It’s been a couple of years since launch, but we’ve finally decided to start a modest blog, its likely to be pretty random with a number of STP bods contributing from time to time, but we hope you’ll find time to drop by occasionally.
Swimming around as we do in the digital music world we have our own ideas of what’s going on, who’s flying, who’s dying and what may happen tomorrow. It’s not about Slicethepie or SoundOut its more of an observational platform.
As a kick off we’re going to give you our economic take on our view of the industry in 3 instalments (1 today, 2 others to follow…). First we’ll look at the exploding streaming sector, next the artist services sector and some pretty strong trends/evolution happening there and finally our personal view of where this is all headed and where you’ll need to be standing when the tide goes out.
The last mile … and free supermarkets
There’s been a mass of commentary about streaming services, all pretty disproportionate to their eventual economic impact on the broader industry. All these deliver the last mile of connectivity to the consumer and all sell/stream the same few million tracks from the same suppliers (labels). On the one hand this is pretty limited as it only represents around 2% of music actually available, but on the other, as discovery technology is currently so nascent, it doesn’t matter right now.
As a result there is almost no tangible differentiation between any of these services , plus any that does exist is rapidly being eroded – and in any event when Apple, with their 70% digital market share, device dominance and Lala tech, switches on, its game over for the rest of the sector.
Imagine a free supermarket chain. Always open and offering free goods to anyone who wandered through the door – the whole concept financed by advertising billboards on the walls splitting advertising dollars with the suppliers. Plus for just $10 a month you could also enjoy the home delivery service. From a consumer perspective this would be compelling and would grab market share in no time at all. Until that is the suppliers went bust or you ran out of money. You’d need some VC backing of course and/or a neat way of not having to pay suppliers (steal the goods). Broadly speaking this is the business model of many of the streaming businesses. I’m not distinguishing between legal and pirate sites as the economic model is very similar – except in one case artists are being robbed, and in the other its VCs (plus the artists who inadvertently also find their feet in the same bath). For the time being the labels are benefiting as the net effect is a cash transfer from VCs to them, a game they continue to play well. From a consumer perspective it’s a similar experience – it’s all free music.
Some operators have been and gone (Spiral Frog, Imeem, Napster (V1), Pirate Bay) some splutter along (Q Trax, Rhapsody, Napster (V2)) others continue and on the user number line they appear to flourish…but if you look at the underlying economics it’s pretty scary….
Take Pandora, who you’ll remember are in personalised radio rather than on demand streaming and enjoy licence costs that are a tenth of the on demand guys (0.1p per stream v 1p per stream), they’ve now got around 40 million users but are only just at break even. Others have not aged so well – Imeem torched $35 million before collapsing into Mr Murdochs arms, Spiral Frog burnt $15m and Ruckus drank $41m of the VC cool aid before passing out. Bottom line is that it’s not easy making money in music retail/streaming. Even the mighty Apple who sold over a billion tracks last year could only manage break even for iTunes.
If music is going to be ‘free’ to the consumer it does not follow that the guy shifting the most free music becomes the winner, it’s going to be a phyric victory without some dramatic extra economic ingredient.
Those at the forefront of this ‘revolution’ continue to feed at the VC trough but the numbers ain’t pretty. Take Spotify, the Waitrose of the free supermarket sector. I, along with 7 million others, think the service is brilliant but does that make it a great business? Right now their numbers appear downright scary: They state they need 12% of users to pay £10 ($16) a month to break even (I’m assuming this is on top of ad income) and that they are on about 3.5% conversion at the moment equating to £2.5 million/month. So they are taking £2.5m from subscriptions a month but need £7.5m – indicating a current monthly loss of £5m ($8m). Ouch. At this rate the $50m they collected last August will soon be exhausted. No wonder they’ve gone invite only and the US is on hold. It’s not a scalability issue either plus even if they have a sweetheart deal with the majors at the moment this is not going to last forever. Cracking product though…
In a commodity market (which is what its now become) the defining metric is price – which in case you hadn’t noticed is now settling at around $5 a month (We7, Sky Songs, Vodafone, Mog etc) – so this would translate into a lofty 25% conversion rate for the likes of Spotify & Co to hit breakeven.
So it’s unlikely many fortunes will be made in music sales or distribution, and the last man standing may simply be the one with the deepest pockets who can take the odd billion dollar hit with a parallel business model that is able to profit from its market position. Hang on a minute; forget the iPad, the big Apple launch this year is still to come…and 125m credit card details and a wifi enabled iPod would be quite a head start.
I know the above is a simplification, but if the foundations are shot, the paint colour doesn’t matter. So where does that leave us? If there is little money in music retail/streaming anymore we’re going to have to look elsewhere for that pot of gold at the end of the musical rainbow. It does exist, it’s just that right now most people are looking in the wrong place. It’s not only about lots of music, it’s more about deeply personalised music on both a consumer and commercial usage basis. Plus if there is a personalised filter the signed/unsigned distinction blurs and the volume of music explodes… Tune in for part 2…..