Online streaming music startups are in one very sorry place. On demand streaming rates range from .4 cents to 1 cent per stream – this is what the startups pay to the labels every time they play a song for a user. Add bandwidth and storage costs on top of that, which aren’t trivial for services that want to stream music quickly on demand. The result is hundreds of millions of dollars flowing from venture funds to startups to labels. Little of it makes its way to artists, and advertising revenues only cover a tiny portion of the fees.
The labels don’t care if the startups make money, lose money or go out of business. All they want is to make enough money to extend the ultimate surrender date as long as possible. That’s when we’ll finally see the economic reality dictated by the Internet impose itself irrevocably on the music industry. Unless draconian laws are created and enforced that put people in jail, or worse, for file sharing. And even that probably won’t work.
Anyway, these crazy economics are making the music startups skittish. MySpace Music, the biggest player in this space, may be spending $2 million or more per week to the music labels based on their own statistics that they’re streaming over a billion songs a week. Their streaming rate is likely to be the best in the industry, and it almost certainly isn’t lower than .4 cents per song. There is no way that they’re making that much in advertising revenue.
The hope is that downloads, ticket sales, merchandise and ring tones will make up the difference, but what we’re hearing is that very little incremental revenue is being made from these other revenue sources.
That means there’s no chance for these startups to work until the labels reduce, significantly, the streaming rates they’re charging. Or agree to radically different business models. There’s no sign that is happening any time soon.
These crazy economics are making startups do odd things. I emailed one startup recently to suggest a post here on TechCrunch noting that they seem to be doing well – recent setbacks with partners didn’t hurt traffic as much as it may have, and I wanted to note that. The startup flat out asked me not to post, because they didn’t want positive press to impact their negotiations with labels. They had to present as desperate a situation as possible.
Read that again: streaming music startups don’t want more people using their service, because they lose money from every one of them, and the perceived success from having more users makes it harder for them to plead with the labels to give them better deals.
Then there’s imeem. A few days ago I had multiple conversations with the startup around rumors that they owed significant amounts of money to the labels that they couldn’t pay, and that they had failed to raise money or sell themselves. Not much information was shared, other than to say that the rumored $30 million owed to labels was too high. Now they tell VentureBeat that the number is in the single digit millions.
Whatever the number – $30 million or $1 million – imeem can’t pay it. Their business model doesn’t work and it is going to continue to not work until the labels let it work. And they aren’t going to be doing that any time soon.
Big Music Doesn’t Like Streaming Music
The big music labels don’t like streaming music because it doesn’t help them offset declining CD sales, and the evidence now suggests that streaming doesn’t lead to music downloads. Everything we’re hearing says that the labels would like to see streaming music startups just go away for now so that they can focus on maximizing paid downloads and extend that ultimate surrender date.
So when you hear about labels renegotiating streaming deals to help out music startups, be skeptical. They’re likely lowering the rates from 1 cent down to something closer to .4 cents per stream. And all that means is that these startups will bleed a little slower. But they’re still going to go out of business, because the venture firms are done investing in them.
Nice post, good article.
Charging for music online is basically a non-starter unless you are going after the non-internet or computer savvy demographic like apple is. Everyone else will just download from the pirate bay.
not to start the apple suxs debate… but I am highly involved in this space for the last 10 years. I am about as internet savvy as they come; I have a degree in Computer Science… and I buy music almost exclusively from iTunes.
Not everyone is as ethical as you my friend.
forget ethical… 70% of the money you’re paying to iTunes goes straight to the very music labels that are suing customers and driving all these awesome sites out of business. On top of that, of all the money that you’re giving to the music labels, only 10% goes to the actual artists and the remaining 90% funds the very same lawyers that are suing everyone.
think about it. fuck that bullshit. I gladly paid for the nine inch nails and radiohead album because I know my money is going to the right place.
don’t be blind… don’t keep funding the labels.
I’m an independent full time touring artist.
On average, from a 99¢ iTunes download, I make 63¢. (US only, Europe is more)
If I was on a major label, perhaps my numbers would look more like the 10% of 70% that Miguelle was talking about.
I may be selling more (at a lesser profit to me)… but I might be making the same amount at the end of the day.
Artists need to ask themselves:
Do you want a lot of a little… or a little of a lot?
Yeah thepiratebay is the best destination for pirated music. Or just go on to warez-bb if you don’t like downloading as torrents.
http://www.smartbloggerz.com
Piratebay/pirated music may be fine if you have lots of time on your hands, but I believe there is a big audience of people who would much rather pay $.99 for a track via iTunes than spending potentially hours using a P2P site.
you should take a look at http://songraptor.com
Jeff- Songraptor is just a Songza rip-off. Lame.
Agreed. Michael Arrington always reports wonderfully on music.
People listen to music, a lot. They just aren’t buying it because they can get it for free. The future of the music industry relies on The Music Revolution at Mybandstock.com ! Buying stock in a band breeds connection, and allows artists and fans to be closer.
I’m tired of this industry that keeps fans at arms length, in a world where connecting with people is so key to success.
why no hyperlink for imeem
We need a rising star – it’s annoying not having one.
It’s coming. Complete with the star!
Survival of the fittest.
The big 4 owe nothing to these startups. Let them die.
Except “survival of the fittest” doesn’t fly when the market is severely broken. The “Big 4″ have an oligopoly in the space that is effectively backed by the copyright laws of the United States… which the Big 4 helped write.
This sounds more like “survival of the most corrupt”.
What’s corrupt is the violation of US copyright law.
Now, regarding startups that operate legally and pay a streaming fee to content providers, the price is too high only relative to the revenue these sites are generating. I’m sorry, but in 2009 anyone who hasn’t learned that ad based websites do not scale is simply not paying attention to the market and is bound for failure. Don’t blame a crappy business model on something else.
The business model was sound, before congress helped to slant things in favor the record labels’ dubious aims. I blogged (see link) about this nearly two years ago, when they first handed down the new fee structure. Now, per this article, it seems that the low end of the fees is double what was expected to be the worst case scenario back then.
Sorry, the blog is long and kind of technical – it was my first one.
maybe you could familiarize yourself with the concept of “market failure” before getting all randian.
I wrote a decent response to this and the comment didn’t post. Is there a filter on stopping posts with links?
The artists don’t owe anything to the big 4, let them die!
Actually if they signed contracts and took advances on sales the artists do owe something to the big 4.
Exactly. I’m sorry, but the idea that the music industry can exist without the majors is flawed to the core. I’m all for DIY and the independent labels, but that movement can only go so far. The majors act like any other investor – they inject capital and resources (legal, PR, studio/equipment, merch support, tour support, etc.) into a project in return for a percentage. Remember, artists don’t have to sign the contracts they are given – they choose to. Once the pen hits the paper, the agreement is bound and the artists DO in fact owe something because they DO in fact take something.
“Once the pen hits the paper, the agreement is bound and the artists DO in fact owe something”
The problem is that the contractual relationship between the artist and the label is now outdated. One day, artists will realise this and turn it around: see themselves as commercial enterprises and treat the majors like a service industry. This is exactly what other businesses do with (say) advertising, marketing and ERP outsourcing. Band management just needs to operate like a directorship: hire the right outfit at the right price to do the right stuff. All this “record contract” stuff is stupid. If a band is good, they will be popular, and they will build up the resources to hire large distribution networks, concert logistics, video producers, etc. etc. If they are bad, they won’t. That’s capitalism.
(repost without links retry)
“The labels don’t care if the startups make money, lose money or go out of business.”
This is where the problem is. The money that pays for these streams should not be paid from the VC, it should be paid on a pay-per-access basis by the users. A .5 cent per song calculation is correct however as we have calculated that the cost of a $17 CD if streamed over the life of the product would amount to 348 lifetime plays of a 10 song album.
The future of the music business is streaming, we believe that. I know a few major label artists getting only $0.05 in royalty per album sale, this equals the same payout per streaming situation. The problem is the “middle man” record label that bloat the price of operation up, there no way to pay this inflation.
Another issue is music startups attach their product with all eggs in one basket. I remember talking to a Wal*Mart music buyer about 5 years ago, and she mentioned that they make no money from CDs and they only carry them as a courtesy to their customers. A startup should base their business model on offering other facets of services as a backup to the harsh music sector.
Regards,
William G. Blanchard
Inventor and Chief System Architect
Retail Zip.com
MuuVii.com
Aren’t you only paying for 34 listens of an entire $17 album with 10 tracks at 0.5 cents / song? So buying a 10 track CD for $17 is a better deal than streaming the tracks if you listen to the whole CD 34 or more times.
Remember that in streaming, the data is MP3 sized, not PCM sized.
average MP3 size of same album = 50MB
1024MB in 1 GB ÷ 50MB = 20 plays per GB X 17GB = 348 lifetime album plays
You guys wouldn’t happen to work for AIG would you?
Let’s see here:
One dollar = 100 cents right?
Therefore $1 = 200 “half-cents”
So $17 = 3400 plays at .5 cents
William where does the 17GB number come from?
^ The 17GB figure comes from each GB costing $1, I should have made that clear in my previous post. Being that a CD represents 650MB, in my calculation, I took the retail cost of a CD i.e. $17 and converted it to 17GB.
Your right at 3400 single song plays at .5 at $17
My calculation is based on a 10 song album, thus where the 348 plays for $17 comes from.
Not to scared to share our business model:
730 hours in a month
168 hours in a week
24 hours a day
43,829 minutes in a month
8765 songs in a month if played 24 hours a day for a month
$4.38 total payout cost for 24/7 streaming for a month per user at .5 per song play payable to content owners.
Subscription price $19.99 a month for “all you can access” service that divide the revenue to content owners in realtime.
Bandwidth needed to deliver 8756 songs in a month with an average size of 5MB per song: 42GB transfer.
42GB at $0.25 per GB cost $10.50.
$5.11 in monthly profits to the service provider.
muuvii.com coming soon.
^ calculation based on a per song length of 5 minutes.
You should be able to get streaming services from a CDN for half your $0.25 rate if you have any volume at all, in which case you make about 50% gross on each customer in your 24/7 scenario. This seems in line with other business models, no?
No, because our rate for our middleware platform that delivers the technology and format for this to happen charges at a rate of $0.25 per GB.
A company starting from scratch and wanting to build this type of system from the ground up, sure, could absorb a lower per GB cost, but here’s the issues:
1) Needing to start from scratch, we are talking about a 2-3 year lag behind the company who does it first just to save about $0.07 per GB.
2) Patent issues, we have a few patent documents defending our ideas.
In the end, for a business to spend $0.25 per GB with us, its not an issue because we are W9 friendly, the companies just write off the charges as business expenses against taxes owed. God bless America!
Ah .. I am not a chief architect, but check Wikipedia .. when talking of storage, 1 GB is not equal to 1024MB, it is 1000MB rather.
@Brian, you’re off by an order of magnitude … half a cent per song equals 5 cents for all ten songs; so a dollar pays for 20 plays of the album, and 17 dollars pays for 17*20 = 340 plays.
The biggest flaw to your business model is that it assumes users will actually pay a monthly subscription fee. Sorry, but it has been tried many times and has failed many times. The reason for failure has mostly been the fact that there are numerous ways to consume music for FREE. I’m wish you the best of luck, but you have an extremely difficult road ahead of you. Your business will not succeed. Sorry. Sometimes we all need a slap in the face.
You have us wrong my friend.
We are operating with 0% debt without a VC.
Even at iTunes level of activity, the music business would only represent 3% of our collective profitability.
Keep your luck, we believe in hard work and smart foresight.
@ William: You’re on the right track with this and you’re going to succeed. Word.
1)
Another economic model, that of cross-subsidies, which consists of offering a product for free to provoke the consumer to buy another one: a telephone and some free communication in exchange for a subscription; a razor in exchange for blades. Tomorrow, perhaps, we will receive computers for free and pay for the software, tech support, internet subscriptions or online games.
2)
“Use piracy as a form of marketing” to monetize the popularity of other products.
3)
the currency of attention. where artists can monetize their popularity, thanks to appearances in ad spots, in films or in concerts. This model, for him, will apply to film and many other sectors, including literature.
quotes by jaques attali, chris anderson
We made provisions in our KodeKey password model in both our technologies for this. Content owners could use Trialpay.com with our KodeKey passwords to deliver what we call the “Pass-Pay” model, meaning use a subsidy offer to pay for your product.
The technology is already here to deliver such models, but content owners still beating a dead hustle expecting a record store to pay for units up front, when all the record stores are all gone.
There are plenty of rising stars in this space if you look in Europe, where did you source the streaming rates you quote? They seem incorrect, I have the royalty rates for streaming music in the US and they are very different. Readers should sense check the factual in this article from journalistic. Music streaming services are important & here to stay, they attract huge traffic & there have been successes like Last.fm. Why would MySpace, Facebook be so keen to use music in their business models if they will be haemorrhaging $2m a week. Wake up!
@london entrepreneur
“success like Last.fm”…
obviously missed latest news
Just because Last.fm is limiting it’s free streams to three countries that they have targetted with advertising does not imply their failure. Yes, they have changed their business model and audience. They are still succeeding in a competitive space.
if you have the rates please share and show the inconsistency.
Seems like a sound business model to me. I don’t understand why these music startups would expect free music? It’s the cost of goods sold.
Hire a sales team and sell ads against the damn music. If you don’t know how to make money, stay out of the space.
There are other business you can do, start a Jiffy Lube franchise or something. Just stop whining.
“I don’t understand why these music startups would expect free music?”
the reason is because these startups are providing free marketing for the labels. Eventually they’ll be paid by the labels to promote music.
That’s not a valid reason. I am sure the labels could care less about the free marketing – especially when it’s not asked for. A small startup offers no collateral that a large label would care about.
they sure don’t mind paying for marketing of their songs on the radio. It’s coming. payola for internet companies to promote specific songs is only a couple of years away.
I agree with Michael on this one. The streaming sites are providing free marketing for the label’s music while the label still makes money on the music.
It will not be too far in the future when the streaming sites will start operating like Radio stations.
Michael, do you know whether or not the labels pay for iTunes placement on the main page or the category pages?
Jim
Radio is a more passive beast — you can’t skip stations and build stations of your favorite artists etc.
Streaming Music sites have built poor media biz models, just like newspapers and magazines.
Payola is an excellent option, and streaming music companies should push for it. However, given the competition from both illegal and legal downloads and a greater incentive for labels to “build their own” (hulu / the new music video site coming soon) –
I’m not sure there will be many business models and therefore exits without branching out into solid revenue areas like internal labels.
Thinking you’ll get paid to market the music is a pipe dream. First off, payoloa is illegal in the traditional sense. I’m not saying it will ever become illegal online, but still. Radio stations don’t make their money off paid to play. They make their money of ad spots and many are doing concerts.
Labels care about one thing: money. They are not going to start trying Startup A – Z to promote songs. I can only imagine how many negotiation meetings they already hold. If they already have an established audience, that might be a different story, but it falls into the realm of “is the audience willing to pay”.
If they don’t have statistics about ROI, why would they risk it?
Payola is a very shady area and often regarded as illegal, and right now internet radio is more of an annoying gnat on the RIAA’s radar rather than a sizable blip.
It’s too much trouble to start the type of relationship that has taken the terrestrial radio industry 50 years to establish and transform it into the online space under new laws and guidelines, not to mention DRM and trust issues.
No internet broadcaster should have to base their business model on something as bad as payola. It should be gravy, not the foundation.
These startups will need to work the old-fashioned way and use concepts learned in good ole’ business school
Does payola to radio stations really still happen?
Sounds like the labels are instead pushing radio stations to pay them fees, just as with their online counterparts: http://blog.wir...corgan-rad.html
Isn’t payola illegal only b/c radio stations are granted licenses out of a limited pool for a given geographic region. Thus, it is important to protect the consumer. In the online space, where choice is unlimited, the consumer can go anywhere, so if you don’t like the result of payola on one service, you can go elsewhere.
Payola is happening in a big way in radio to this day.
Ex “Thanks for helping us get all these spins for the new artist, let me know and I’ll give you anything you want.” Hmmm — what about a trip for two winners (and the PD and the GM w/wives etc) to go see this artist play live in Barcelona next month? Sure — here are tickets, hotel, spending money etc. Enjoy!”
The the radio station then turns around and sells the promotion to an advertiser. Great business and everybody is happy as long as the FCC doesn’t snoop around too much.
Labels will not die — but they will be making a whole lot less very shortly. Keep in mind that the costs of launching a new album (production/marketing etc) has dropped significantly, so the labels are loosing a lot of their power.
Pretty interesting to know that labels like UMG takes 50% of artists non-music related income. Whether that’s a shoe deal or a fragrance, the label gets 50%. Got to make up for all the lost sales from Pirate Bay etc…
I think you’re right in terms of the future of music.
What I don’t get is how VCs pump million over million into business concepts that operate outside the law and thus are destined to be sued til they bleed out of their eyes.
How about I’d show up with a business concept of free ’streaming’ software for everybody. The idea would be that I host a site where people can recommend their favorite office software and because it happens that we have a copy of the recommended stuff on our server everyone can download and use it for free.
I am sure that would be very popular for our user base – but do you think I’d get funded and VCs would continue to pump cash no matter what? I guess this could turn into a new kind of lawyer operated sales pipe for Microsoft & co.
The legal basis is the same: Copyrighted material is not free until the copyright holder declares so.
BTW, this appears very counter active to most VCs wanting startups to have their ‘toys’ patented before they see value in a potential investment.
“The legal basis is the same: Copyrighted material is not free until the copyright holder declares so.”
There lies the answer. If labels and rights owners release selective tracks under a Creative Commons license, they would be able to use all this “free” marketing as a way to sell albums, tickets…
@ Peter It never fails to amaze me either. And the idea that using music is “free marketing” doesn’t stand up. MTV tried to say that and still ended up paying labels for the video promos.
Tim: give away tracks so people might buy them? And labels don’t organise concerts, and so don’t sell tickets.
Yes, and guess what?
Radio stations pay royalties to and are still making money!
I know I am shocked to
not in the U.S.
http://radio.ab...a/aa122904a.htm
Your right Michael but they still pay.
i’m anxiously awaiting your next insight as to why streaming royalties are higher than broadcast royalties.
If the marketing replaces the product, then it’s not worth paying for. Radio listen might hear their current favorite song ten times a day if they tuned in all day. That’s going to/used to lead to album sales. When it comes to streaming, I can listen to 90% of the songs I will ever want to hear all the time at any time. That’s not just marketing.
If the sole business plan in music streaming is: we’re doing you a favor, pay us — they all should die.
“RADIO LISTENERS might hear…”
“the reason is because these startups are providing free marketing for the labels. Eventually they’ll be paid by the labels to promote music.”
That is a ridiculous argument. For indie labels is somewhat credible (although not much), but for the majors the reverse is the case. The labels have spent big money promoting the music to make it popular. A streaming site is taking advantage of the major labels promotion to get customers. No streaming site would be successful with a bunch of bands no one has ever heard of. You need the big ticket acts to draw in the customers, and the big tickets acts are big ticket acts because the major labels have spent a lot of money promoting them. The whole “free music” argument doesn’t make sense anyway since the labels usually only make money off the sales of the recordings. The argument that they can make it up on the back-end with ancillary revenue sources is moronic. Those sources are usually the domain of the artist (unless they’ve signed a goofy contract). Asking the labels to roll over and die so that some tech startup can make a zillion dollars shows a complete lack of understanding of the music business. Also, expecting labels to cede profit to support some nascent startup is silly since the failure rate of startups is so high. If the labels pulled a Hulu, that would make more sense…
“They’re streaming rate is likely to be the best in the industry”
s/They’re/Their
I will quote Bruce Lee:
“it is like a finger pointing up to the moon” SMACK (on forehead) “Don’t concentrate on the finger or you will miss all of that heavenly glory”.
Are you stoned?
Stop paying attention to dumb things like typos or your going to miss enjoying the thread’s entertainment.
Streaming music? I get. It seems all these site are missing the big picture… Every ones seems to be concentrating on the big four (the finger). Technology has caught up, and the finger is irrelevant.
It seems to me that this model is backwards. Sure the MySpaces make money off of users visiting their site and clicking on ads, etc but what if they weren’t around. Who would be promoting the label’s crappy music? This needs to be a partnership, not a dictatorship.
It’s a shame that the phrase “digital music startups” has become completely attached to these music streaming destinations.
We’ve been working on a “digital music startup” for 19+ months that is totally pro-artist, labels & fans AND does not involve streaming! who knew that was possible??
I have recently adjusted my pitch to say “crowdsourced ranking platform” compared with “digital music startup.” I think it’s been going over a little better of late…
It’s in private alpha at the moment, and we’ll let you know as soon as were ready to unleash it to the public.
Here’s a thought…
Maybe we should start paying for music instead of expecting it for free!
O ya that is right, web 2.0 kind of abolished that concept didn’t it?
http://lostthet...we-have-to-pay/
The sad thing is that it’s most likely one of these start ups that will stumbleupon develop a (or many) new business models that could save the music biz. I highly doubt the solution will come from one big four labels.
http://twitter.com/markdienger
Good thing there are plenty of sites streaming indie, unsigned music that don’t have to worry about paying streaming rates to any labels.
If anyone is fit to go, it is the labels. Music streaming is just getting started.
why do u always think that streaming music website are the only kind of music startups ? everybody knows in the music industry that this model was scrwed from day one. dont mix up music start ups that are licencing music and those who are music services platform and where the content is upoaded by content owners … cf : myspace, fairtilizer, topspin …
Not that I’m a fan of the labels but why do most feel that it’s labels’ responsibility to make the streaming business model work? So what if it helps to promote album sales. So what if it may be in labels’ advantage to stream. I don’t understand the mentality of we must force the labels into a model that will save streaming (or streaming companies.) If I choose to eat junk food, die early and not contribute, let me!
I don’t understand why the labels keep thinking they need to be in charge of their marketing still- they could probably lower their costs by outsourcing marketing to these startups, and in the end get better marketing for less money. Having a more reactionary music industry(i.e. give the people what they want instead of what the labels want to sell) seems like common sense. However, I guess when you deal with big labels you never assume sensibility.
So sad but true
Absolutely ridiculous idea that the Big 4 or the Little 4,000 (aka the Indies) should provide content for free or at a rate which works within the confines of cookie cutter hockey stick business plans. Fact is rates are transparent; VCs should get a clue regarding how to analyze prospects and entrepreneurs should do their diligence in understanding the economics necessary to secure content and generate positive cash flow.
It ain’t the labels fault that most start ups fail.
I manage an independent net radio service Digitally Imported (www.di.fm)
From my experience dealing with SoundExchange and negotiations regarding royalties, I feel Michael exactly nailed the point on the head. Thank you, because some of us in my industry are steaming inside.
I call the state of things now “Subprime Royalty Rates”. By that I mean that we have a few ventures/startups that are willing to pay the outrageous fees NOW, for the sake of living on another few months or years, even though common sense tells everyone that the rates are totally unworkable to a business model.
Subprime Royalty rates because just like with all the house buyers who thought they could take on overpriced house rates in the bubble, we have a bubble of royalty prices which a few are perpetuating with venture funds. Eventually this house of cards will fall too, just because they pay them now doesn’t mean that’s how economics will play out.
I work on a streaming music service called Radio OneLlama, but most people don’t understand we don’t pay license fees or even streaming fees. All we do is help you find radio stations that play music you might want to hear.
I try and explain this to people who often confuse OneLlama with Pandora or Rhapsody. We make revenue, but it’s not from what you’d expect (the streaming of music). Definitely agree with what you’re saying though. For a startup like OneLlama, it’s very cheap to operate. I can imagine survival would be difficult if we did.
Huh? You clearly make money from streaming music – what the hell do you think the people who use your service are doing? They’re coming to you so they can find a service that will allow them to stream music (like Pandora or Rhapsody). you provide no value outside of being a directory service. If those services do not exist, you will have nowhere to direct users, and therefore you will have no users.
Apply these royalty rates to radio and the numbers are insane. Chicago averages 1.5M daily listeners. Let’s instead use 100,000 listeners and average of three minutes per track. 100,000 * $0.007 / 3min * 60min * 24hrs = $336,000 a day or $122M/year. I doubt if there is any radio station profitable enough to pay $122M a year in royalties. Now multiply that by 500+ stations. These royalty rates are way too high.
feel sad for imeem
Mike, does Muziic.com circumvent all this buy “feeding” audio from youtube videos?
Hmm…can’t get to their site interestingly enough too?
I’ll play devil’s (label / artist) advocate here:
1) How will one of these services “save” the music industry if users don’t buy music AND the services can’t sell ads. All that’s happening then is a bunch of bandwidth transfers. Assume the music costs went away. They still aren’t selling enough ads to cover operational overhead – so the real money transfer is Venture Capital -> Tech Teams that like music. Even Facebook and Twitter haven’t monetized.
Maybe it’s time for startups to focus on actually doing business and generating revenue before growing users? Otherwise it’s a hobby, and hobbies have costs – cars don’t restore themselves, kites cost money, gardening needs water – all of which have some profit for a supplier.
2) I won’t pretend that music will disappear if rates go down. Kids will always start bands. And technology has crushed recording costs. But that doesn’t mean there’s not a time cost. And that musicians can’t grow. Eliminating compensation for musicians – which is what slashing fees does to all but the existing superstars who do enough volume is drive a one-hit wonder market. Bands will grow up, move out of the house and you won’t get Sgt. Pepper’s because John and Paul had to take jobs writing supply-chain code for Amazon.
3) Real problem long and short are too many conflicting rights holders. Sound recording and composition rights are relics of sheet music and phonographs. Labels (this term includes artists who own their own masters) and Publishers (term includes writers owning their own compositions) need to figure out reasonable split (let’s say 50/50) for streaming revenues allocated to music and negotiate from there to eliminate the “Surprise, you’re screwed” factor. But that doesn’t mean business should get a pass on paying for parts. Hosting costs money, bandwidth costs money, and using other people’s copyrights costs money.
thank you
awww
Fantastic post Michael – I’ve been in the startup world for a while now, but I’ve never understood the economics or biz model of all these music startups. I just hear the hype.
But you’ve just broken it down and made it extremely simple. Unfortunately, the CliffNotes version of this battle between startups and the labels reads like a Shakespearean tragedy: one where all the music startups have no choice but to kill themselves.
Great post again!
Letting people hear music over the web distributes the music. Users will eventually, even though not directly, spend money on music.
Note that the rates mentioned here are for on-demand streaming.
There is a whole other dimension of online streaming, radio-style non-interactive streaming. This is covered by the DMCA and costs about 15 times less, this is the license that services last.fm, pandora, 8tracks, live365 are legally operating under.
and you never pay directly to the labels but to soundexchange or a similar royalty collecting agency.
All the major labels will fail sooner or later. The labels can’t sign everyone. More and more artists are going to sell downloads through their own sites and not even care about major labels. Music pr will be where the money is at. Who can drive the most traffic to whatever new artist. IMO.
“Streaming music startups don’t want more people using their service, because they lose money from every one of them”
That sounds like a broken business model. If you you sell things for less than you buy it you are just a bad merchant.
The question if the initial seller (labels) have the wrong pricing or if they have other deals with other channels (radio, tv) does not matter at all.
If you have no or a negative margin either fix your business model or stop doing business.
The business model is broken right now because of the outrageous rates by the recording industry. All the players are biding their time, trying to stay as lean as possible for as long as possible, hoping that their competition dies from wounds of attrition.
If the record companies give up in two years and you’re in the business of online streaming, you stand to make a boatload of cash.
A classic stump : are you prepared to deal with success?
I think the exorbitant demands of the majors are the biggest part of the problem, but we the listeners are to blame too, for assuming everything should be free. Have a look at your last cable bill, your internet, your cell phone bill– how much do you pay each month? Over $100 for each? We don’t bat an eye when we pay those. But try suggesting that a listener should pay even a fraction of that each month to listen to music online, and people immediately start blowing their tops.
I’ve been using the Lala service for the past 4 months and I’ve got to say, while it does make it possible for me to stream lots of music for free, since I’ve been an active member of this service I know for a fact I’ve BOUGHT more music (both downloaded mp3s and CDs purchased in stores) in the past 4 months than I had in the previous 4 YEARS.
Music streaming is marketing.
“suggesting that a listener should pay even a fraction of that each month to listen to music online, and people immediately start blowing their tops”–I disagree. Not all listeners believe they should be able to listen as much as they want for free. Most would probably consider paying reasonable costs, but not necessarily what the labels consider reasonable.
Same here. I’ve been buying albums left and right from Lala, whereas previously I probably bought 5 or less per year.
Lala has an awesome model. The one free listen is huge. Pair that with decent suggestions and some social features, and you’ve got a winner. I hope Lala is around for a very long time.
The only ones making real money from this whole scenario are the ISPs, who must be laughing at the extra bandwidth being gobbled by Spotify and co. Lots of money is being made on streaming, and it is going straight from users’ bank accounts to the ISPs entirely skipping the labels, artists and songwriters.
I don’t envy the position that sites like Pandora and imeem are in. Getting a fair shake with the major labels is tough.
However, there is plenty of room to do interesting things without touching music tainted by the Big 4 labels. We are doing it with Mugasha in regards to electronic dance music and TheSixtyOne is doing it with indie music. The niche is your friend, the major labels are probably not.
Also, I think it’s time to realize that basing your business model on advertising isn’t working. These services are going to need to start getting creative with their business models and start making money on things people want and not things people hate (ads).
who cares — let’s contribute to the fall — head over to myspace, give neko case a listen, and subtract another .4 from the bottom line
Streaming sites need to wake up and start selling ads. We listen to and accept them just fine on radio stations, and that’s a passive relationship in that we can’t customize our experience. With streaming sites, we can customize to our hearts content. There are many clever ways ads can be built into that experience that are not disruptive yet still visible. Pandora has recently been introducing ads and I don’t mind a bit if it helps them continue to stay in business.
google announced to do exactly that, they will repurpose their audio ad division developed for radion stations. spotify has already a ad based free on demand streaming service out in the UK and other parts of europe.
Dailymotion.com shows vids with short ads attached.
I’m not sure how Lala.com works in terms of royalties, but since they only allow one free stream per user per song, I would guess their royalty obligations are pretty low. Meanwhile they’ve worked out what appears to be a fantastic licensing deal for their “web albums” and also offer matching or better prices on most MP3 albums compared to Amazon and iTunes. That sounds to me like a winning strategy, any idea how well they’re doing?
*speaking as a fan that is in no way affiliated with the service other than as a user
Well here in France there is Deezer.com that is popular. They pay % of ads revenues (which is not much I reckon). So they will put ads in albums and offer paid subscription.
Other than sending a track to a friend or discover new albums I must say that streaming may not be a solution in the long run because I think this is just another step in the degrading sound quality and desecration of good musics and talented artists.
No wonder many excellent music studios are closing and that sound engineers are suffering ..
“They pay % of ads revenues”
They pay also for every stream… so their situation is about the same as their competitors.
Deezer with SACEM :
- 8% of income
- 700€ guaranteed for each millions listening = 0,0007 per song
http://eco.rue8...#comment-756132
“0,0007 per song”
That’s being greedy?
That’s only on publishing… you don’t cover the big four money with that!
All I’ll say is that if Last.fm ever shuts down, I hope they let me (somehow) export all that listening data from my account over the past four years and counting.
Something like this will never work until either the labels stop being greedy thieves or the public starts to be willing to pay for online services.
I think it is impressive that the labels are doing as well as they are. And I think Arrington oversimplifies this whole issue. Music streams are software that corporations hold copyright to. I think they are very smart to not just trust that it will all work out by streaming for cheap.
The record labels are doing well?
Um, that’s not what I’ve been hearing.
I think there’s a real analogy to be made between the way labels are handling their “music platform” vs. the way Facebook and Twitter are only taxing after partners find a revenue model.
Of course, they aren’t trading away profits…
Can anyone describe the Imeem usership base for me? Does it overlap with social networking sites MySpace and Facebook or content sharing site YouTube at all, or is it completely different?
Why have last.fm and pandora (and now, apparently, spotified) received more publicity than imeem in this “first era” of on-line streaming, in spite of the fact that imeem has best apps, has continually ranked higher as social site and as streaming site and appears to have the most devoted following?
These questions have puzzled me for some time.
I gave up the notion of media ownership years ago – buying plastic discs or bits – and now have annual subscriptions to Rhapsody.com and Pandora. For the Rhapsody.com service, I pay just about $10 a month to stream as many of their ~ 5 million tracks as I like.
On a day when I don’t have too much ‘thinky’ work to do, I might listen to 50 tracks of music. Assuming Rhapsody.com had negotiated the best possible rate – 0.04/track – and that I listen to 50 tracks a day for 20 days each month.
50 tracks * $0.04/track = $2.00/day
20 heavy listening days * $2.00/day = $40/month
And I pay about $10/month for that. Those are not numbers I would want to base a business plan on.
Fortunes may be lost and found, and the record labels may live or die, but I find it difficult to believe that streaming and downloading aren’t here to stay, in one form or another…
Now I’m starting to feel guilty for all those days I’ve walked away from my computer while it was still streaming Last.fm.
Thank you for covering this issue, when the CRB “deal” was reached last month, I felt the same way, but even then, some folks didn’t get it. Thank you for helping to shed some light on the problem.
[See: http://www.busi...et-radio-2009-2 ]
Joe
There’s another business model: Startups distributing the music of independent musicians, using non-exclusive agreements, and giving the majority of the income directly to the artists as we’re doing at http://ManyMilesMusic.com.
If the income is 0.0007 per song, that won’t help much.
PS: Looks like a nice label you’re running, by the way.
I believe Its a serious error for anyone to look for a ’solution’ to the recording industry broken business model. Instead look at it as a ‘correction’. At the beginning advancement in technology led to media consolidation where the major label system capitalized off of scarcity and control of content and now new advancement in technology has ended the monopoly and put the power back in the hands of the consumer. More importantly the PROSUMER as the line between artist and fan has been blurred nearly beyond recognition and its right in this grey area where the feasible business model will be built.
I think Last.fm and Pandora will make it, and Youtube while not considered a music site, has a lot of music videos on it that millions of people view every day. Myspace will be doing music for a while, but that site is such a mess I’m not even sure what that means. iTunes is huge and not going anywhere.
So those few will be around but most of the rest will go. The major labels run the show, and coming from that business, I can say that it is still run by old guys who were selling albums in the 70’s. They are old school, and do not want the internet interfering with their business.
Why has no one mentioned that ridiculous price difference between streaming music and terrestrial radio stations royalty rates? Even for streams that don’t have the skip feature, they pay many times more than terrestrial radio does.
http://www.boyc...m/article/21607
Do you people who are saying that the online startups are whining really think this is fair??? This isn’t about not wanting to pay anything. This is about paying a fair rate.