Streaming Music: A 5 Horse Race?
***UPDATE: Google To Launch Music-Streaming Service (Market Watch, May 14, 2013). This could be a game-changer, as Google is a major infrastructure challenger to Apple. Also missing from my analysis below is Amazon, who could also become a major player, and does have a cloud-based music storage system today.
On the eve of the Future of Music Coalition’s Summit, where music licensing is prominent on the agenda, it appears that the horses in the streaming music race are finally lining up. Now, I could be totally off base on this, I’m just an indie musician with a software background and not a lot of insight into the behind-the-scenes happenings, but I think it’s shaping up to be an interesting race. I believe there are some silent bettors, the major music labels and Google, and it’s not really clear (yet) whom exactly is betting on whom. These players are listed in no particular order:
First, we have the apparent favorite, Spotify (16 million active users, 4 million paying, subscriber-revenue-driven). They’re about to close another $100 million round of investments led by Goldman Sachs, who knows a good investment when they see one, right? Why is Spotify such a good investment when they are bleeding green? Because it reportedly has licensing agreements with the major labels that guarantee it will make a 25% margin, while handing over 75% of its revenue to the labels. Some view this as a millstone around Spotify’s neck, but if Spotify can hold on long enough to dominate the market and achieve some kind of workable cost model, they become a utility: an entity with a guaranteed margin and guaranteed income.
Utilities are good investments. The only problem may come when investors realize they have to throw money at Spotify a lot longer than they think. But this revenue model makes the labels happy, so my guess is this is the primary horse they are backing. It’s just not clear Spotify can stay in the race long enough to win against major platform players with a longer term strategy and deeper pockets.
Next is Clear Channel’s IHeartRadio (10 million registered users, advertising-revenue-driven). Few seem to have noticed, but Clear Channel is quietly signing innovative licensing deals with labels like Taylor Swift’s Big Machine Label Group. Clear Channel knows better than anyone how the radio model (read: free streaming music content) works, and they have seen it moving online for a while. They are poised to leverage a business model they understand (free content supported by advertising), and existing business relationships in those areas. They also have deep pockets and an integrated live concert/merchandise/re-packaging model for leveraging music content, even if their streaming model is “not yet profitable.”
Pandora (55 million active users, advertising-revenue-driven) is now attempting to “level the playing field” (read: reduce their costs) by encouraging regulation called the Internet Fairness Radio Act. This legislation would lower the fees Pandora has to pay to the labels so they are in line with those for satellite radio. Somehow Google is involved in this, but I’m not really sure exactly how. If you read down in the comments on the Joey Flores Hypebot article above, David Lowry points out that Google is a prominent member of the CCIA (Computer and Communications Industry Alliance), a tech and big media alliance which is a key player behind the IFRA. It seems clear to me that if Google is not actually investing in Pandora, it certainly is not about to back Microsoft or Apple’s music service. Clear Channel is siding with Pandora on the IFRA. Pandora, like Spotify, is a startup, and it is not clear they can stay in the race with the current revenue/cost structure without being absorbed by one of the larger players. They like to play the underdog card, but they seem to have important allies.
Apple (400 million iTunes users, subscriber-revenue-driven) seems to have just realized recently that they should have negotiated streaming with the labels before Steve Jobs died, because apparently no one else at the company can manage to do it now. Or perhaps the Sony/EMI merger has created a monster that even Apple cannot tame, with a music catalog that gives them too much leverage. The market seems to be betting on Apple as the eventual winner in this race (Pandora stock dropped when Apple streaming rumors took off), given that music is the silver bullet of content that sells Apple hardware. They certainly have the deep pockets, and the strategic need to have a streaming music offering. And the labels know it.
The long odds are on Microsoft’s Xbox music service (70 million Xbox 360 consoles sold, subscriber-revenue-driven). (Full disclosure: I worked at Microsoft for 8 years in the 1990s.) There’s another Seattle player, Rhapsody (subscriber-revenue-driven), with 1 million paid US customers, and why Microsoft doesn’t just go ahead and buy Napster, I mean Rhapsody’s, subscribers is beyond me. At any rate, Microsoft could be the dark horse in the race, since their world domination plan just sounds so good on paper, but Redmond is not known for getting the technical execution right in version 1.0 of their software products. However, they have apparently succeeded in negotiating with the labels. I don’t personally know anyone who has purchased this service, although it is available now. Microsoft, like Google and Clear Channel, has very deep pockets. Clearly they want to sell more Windows Phones and Surface tablets, and Apple proved that music sells devices (particularly mobile devices).
So at last we are at the gate and it’s a five horse race, maybe soon to be a 4 horse race. There are other services (MOG and Rdio do not disclose their subscriber numbers), but none with the subscriber bases or deep pockets of those listed above. In the long run, I believe we will see the bigger players, Clear Channel, Microsoft, Apple and Google, battling it out, absorbing the other players in the process.
What do you think? Am I totally wrong? Way off base? Let me know!