The Problem With Music Streaming and Why It's Only the Beginning

The Problem With Music Streaming and Why It’s Only the Beginning

Posted on 08. Nov, 2009 by refe in MUSIC INDUSTRY, TECHNOLOGY

French streaming service Deezer launched a Premium Subscription last week.

There isn’t usually much to talk about when a product is perfect. People may rave for a while, but there’s little to discuss aside from the accusations of a few inevitable dissenters. A product or service that is truly newsworthy, however, is one that is almost perfect – but not quite. An excellent product that offers a solution to a real problem, but that has one or two inescapable flaws of its own can provide months of heated discussion and analysis.

Online music streaming is exactly that kind of product. It’s almost paradoxical, in many ways: on the one hand, people want on-demand music. Who’s going to argue with convenient access to (almost) the entire world catalogue of music? Yet, many people still have a nagging desire for ownership. Ownership may be “for pussies” as Lefsetz so eloquently pronounced in a recent post, but I’m willing to admit that I enjoy downloading a track on iTunes and adding it to my collection. Yes, I understand that my “collection” is really just a store of digital code, but this isn’t about the intellect – it’s about the feeling.

Also, streaming finally offers a system of music delivery that is faster and more convenient than most forms of file sharing. “Why are you going to steal,” asks Lefsetz, “if all of a sudden you can check it out quickly on a streaming service?” A couple of recent surveys seem to support this. According to the New York Times a survey by the NPD Group here in the US found that “teenagers aged 13 to 17 illegally downloaded 6 percent fewer tracks in 2008 than in 2007, while more than half said they were now listening to legal online radio services like Pandora.” Not exactly earth-shattering evidence, but it’s a start.

On the other hand, if these music streaming services aren’t profitable or sustainable, does any of that really matter?

That’s the big question. How do streaming services hope to make any money? Spotify, Grooveshark, Imeem and others are burning through large amounts of cash as they continue struggling to find a way to climb out of the red. The recording industry has set royalty rates for on-demand streaming as high as 1 cent per song. That may not seem like much, but consider that by some estimates Spotify is currently streaming over 1 billion tracks per month. Add in the cost of bandwidth and hosting and the cost of streaming quickly becomes astronomical. (This is obviously an oversimplification of the equation. For a more detailed look at the numbers behind streaming click here or here.)

Freemium has been the model of choice, but so far converting free users to paid subscribers has proven difficult. Spotify has reportedly been able to convert about 4% of its users to paid subscribers, or 116,000 in total. That’s a big improvement over the 34,000 subscribers in May. But these numbers still point to the challenges that face platforms relying on freemium to drive revenue.

With any freemium model the product’s core functionality is already available to users for free. The challenge lies in developing the right incentives to make upgrading worthwhile. Spotify appears to be finding success in their mobile offering. Premium subscribers are able to sync their account with their iPhone or Android device. Mobile access is increasingly important to consumers, and judging by the doubling of subscribers noted above it has been enough to seal the deal for many.

In further evidence of the power of the mobile device in music streaming, the company behind the French streaming service Deezer surveyed its users and found that 80% wanted mobile access. Until this point, Deezer was 100% free. Last week the company introduced Deezer Premium, which directly responds to the results of this survey and offers mobile access for a monthly fee.

But what happens when a platform comes along and offers free mobile access? It’s only a matter of time as the streaming space is becoming increasingly crowded with new entries such as MOG. The feature that converts users becomes a commodity next month and it’s back to the drawing board.

Freemium is not the only option. The strongest alternative may be mobile bundling. In this scenario the cost of the streaming service is partially or completely subsidized by the cell phone carrier, and built into the cost of the plan. In this feels-like-free model cell phone users are still paying some of the cost for a subscription, but they don’t feel it because in many cases it doesn’t even show up as a line item in their monthly bill.

While this model may solve one problem, it does so by creating a few problems of its own – which is par for the course in music streaming. Most bundled services operate with some level of exclusivity toward their partner carrier. This type of arrangement could solve a platforms revenue problem as it relates to mobile users, it could also dramatically hinder a platform’s adoption on the desktop.

Can a streaming service afford to alienate a large portion of desktop users? Mobile devices continue to carve out a bigger and bigger presence in consumers’ lives, but the desktop is still the digital hub. I would argue that market dominance still depends on it, although I’m not sure what good dominance does it you have to sacrifice profitability to get there.

One thing is clear: without a free version to get users hooked any new streaming service is dead on arrival. I agree with Lefsetz who writes, “You can’t get people to pay first, that’s twentieth century thinking. You give them a taste now, and then get them to pay.” He goes on, “We live in an attention economy. It’s almost impossible to get people to spend time with [your service.] Make it easy for them! Convince them! Then get them to spend money.”

The bottom line is that music streaming services need to find a way to get more people to pay. No one wants to see streaming disappear, but there aren’t too many who are willing to donate cash each month if they don’t feel they’re getting additional value. Without the support of the industry or the government, Spotify, Deezer and the rest are left to survive the old fashioned way – by convincing consumers to buy.

And these services don’t have the industry’s support. Many in the business still cling to the download as the only acceptable transaction. This is not lost on Daniel Ek. “The big question is, are we not just fighting piracy, but also taking away the industry’s most lucrative customers, the ones that were buying 30 or 40 CDs a year?” Ek recently asked the New York Times. “If so, the music industry is in worse shape than it was before.” Perhaps that’s the biggest paradox of them all.

Still, music streaming is not the end of the story. Spotify, Deezer and their competitors have accomplished something that is likely to have massive ramifications on the music industry – they’ve given us a taste of true on-demand music consumption, and I don’t think we’ll ever be satisfied going back.

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Tags: Deezer, music streaming, royalties, Spotify

13 Responses to “The Problem With Music Streaming and Why It’s Only the Beginning”

Tweets that mention The Problem With Music Streaming and Why It's Only the Beginning | creative deconstruction -- Topsy.com

09. Nov, 2009

[...] This post was mentioned on Twitter by Refe Tuma and Refe Tuma, Greg Nisbet. Greg Nisbet said: "Music Streaming Services Need to Find a Way to Get More People to Pay" – Creative Deconstruction – http://bit.ly/2Am1Of [...]

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MusicBizGuy

09. Nov, 2009

Most people have more music than they know what to do with. Choice and control are becoming more and more important as the masses are looking for their new music to come from filters or better personal recommendation. However, these all you can eat services make sense for those who want access to everything when they want it and who like making play lists and don’t mind managing loads of songs on their devices. I question whether people will pay anything to get a service on their cell phone. Free is still free. With a little work and resourcefulness anybody can download easily virtually any if not all music. Are the artists seeing any of this money or is it only going to record companies as “access” fees which artists never see a piece of. All this chatter about these services and what’s in it for the artists. Their is some fragmented exposure and some sales but not nearly enough traction. The artists in the independent music community need to protect themselves. Building these services into cell phone or ISP costs again only benefits record companies. There must be a better way but I haven’t thought of it yret.

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Eugenia

09. Nov, 2009

I personally like to own the tracks rather than stream. I don’t mind streaming radio/internet-radio, but I do have a beef with streaming actual songs I want to listen to.

The reason for this is because internet connections are just not reliable. At least once a week Comcast will just have some outage in my area. Also, I don’t forget that Comcast has put hard limits about how much bandwidth we can consume every month. Or when I want to sit by the water and listen to music, and my wifi connection is not strong enough to reach me there.

Therefore, I prefer to own my tracks. Download them, put them on my iTunes lib, ipod and most importantly, on our AppleTV, which is our headless audio server (we don’t use it as a video device, but as a headless audio device hooked up in our big speakers, and operated via the “Remote” iPhone app).

Maybe in the future, when internet connections are everywhere, and are 100% reliable, and there are no silly bandwidth restrictions by ISPs, maybe then I would consider streaming for actual music listening, rather than just for internet radio.

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Paul

10. Nov, 2009

Your point about market dominance is spot on. If these services don’t turn a profit they will go under, maybe not tomorrow or next month but it will happen. And then what? At least all the “pussies” as Lefsetz calls them will still be ok.

One service that might live on however is WE7 which does free streams with attached ads at the beginning of each stream. People who find the ads annoying can pay for a premium account that is ad-free. Competing now against ad-free services like Spotify etc. is probably difficult for the company and its market share probably shows it but that could change if the others don’t figure out a way to become profitable, and fast.

I have used Deezer and Grooveshark and find these services great for checking out new bands that I have heard about or listening to a particular song from a band that I never really “got into”. For the bands and artists that I have developed a true connection with, the only route for me is ownership, mostly CDs and then different mixes from them on my MP3 player. This music means a lot to me and I wouldn’t risk having my access to it cut off because of “technical difficulties”.

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Si

11. Nov, 2009

Why is it so rarely mentioned that the major labels actually own a large chunk of spotify? This was given to them as an incentive to sign up and show spotify wasn’t going to sell up as soon as it got buzz to the highest bidder

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- refe
  
  13. Nov, 2009
  
  They may own a chunk of the company, but they certainly are not acting as though they care one way or another if Spotify lives or dies. They are all but blocking Spotify’s entrance into the US market.
  
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Jeremy

11. Nov, 2009

Eugenia and Paul together have hit the nail(s) on the head as to why streaming has a place but is *not* a replacement for ownership. Be wary of industry wizards selling streaming as the be-all and end-all “future of music.” Most of them have vested interests. (Or they’re just plain silly, like Lefsetz.) But none of them can guarantee the streaming service you hand yourself over to will stay in business, and none of them can guarantee that your internet service will be 100 percent reliable everywhere you need it. Is that really what music listeners want– to hand over their favorite music to a capricious third party?

And Refe, I don’t think we have to apologize for still feeling like ownership is important. The zealots overselling technology are the ones who will have something to apologize for in the long run.

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- refe
  
  13. Nov, 2009
  
  I don’t think anyone is asking you to apologize for valuing ownership (except maybe Lefsetz.) As I indicated in the post, I feel the same way. I also agree about the ‘future of music’ hyperbole. Will streaming replace downloading? Almost certainly no. But I do think that this concept of on-demand music with stick in some form or another and inform new models as they’re dreamed up in the years to come.
  
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koningwoning

12. Nov, 2009

Uhm… don’t know where you get your figures from…. but as far as I know Spotify is already making a profit thanks to the paying customers…. will try to find the link though

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koningwoning

12. Nov, 2009

just for your calculation 116.000 * € 10 = 1.160.000 per month
so with that they could stream 116.000.000 songs at € 0,01 per song.

Take into account the amount of long tail songs for which nowhere near € 0,01 per song is being paid… and as mentioned above: the record companies have a stake in Spotify – so they in all probability will not have to pay a standard rate but just a jiffy….

add onto that that you now can also buy songs – for which they will also get enough money and the amount of advertisers that is growing that are doing cool things with letting people make lists etc. (like Fiat did) and you can start to imagine that Spotify if not making money (they probably are burning quite a bit of money because of their US launch) is at least not making too much of a loss…. nothing like YouTube or anything!

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- refe
  
  13. Nov, 2009
  
  Yet they are delaying their US launch yet again because they can’t work out a deal with the majors that would allow them to operate without losing lots of money. To give you an idea of where Spotify stands regarding profitablity, they may be scrapping freemium entirely in the US and requiring users to pay from the get-go.
  
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Brian

13. Nov, 2009

Great article and summary of where things sit in the freemium and streaming side of things Refe.

Amidst all of this, one thing is certain…new creative technology is the answer. I just don’t think anyone has come up with it yet.

It’s funny that we’re thinking along parallel lines at the exact same time…I just posted a blog this morning that touches on this topic as well.

You can read it here:

My Solution To Save The Music Industry
http://bit.ly/3h2Trk

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invisiblepilot

13. Nov, 2009

[...] Deconstruction posted a great article on the problem with music streaming and why it’s only the beginning – got some interesting comments [...]

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