This guest post on the struggles of online music services to reach profitability is written by Michael Robertson, the founder of music sites MP3.com and MP3Tunes, as well as a number of non-music related startups like Gizmo and Dealipedia. As one of the first entrepreneurs to battle the music labels over an online service, he has a unique perspective on the scene.
A new music service called Spotify has attracted millions of users in a short time with the enticing lure of listening to any common song on your computer free. Meanwhile, the digital music grandpa Napster has quietly launched a $5 service that offers unlimited streaming plus free MP3 files.
A closer examination reveals that Spotify has raised tens of millions of dollars, given equity to the record labels, is under constant attack by hackers, uses clever P2P technology, is accruing enormous per song royalty obligations and has the seemingly impossible task of figuring out how to generate enough money from a free ad model to satisfy the music companies.
Here’s my admittedly biased look at both companies:
Spotify:
Spotify is a music service to browse and play songs from a library of 3.5 million songs. Users can create custom playlists, culling out their favorite songs and the service generally gets high marks for an intuitive user interface and peppy performance. It is a free ad supported service in which users get banner ads and audio ads. There’s also a $13/month premium level which gives you an advertising free experience. The service is available in U.K., Sweden, Norway, Finland, France and Spain and the premium service is available in other EU territories. U.S. access is not available although company representatives are saying it is coming.
Technology:
Unlike other web based services like imeem and Last.fm, Spotify requires a downloadable client available for Mac or Win computers. When songs are requested they are delivered from either the Spotify central servers or other users computers using P2P (peer to peer). This means Spotify will use your bandwidth even when you’re not listening music to service their other customers. They have filed a patent for this technology. Music is delivered using the Ogg Vorbis q5 codec at around 160Kbps which sounds nice and is also speedy to load.
Background:
Spotify was founded in 2006 by serial entrepreneurs Daniel Ek (previous CTO at Stardoll, founder of Advertigo and Evertigo among others) and Martin Lorentzon (one of two co-founders of Tradedoubler, the largest European online affiliate advertising company). Spotify is based in Luxembourg to avoid taxes although most of its employees are in Sweden, the UK and Romania.
Finances:
While Spotify has been tight lipped about financing amounts and sources details have leaked out and they reveal that Spotify has raised millions from its wealthy founders and tens of millions from venture capitalists. Similar to imeem, Myspace Music and Lala, the major labels own part of Spotify.
| Financing for Webcasting/On-demand Digitial Music Companies | |
| Amount |
|
| Myspace Music |
$45,000,000 |
| Pandora |
|
| Spotify | $28,000,000 |
| Slacker | $65,000,000 |
Security:
Since Spotify has 3.5 million songs it is an obvious target for hackers. There’s a battle pitting Spotify programmers against net hackers trying to decipher how the technology works. Code within the Windows version attempts to block debuggers so the Mac version is a more easy target. Several software programs have been released which download tracks from Spotify such as spotifysave and despotify. Spotify has is available in a limited number of countries, but its been well documented that the only check is on the initial signup page and its trivial to bypass. Users can easily bypass this by going to http://www.defilter.co.uk/ and entering the signup URL: https://www.spotify.com/en/get-started/ A UK mailing code like W1T 3EF is required but users simply look those up athttp://www.postcodesearch.org.uk/
Economics:
The Spotify CEO boasted they have spent just £5,000 ($10,000) in total marketing the Spotify service in the UK and attracted 1 million users doing 10 million streams making it the cheapest and most effective service launch since Google. Missing from the calculation is the royalty obligation. Like all webcasters, Spotify must pay a per song fee for every song they play. These range from 1 cent per play (for interactive playback) to 0.2 cents (radio experience). While the rates seem modest they add up quickly. 10 million streams per day translates to $100,000 per day, $30mm/month and $360 million annually in royalties – just for the UK operation. Royalty rates are similar in other countries and its Spotify claims 1mm users from Sweden as well. Advertising from audio and banner ads cannot generate even a sizable fraction of these royalty obligation.
Spotify is a on quest to get paid monthly subscribers and has launched a $13/month service. They join a crowded field of competitors including Napster who recently relaunched their subscription service moving from $12.95 down to $5/month. The Napster service includes unlimited streaming like Spotify but also 5 free MP3s to add to your permanent collection each month.
Napster:
Literally weeks before the economic meltdown Napster was sold to electronics retailing giant Best Buy. Best Buy’s plan is to cost effectively market the Napster service to their large customer base. To achieve this, Napster had to move away from their limited Microsoft orphaned DRM service to a MP3 service. This would allow the service to work with all devices sold by the big box retailer. Recently, they announced a $5/month service where you can stream any song – much like Spotify – but you also get 5 free MP3s per month to add to your personal collection. Since most newer MP3s are $1.29 this is a cost savings in itself and the unlimited free streaming is a bonus. Users paying for an annual service can immediately download 60 tracks plus a bonus 10 making the cost of tracks 85 cents.
Like AmazonMP3 and itunes, Napster has a rich uncle to lean on to not only promote their service, but add other business segments to rationalize a low or no-margin digital music business. Apple sells ipods, Amazon sells other stuff while you’re shopping for MP3s and Best Buy can send you home with electronic gear they profit from selling. Using this financial flexibility Napster is able to offer an industry leading price point for a full streaming and MP3 service. This renders other services seem overly expensive and uncompetitive.
| Premium Music Services (Ad Free) | ||||||
| Monthly |
Streaming |
Devices |
Mobile |
Region |
Other |
|
| Napster |
$5.00 |
Interactive |
Net radios |
- |
US, expected in UK, Germany shortly |
Includes 5 MP3s/month |
| Pandora |
$3.00 |
Radio |
- |
iphone, Blackberry, J2ME version for other phones |
US |
Huge userbase, but struggling to get per stream royalty rates changed in Congress. |
| Rhapsody |
$12.95 |
Interactive |
Net radios |
- |
US |
Windows Only |
| Sirius |
$12.95 |
Radio |
Car radios |
- |
US, Canada |
iphone app promised Price raising $1.95/month end of July |
| Spotify | $13.00 |
Interactive |
- |
- |
EU, Scandinavia, US promised |
Android app previewed, but not released |
| Slacker | $3.99 |
Radio |
Net radios |
iphone, Blackberry |
US |
#1 music app on Blackberry. Rumored to be considering a MP3 store. |
Future
Users have largely rejected paying a monthly fee for music subscriptions. The masses have ignored subscription services like Napster and Rhapsody which offer similar catalogs, some music portability and limited device support. Cheaper radio services like early paid Pandora have also been failures (although a desperate Pandora is bringing it back to try again). There’s little reason to believe that customers are willing to pay $13/month to stream music mostly to their PC. (Even Pandora estimates only 3% will pay a monthly fee.) This leaves Spotify with strictly an advertising-based business. Ad rates cannot generate revenues sufficient to pay even the mandated royalty rates much less all the costs of running a high tech business. Publicly Spotify is promising a US launch and mobile clients (iphone andAndroid) however this completely ignores the incongruity of the underlying economics. Current royalty rates are too expensive by 10-100x for an advertising business to work. This is why Youtube dropped music videos in the UK. Getting more users will not improve the upside-down economics.
Napster’s new service has lowered the bar dramatically to a modest $5/month for unlimited streaming and personal MP3 collecting. It’s not clear that Napster can generate a profit from this service, but as a tiny division of Best Buy it’s not clear they are required to. What is clear is the $5 price point means financial pressure on standalone digital music companies. The music selling and radio business is increasingly being commoditized. Profits are being squeezed to the point of unsustainability. This spells pending doom for imeem, Pandora, Myspace Music, Slacker and the newest entrant Spotify unless there is an industry-upheaving royalty rate change.
I just signed up for Napster’s $5 and its not bad and not great. The GUI is not so cool. But I like that I can make and choose individual songs. I will be happy if they make an iphone app!
BTW- Who actually buys MP3 songs these days? Streaming is so much more easy.
FYI, Spotify Premium streams at ~320kbit/s.
This post wreaks of jealousy over the recent buzz and rumored valuation Spotify has gotten.
1) Taking the time to point out how a non-UK resident would go about signing up?
2) Missing the bit-rate offered to premium subscribers.
3) Dismissing advertising revenue w/o noting Spotify is doing both audio and visual adverts (not sure if this has been tried before). Not even justifying the statement with some simple math (given Robertson’s obvious industry knowledge) is ridiculous.
4) Trying to play up the P2P piece of the technology in order to discourage (ZOMG! They use YOUR bandwidth!).
This post is full of silliness and a bit of FUD.
Agreed.
That said, I have a ton of respect for Robertson… my question back to him is: So, what’s the answer?
Clearly you’ve spent a lot of time and energy looking for the right model…
Ads won’t work. Got it. What will? $0.99 per song?
1> 2> BFD. who gives a crap. They’ll be lucky to get a 2% conversion rate.
3> advertising?! come back when you know what you’re talking about
4> BFD. bandwidth is cheap compare to royalties
I may not agree with the dude on everything, but the dude knows the business a lot more than you.
You seem to have mistaken my comment as a defense of Spotify. It is not. It is, however, a comment on the obvious bias of the author, an incomplete competitive analysis (i.e. missing facts about Spotify), and unsupported claims (i.e missing facts about online music bus. metrics). I didn’t write a post and state my credentials implying industry-specific knowledge without any direct acknowledgment for conflict of interest, I wrote a comment about the lack of substance.
As a ’serial entrepreneur’ writing on TC (remember TC50?), I think it’s absurd Robertson would insist the large corporation is the better bet compared to a startup hungry for user satisfaction and wouldn’t expect some criticism.
was
> This post wreaks of jealousy over the recent buzz and rumored valuation Spotify has gotten.
and
> This post is full of silliness and a bit of FUD.
that gave me the impression that you’re positioning your comment as a defense of Spotify.
otherwise I agree with your assessment.
I agree with coldbrew. This was a strange piece of writing.
A fact that Robertson seems to have missed is that the mobile app will require a Spotify premium subscription.
Another benefit with Spotify premium is free travels all over the world. For example, as a Swede I can visit Japan and use Spotify with the same quality.
Comments off?
Spotify, another epic fail in the continuous string of epic fails known as internet radio, and will continue to fail until somebody realizes that internet radio is a litigation business not a “tech” or “media” business.
Lex:
If you think Spotify is internet radio you are seriously misinformed. You are free to comment but it´s very important to get the facts before you speak. Using sentences “like another epic fail in the continuous string of epic fails” does not exactly exude an aura of intelligence. I gather that you are young and not properly schooled in the art of language, so you are forgiven. Lack of linguistic qualities aside you should do your best to inform yourself on the difference between radio and on demand streaming. You know what streaming is right?
> I gather that you are young and not properly schooled in the art of language, so you are forgiven.
hahaha… jaded, maybe. Young and unschooled. BS.
the difference of interactive, non-interactive, and on-demand in “internet radio” is minor and only in terms of listener experience. In terms of royalties, Spotify is under the same gun as everyone else in the “internet radio” business.
Until Spotify gets a better DSRP deal than everyone else in the business, it’s still swirling into the deadpool.
as far as language style… welcome to the interweb, Jack.
I’m starting to believe you are the author of the article.
At any rate, using jargon like “DSRP” reveals you to be highly involved at some point, so you are highly biased, and probably aren’t mentally positioned to be part of the org that strikes the next blow to the music industry that someone like Spotify could be. You stated you are “jaded” which is probably accurate.
nah.. I’m sure Robertson has enough integrity to own up to his own comments.
I’ll own up to being wrong if Spotify actually pulls off a great deal with the music industry. But the way I see it, the only “blow” they’re in position of striking is on their hands and knees.
me? I’m a bystander having a bit of fun.
Lex:
Thanks for welcoming me to the Interwebs. I found out about it last week and got me an old 28.8Kbs modem and now
I´m just racing along the Information Superhighway at mindblowing speed. Bits bytes are flying through my handy Netscape vessel and I´m learning new things everyday.
Yesterday I found an image depicting a woman with almost no clothes. That “rocked” as the young ones say.
Regarding innocent bystanders. Didn´t Bruce Willis once say that in war and music streaming there are no innocent bystanders..? I may be mistaken….well..hmm
I didn’t say I was innocent, Jack. I simply mentioned that I was a bystander in this particular argument. Although the topic has impact on me personally, the impact is not direct.
age was an assumption on your part, not mine. I would have a lot more respect toward what you had to say if you targetted my arguments instead what assumed is my character.
28.8k modem? come on, at least go back to 1200 baud or 300 baud to impress me.
Lex wrote:
“I would have a lot more respect toward what you had to say if you targetted my arguments instead what you assumed is my character”
Look how beatiful I made you talk! I knew it, didnt I? Within every commenter lurks a poet. I´m not being ironic, that was a true sentence. Regarding arguments I guess its happening further down the comment thread…
a valid point starting “dude” is still a valid point. I do find a more “casual” style rather useful. I’m barely passable in the grammatical sense, let alone laying claim any “poetic” tendencies.
Hope you don’t take any offense in my comments, Jack. I try to approach this topic with a little humor since there’s so little sense on how all this works.
Lex, Poopie D:
I don´t take offence! The first “you are young and dont know how to use langaue properly” comment was mostly inteneded to as humour as well as the “thanks for welcoming to the Interwebs” one..English is far from my first language (and im in my twenties..) and I like to play around a bit, I was susprised you didnt get angrier by my first comment…I prefer a casual style, I dont care too much how people write but sometimes you need to play with the format a bit I mean, most techcomments are full of “thats total BS you don´t know anything, Epic fail, been there done that,” and all that. Most commenters on techblogs don´t care what they write anyway, or read other comments.. but if someone actually tries to say something.. well thats a different discussion
Poopie D: Admitting that Lex mopped the floor with my ass. haha Well I would never admit that even if it was right. Not on a techblog. That would be the lamest thing. No mopping with asses ever occur on techblogs. It´s not the right forum or format. Regarding Robertson he is a nice guy (as can be seen in the picture).
> (and im in my twenties..)
and you’re chiding me about “my age”?!
dang diaper-wearing whippersnappers
This is my way of thinking, the author has first hand experience in this industry so I dont think he should be dismissed. Spotify is a great product but with current industry dynamics not financlly viable unless it is heavily subsidised!
I’m absolutely loving Spotify and I hope they aren’t going anywhere anytime soon because their technology is fantastic. I can type in pretty much any popular song (over the past few decades) and a few seconds later it can be playing loud and clear.
Fantastic app, and I’ll be excited when they officially support Australia. Had to trick Spotify to get it to work down here.
Rough around the edges, this. Seriously, edit.
sayeth, Yoda.
i was a little irritated when i saw another Spotify headliner, but great article indeed.
Thanks to Robertson for playing the Devil’s advocate role and adding a little counterbalance to the hype.
these guys have a long road ahead. best of luck.
Dealpedia or Dealipedia?
I’ve also got to agree substantially with M. Robertson on this issue. (I don’t agree with his decision to give user unlimited space with MP3Tunes only to rip it out from under his users.)
Regardless of visual and audio ads, people still want that anywhere any time experience. Most users are currently satisfied with streaming radio like Pandora or Last.fm on their PCs and their library when internet/computer is not available. Pandora and Slacker have upped the ante by putting their product on the major phones, with Slacker going 1 more with cache-able stations. This is a great UX, but you have to ask how sustainable? Until internet radio royalties go down, it’s hard to see long term futures for these services.
Napster bridges the gap between radio and portability (ie having a complete music library) with their subscription service. If they innovate into iPhone, Blackberry, WinMo, Android, etc arena, Napster could actually rise again…hehe.
Personally, I will wait until the service getting the kinks out but I’m seriously considering signing up…which is a big deal considering how cheap I am.
I am happy that Robertson made his fortune early in the online music era, because again… anything dealing with music startups is a waste of time and will fail.
I personally stopped dealing with a ton of music industry friends and do not deal with any major music industry people.
Since they decided to make Shawn Fanning the bad guy and instead of a billionaire (as he SHOULD be for what he started), and gave all the kudos to Apple who only screwed them over in the end… yeah music is doomed due to the bad dirt they threw in ‘99.
TV and Film is the only ticket moving forward.
I think Michael’s main point is a good one: the only ones who will survive this game are the ones backed by deep pockets that can afford to lose money on a music service. Surprised not to hear Zune mentioned. Or that Last.fm bridged this gap somewhat by selling out to CBS.
Zune?, ZUNE? Is that thing still around? Have never even seen one let alone no anyone who actually own one of the things…
> This is a great UX, but you have to ask how sustainable? Until internet radio royalties go down, it’s hard to see long term futures for these services.
I’m still waiting for Tom Conrad to tell me how the pureplay deal “saves” Pandora. Capping hours and switching to subscription?
Even if Pandora qualifies for the 25% gross minimum, they’ll still have pay the CRB rate for the subscription listeners on top of it. 50% on just performance royalties? if you’re unbelievably lucky.
Better spend that cash from Greylock on beer and hookers while you can buddy.
Who thought it was a great idea shoving Tim out there to pitch for the PRA anyways? thought you guys needed some bad press?
Ex-Pandora? Evidently, you have an agenda besides debate.
nope. here purely for my amusement.
Hey Lex,
> I’m still waiting for Tom Conrad to tell me how the pureplay deal “saves” Pandora.
Thanks to the pure play settlement (http://bit.ly/K6Wpo), webcasters will pay $0.00093 per song “performance” in 2009.
The pure play deal replaces the 2006 CRB ruling (http://bit.ly/2KEeDs) which would have required $0.0018 per song in 2009.
The pure play deal reduces the SoundExchange 2009 royalty by 48%.
This 48% reduction in the core costs of licensing very literally saves all of Internet radio.
Just to clarify, Internet radio licensing terms (which only apply to radio-style services) are irrelevant when talking about the licensing terms for on-demand streaming services like MySpace Music, iMeem, Rhapsody and Spotify. They play music “on demand” and as a result they have to directly negotiate licenses one record label at a time.
Tom
That’s why I like you, Tom. I always respect the way you engaged the community personally, which is why I’m so disappointed to see the position that Pandora has taken in respect to the pureplay deal.
As you noted, the 48% reduction is only in regards to 2009. The rates continues its march up through to 2015 to $0.0014, during which time you still have to pay CRB rates for the subscription revenues. I’m sure you know as well as anyone that these deals would be used most likely justify SoundExchange to present for the next CRB round double what the current CRB rates are.
The pureplay deal saves Pandora TODAY and perhaps for the short term future, as the investment round Pandora raised is probably depdendent on the deal being reached. But in effect, the pureplay deal will be the bludgeon that crushes internet radio once and for all until the music labels pushes out its own version of hulu.
I can understand Pandora looking out for its own interests, but positioning the deal as “saving all of internet radio” is not only ludicrous, but disingenuous. I would have understand if the position had been “It’s a deal that nobody was happy with but it buys us more time”, but you just had to be the Neville Chamberlain.
Any case, I’ll take the time to apologize for my taunting, but it grows out of disappointment in whom I thought was a good guy in the industry.
Sorry if I wandered into a bit of hyperbole — it’s just that I’m proud of the part that our listeners, Pandora, and the rest of the webcasting community played in reaching a revised set of rates under pretty much the worst possible circumstances. At Pandora we really were driven by a desire to get to a set of rates that would help secure not just the future of Pandora, but of the entire category. I personally believe that IP-delivered radio will in time become *the* form of radio delivery and that ecosystem will consist of lots of companies streaming music radio programming. Helping the industry get to a set of survivable rates is a key part of that.
I do think the new rates make a fundamental difference in terms of the sustainability of the Internet radio model. No argument though that the digital music business in general is a very tricky one and that careful thought about royalty rates should be the cornerstone of any Internet music business plan.
In terms of what happens in the out years, it’s true that the rates ramps up materially. Under the pureplay deal the 2015 rate is $0.0014/song. Under the NAB deal (http://bit.ly/JET7e), the 2015 rate is $0.0025/song. So the pureplay deal still represents a 44% discount to the NAB rate.
It’s also true that the deal runs through 2015 so any notion that Internet radio’s future is secured beyond 2015 is contingent on a belief that rational minds will prevail in the 2015 CRB proceedings. While you may bemoan the precedent set by the Pureplay agreement, it’s important I think to examine it in the context of the NAB settlement which sets a much higher royalty bar. If anything the Pureplay deal in part serves to temper that precedent a bit.
It’s also true that the Pureplay deal represents big compromises on both sides and that even the revised royalties are very significant. At Pandora we think we have a model that will work. It’s now on us — and the rest of the webcasting industry — to prove that out.
I appreciate the thoughtful response, Tom.
I’m sure you’re more than aware of the type of position SoundExchange taken with the industry up to now, and “reasonable” would be the last word that I would associate with how the deals are “negotiated”.
The back of the envelope numbers I’m seeing are stark. I’m hoping you’re seeing something that I haven’t. Personally, I hope I’m wrong and Pandora will prosper, but what I’m seeing is another shakeout that’ll make the last one look puny in comparison.
We only have some much good will with the internet radio user community, and with that announcement, it’s effectively spent. There’s no “Oops, we mucked up the mathematics so we’ll need you to make noises again” campaign.
Anyways, time will tell and all we can do is see how it plays out. I do hope the best for you and Pandora. Thanks for the gracious response, you’re a bigger man than I on that.
Disappointingly biased article, although I can understand that TC welcomes some balancing arguments to the current Spotify hype
I thought it was remarkable how a $5/month pricepoint was considered disruptive given the competing $0/month offer, and how the broad catalog (which must be considered obligatory for any streaming service with ambitions for mass appeal) of Spotify only constituted a disadvantageous security risk.
I also think that it is ridiculous to say that Napster can tolerate large red numbers because of its mother. Best Buy is in a business that well established players are exiting…
I am also biased beyond any objective analysis, since I (after an extended period of scepticism) am a passionate user. The value proposition of Spotify is not comparable to any current or previous alternative and it seems reasonable that they are closest to find a working business model for the currently dysfunctional music industry.
The fact that the major labels own part of Spotify seems to sudjest they are partly imune from litigation.
The P2P side of there service can be delivered at almost 99.9% bandwith cost savings, it’s not as if they have to add supernodes to the stream to help throughput, it’s not exactly HD.
The post albeit bias touches on good points in the monetization area, but if you have music on the go wherever you are free with ads, then it’s a no brainer for the consumer.
Looks as if the labels will gangster the competition by increasing the royalties, push the competition out then monetize the shit out of Spotify.
Like the way P2P is being adopted by the major labels and without a sqweek from the ISP’s.
ahem. Imeem.
anyways, just so I don’t sound completely negative..
what works now in the music industry?
Apple (for now) – make money on hardware, screw music.
American Idol – F’ you puny labels. we break artists.
Activision & Harmonix – see both above.
everybody else, just F’ked, including the labels.
Like your focus Lex. Good Morning
just frustrated with the position music labels have taken.
It’s like getting a loan from a bank proverbially. The only way to succeed is letting labels know you don’t need them.
The web client of Rhapsody works on Mac, by the way.
And if you have a PC and you’re not using Rhapsody with a .wma music converter, you’re paying way too much for music.
I’ve been waiting for years for the Rhapsody to close up shop, but it’s been a decade and they’re still going strong. I imagine they’ve built a nice niche of super loyal customers.
This article seems a bit out of touch. The criticisms aimed at Spotify dont touch base with me, as a user, whatsoever.
The uptake of Spotify here in the UK has been staggering.
There were about 1000 more interesting things to mention here but our humble narrator has skimmed them all. Weird.
“Napster was sold to electronics retailing giant Napster”
Awesomeness.
Need extra help or just another set of eyes?Let http://www.thessayist.com be your researcher – we can help you!
I use spotify. £9.99 a month. Most of the music I like (Not much Hardtechno/Schranz But I can buy that at Beatport).
The big plus is I don’t have to use space to store music. Who needs downloads when you can stream anytime you like. For any UK users, it also works very well over the mobile broadband services phone companies are offering.
Finally, there is also a higher streaming rate for paid subscribers.
Napster? They can get stuffed. For years they ignored Mac users. Now it’s my turn to play…
Cheers – Ish
If people in the music industry does math as badly as Robertson, no wonder things have fucked up for them…
100k x 365 = 36.5mm, not 360mm… Quite the difference, eh?
You are not very smart are you… “Spotify service in the UK and attracted 1 million users doing 10 million streams”
my bad…
I agree that the download market is down but i still believe that people want to at least own the music in some way shape or form. Not everyone has the technology to play streamed music through their hifi etc. I think the most important thing is that the musicians are getting what they deserve for the music they are creating. We need to focus on all models that generate revenue for the rights owners not programmes that steal it! I saw an article about http://www.comparedownload.com that has launched in the UK recently, It is service like them and spotify and the other models that need to be written about.
Well that proxy does not work for the signup, I just tried it from SA.
Strange that a “competitor” is allowed to write a guest post on TechCrunch and is filling the text with links on how to bypass the Spotify security controls????
6 links in 1 text segment on how to bypass Spotify security? Not nice at all, guys…
“While the rates seem modest they add up quickly. 10 million streams per day translates to $100,000 per day, $30mm/month and $360 million annually in royalties – just for the UK operation.”
Is it me, or is that just bad math.
Sirius already has an iPhone App that streams their satellite radio to customers.
Shawn Fanning RULES!!! Napster introduced me to online music circa 1999 in the P2P file sharing heyday. I don’t think I could ever pay subscription fees for music when there are a myriad of other ways to procure tracks for free on the web. That’s just me, but I’m sure a large contingent of my generation feel the same.
“Royalty rates are similar in other countries and its Spotify claims 1mm users from Sweden as well. Advertising from audio and banner ads cannot generate even a sizable fraction of these royalty obligation.”
It’s one thing to point out a grammatical mistake, but for a dude to spin most of his critique around a massive math fail, it seems worth pointing out. Yearly royalties are in the 36 million dollar range, not 360 million.
I would rather pay more per track for 320 kbps and get to own the file, without DRM limitations than pay a small monthly fee to stream music to my PC.
Why limit it to being tied to your desk? iPhone and Android apps make it portable but 3g streaming whilst great technology is hardly awe inspiring quality!
Huh? I use EDGE streaming (I think the tracks come in at 128 kbps) on my original iPhone using Slacker and I kid you not, it sounds almost as good as a CD. It’s so close that I don’t think anyone would notice in a blind test.
With a 320 kbps streaming service like Spotify possible on 3G, CDs and even syncing tracks to your portable player will be a thing of the past. Why would anyone EVER buy a CD when you can get all music, anywhere, at any time?
He’s right, but for the wrong reasons. It’s just a simple matter of economics. In the digital music space there are 2 non-scaleable costs: bandwidth and royalties. These costs create a ‘paradox of popularity’ where the more successful you get the faster you run out of money.
Spotify has been very smart to eliminate the bandwidth costs from the equation, however bandwidth is the lesser of the 2 problems by a big margin. Royalties are the end of the game for these services because even if enough revenue gets generated to become profitable, the labels have the right to change the economics almost at-will. So they can struggle and struggle, and as soon as they tip into success the rights-holders can swoop in and change the rules, and they will.
I have mad respect for what Spotify is attempting, but at the end of the day they’re fighting to make a success of an industry that the labels themselves are fighting much harder to make fail. And, as they actually ‘own’ the content, the labels will ultimately win.
This sounds great, I’ve been paying for Rhapsody every month, but I will check out Spotify right now.
Spotify obviously has a lot of obstacles ahead, many of them already mentioned, but I think that there are still a few arguments that there may be a place for Spotify even in the future:
*Continuing decline of CD-sales
*The price of bandwidth and storage gets cheaper every year
*As smartphones become mainstream the Spotify preimum offer gets more interesting
*The change in music consumer behaviur from an owning to an access model. The more users get used to having all the music in the world at their fingertips, the harder it is for them to reverse to older models where you pay for (or illegaly download) single songs or albums
*Uniting “streaming music consumers” (instead of scattering them accross a multitude of services with different levels of qualtity and revenue models). When people finally get to experience streaming done right, a lot of migration from other services will no doubt occur (in Europe it already has).
*Continuing growth of services like Facebook, Twitter and blogs which make good use of Spotifys sharing capabilities. In the countries where Spotify has established a steady userbase, the aforementioned services has benefited greatly.
*Smarter use of the huge amounts of metadata Spotify gathers every month resulting in more targeted and effective ads (and better music recommendation for that matter)
*Time. Spotify is a very very young company and establishing the trust of labels (will this generate any revenue?) advertisers (will anyone use this service?) and users (is it worth my time?) will take some time. When faith is established, streaming rates will perhaps be more open to negotiations, and the service can be expanded to more regions.
You are basically describing a monopoly…why should spotify have to be a monopoly for it to stand a chance.
A effective business model is one that a multitude of businesses can co-exist in the same sector. What happens when someone comes up with a service that is better than what spotify offers? should that mean the end of spotify.
What metadata does spotify get about the user apart from their musical taste that will allow them to deliver targeted ads with a cpm of $10?
Its easy to establish the ttrust of users..music streaming services all experience rapid growth as it is scarce on the internet..this is why ilike and imeem have many users and web radio like lastfm and pandora see great user adoption.
Imeem with its over 20 million users has failed to generate revenue for labels with all its users..do you think that spotifys product is so much better that it will lead to 50% of total users paying over $10 a month?
SJ:
Monopolies. I don´t think a true monopoly can exist in a free digital market. However in a market where default price is zero one service tend to dominate (often determined by quality of service). Since Internet serves many needs the model of one service per need is pretty convenient for regular users; Google=Search Facebook=friends, Hulu=TV,Skype=telephone, Blogger,Wordpress=blogging and perhaps Spotify=Music.
Does Spotify need to be a monopoly in order to work? Lets not forget that Spotify is a platform within an ecosystem. Like lifting out the musicplayer out of services like Myspace, Imeem or last.fm , pimping it up, and let it interact freely with more organic, niched and high-plasticity platforms like twitter, musicforums,facebook and the blogs. Myspace and other screams to the users “hey get over here!”, while any forum or blog can act as a music platform using Spotify as a dedicated musicplayer. This eases the creation of that sought after bridge between artist and fan that can be monetized in so many other ways than just streaming a load of songs;mechandise, tickets, select collector items,vinyl and other things (better targeted ads may help monetize that relationship). Monetizing relationships is what internet-marketing seems to be heading and Spotify can probably help with that in some ways..
In an world where an indieband make more money chatting with users and selling merch through Twitter than selling CD´s Spotify can act as the perfect intermediary.
A music service cannot simply rely only on offering users a quality-service for regular users, the artists must also benefit in a number of ways (more than just a lot of streaming of their songs). I think Spotify realizes this.
Metadata: Information of peoples music taste, whereabouts (age and gender is also suppllied in the registration process if I remenber correctly) should help effectivness I think. A lot of advertising within Spotify is for concerts, festivals, CDs, movies and entertainment. Music metadata can probably help a great deal in making those ads more local, fitting and relevant for each individual user. The average users gives Spotify an hour of attention a day, that creates two or three small ad breaks (not counting the banner ads) where advertisers can make a proposition to the users in a clean, uncluttered environment. I think there is value in that.
Popularity of music services is no new phenomenon . People simply love music and will head where it can be found. Thats why most service haven´t worked really hard to create supberb UI and users experience , hence the WOW!-effect of Spotify. On the desktop Spotify competes with Winamp,.Itunes and Windows Media Player. For most user Spotify has won that battle but to make that victory permanent people need to feel that the Spotify servers are as reliable as their own harddisk. They aren´t quite there yet but the longer Spotify exists without fucking up in a major way the closer they get to that elusive Gmailserver-Trust.
Its interesting to discuss music services but I think things get a little oversimplified sometimes.. and unbiased tc guest-writers would probably also help create a good discussion….
The same pro arguments have been used for internet radio year after year, Jack.
The only way to crank the CPM rate back up in the long term is a monopoly. The problem is creating this monopoly requires a ton of money and absolute support from the labels. The problem is that barrier to entry to the online music business is low, so there’a s procession of “fad” companies every year.
if you’re claiming negative bias on Robertson’s part, you’re providing nothing but positive bias arguments with no basis in reality. He may be saying something you don’t like to hear. If you actually listen, you might learn something.
Lex:
I think it would be easier if we distinguish between ondemand streaming and Internet radio. On demand streaming is more expensive, needs freemium model, and internet radio is cheaper and faces slightly different challenges.
My arguments may have been used before but think it´s more about timing. I don´t think a Spotifylike service can exist without flexible social networks of all kinds surrounding it and letting people “share the fun”.There has to be interaction with and between users, but on their terms and not locked in a colossus like Myspace, last.fm or maybe imeem. Internet radio is, as I said, slightly different and I dont know that much about it…
There are lot of “fad” companies every year, yes (Qtrax, Spiralfrog,Grooveshark,Project Playlist, Songza, Seeqpod etc) The labels create a bidding war between entrepreneurs and make a quick buck through up-front fees before the company fades away. But I dont think Spotify is anything like that. They started in 2006 and stayed in closed beta for two and half years (also due to building reltationships with the labels of course) before they released their service in invite-only version almost a year ago in Sweden. It´s still beta and it´s still invite only in all countries (five in total) except the UK. They have done everything they can to keep growth under control, so costs dont go racing up. They have always been very quiet and secretive and has never had a PR-unit. The buzz, like for Twitter, is completely user generated.
In only a few months they have 100 000 paying 10 euros a month to use the service. When the the highly anticipated mobile apps are relased you should probably expect that to rise to about a million.
Regarding uptake , if you look att Sweden (1 million,slightly more than 10 percent of the population uses spotify) and the UK (about 4 percent after a few months, will probably stabilize at around 10 percent of the population) In a year 10 of the american population will probably use it as well. 5-10 percent will use premium. It looks okay , but still no guarantees in this business of course.
And if all fails it´s still a fantastic service and its inspiring to see great minds put their effort into something (their team an exceptional collection of programming talent, the u-torrent creator being one). There really aren´t that many companies in the fickle internet-world where you can actually learn something by just watching (google, twitter, skype, apple are a few). Spotify is such a company and their contribution to the startup-world regardless of success is already substantial.
(regarding bias, it dont´really know or care if Robertson is biased, it was unnessescary of me to bring it up, so lets just forget it)
The merging of social networking and music is an obvious one, and one that everyone in the space is already trying to exploit (social.fm, myspace, Pandora, Last.fm, slacker, blah blah..)
many of the “internet radio” companies are already on the freemium model, so that’s nothing new. The royalty structure will crush even a non-interactive internet radio company, let alone a on-demand one.
SoundExchange is in the business to wring as much money out of the industry as possible. Sanity of the rates and survivability of the industry is not only not on the list of their concerns, the thinking is that crushing the industry is in the long run better for them. That’s the negotiation stance you should expect to receive. Once investor money that’s being sloshed around runs out, growth is done and so is the company.
Using your 10% of 10% formula, you end up with 3 Million paying US subscribers in 1 year… You’re describe a service that’s more popular than World of Warcraft, and will most likely generate $100M of profit each month!! Yea.. good luck.
I’d say at 50k paying US subscribers in the first year, you’d outdo every company ever in this space.
Personally, I hope Spotify do succeed. My advice, bring the most vicious team of lawyers and negotiators anywhere, and allocate a lot of cash for.. uh.. “extra negotiation incentives.”
Lex:
Lex wrote:
“The merging of social networking and music is an obvious one, and one that everyone in the space is already trying to exploit (social.fm, myspace, Pandora, Last.fm, slacker, blah blah..)”
I think a lot of the services you mention have tried to create those social networks themselves, and I´m not sure thats nescessary any more. I think it´s smarter to just make a very good musicplayer competing with Winamp and Itunes on the desktop (with advertising and sharing capabilites built in) and let the application interact freely with all the available social networks. I know many music-services solves this with widgets but I dont think a widget has the same power and user experience as a cleverly programmed standalone player (like Spotify).
Streaming rates and negotiations are no doubt tougher in the States than in Europe. But I then wonder why Pandora restricted themselves to the US a few years ago, presumably to save money. They should have just moved to Europe to fix it, or?
“$100M of profit each month!! Yea.. good luck” Lets make that three years. Then my calculations would be 100% realistic.. or somewhere in between 67-98% realistic. we´ll see how it plays out. But lets hope for the best.
Lex wrote:
“Personally, I hope Spotify do succeed. My advice, bring the most vicious team of lawyers and negotiators anywhere, and allocate a lot of cash for.. uh.. “extra negotiation incentives.”
Nice to hear. And regarding negotiations the Swedish mafia can make anything happen when they really want to. No seriously, it is going to be tough but I think there is a chance still.
Swedish Mafia? *LOL*
wait.. wait..
*LOL* *LOL* *LOL* *LOL* *LOL*
oh man.. that hurts..
They ride on moose and throw meatballs. Beware. Streaming rates don´t scare them.
here’s some pieces thrown in from another report, and i think what somebody mentioned earlier about the only thing mattering is that the artists earn a living from their trade, paying per download to me sounds like the best solution, all these other ass holes offering free streams of HQ music can burn i hope.
/*—————*/
The mainstream music industry is coming to recognize a price for digital songs that might be good enough to compete with the underground exchange of tunes on the Internet: free.
It is a new and abrupt acceptance in a business that has been desperate for a defense against the steady erosion in overall sales of recorded music. Last year likely saw another 10 percent decline, to $17.6 billion globally, a trade group estimates, compared with $38 billion in 1998.
“The pressure is totally toward free,” Ted Cohen, a music industry analyst and former EMI digital music executive, said at the annual Midem music business conference here.
Unlike their predecessors, the new field of “free” digital services may even have Top 40 tracks that consumers can download, keep and sometimes copy. The catch? For the most part, it is being exposed to advertising.
The latest Web site to join the ad-supported free-music bandwagon, Qtrax, had a coming-out party Sunday complete with rap stars and invitation-only concerts. Hyping itself as “the world’s first free and legal peer-to-peer music service,” Qtrax blanketed the start of the music market with posters, free flash drives and snappy slogans.
Multimedia
Video: Music industry gathers in Cannes
Qtrax says it is opening its virtual doors Monday with all of the major record labels signed on, adding that it has a selection of 25 million tracks. But that total comes from an estimate of all the tracks available on LimeWire and other peer-to-peer networks, not just commercial and licensed releases from the record companies, and so may not represent actual customer choice.
But in just the past seven months, all four of the major recording companies have agreed to allow DRM-free licensing of their catalogs of music. Earlier this month, Amazon MP3, the online retailer’s new music store, signed up Sony BMG’s unrestricted catalog, with individual tracks for sale at 89 cents each.
Last week, Last.fm, the British music site owned by CBS, announced that it would open up its service, which streams music to personal computers like a radio station, for free. At the same time, Yahoo let word out that it was in talks about an advertising-driven free service as well.
Great post, though I can’t judge the revenue figures you mentioned.
I’ve been using Spotify for a quite a while now and I really like it a lot. I think it’s one of the best tools available for listening to music and I really don’t know why I should download MP3s if I can just stream the whole thing instantly anytime.
The only thing that bothers me is that our mobile data plans still suck as they are volume limited. Mobile Spotify gets very expensive if you have a 250 MB data plan and pay 1 Euro for every additional 10 MB. So here comes the value proposition of MP3s in again.
13 Dollars per month for Spotify? That’s pretty high. It equals about 9 CDs per year and I usually hardly buy 2 CDs per year. So that needs to be about 4 times lower for me to jump on.
Otherwise: Great!
In the UK, Spotify charges (according to their rate card) £15 per 1000 impressions. In my experience, users can expect 30 seconds of adverts every 15 minutes. Assuming one impression fills the 30 second slot, Spotify makes £0.015 per 15 minutes.
If you assume that 5 songs play every 15 minutes, that equates to £0.003 in ad revenue per song (about 0.5c for our friends over the sea).
If each impression is actually only 15 seconds long, this doubles the revenue per song to 0.6 pence or 1 cent.
If the licence fees are 1 cent per song for “interative” playback, then Spotify are only going to break even on a 100% advertising model if they sell 100% of their ad inventory and have zero operating costs. Of course, if you bump up the length of an average track to around 4 minutes, it looks slightly more achievable, but still not a serious profit generator.
Looking at their premium option, you can choose to pay £10 per month to get rid of the adverts. That’s around $16.70, or 1670 songs. If you listen to more than 55 songs per day (around 3-3.5 hrs), then Spotify is loss-making, even on a zero cost-to-serve basis.
The point of this rather meandering post is that I don’t think the licence fee can be nearly as high as 1c per track. In reality, Spotify will have to pay pretty substantial bandwidth & server costs, not to mention the staff to deal with advertising, formatting new music, lawyers to write contracts with the record labels etc etc. Additionally, you’d have to be pretty optimistic to assume that you can sell 100% of your ad inventory at list price.
According to Per Sundin (Universal) and Mark Dennis (Sony), earnings from Spotify already exceed earnings from iTunes for Universal and Sony (in Sweden).
Read more at Sweden´s Dagens Industri
http://di.se/Ny...icleID%3D200988\347737%26sectionid%3Dundefined
Meh. D00dz this is epic fail plus. Just take what U want 4 FREE – save ur bucks for 420. Bidness model? Pirate bay FTW XD XD. Only SUCKAZ pay 4 music.
I still see streaming music as a great medium for musicians and producers. It is still the easiest and most cost effective way to distribute music globally.
The problem as mentioned in the article is about monetizing it so it benefits both the artists and the people running the operation.
Soundcloud is a great example of a music platform that works, however I have yet to see any financial figures for their operation.
Please check your facts. Having attempted to use defilter.co.uk to sign up to spotify from Ireland on numerous occasions (I just checked again there), IT DOES NOT WORK.
The fact that you assert this as if it were true when you clearly didn’t even bother taking the 10 seconds required to verify it doesn’t lend much credibility to your technical opinion. How can I believe anything else you say when the 1 thing I know about in your article turns out to be false?
FWIW I agree with those who commented that this is a very biased post. I don’t think trhis kind of thing belongs on TC imho.
I’ll just quote a paragraph from Greg Sandoval’s article on CNet this morning:
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And if you’re waiting for the Swedes, in the form of white-hot music service Spotify, to come charging over the hill to show us how to make the model work, you needn’t bother. Three industry sources told CNET News last week that the service–expected to debut in the United States next year–is struggling to convert users into paying customers. Just like others on this side of the Atlantic, Spotify hasn’t figured out how to make money.
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The article is titled “Plenty of proof that ads don’t support Web music”
Subscription models devalue music, and promotes excessive mass consumption. This is just the equivalent of *all-you-can-eat*
I don’t think people (I know) want another monthly bill to worry about.