Spotify can’t use the public markets to complete their expansion, it will have to make very painful decisions.

A former colleague, who always was skeptical about their financials, said that Spotify’s future was either to be one of two troubled company’s–Lehman Brothers or General Motors. Once Spotify reaches significant scale of, say, 20 million paying subs and 60 million free users, the company will control enough of label revenues that it’ll be able to demand a much lower rate. At that point the record labels will need to decide if they provide a bailout or let Spotify go belly-up.

One thing is clear. Regardless of the high stakes, Spotify will continue to play their game.

Sonic Boom: How Spotify Acquiring The Echo Nest Remakes Digital Music’s Landscape

The Echo Nest: now part of Spotify
The Echo Nest: now part of Spotify

Whoa! Did you hear that? If you’re in the digital music business, that ear piercing sound you just heard is the cracking of the industry’s landscape. Maybe not right away, and maybe it won’t cripple many companies, but the fact that Spotify purchased The Echo Nest today puts a spotlight on the challenges all the companies that partnered with the music discovery company now face. And even beyond that, it could give Spotify a huge advantage.

The Echo Nest powers music discovery for quite a few of the music services, from Rdio to Rhapsody to iHeartRadio to Vevo. The companies use it primarily to run their radio services. But the service can take any piece of content–tracks, albums, playlists, radio, similar artists, or genres–and create recommendations. And The Echo Nest makes the recommendations personal for each of their client’s customers. The service provides the company with all the plays that a customer logged and The Echo Nest creates a ‘taste profile’ for every user. That, in turn, guides the recommendations algorithm.

Within an hour of the announcement, an exec from one of Echo Nest’s customers told me that The Echo Nest said they will fulfill their contract, which he understood to mean that after the contract is up, his firm will need to build a recommendation algorithm. “It’s tractable work. It just requires time and money,” he said.

And talent, too. Let’s not forget that part of the equation. What has made The Echo Nest so attractive to music startups is the peerless quality of their algorithm. To create a great algorithm, you need to understand music, you need to understand technology and you need to understand cultural significance. These are three different skillsets that don’t naturally go together and getting them to work as successfully as The Echo Nest has, for a massive number of customers, is extremely challenging.

So unless startups are willing to create highly skilled teams of musicologists, machine learning Ph.Ds. and engineers that know how to tap big data, a company isn’t going to get close to what The Echo Nest can do. Conservatively it’s at least a million bucks to get into the game, and probably more than that just to get to parity with them. And instead of development times taking a minimum of a year, The Echo Nest can get you up and running in about a month.

But here’s the thing: to do a deal with The Echo Nest, a company most likely chooses to not build its own algorithm, which is what all these companies are staring down the barrel of today. Everyone who is a customer considered The Echo Nest to be a neutral partner that didn’t play favorites to any of their competitors.

But not everyone thought about it this way.

When Spotify launched their radio product in 2011 it was with The Echo Nest’s algorithm, but it quickly developed its own. Why? The company knew owning its algorithm was strategically important. Beyond that, it might not have wanted to hand over customer play data to personalize the system. And that’s where this deal gets very scary.

Think about play data for a digital music company like you’d think about a country’s natural resources. It contains amazing insights of what customers like, what songs relate to each other and a great deal of intelligence about customer behavior. But just like getting natural resources out of the ground, it requires a big data infrastructure to mine it and make it actionable. Some companies have invested in heavily in this infrastructure, but most have this data—perhaps a service’s most important asset—buried deep in within their usage logs.

It just so happens that The Echo Nest has all this data—from all of its customers—to power its algorithms. Services are very protective of this data and are therefore extremely concerned about exposing their streams to competitors, and of the ability for The Echo Nest to potentially centralize the data and create products that show a total view of online listening.

But here’s my question: did Spotify just get access to all the listening data for all of The Echo Nest customers? Even if it does not commercialize it, just seeing that data could lead to enormous advantage for the company.

Look, all these services have different customer bases. An iHeart customer is very different from an Rdio one. Rhapsody customers listen differently than an Xbox one. Insights on how these music fans are different (and are alike) would give Spotify a total view of the listening universe, which could help in everything from tuning their algorithm to targeting customers for acquisition.

And if Spotify wants to continue to sell The Echo Nest’s algorithm, wouldn’t that give the company an enormous, NSA level of music playback? The company confirmed today that they’re pulling out of the algorithm business for other platforms once all the terms are up. But if you want to build an app on the Spotify ecosystem, you can have access to The Echo Nest’s goodness.

Daniel Ek has built Spotify into a company with the best technology in the industry. He’s now bought the shiniest tech toy on the market and he’s taking it home to play with it. Alone.

Algorithmic-Free Linkage

TechCrunchTogether, Spotify And Echo Nest Want To Build The Facebook Connect Of Music

GeekwireSpotify acquires music discovery service The Echo Nest to the dismay of Rhapsody, Xbox Music

HypebotSpotify and Beats Music Acquisitions Illustrate Differing Strategies

Gigaom: Spotify Acquires The Echo Nest and Its Musical Smarts

The VergeSpotify Could Be Making Trouble for Rdio

How Streaming Music Continues to Fail Artists

Streaming services could get fans as close to their favorite artists as they get at SXSW.
Streaming services could get fans as close to their favorite artists as they get at SXSW. That’s Alabama Shakes in 2012.

Perhaps it’s the news cycle, the launch of the next-big-thing or just simply boredom with the topic, but it sure seems like we’ve forgotten the meme of artists getting ripped off by music startups.

Nearly all last year this was a huge topic with artist like Thom Yorke and David Lowery menacing pitchforks at Spotify and Pandora. One of the major problems with the streaming services is they can’t have a frank and honest conversation about how much they pay for their content.  Because of their confidentiality agreements, they are bound to not discuss the financials of their deals with major labels. I’m sure it’s frustrating for Daniel Ek to pay out a billion dollars for the rights to music only to hear David Byrne call Spotify evil.

In December Spotify posted an extensive site that breaks down everything from the formula used to determine payments to specifically how artists are compensated. While the site lays it all out nicely, it kinda buries the real message to artists. The unsaid message goes something like, ‘We paid out a crapload of money for the music. But we don’t pay you directly. We pay the label, so go talk to them.’ Also it shows how future growth will make those moderate sized payments grow to gargantuan numbers, which you need to squint really hard to see.

Fair enough. At least when you consider music playback. But I don’t consider that enough and neither should artists. You see, streaming services really should be vibrant active communities of fans who love their favorite artists. But today, they most definitely are not. They are primarily flat, with stale boilerplate content and the charm of a filing cabinet. Even the recently launched Beats Music had nearly the same execution of artist pages as all the other services, (although I have seen some screenshots of a nice implementation of Topspin’s artist commerce in the app, so I’m assuming that the features will roll out soon).

What streaming services must do is find a way to authentically connect fans to the artists they love. And they should provide ways for the artist to directly speak to fans on their platforms. It’s one of the trickier problems for artists today. Fans are listening everywhere from Pandora to Spotify to Soundcloud to iTunes. But unless the fan reaches out directly through social channels or the artist’s website, they won’t know what the artist is up to. And if they’re not paying attention, a fan can miss it on those channels too.

Let’s take a “use case” as we say in product development. Let’s say I happen to be walking through Billy Reid on Bond Street and I ask the well-coiffed dude behind the counter what was that beguiling song emanating from the speakers. “Oh, that’s Lord Huron. Great band.” I pull out my smart phone, download it using my favorite streaming service and dig into it for the next week. But when I finally get around to checking out the band’s Facebook page for concert dates, sure enough they played in Seattle two nights before. Fail!

My service knows I like the band, since I’ve played it incessantly for the past few days. And since I have the app downloaded it also knows where the hell I am. So why can’t it suck in all the concert dates and let me know that I’m about to miss the band in a super small venue (The Crocodile in this case)? And maybe I couldn’t get to the Crocodile, but I should be able to buy a poster or a tee shirt, right? Maybe I want to connect directly to their @lordhuron and read all their updates while I listen. And why can’t it look at all the other verified @artist tags that Lord Huron is following to give me a list of bands that I might like?

Let’s keep in mind, my use case is of an, um, older demographic. There’s a whole generation of fans who crave direct connections with artists and their needs have yet to be defined. There is so much discovery work that needs to be done to figure out what those products and offerings should be. We’re just getting started on what the best product will look like and what people will need.

Services need to shift the way they are thinking about artist engagement. It’s not just a place where fans listen to music. It should be a place that unites the information and offers from artists to create a unified solution for the fan and also be a platform for artists to market directly to the fans that care most about them.

The bad PR streaming receives right now is because they haven’t scaled enough to make up the revenue difference in flagging physical and digital sales, and these services are hot so they become the punching bag. But the services do have the superfan, the ones that live and die for the artist. They might still buy all the band’s CDs. They make it a priority to see the band when they roll through town. They might even buy a $1500 ticket to take a cruise or travel long distances to see a festival.

Solving this problem should be one of the top priorities for every service out there. Until the day that happens, we’ll be talking about the micropayments for plays and waiting for scale. I’m sure this is discussed at every service, as we used to talk about it all the time. There have been a few early initiatives, like Spotify’s integration of Topspin commerce into their desktop applications or Rhapsody linking Bandpage’s Experiences within their apps, it hasn’t been focused on mobile and personal, which are the two key ingredients for the fan to take action. Addressing those valuable modes will power increased engagement and, hopefully, revenue.

Trust me, I know all too well the jammed up product roadmaps that services must juggle. There multiple competing projects all the most urgent priority. But completing this work will go a long ways toward changing the conversation and building new value for both artists and streaming services.

Links for the Obsessive

The GuardianWhy David Byrne Is Wrong About Spotify

MediumWhat Streaming Music Can Be

WSJ (Requires $$$): An Ode To Joyous Streaming

Hypebot: The Barriers of Music of Music Listening: Past And Present

Viacom BlogMTV’s Music to the M Power

Post-cociousDavid Byrne Tells Streaming Services To Get Off His Lawn