I’ve been in streaming music in one form or another since 2000, in particular in the Asian markets, and I’ve yet to see a streaming service anywhere that has ever made money.
There have been a few who’ve “flipped” and made money for their backers, but there have been so many more that have simply disappeared without a trace – because they couldn’t find a path to being profitable.
With my rights owner hat on I could say “who cares?”. But we should all care, because the health of our business is being pinned on streaming being successful.
For the large internet or hardware companies like Apple, Google or Tencent, music isn’t their core business and so this isn’t a core problem. They’re probably the only companies who can afford to have a loss-making streaming service, as long as it drives device sales, search, or messaging.
And that’s fine, and it’s ultimately good for the music business that they exist. But we should be concerned about how difficult it is for standalone streaming services like Spotify to be profitable. Spotify will probably make it, but the sheer volume they need to get to that point will elude just about everyone else.
If almost no-one can make money from streaming except companies whose main focus lies elsewhere, that can’t be good for the long term health of the music business. The very innovation that gave rise to Spotify will be stifled by a lack of investment in new services.
So what’s the problem? There are lots – high upfront investment, lack of consumer understanding of the model, and poor marketing and promotion by the services themselves being just a few.
But the biggest issue long term will be the razor-thin margins streaming companies have to work with. A streaming service is likely to be paying 80-85% of all revenues to the rights owners. That’s before they cover the costs of technology and software development, content delivery, the people that work there, marketing, rent and so on. It’s almost impossible to run a sustainable business on a 15-20% gross margin.
There’s been quite a bit of rights-owner bashing on this point but I do think we need to keep some perspective.
Back in 2000 the music business (including publishing) was a US$40b business. It’s now a US$20b business. Thousands of people have lost their jobs over the last 15 years in major and indie labels and publishers, many of them our friends and colleagues. Those that are still there will tell you they’re doing the work of 3 people.
That’s the disruptive beauty of the internet and music was one of the first to feel its full force. But there’s no doubt it’s been a tough transition.
The problem is that with streaming finally delivering strong revenues, the “balance” between the rights owners and the streaming services is starting to get out of sync. And that will have to be addressed if we’re to build a sustainable business.
For artists streaming is a volume game and so the more healthy players in the ecosystem the better. We should all want a business where not only large companies but smaller services, start-ups, single-country, niche and even brand services can make a dollar with music (paying more through to the rights owners and artists in the process) – and not have to endlessly go back to investors. That trough is almost dry.
So not only do we need Spotify to be profitable, we need to encourage investment and innovation in smaller services and give them a chance to grow. The quickest way to do that is remove some of the crushing barriers we’ve put in the way of them making money. It’s business, if they don’t make money they’ll die. And we need more of them to prosper if we’re to get anywhere near returning to a $40b business.
Unfortunately there is no Plan B if streaming doesn’t deliver.