Spotify & Other Music Services - ALL You Need to Know

Last week I wrote about the premium OTT video business -- "all you need to know" about SVODs, AVODs, and virtual MVPDs. 

This week, my focus is on music. So, here is my "all you need to know" about the music streaming world -- its major players, their strengths, their vulnerabilities.

INTRODUCTION

Apple fundamentally changed the music game with iTunes and its $.99 digital downloads more than one decade ago. But, a funny thing happened in the past couple years. Digital downloads’ dominance in the music industry – which, by definition, also meant Apple dominance – gave rise to a newly dominant OTT streaming model. 

I anticipated this reality 15 years ago when I served as President & COO of Musicmatch, where we pioneered on demand streaming “back in the day” and were shockingly profitable doing it (Yahoo! ultimately acquired the company in 2004 for $160 million). I vividly recall virtually everyone in the music industry scoffing at the notion that consumers would ever leave their digital downloads behind for subscription streaming. Well, guess what, although it took a while, they did. The mass consumer market ultimately realized what we always believed – i.e., that “renting” and “owning” music makes no difference in a mobile-first, always-listening world with powerful wireless networks. 

In fact, so-called “renting” songs via on-demand subscriptions gives you “More Taste” (Apple Music claims access to nearly 40 million songs) and is “Less Filling” (generally $9.99 per month for all those tracks instead of iTunes’ $.99 per track rack rate or $20 for a single physical album). That’s a truly amazing value proposition when you think about it, which gets even better for Amazon Prime customers who pay only $7.99 month for that unlimited music listening privilege. 

Streaming revenues surpassed digital downloads for the first time in 2015, and now account for a rather astounding 62% of the U.S. music industry’s overall $6.7 billion in revenues (according to the Recording Industry Association of America’s (“RIAA”) mid-year 2017 report). Paid subscriptions alone are up an eye-popping 61% year-over-year. 2016 marked the U.S. music industry’s first period of double-digit growth in twenty years, and that double-digit growth extended into 2017. And, this transformational streaming trend is only expected to accelerate. Global music streaming revenues are expected to reach $9.1 billion in 2017 and, get this, Goldman Sachs expects them to more than triple and contribute $28 billion to a re-born $41 billion global music industry by 2030. 

So, much-maligned streaming looks like it may become the industry’s ultimate savior after all, also opening up other tantalizing revenue possibilities for artists in the process (I will explore this point more in a subsequent article). And, to think that even Steve Jobs – the innovator amongst all innovators -- once (in)famously said, “The subscription model of buying music is bankrupt” and couldn’t be saved even by “the Second Coming.”  

Well, guess what’s Coming in 1st place right now?

YouTube, Spotify, Pandora, Apple Music, Amazon Music Unlimited, Tidal, SoundCloud – these are the main cast of characters in the global music streaming wars that now dominate the music industry.  New players continuously enter the market, and many old ones leave.  Amazon Music Unlimited launched in October 2016 to disrupt the entire streaming game and its long-established $9.99 monthly subscription price point, while Samsung quietly and downright sheepishly closed the door on its essentially-overlooked Milk Music service in 2016.

Market realities nearly pulled the plug on music darling SoundCloud in 2017.  Even with its significant global reach and monetization (the company says its annual revenue run rate reached $100 million as of August), SoundCloud still bleeds cash.  Late summer 2017, as zero hour approached (always a good time for white knights to extract the best deal terms), media-focused private equity firm Raine Group and Singapore’s sovereign wealth fund Temasek injected $169.5 million into the company to keep the wheels on the bus and now own most of it.

Others like iHeartRadio, Deezer, and the second coming of Napster (okay, maybe third, since this version is re-branded Rhapsody) continue to languish in folksy solitude, generating little attention at all.  Meanwhile, early this year, "under the radar" media company LiveXLive acquired nearly-forgotten Slacker for a surprisingly robust $50 million. 

Let’s take a look at where things stand right now with the key players in this Media 2.0 music space in which YouTube -- in a fact that may surprise you -- is the dominant force for millennials (I will write more about that in my next post next week).

I.          SPOTIFY & PANDORA – THE LEADING PURE-PLAYS

Spotify is the closest thing to holding Netflix-ian dominance amongst music streaming services.  You and I both probably use it.  Spotify counts about 70 million paying subscribers worldwide for its $9.99 monthly on-demand streaming service across 60+ countries.  That’s up from 40 million paying subs in Q4 2016.  Spotify also offers ad-supported radio-like free streaming.  

We also likely listen to Pandora.  Prior to 2017, Pandora offered only less-controlled radio-like streaming in two flavors -- free ad-supported, or ad-free at $4.99 monthly.  But, in a major strategic shift to significantly improve its overall challenged economics, Pandora launched its own “Spotify-Killer” on-demand service in 2017 at a now-familiar $9.99 monthly price point.  Pandora announced big plans when it did, forecasting 6-9 million paying subscribers by end of 2017.  

But, those lofty goals hit cold stark reality soon thereafter when the company reported only 390,000 paying subscribers to its new service as of Q2 2017.  Even worse, it reported that its active listener count had actually declined.  And, as year-end 2017 approached, while Pandora’s active user base approached 80 million monthly users (an impressive number to be sure), roughly only 5% of were paying customers -- and the vast majority of those pay for Pandora classic at $4.99 monthly rather than the higher-priced Spotify-like service.  That’s why interim CEO Naveen Chopra advised the industry in Q3 2017 that Pandora would re-focus its efforts on its free user base, “not relying on the subscription model as much as in the past.” 

Spotify and Pandora (and Tidal, Napster, Deezer, and Slacker) are pure-plays like Netflix and Hulu on the video side, which almost exclusively monetize just the music itself via ads, subscriptions, or both.  As a result, most continue to bleed cash.  Spotify alone is reported to have lost more than $600 million in 2016, and was on a similar path for 2017 despite gargantuan revenues expected to reach $5 billion.  And we already know why.  These pure-play music services face the same challenge – the same existential crisis -- that Netflix and Hulu confront on the video side against multi-faceted behemoths Apple, Amazon, AT&T and YouTube.  As discussed in my most recent post ("all about the OTT video business"), the business models of those tech behemoths differ fundamentally from those of stand-alone pure-play OTT streaming services. For Apple, Amazon and YouTube, content (in this case music) is simply a means to an end.  Not the end itself. 

That’s why Pandora, like SoundCloud, needed a life-line in 2017.  And it got one in June in the form of a $480 million investment from SiriusXM, which acquired a 19% stake in the company in the process.  Will SiriusXM ultimately convert its 19% “try” to a full 100% “buy” via M&A?

Certainly wouldn’t surprise me, because neither Spotify nor Pandora can stand alone long-term as independents unless they achieve some kind of new monetization breakthrough.  They will instead end up playing strategic roles in a much bigger machine.  In the belly of one of the behemoths.  

II.        THE BEHEMOTHS

Speaking of … now it’s time for the giants that have the luxury of being able to use music as marketing.

APPLE

Let’s first take Apple.  Apple Music is one big advertisement for Apple hardware (iPhones, Macs). Content is its Trojan Horse.  Apple Music succeeds even if Apple Music doesn't generate $1 of profit.  But, that doesn’t mean that Apple Music isn’t strategic for Apple, because it most certainly is.  Apple needed an on-demand music streaming service to counter its declining iTunes music download business and continue to drive the faithful into its kingdom of hardware delights.  Unable to build it itself, Apple looked into the marketplace and found a kindred spirit in streaming service Beats (a company that shared Apple’s DNA by operating primarily in the hardware business with its headphones).  

Apple Music offers two tiers of music streaming – monthly $9.99 or $14.99 for a family plan (note to self – Apple also quietly offers a $99 annual plan that can be unearthed with some digging).  As of this month (February 2018), Apple Music boasted about 36 million paying subscribers (and it is expected to surpass Spotify's subscriber count in the U.S. this summer due to faster U.S. growth).  Impressive – a feat driven by Apple’s unique ability to bundle and headline Apple Music across all of its Apple products.

That’s certainly a luxury that no pure-play has.

AMAZON

Amazon’s multi-pronged business model is like Apple’s, but also very different. Yes, Amazon too sells hardware, including the surprisingly massively successful Kindle and Alexa-driven Echo.  But, unlike Apple, Amazon is not and never will be fundamentally a hardware business. Amazon is all about commerce pure and simple.  Selling stuff. And lots of it.  So, Amazon’s Music Unlimited subscription service, as well as its companion Amazon Prime Video service, function as Apple-like gateways to Amazon’s virtual mega-mall and its increasing focus on mobile shopping.  Like Apple, Amazon doesn’t need to profit from the music itself, and that gives it great business and competitive freedom.

Amazon flexed those threatening muscles big time when it launched Amazon Music Unlimited late 2016 with a disruptive new monthly price point $2 lower than the competition ($7.99 for Amazon Prime customers).  Amazon’s royalty rates with the major music labels likely aren’t any different than those of the pure-plays, but Amazon simply can “eat” that extra $2 and spread it across its overall financials.  

Scary indeed for those that can’t.

YOUTUBE

Ahh yes, and then there’s the biggest 800 pound Media 2.0 music gorilla of them all, YouTube -- a very different animal altogether (as I will discuss more in my post next week). YouTube continues to feel virtually uniform industry wrath for its very different economics that flow from its very different video-first DNA.  Yet, YouTube nonetheless succeeded in negotiating new licensing deals with all major labels in 2017, because its strategic position in the overall music industry is now simply too cemented in millennial lives. 

As 2017 began, Google also operated its Google Play Music and YouTube Red streaming services (the latter at the usual $9.99 monthly price).  But, both services pale in significance to music on YouTube itself and, as the year progressed, YouTube announced plans to merge those confusing services that together count 7 million subscribers as of August 2017.  After all, both services (whether separate or unified) are all about driving Google’s fundamental underlying and seemingly unlimited advertising-based cash machine – just keeping its overall user base entertained amidst increasingly predatory competition. 

That’s quite a differentiator and competitive advantage.

III.       THE WRATH OF THE TITANS

Apple, Amazon and Google/YouTube also control massive marketing dollars outside the wildest dreams of the pure-plays. Apple continuously bombards us with Apple Music pitches in its own characteristic “sexy” way, with every breath you take and every move you make, across all of its platforms -- both virtual (online) and physical (offline retail stores). There is no escape. And, to be absolutely sure, Apple features Apple Music natively on all Apple devices (iPhone, Macbooks). No app install is needed. That's immediate distribution – and headlining -- that Spotify and the others can't match.

The behemoths also certainly have the ability to invest significantly more deeply in artist relations and artist exclusives – differentiated content that is increasingly critical for these services in this aural battle royale (just like the strategic role Originals play in the Media 2.0 video world).  Steve Jobs played to artist sensibilities from day 1, and Apple underscored the strategic nature of its heritage when it retained Jimmy Iovine and Dr. Dre as part of its Beats acquisition.  Meanwhile YouTube, faced with mounting music industry pressure, smartly hired long-time music executive Lyor Cohen as its new head of music in order to try to quell the music industry masses about YouTube’s advantageous economics.  

Spotify, on the other hand, seemingly bit the hand that feeds over the years and counted a very vocal and very bitter Taylor Swift and Radiohead – in addition to the labels themselves -- as foes at various points.  Sweden’s Spotify – born a long, long way from the U.S.-based music industry -- proudly celebrated its colder tech-based roots first and foremost in its early days, ignoring the music industry’s more sunny soulful essence until it learned the hard way.  The company finally atoned when it hired well-known, highly respected entrepreneur and artist manager Troy Carter (Lady Gaga, John Legend, among others) as its new global head of creator services in 2016.  These kinds of gestures matter.  

Spotify hopes to flex some muscle of its own when it finally goes public.  But, regardless of its eventual purse when it does, Spotify and the other pure-plays will continue to face daunting challenges in the face of giants.  Yet, in the immortal words of Yoda (as he fixes his gaze upon Spotify, Pandora and the others, based on his own intergalactic challenges), “Do, or do not.  There is no try.”  So, “do” they do.

Here’s how.  First, Spotify will catch the Tidal wave (clever, huh?) and increasingly feature artist and song exclusives like it did this year when it dropped Jay Z’s latest first.  Content is king here in the music world too – the most critical differentiator – and featuring Jay Z is massively more important to boosting paid subscriber numbers than adding yet another service feature.  The trick, of course, is for the pure-plays to find a way to continuously incentivize artists and labels to work with them rather than with the deeper-pocketed big guys.  Tidal got the job done by making Jay Z and a few other marquee artists part owners.  So, that’s one option.  Spotify, of course (much like Snapchat versus Instagram), also will continue to try to out-innovate on the feature and user experience side of the house.  Its “Discover Weekly” personalized playlists were a big taste-making hit in 2017.

Even more fundamentally – nay, critically -- Spotify and other pure-play music services will try to diversify their one-dimensional business models. Yes, everyone around the world uses Spotify, but that doesn't mean that stand-alone music streaming businesses are long-term sustainable.  Conversion rates from free ad-supported music streaming to ad-free paid subscription streaming are simply too low.  Even if they weren’t, today’s licensing realities and overall economics just don’t pencil out.  That’s why mid-2017, Spotify announced re-positioning its overall advertising opportunity.  Now, Spotify plans to build a leading ad sales business targeting small and medium businesses and with the audacious goal of becoming the world’s third biggest digital advertiser next to Google and Facebook.  So, look forward to seeing more and more sponsored playlists and new audio ad formats.  

At around the same time, Spotify also announced that it would begin to focus on podcasts, a throwback format that continues to be shockingly popular.  Bloomberg reports that about 15% of U.S. individuals over age 12 listen to at least one podcast weekly -- and nearly 25% of us at least one monthly.  Even better, podcast ad revenues are forecast to close up 85% in 2017.  That’s some massive growth.  Importantly, podcasts don’t come with music’s massive licensing price tag.  Those royalties accounted for an EBITDA-killing 75% of Spotify’s costs in 2016.  And, in another new strategic area of focus, Spotify also now integrates with Google’s Home smart speaker in its quest to enhance its monetization hopes and dreams.

One of Spotify’s previous big bets to change the order of things is our good old friend video Originals that I discussed in my previous post, although by year-end 2017 its video ambitions had significantly narrowed to be playlist-focused.  But, Spotify still hopes that seeing is believing in a pay-worthy and broader music lifestyle experience kind of way.  Tidal succeeded briefly in that regard when it debuted Beyonce’s incredible long-form Lemonade video in 2016 and boosted its paid subscription numbers significantly in the process.  

Pandora itself announced major video plans in 2016, but we didn’t see much happen there in 2017.  In any event, video game playing by pure-plays Spotify and Pandora won’t be easy.  Their DNA is music, and we go to both Spotify and Pandora to listen. It’s not obvious that we will think of those services more broadly.  Pattern behavior, after all.  And, of course, the OTT premium video market is increasingly downright saturated.  Maybe that’s precisely why both Spotify and Pandora, which  trumpeted their video scores loudly as 2017 began, decrescendo-ed those notes throughout the year.

Pandora previously had placed its own major diversification bet in 2015 when it bought ticketing agency Ticketfly for $335 million, thereby adding an entirely new (and seemingly logical) revenue stream.  But, schizophrenically, it changed course and sold off that tantalizing new piece to Eventbrite in 2017 for a jaw-dropping $135+ million less than it paid just two years earlier.  So, whereas Pandora once sang loudly and proudly to the world that Ticketfly would broaden its overall appeal to become the single home for the music lifestyle (not just the home for the music itself), it lowered its multi-platform voice to a whisper-like sotto voce in 2017 and returned to its rather one-dimensional refrain in the name of focus.  All I can say is, “Wow!” (as in, sigh, non-caps “wow”).

So what else can the pure-plays do to surmount their daunting challenges in the face of seemingly impenetrable behemoths?  

Why not take their broader revenue-generating quest significantly further by engaging much more directly with their users who are massive and frequently rabid artist fans?  Fan engagement means live events, compelling e-commerce (merchandise), and direct artist-fan and community engagement.  Hey Spotify and Pandora!  Focus on deeply integrating those components into your overall customer experiences and, man, significant monetization (not to mention brand love and loyalty) will follow.  No music streaming service does that right -- no, not even the behemoths.  Music is unlike any other form of media in terms of its impact on our lives.  Artists are our messiahs.  Tap into that transformational human element -- that’s where the magic happens.  Fans will pay (a lot!) for that direct connection, as well as for a direct link to others in the community who feel the same way about the artist as they do.

Even so, the pure-play existential crisis is unlikely to resolve itself in the face of behemoth super-powers, which means that Spotify’s and Pandora’s most likely end games are to be swallowed up in true Apple/Beats-ian fashion.  Like the big banks, Pandora and Spotify are simply too big to fail, of course.  One of the many Goliaths out there will bail them out instead.  After all, many have the means necessary, as we saw when AT&T dropped $85 billion to buy Time Warner.  Yes, pure-play stand-alone economics may not work, but their respective brands, global audience reach and overall engagement in our daily lives do.

How many of us listen to streaming music services for hours each day?  (I know I do, virtually 24/7 – it keeps me sane as I write this).  That’s some kind of reach.  And, Goliath buyers can amortize the singular, fundamentally challenged pure-play business models across all of their many revenue streams.  After all, they can simply throw those challenged financials into their marketing expense lines.  So, in the immortal lyrics of one of my favorite 80’s bands Tears For Fears, these Media 2.0 music realities inevitably will be “sowing the seeds” of M&A for Spotify, Pandora, and a host of others.  They did for Slacker early this year.

Of course, that means fewer competitors in the music distribution game – certainly not the optimal reality for any supplier (in this case the music labels).  The more competition, the better.  More demand for the content that fuels that competition.  More leverage in negotiations.  More lucrative terms.  Feels almost like those “big box” days of yore, when Walmart and Target used music as loss-leaders to drive sales of paper towels.  Don’t forget, Amazon is kind of doing that now by charging $2 less per month for Amazon Music Unlimited for its Prime customers so that they stay in their virtual store and buy more, well, paper towels (and all kinds of other stuff that most certainly is not music).  That race-to-the-bottom pricing pressure and overall mentality ultimately killed the pure-play Tower Records and Virgin Megastores of the past.  

Quite a different state of affairs, then, from what’s happening in Media 2.0’s video side of the house.  While the number of streaming music players continues to shrink, it’s “go, go, go” time in the world of streaming video, where we see a continuing string of new market entrants joining the long list of OTT players already in the game – all kicking and screaming to create and license as much premium video content as possible (and significantly driving up video content prices in the process).

Music and video.  Both premium content.  But, very different rules of the game, because of the very different players who wrote them.

Which streaming music services will independently stand at the end of 2018?  

Give me your predictions now in the "Comments" section to this post.

[This is article -- which I have updated -- is an excerpt from my new book "Media 2.0 (18): An Insider's Guide to Today's Digital Media World & Where It's Going" that is available now on Amazon in both print and Kindle editions.]