Ad Supported Music Unsustainable – A Guest Commentary

In this guest blog digital consultant Bill Houghton (no relation) who blogs @ BroodingSavage takes a critical look at the future of ad supported music.

(Join the discussion and read a guest rebuttal from Ad Supported Music Central here.)

Despite the release of Spiralfrog, Qtrax, and other ad-supported music services, it’s not possible to fully subsidize music via traditional digital advertising.  The size of the digital music market is simply too large to be subsidized by the online advertising industry.

A quick analysis of both industries illustrates the point.  Including P2P downloads, the online music industry has an estimated value of about $30 Qtraxbillion and rising.  That number will only rise as in-store CD sales continue their slide. Free and subsidized distribution models also will increase the
percentage of music distributed online.

Meanwhile the total revenue from Internet advertising across all markets and platforms is about $20 billion…

as reported by MediaPost.
Experts are predicting this number is approaching a plateau for various
reasons.  Online media accounts for only 20% of consumers’ attention –
implying that there’s a limit of 20% market share that online
advertising can hope for.

That’s a clear shortfall of $10b billion and growing.  Obviously the
entire ad industry does not produce the revenues sufficient to
subsidize the online music industry… and it likely never will.

But the outlook is even more dire for ad-supported music.  At
current price levels, every song will have to generate at least $1.00
of advertising revenue to cover expenses.  If CPMs on a highly-targeted
web site averaged $10, the user would need to be exposed to 100 ads for
every download.  That number of ads would quickly deflate the
advertising market, devaluing the inventory and making the strategy

Ad-supported music seems like a good idea because the price per song
is low.  But when the total value of digital music is tallied, it’s
clear how unscalable the strategy really is."

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  1. Could Bill cite a source for the claim that the online music business is valued at $30 billion?
    Key question: How do unpaid P2P downloads add value to the online music industry?

  2. People seem to all be looking for one way to ‘fix’ the woes of the music industry
    There isn’t one way and never will be. Online advertising I’m sure will grow to aid music revenue, but will just become another source of income.
    Business as usual, just spread more thinly over more ground. But not one ‘answer’.

  3. With the major labels, CD pressing plants,MTV, radio stations and hoards of middle men now out of the picture, we now only need 12% of that 30 billion to sustain the artists and creative community. That’s all we ever saw in the past. From someone who makes their living as a songwriter, this new add driven model sounds fine to me.

  4. The $30 billion figure is based on data within the RIAA’s 2007 annual report. Specifically the 1.7 billion sales figure for digital downloads, plus an additional 20 illegal downloads for each legal. I won’t recreate the math, but all figures are available in the RIAA 2007 report.
    — Bill Houghton

  5. This is an interesting issue… I am a 20-year-old student, and am definitely a target of music industry efforts to curb illegal downloads and create new money-making methods of music distribution. This post contains the idea that only 20% of consumers’ attention is aimed at online media–but even if only an average of 20% of a randomly selected subject group of widely ranging ages pays attention to online media, does it not count for anything that probably more than 50% of young people’s attention is focused only on online media? I think, given that all of the issues surrounding ad-supported music programs and problems in the music industry rotate around people under 25, young publics’ media attention should be studied to determine whether or not ad-supported music programs are worth it–national averages do not really work, in my opinion.
    Cait (http://lossfurwords.blogspot.com/)

  6. I agree to a degree. Ad supported ALONE won’t sustain it. Does TV ads support the industry. Last time I checked I still have to pay for cable. The ad supported model will be one of multiple business models (paid high quality downloads, exclusive content/clubs, touring, merch, etc.)the industry will use, just like other industries. None will support it alone, but combined it they will thrive.

  7. You CAN”T add value to something that users are downloading for FREE. That seems really obvious, at least to me. The RIAA is fighting a battle that’s already been lost.
    That’s why I see all these labels going to 360s within the next 5-10 years. They cant add value to the music as product, so they’re going to capitalize on the artist as a brand.
    Ad-supported models are cool, as long as some of that monetization actually ends up in the pockets of the artists. Funny how things come full circle, though. Conventional radio is just ad-supported music. So I guess there’ll be a new age of payola on the horizon…?

  8. The 30 billion dollar figure for the online music industry doesn’t make any sense, and since it is such an extraordinary claim it needs strong evidence. You need to back this up with more than hand waving in the direction of RIAA claims.
    What does the “an additional 20 illegal downloads for each legal” mean? That those 20 downloads are lost revenue at the same price as the paid downloads? But if downloaders are sensitive to price, that math goes out the window.
    Note that RIAA figures are partisan to an extreme and often fail the laugh test. Your 30 billion here is along those lines.
    Secondly, this isn’t logical: “At current price levels, every song will have to generate at least $1.00 of advertising revenue to cover expenses. ”
    Every song will have to generate a dollar to cover the same *charge* is what you mean, not to cover *expenses*. Expenses are orders of magnitude lower.
    And even if the logic was correct, the economics aren’t. The purpose is to maximize profits, which means lowering price to raise volume until the net revenue (-cost) stops growing. Without addressing volume the $1 price point is meaningless.
    The meaning of the $1 price is that it creates the same kind of low-volume high-price business that the majors are emotionally comfortable with.

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