Spotify & Pandora - Can They Survive Amidst Giants?

YouTube, Spotify, Pandora, Apple Music, Amazon Music Unlimited, Tidal – these are the main cast of characters in the digital 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 (sheepishly?) closed the door on its essentially-overlooked Milk Music service in 2016 (which was essentially warmed-over and generally overlooked music service Slacker).  

Others, like iHeartRadio, Deezer and the newly-minted second coming (okay, maybe third) of Napster – which is Rhapsody rebranded as of mid-2016 -- simply languished last year, generating little attention at all. 

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 (as discussed in my earlier post) is the dominant force for millennials. 

SPOTIFY & PANDORA

Spotify is the closest thing to holding Netflix-ian dominance amongst music streaming services.  You and I both probably use it.  We also likely listen to Pandora.  As of Q4 2016, Spotify counts over 40 million paying subscribers who pay for on-demand streaming (at $9.99 per month), but also offers ad-supported radio-like free streaming.  Pandora only offers less-controlled radio-like streaming in two flavors (free ad-supported or $4.99 per month ad-free).  As 2016 ended, Pandora’s active user base reached about 80 million (roughly 5% of which were paid subs).  Pandora plans to launch its own Spotify-“killer” in 2017 with similar functionality for $10 per month.  

Spotify and Pandora (and Tidal, Napster, Deezer) are pure-play music services that almost exclusively monetize the music itself via ads, subscriptions, or both.  As a result, their losses continue to mount -- and we already know why.  These pure-play music services face the same challenge – the same existential crisis -- that Netflix does compared to multi-faceted Apple, Amazon, AT&T and YouTube on the video side.  As discussed in one of my recent posts, 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. 

APPLE

Let’s first take Apple.  Apple Music is one big advertisement for Apple hardware (iPhones, Macs). It 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 counteract its declining iTunes music download business and continue to drive the faithful into its kingdom of hardware delights.  So, unable to build it itself, Apple looked in the marketplace and found a kindred spirit in streaming service Beats (operated by a company that also was primarily in the hardware business with its headphones).  As of Q4 2016, Apple Music boasted over 17 million paying subscribers.

AMAZON

Amazon’s business model is multi-faceted like Apple’s, but is also very different. Yes, Amazon too sells hardware (the Kindle, Echo, Amazon Fire phone), but Amazon is not and will never fundamentally be a hardware company like Apple. Amazon is all about commerce -- selling stuff -- pure and simple. So, Amazon’s new Unlimited Music subscription service (and its Amazon Prime Video companion service) are Apple-like gateways to Amazon’s virtual mega-mall and its increasing focus on mobile shopping.  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 in October 2016 with a disruptive new monthly price point $2 lower than the competition ($7.99 for Amazon Prime customers).  Amazon’s royalty deals with the music labels likely aren’t any different than those of the pure-plays.  Amazon simply can “eat” that extra $2 and spread it across its overall financials.  Scary indeed.

GOOGLE/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 discussed at length in my last post).  YouTube felt virtually uniform industry wrath throughout 2016 for its very different economics that flow from its video-first DNA.  Yes, Google also operates its Google Play Music streaming service, and YouTube launched YouTube Red in 2016 (a new $9.99 monthly streaming music subscription service a la Spotify and the others).  

But, both services pale in significance to music on YouTube itself and are all about driving Google’s fundamental underlying and seemingly unlimited advertising-based cash machine by keeping its overall audience satisfied amidst its increasingly predatory competition.  After all, just for good measure, YouTube Red tosses in exclusive premium video content for no additional fee, so it’s not just about the music.   That’s quite a differentiator and competitive advantage.

THE WRATH OF THE TITANS

All three behemoths 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 via all of its platforms, both virtual (online) and physical (offline 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.  Steve Jobs played to artist sensibilities from day 1, and Apple underscored the strategic nature of this 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 2016.  Cohen looks 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, ignoring the music industry’s more sunny soulful essence, until it learned the hard way.  Finally, the company atoned in 2016, hiring well-known artist manager Troy Carter (Lady Gaga, John Legend, among others) as its new Global Head of Creator Services.  These kinds of gestures matter.  

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

Here’s how.  First, Spotify will catch the Tidal wave (clever, huh?) and increasingly feature artists and songs not available anywhere else.  Content is king here in the music world too – the most critical differentiator – and featuring Kanye (who launched his last album exclusively on Tidal, creating a wave of new subscribers) is massively more important than adding yet another service feature.  The trick, of course, is for the pure-plays to find a way to incentivize artists and labels to work with them rather than with the deeper-pocketed big guys.  Tidal got the job done by making Kanye (and a few other marquee artists) part owners.  So, that’s one option.

Even more fundamentally, Spotify and other pure-play music services will continue to diversify their one-dimensional (and so far unprofitable) 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.  Spotify’s big bet to change the order of things is, once again, our good old friend, video Originals.  Spotify hopes that seeing is believing in a pay-worthy and broader music lifestyle experience (kind of like YouTube Red in reverse).  

Tidal already is there, debuting Beyonce’s incredible long-form “Lemonade” video in 2016 and boosting its paid subscription numbers significantly in the process.  Pandora announced its own video plans in 2016.  But, Spotify’s video game won’t be easy.  Its DNA is music, and we go to Spotify to listen. It’s not obvious that we will think of it more broadly (pattern behavior, after all).  And, of course, the OTT premium video market is increasingly crowded (some would say, already oversaturated).   

So what else can the pure-plays do?  Pandora placed a major diversification bet when it bought ticketing agency Ticketfly in 2015 for $450 million and thereby added an entirely new revenue stream.  I like that move.  Pandora sang loudly and proudly to the world that it hoped to be the single home for the overall music “lifestyle” (not just the home of music itself).  

Now, why not take that broader revenue-generating quest significantly further by adding live events, more compelling e-commerce (merchandise), and more deeply integrated direct artist-fan and community engagement?  No streaming service does that last part right (no, not even the big guys).  And 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 and, man, that’s where the magic happens.  Fans will pay for that direct connection (and for a direct link to others in the “community” who feel the same way about the artist that they do).

Still, the existential crisis for many of these pure-plays will be resolved when much-bigger fish swallow them up (just like when Apple bought Beats).  Like the big banks, Pandora and Spotify (which itself was rumored to be eyeing distant rival SoundCloud in the second half of 2016) are simply too big to fail.  One of the many Goliaths out there will bail them out (after all, many out there have the means necessary, as we saw when AT&T dropped $85 billion to buy Time Warner).  Yes, the stand-alone economics of these pure-plays may not “work,” but their respective brands, reach and overall engagement in our lives does. 

How many of us listen to streaming music services for hours each day?  (I know I do, virtually 24/7 – it keeps me sane).  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, it can be thrown into the marketing expense line in their financials.  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.  Perhaps as early as this year.

But, that means fewer competitors – 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 (remember, Amazon now charges $2 less per month for Amazon Music Unlimited for its Prime customers).  That race-to-the-bottom pricing pressure 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” 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 license premium video content (and significantly driving up prices in the process).

Music and video.  Very different content.  Very different rules.

Which streaming music services will be standing at the end of this year?

[NOTE - this article is an updated excerpt from my recently published bestselling book, "Media 2.0(17): An Insider's Guide To Today's Digital Media World (& Where It's Going)", available now on Amazon in both print and eBook editions.]