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Too big to succeed: Is the music streaming market doomed to failure?

BusinessBlog
by Rawiya Kameir
, 08 Nov 2012Blog
Too big to succeed: Is the music streaming market doomed to failure?

The music industry’s refusal, or inability, to embrace the Internet and digital technology is what led it to spiral into the mire that it’s still trying to claw its way out of. But, today, record labels, publishers, and distributors are clinging to those two things in the hope of reversing the almost-fatal missteps of the past two decades.

As the public buys fewer and fewer records and digital sales struggle to adequately make up for the ebbing of that revenue, the music industry, media companies, and technology ventures are increasingly putting their eggs in the music streaming basket.

New streaming services are popping up every day. Among the latest services to grab headlines is Deezer, a French startup that recently courted a $130 million (£81 million) investment from Warner Music owner Len Blavatnik and is expected net a more global user base than current darling Spotify. On the strength of partnerships with Facebook and mobile operators such as Orange and Deutsche Telekom, the service has amassed more than 20 million registered users and two million paid subscribers.

But it seeks to grow in what is an already crowded playing field, with a glut of streaming services using a handful of different models all vying to capture the estimated 100 million person-strong market.

Among the bigger-name streaming services are Spotify, which uses a freemium ad-supported, desktop app-based model; Rdio, which takes a tiered, cloud-based approach; and Pandora, whose personalised streaming radio is also available on a freemium ad-supported model. There’s also Wimp, Rara, Napster, We7, Pure, Last.fm, Senzari, Grooveshark, Sony Music Unlimited, Songza, Mog, Samsung Music Hub, and Microsoft’s Xbox Music, to name a few. In total, more than 500 legal music services are operating across the world, together having registered over 13 million paying subscribers - a figure that jumped more than 65 per cent last year, according to the International Federation of the Phonographic Industry’s (IFPI) Digital Music Report 2012.

But for all of the industry’s enthusiasm, will anything valuable be found at the end of the music streaming gold rush? Or have we quickly approached a ceiling?

One of the most elemental factors of streaming services is the shift in public attitudes and behaviour when it comes to the consumption of music and other commercial media - whereas ownership was once the norm, media has become almost disposable, with consumers more interested in having content within reach - be that via YouTube or Spotify or SkyBox - than in possessing physical, or even digital, copies.

“I believe the future is access, not ownership, not iTunes as it is today,” Vevo chief executive Rio Caraeff told Tonedeaf last month. “We’re not trying to sell people music; our customers are not the small amount of people that want to buy music. We are about providing access: it is the only scalable model for the music industry.”

Vevo, despite existing outside of the formalised music streaming ecosystem, effectively serves a similar purpose, especially for the younger end of the music-listening spectrum. According to research by Nielsen, nearly two-thirds of teenagers younger than 18 visit YouTube, and by proxy Vevo, more than any other medium to listen to music; quality, ownership, and control come secondary to access. It’s unclear whether this is a symptom or an instigator of changes in media technology, but many consumers have developed a different relationship with music - one that is centred on media being disposable, non-tactile and, ultimately, free.

But the music streaming ecosphere doesn’t appropriately account for this shift - especially the ‘free’ part; many services tend to be projects conceptualised by business people and record label executives using modern-day technology but with an old-fashioned business model reflecting a bit of denial about the, sadly, lowered value people ascribe to music.

Though the numerous services vary in their structure, they tend to hover around £9.99 per month for premium streaming - a figure that, albeit reasonable on the surface, has proved to be too high to entice hoards of paying users, but not high enough to cover the marketing and advertising it takes to pull in those users. Nor is it enough to cover the licenses due to labels, publishers and other copyright holders.

Yet, despite seemingly being unable to offer customers a more attractive value proposition, the streaming market is oversaturated. Of the dozen or so subscription services mentioned above, many are sucking up yearly loss after yearly loss, chugging along thanks to generous funding from venture capitalists. While some have tried different approaches to attract the masses - for instance, Rara’s visual-heavy design and Songza’s music expert-driven recommendations - none has introduced an innovative business model that makes the concept fully viable.

French service Deezer has reported a profit, but did so on the strength of partnerships with telecoms giants, suggesting that tighter integration with existing paid products and services like smartphone contracts and/or broadband bundles could be the surest way forward. Meanwhile, Spotify, which now requires users have a Facebook account to join, increased its revenues by 151 per cent last year, while its losses ballooned by some 60 per cent. Though it’s floating by on investments for now, it is becoming more apparent that the economics of streaming are not particularly sustainable; venture capital is neither unconditional nor bottomless.

Noticeably absent from the pack is Apple, which, ironically could prove to be the music streaming world’s last hope. Since earlier this autumn, reports have suggested that the company is preparing to launch a streaming service in an effort to offer new functionality via iTunes, possibly the long-awaited fruit of its 2009 purchase of Lala. Last month, new rumours pointed to an early 2013 launch of what is expected to be a personalised radio streaming service à la Pandora; Apple is reportedly in ‘intensified’ talks with labels to reach mutually beneficial licensing agreements.

But, Apple, which will have to walk a narrow line between introducing its own streaming service and cannibalising iTunes sales, could prove to be the company that disrupts the music streaming market and revolutionises the digital music industry. Again.

In addition to its strong relationships with record labels, for whom iTunes sales are paramount and with whom Apple likely has the leverage to negotiate flexible licenses, the company has a store of 400 million iTunes accounts already linked with credit cards - that’s more than the subscription base of all of the existing streaming services combined. Much in the same way it capitalised on that advantage with iBooks, an Apple streaming service would debut to a large built-in audience, effectively solving one of the major problems its competitors are desperate to fix through marketing dollars.

Moreover, the company could be preparing an attempt to remedy the access over quality paradigm by introducing high-fidelity music files to the iTunes store. Most digital music today is available in relatively low-quality formats - MP3 or AAC files that are massively compressed, sacrificing quality for the sake of fitting as many tracks as possible onto an iPod or iPhone. But some reports suggest Apple is working on a project that will see the inclusion of higher bit rate tracks and albums in its online catalogue - likely a niche venture, but certainly a welcome one.

Either way, while Apple can’t afford the backlash of yet another disastrous, premature service launch, it will enter the market with a significant upper hand. There’s no telling what its streaming offering will look like, but I can’t wait to find out.

Image Credit: Nina Matthews

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