It’s not that streaming can’t work. It can. It’s that Spotify is a bad business model that has unsustainable economics and exploits artists because it is a wall street financial instrument and not a music company.
We’ve previously published a couple posts on streaming music where we explore how access models and windowing are working for the film industry and could serve as a guide to the record business. We’ve also shown how transactional music purchases have made legal music consumption the best value in the history of recorded music.
The key to building streaming business models that make sense and are sustainable is to increase the subscription fees, utilize well thought-out windowing models and experiment with new pricing tiers for access based services.
Historically the music business has employed the use of special markets such record clubs (remember 11 CD’s for one penny). It’s not that record clubs were bad, in fact numerous studies found them to be great source of additional revenue if managed in a way that did not cannibalize front line sales. (Remember 12 month record club holdbacks?) Now we need to strike the same balance with streaming services.
So let’s get real, the Spotify business model and streaming math just does not work and can not work in it’s current form.
Here are five suggestions to get music streaming back on track as a viable business model.
1) Minimum Payment Per Play
You want to give your service away? Fine, but artists and rights holders are not going to subsidize your business by devaluing our work. No plays without a minimum royalty–including the “free service”–and all plays pay at paid subscription rates. If you can’t sustain your business doing this, then you need to rethink how your business works. Your bad business model is not our problem. Maybe an unlimited, non-graduated free tier is a really, really, really bad idea. 30 Day trial offer, ok. Virtually unlimited free access, no.
2) Windowing
The music business must embrace windowing to maximize revenues across all distribution channels and platforms. It’s so basic we can’t believe artists and labels are not utilizing this to greater effect. The first 30 days of a new release could be limited to transactional streaming access by the day, week, or the month at different price points. Likewise, perhaps only two songs from an album are made available on streaming platforms for the first year of release. There are many unexplored variations and options.
3) Transactional Streaming
The music business needs to embrace new models such as “transactional streaming” much like VOD exists for film versus transactional downloads or physical product. There is no reason why streaming distributors should have every title, ever released, for one fixed, flat price. Again, new releases in particular should be priced as transactional streams where the consumer can chose between low cost limited access to a new release, or pay more for a transactional download.
4) Tiered Pricing based on Access and Consumer Value Proposition
Just like cable tv and SiriusXM, one possible solution is to create price tiers based on access. For example, catalogs can be curated into genre and lifestyle packages. Creating bundled packages adds value to both the end user and the streaming service. Individual packages can be as little as $4.99 a month, and complete access could priced at $49.99 a month. Again, there are many unexplored variations and options.
5) Move Beyond Stockholm Syndrome
The answer to every attempt to introduce real world economics to the marketplace can not be met with “or else they’ll steal it.” We already know that. They have been stealing it for over a decade (thank you Mr. Ek for your contributions to uTorrent). The film industry is not approaching streaming with a gun to it’s head offering every title ever made on every platform for one low monthly fee. Itunes is the single most successful dedicated online music business ever, and it doesn’t have a “free-tier”.
Isn’t it odd that companies like Pandora and Spotify that are not profitable and don’t support artists are thought to behold some kind of gnostic wisdom of economics that defies all logic and reason? Last year Twitter lost $645 million dollars. Record labels have been profitable for over half a century with a sustainable ecosystem that invests in artists and new talent, while also creating hits and stars. It’s time to leave the rainbow unicorn school of economics and faith healing behind and develop real business models based on real economics.
Anyone remember the dot com bubble? Where is mp3.com now? Things can and do change fast in web/tech. Any talk of the “record industry” without MySpace in 2004 and you would have been laughed out to the room. Where is MySpace now? Spotify can (and very well may) quickly become MySpace. So let us all focus on how to make streaming actually work for all stakeholders and not only those with equity… it’s just math.
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The Trichordist 
I remember the dot com bubble. I’ve been through two of them. I knew the first bubble was coming when Pets.com got something like $50 million to ship me 70lbs bags of dog food without charging me shipping. Not to mention one of my clients one day paid me by shipping me 6 iMacs from their office to my front door. Time to get out…so I left tech for awhile and started writing about tech instead.
We’re rapidly heading for another bubble, but it isn’t generally for the reasons most economists or VC’s are even saying, ridiculous valuations and spending. No, the bubble that’s getting ready to break is because we’ve built an entire tech industry (the most important financial component to the economies of the world) on advertising dollars. Everything is “free” and people are accustomed to not paying for anything. If you look at the current trend, ad rev rates have been dropping YoY for the past three years. Why?
Well, because there is more volume than ever. Since everything is ad based (Facebook, Google, Twitter, and now Snapchat), brands have their pick of where they want to place their ad dollars on almost what is becoming an infinite marketplace for finite dollars and eyeballs.
Imagine any number of things happening…but just imagine the global economy takes a dip…and this whole house of cards falls. Google made $50B from ad revenue in 2013…imagine if that number took a hit for any reason. Google might not survive it, because of course they don’t have any paid products that can sustain it outside of ads.
If you want to see a stark contrast between companies, simply compare Apple and Google. Google gives free storage away, free email, free apps, free Android OS. Apple charges for everything. You want an email account…iCloud isn’t free. Want more storage in the cloud? They charge for that. Want apps for free…buy our hardware products. Apple is proof if you build a good product you can charge for it. Google is proof if you want something for free…there is a cost, but that cost is your privacy…they are a data hungry monster that must consume more and more data to keep making money. But all that monetization is in the form of ad revenue. Without it…what is Google? Just another tech company that can’t support itself.
Spotify, Deezer, etc…all propped up by VC money and one economic correction away from vanishing…and the clock is running out on whether they can survive.
If you make artisan cheese your number one cost is milk. If your milk costs go up, you either pass that cost on to the customer or you eat the cost. If you eat the cost, you go out of business. That’s how streaming works today…their milk costs are of course music/expansion/growth, and instead of passing costs to customers grow a sustainable business…they eat those costs. In the meantime they train customers that there is no value in their offering and once you’ve cut the cost to the customer, good luck getting it back up.
And don’t forget…the person who supplies the milk (the artists) are being hurt by the cost of the cheese going down, which means they go out of business…it means fewer dairy farmers and instead only the giant farms (the biggest artists/labels) survive.
Well this in uncanny timing today speaking of my cheese comment above:
“Overall, the momentum we have going right now feels pretty good. It’s helping to moderate some of the concerns over increased commodity prices, particularly cheese,” J. Patrick Doyle, Domino’s CEO, said on the company’s earnings call this morning. “Cheese prices are certainly higher than the experts had expected at the beginning of the year, but higher sales have helped mitigate the impact.”
http://www.buzzfeed.com/mariahsummers/dominos-pizza-has-a-problem-cheese-inflation?utm_term=4ldqpia#3ev55sg
Going to be interesting to see if Dominos just expands volume or decides to pass the cost onto the customer. Perhaps streaming companies and pizza companies should have a Round Table discussion. Ahem.