Music Industry Is Keeping Streaming Services Unprofitable 118
Lucas123 writes "Music streaming services, forced to give from 60% to 70% of their revenue to the record industry, will never be profitable in their current state, a new report shows. Unless the services can monetize their user base by entering new product and service categories, or they can sell themselves to a larger company that can sustain them, they're doomed to fail. One method that subscription services might be able to use to achieve profitability is to up sell mobile deals or bundles to subscribers. For example, a select package of mobile services would be sold through the music service provider, the report from Generator Research suggested. 'Services like iTunes Match and Google and Amazon are already heading in this direction,' the report states. Another possibility would be for a larger company to purchase the music service or for the service to begin offering sanitized user behavioral data to advertisers, who could then better target a customer base."
Re:quite the news flash... (Score:5, Informative)
There were basically three types of ringtone companies back in the heyday:
1. Subscription: These were companies who convinced people to sign up for a recurring $9.99/mo charge on their mobile phone bill to receive some number of monthly "credits" for download;
2. A la carte: Companies who provided the implementation of the carrier "decks" that sold ringtones for $1.99-$2.99 a pop;
3. User Generated: services that allowed users to upload content that would be made available for download by other people.
The fundamental problem with the Subscription services was that they could only possibly make money by breakage - that is, if people who signed up for the service failed to download all of the content they were entitled to in a given month. Or, better yet, the subscriber forgot (or never knew in the first place) that they had signed up for the service, and therefore kept paying until Daddy noticed the charge on the phone bill and called the carrier to complain. The royalties they were paying (together with the carrier transaction charges) forced them into this unhealthy operating model that was clearly unsustainable. There were several US companies that reached revenues in excess of $100M without ever turning a profit. Venture capital pumped money into them on the way up, lured by the top-line growth. Crazy.
The a la carte providers didn't fare much better. There is really no possibility of negotiating realistic licensing with the music labels, because there are only four (three now?) of them, and they all refuse to do any licensing deal that doesn't have a "most favored nation" (MFN) clause. Essentially what this says is that if the licensee does a subsequent deal with another record label, and that subsequent deal has better terms than what was negotiated with the first label, then the first label automatically gets those terms. In practice, this means that the company would do a deal first with the smallest and most hungry label (cough, EMI, cough) at terms that seemed viable - making the company think they had a real business -- but then the deals with Warner, Sony, and UMG would progressively make the economics worse to the point where there was no real way to make money. And because the deals are heavy on upfront payments, and annual guarantees, the labels are making money even when the retailer never really hits escape velocity.
The user generated sites, which were attempting to cut out the unnecessary middlemen, allowing artists to connect directly with their fans, were mercilessly sued by the labels. Untold millions of dollars were transferred from venture capitalists who had funded these companies to the labels that sued the companies - along with their directors, their investors, their managers - in settlements and coerced licensing deals specifically designed to ensure that the money going to the labels would stay in their own coffers and would not have to be shared with artists.
The economics of MP3 and streaming sites are not much different. One day I expect it will be taken for granted that a service can operate profitably by providing a useful service that allows artists to sell (or share for free) content with their fans without fear of litigation by major labels. But that's not today.
Ultimately, I still believe that the copyright and legal systems will come to understand that protecting the rights of artists is different than protecting the legacy music labels. I've been amazed and enthralled over the past few years by the incredible amount of beautiful new music being released - no label required.