Music Business

Do Freemium Music Services Actually Offer Greater Revenue Per User Than Radio + Sales?

2Many in the music industry seem to long for a simpler time when free ad-supported radio was used as a mechanism for selling records, but was the revenue from that model that much greater than the freemium streaming which we see today? 

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Guest Post by David Touve on Rockonomic

The purpose of this story is rather simple:

First, let’s treat the music industry like a “freemium” music service with both paid and free components. And, using the data we gather, estimate the average revenue per user for this freemium experience.

In fact, the music industry has always been a freemium music experience at the macro level: Free, ad-supported services like radio existed to both (a) make some money selling ads and (b) hopefully make even more money selling records. 

Then, let’s find an alternative freemium experience—the so-called counterfactual—that also attempts to (a) make some money selling ads alongside a free music experience and (b) hopefully make even more money selling a paid version of that experience.

I don’t know about you, but I think a service like Spotify might suit our needs for the thought experiment at hand.

Finally, since the RIAA and Spotify have been kind enough to release figures from 2015, and both ASCAP and BMI have released figures as well (as far as SESAC, we can make a guess), we are in position to compare the average revenue per user for the US Music Industry  (one freemium economy) against that of Spotify (another freemium economy).

Why would we make this comparison? Because as far as I can tell, a great proportion of the FUD related to music services reduces to a desire to just have the world as we used to know it — a simpler time, with free  Radio and paid CD or Download Sales, and none of these pesky music services.

So, let’s compare these two worlds using a similar metric and the data at hand to see which workd we should prefer.

What we are going to find is not necessarily what we might expect:

A Freemium music service like a Spotify — one wherein free experiences hopefully convert to paid subscribers — may actually offer a greater average revenue per user than the “freemium” industry we knew so well — one wherein free radio spins hopefully convert to paid sales.

$25.08 = Average Revenue Per User, US Music Indsustry

$26.11 Average Revenue Per User, Spotify.

What follows are the numbers on the back of the napkins through which the above results were estimated. Please feel free to digest, debate, and even debunk.

4 (1)

US Music Industry

On the back of this napkin, we have the 2015 results reported by the RIAA, ASCAP, BMI (a mix of 2014/15), and a decent guess at SESAC.

Total Active Users (TAU) in this world, just like active users in the online world, would be anyone who connects with our “service” — free or paid — during a thirty day period. Thus, a simple way to impute Active Users in this “real world” is to just use the number of listeners who connect to radio each month.

And remember, a simple way to estimate Average Revenue Per User (ARPU) is to simply divide Total Revenue from a service across all version of that service (free and paid)  by the Total number of active users.

$7,015,900,000 (Total digital and physical, paid and free revenue, RIAA)

(-) $1,218,900,000 (Revenue from paid music services — removing our other economy from the mix)

(+) $415,000,000 (estimated Total royalties paid by Radio, across ASCAP, BMI, and SESAC)

(=) $6,212,000,000 in Total Revenue

(/) 247,706,000 (Total audience, average, according to RAB/Nielsen)

(=) $25.08
Average Revenue Per Music User, for the US Music Industry.

Spotify

1Estimating Spotify’s ARPU is a bit easier since, well, the service a closed economy with a single source for information — the company’s supposed financial filings, recently revealed (thank you, Mr. Ingham, and Music Business Worldwide).

$1,945,322,000 (Total Spotify paid and free service revenue)

(/) 74,500,000 (Total active users, average across 2015)

(=) $26.11 
Average Revenue Per User,for Spotify.

WHAT?!?!

I have to admit, the first time I ran these numbers, I was boggled as well. But remember, Radio’s conversion rate (the ratio of spins to people to sales) is really, really low; So low, that the free-to-paid conversion rate for services like Spotify—however disappointing to some stakeholders—is still orders of magnitude greater than that from Radio.

BUT…

But wait — those streaming revenues you pulled out from industry revenue could have been sales, so put them back in!

OK… But where that line of reasoning will take you if you really follow through is quite simple: A wayback machine to the numbers before 2003 — the days before the “new” music experience that are feared to cannibalize sales (e.g., webcasting, services, even the sales of downloadable singles). And a trip on that wayback machine is for another day.

But wait — those Spotify figures are global, and include both small and large countries, at a variety of prices, some of which are not comparable to prices in the US Music Industry.

That’s right, they sure do and they sure aren’t. But, we would expect this bundle of countries to be worth less than the US. And yet, that is not what we see. And a comparison using a bundle of date from a variety of countries is for another day.

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1 Comment

  1. Interesting comparison. However, worth noting that one thing that makes this a little apples to oranges is that you’re comparing the total royalties paid by radio to total revenue earned by Spotify. A more accurate comparison would be total revenue earned by radio (before factoring in infrastructure and operational costs) vs total revenue by Spotify. I suspect total revenue earned by radio is higher, and thus would likely increase the ARPU for the music industry.
    Hmm… come to think of it, you can probably do a rough calculation of total radio revenue by reverse engineering the royalty formulas. Something to think about.

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