Streaming and on-demand music services are starting to gain momentum and consumer acceptance. While still small, these music listening entities are growing quickly. But will these models benefit songwriters, publishers, artists and other copyright owners?
A decade ago when the iTunes store debuted, many physical retailers thought it inconsequential. But in 2011, for the first time, the RIAA reported that U.S. digital shipments overtook physical. Are streaming and on-demand destined to become the next big thing?
Downloads required a new learned behavior, but were relatively straightforward in terms of royalties and revenues, much like the physical world. But on the new streaming frontier—internet and satellite radio, plus jukebox-in-the-sky services—the accounting has become a lot more complicated. Some companies have adopted multiple tiers of services resulting in a jumble of licensing and royalty streams that remain confusing even to those directly involved. For example, Spotify which began as an on-demand service recently added a Pandora-like Internet radio service and rolled out mobile apps for IOS and Android during the past few months.
Pandora, was first to capitalize on the personalized Internet radio market segment and today claims a 6% share of the total radio market, ending June with almost 55 million active listeners and about three quarters of the entire internet radio listening audience. Its proprietary Music Genome Project, which drives its programming algorithms, claims to be “the most comprehensive analysis of music ever undertaken.” Listeners can rate each song as it plays and even elect to jump to the next song.
Jealously eyeing Pandora’s dominance however, are a number of smaller competitors which not surprisingly, continue to siphon away some of the giant’s marketshare. The latest entry, Songza.com, had its iPad app downloaded over 1.2 million times in early June 2012.
Ironically, this new breed of Internet music providers are grappling with some of the same programming challenges faced by their terrestrial ancestors. Not everyone wants to hand pick (on-demand) every song they hear. Many listeners prefer to have music chosen for them according to specific taste guidelines. Songza CEO Elias Roman recently told Billboard’s Glenn Peoples, “[Radio] doesn’t ask the consumer to buy, download, sync and manage files. On the Internet, just as with broadcast, all radio requires is pushing play.” (Next Digital Battleground, Billboard July 28, 2012.)
In addition to streaming services like Pandora and newbie Songza are others such as iHeartradio, Slacker, Spotify, rdio and Rhapsody. Some offer personalized channels while others aggregate existing channels. However, they are all studying revenues, costs and audience to try and position themselves in the best seat for future growth.
Sirius/XM satellite radio may be the closest model to terrestrial radio. Over 100 stations are programmed by its experienced radio professionals. The Satcaster’s model recently claimed 22.9 million subscribers as of August 2012 and revenue for the quarter passed $837 million. By way of comparison, Spotify had $250 million total annual worldwide revenue for 2011 of which it paid out about $174 million. Earlier this year Spotify publicly disclosed it has about 600k U.S. paid premium users, significantly less than satellite radio. Pandora generated $274 million in revenue for 2011.
Global streaming destination TuneIn reportedly has aggregated over 70,000 terrestrial stations from around the world and offers them up to an audience of 40 million monthly active listeners. “As we’ve seen with the television, movie and book markets, the digital radio space is headed into a period of disruptive change,” said Hemat Taneja, Managing Director at General Catalyst Partners, which recently was part of another round of TuneIn funding totaling $16 million. “The open-platform approach demonstrated by TuneIn uniquely positions the company to take advantage of this enormous market opportunity.”
So all three models, on-demand, personalized radio and broadcast radio seem to be drawing audiences, but how do their contributions translate for owners of intellectual property?
Show Me The Money
Most of these new services pay performance royalties to ASCAP, BMI and SESAC and to Sound Exchange which was appointed by the Copyright Royalty Board to collect statutory royalties from satellite radio (such as SIRIUS XM), Internet radio (like Pandora), cable TV music channels and similar platforms for streaming sound recordings. Others, such as Spotify, pay licensing fees directly to content owners.
According to the RIAA, 2011 streaming payments totaled $241 million and digital performance royalties (paid by Sound Exchange) totaled $292 million. The total of those payments however is only about 8% of the total value of the 2011 U.S. shipment statistics.
Peoples nicely wraps some of the U.S. 2011 numbers in a 6/27/12 Billboard article, saying, “Spotify ranks well behind iTunes, Amazon, a host of brick-and-mortar retailers (Walmart, Best Buy, Target)… Subscription revenue accounted for just 6% of digital revenue and 3% of total revenue in the U.S. in 2011. Those small numbers are certain to grow in 2012 and beyond, but nobody should confuse growth with absolute size.“
The underlying problem behind the above numbers is scale. The services need to grow larger to become profitable enterprises, but many of the royalty laws are fixed in such a way that they increase on a straight line with revenues making it very difficult to create that profitability. Pandora founder Tim Westergren summed the challenge nicely in a recent Huffington Post editorial where he also noted the uneven playing field that exists between terrestrial and Internet radio.
“The fast rising popularity of new alternatives such as cable, satellite and Internet radio have changed the very notion of what radio is,” says Westergren. “Unfortunately, the laws that govern radio royalty payments have not evolved at the same pace. Consider this: last year Pandora generated $274 million of gross revenue, and paid $136 million of performance royalties—approximately 50 percent of the total revenue. In the same year, SiriusXM, on revenues of $2.7B paid $205 million in royalties, or 7.5 percent. Radio delivered over cable television pays 15 percent of revenue. Radio delivered over the FM/AM spectrum pays nothing to performers.”
How you view the musical landscape largely depends upon where you sit in the theater of fame and fortune. Digital downloads certainly have not compensated for the loss in physical product whether measured by units or dollar value over the past decade. (According to the RIAA, U.S. sales revenues are down a full 50% since 1999.) Can these new streaming and on-demand music services turn those losses around?
Most likely to succeed they are going to need exponential growth and an improved royalty payment outlook. It also means they will need investors to keep them in business while they strive to tweak the perfect formula. In short there is still a long road ahead before these services can really begin to become a substantial part of the industry revenue food chain. For copyright owners wanting to maximize revenues, there is the challenge of assessing both the short and long term prospects of nurturing a new business model and analyzing the associated costs and benefits.