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Tuesday, September 17, 2013

Streaming Music Just Isn't a Good Business

Posted By on Tue, Sep 17, 2013 at 1:15 PM


With recent bad news for several online music services, we are likely seeing the beginning of a major shakeout. The underlying problem is that music streaming is just not a very good business. And it's probably only going to get worse.

That might come as a surprise to some, given the amount of hype that surrounds companies like Spotify and Pandora. And the services are popular -- they just don't make any money. Not a single music-streaming service is consistently profitable, and most are losing increasingly large bundles every quarter.

There are plenty of reasons, but the top two are: high royalty demands by the music labels (that don't do much for the musicians themselves), and piddling revenues, whether from advertising or subscription fees. For streamers, that means costs are rising while revenues-per-stream are either flat or falling. That doesn't make for a bright future.

Meanwhile, the entry into the market of giant, cash-rich companies like Apple, Google, and Microsoft will only make things tougher. Those companies have no intention of making money from streaming. For them, streaming is a loss-leader, drawing listeners in as a way to make money elsewhere. For instance, Apple's iTunes Radio, which is expected to launch this week, is meant to prompt listeners to buy from iTunes, and, most importantly, to boost demand for Apple's appliances, such as the iPod and the iPhone.

Companies like Spotify, Rdio, Pandora, and Rhapsody are left to try to earn profits from the music itself. That seems to be less and less likely with each passing day.

On Monday, The Verge reported that Rhapsody -- the oldest company in the business -- had laid off 30 people, or about 15 percent of the staff, and that it plans to oust several key managers, including the company's leader, President Jon Irwin. Last week, -- which allows users to upload and share music -- announced it would no longer allow uploads. That company is a bit of a gimmick and probably never had much of a future, but the underlying economics are the same as they are for all the others: high costs and low revenues. Spotify recently reported that its losses are still growing. The lesser-known Grooveshark recently announced layoffs.

Rdio, meanwhile, announced on Monday that it had hooked up with a traditional radio company, Cumulus, which will take a stake in Rdio, give the streamer access to its programming, and promote the service on its 525 stations. Cumulus, which counts KFOG among its bigger stations, is characterizing the deal as its foray into digital radio, but terrestrial radio isn't faring well itself. So the deal -- which doesn't involve any cash changing hands -- amounts to a marriage between two companies in two troubled industries that are facing the same set of possibly existential challenges. In the short term, it will likely help both of them. But the long-term problems remain.

None of this is necessarily bad news for listeners. As long as the big companies like Google and Apple see value in streaming, it will continue to exist. It's a bit troubling to see the business concentrated into fewer and fewer hands, but that often happens in media -- it's just the nature of the beast. Streaming obviously represents the future of music, but given that people clearly desire to pay little or nothing for music, it might be that recorded music simply can't function as a standalone business anymore.

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Dan Mitchell


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