INgrooves CEO Robb McDaniels On Music Streaming: Setting The Record Straight

Guest post by Robb McDaniels, Founder and CEO of INgrooves.

It's a format change – that's why it is stoking so much fear and anxiety in the marketplace. The ability to "access" your media and stream it to any device, anywhere is simply the logical progression of technological development that has led us from vinyl to cassette to CD to download to stream. With each of these format changes, there were a lot of other things that changed as well: economics, marketing strategies, product types and level of consumer engagement are just a few aspects of the music ecosystem that were forced to adapt to the new, different reality.

Some "good" and some "bad" always emerges from these format changes and its impact on any specific artist, label, manager or consumer of music is dependent on numerous variables including: music genre, age of fan base, geographical location and the ability to adapt quickly and embrace the new paradigm. We all know it is hard to let go of the old and bring in the new – it's human nature to be wary of the unknown future – but let's try to rationalize the differences between what's old and new so that everyone can make a more informed decision about how they want to react to the new reality.

Here are the things I know to be true based on my own experience in digital music, our own internal analysis at INgrooves and my gut:

1) Future: The streaming access model is the direction we are currently headed and, by the time CDs are the size of the vinyl market, it will have likely replaced the download as the favored digital consumption option. From the music fan's point of view, streaming services are an important leap forward in the evolution of the consumer experience, providing access to a legal, portable, robust and on-demand music offering for a small monthly subscription fee.

2) Less Money, More Money: A lot of emotional debate has surrounded the question of whether the per stream payout is significantly less valuable than a download payout for artists. While this is true in the short run, it is also true that many artists stand to make more money over a longer period of time from streaming than from downloading and, if artists believe in the eventuality of #1, then it behooves them to start monetizing their streams sooner rather than later. By doing so, they will shorten the time until the "breakeven point" – where their cumulative streaming income from a single user is greater than their download income from that user. They will also immediately begin to benefit from users discovering and streaming music they otherwise wouldn't have found and downloaded, thereby adding to the cumulative total. The breakeven point, depending on the artist, song and genre, is typically between six months and three years.

3) Measuring ARPU: Average Revenue Per User is an often referenced, and reasonably meaningful, metric used by streaming services to make their case for the potential economic benefits of this new format. The argument basically goes something like this, if the average iTunes customer purchases $8 worth of music a month, then the $10 per month charged by the streaming services should result in a gain of 20% paid through to the rights owners. This is the right way to look at it, but if you dig a little deeper there are other questions that emerge, including:

a. over what time period will this migration happen?

b. Is there a "type" of user, like the heavy user, that will shift formats faster thereby negatively impacting ARPU in the short term?

c. Will current heavy P2P users migrate over to this format more quickly, thereby positively impacting ARPU in the short term?

d. ARPU increased for the digital industry in countries like Sweden, but was this simply because the streaming services (mostly Spotify) were incentivizing P2P users to pay the monthly fee? If so, won't the impact be different in countries like the U.S.?

4) Impact on Indies: Any music service that makes experimentation easy stands to benefit the independent music community, and our data so far suggests that the "sales curve" for Spotify is a lot flatter than iTunes. In fact, when measuring the sales decay curve for the top 100 songs in a recent week, we found that songs between number 20 and 100 averaged approximately 30% more activity than on iTunes, when measured as a percentage of the entire sample group of 100 songs on each retailer (i.e. – the 75th most popular song on Spotify represented a relative 30% greater level of activity than its peer on iTunes). However, the potential negative implications of any short term cash flow impact is sure to strike the indies the hardest. Additionally, while some emerging artists will benefit from being "discovered" on Spotify and will move up the sales demand curve, other emerging artists could realize a net negative impact because they will no longer see the immediate income from downloading (which they sometimes earn when a consumer downloads a song they never listen to), and it could take them significantly longer to reach the break-even point as mentioned above.

5) Charting as a Deterrent: Until Soundscan finds a way to translate streaming activity into its units sold calculation, artists that have a potential top 10 hit on their hands may choose to window their release to streaming services. The PR benefits from a number one release are too great for this not to be considered by labels, managers and artists. If they are sure that the streaming services are not cannibalizing sales or that the promotional benefits outweigh these risks, then it makes sense to release on the streaming services immediately, but I certainly understand that the pros and cons are different for each artist.

6) Premium Access and Value Added Products: Let's sell super fans on access, exclusivity and privilege. I know who my favorite 20 artists are and I would be willing to pay an extra few dollars a month to have access to their new releases first and access to exclusive songs and deals. Think of it like cable TV – as a consumer, I am willing to pay more than the cost of basic cable for premium channels with great content. Make it easy for me to add and remove artists from my subscription and you have a very valuable product for fans and artists.

7) Marketing Investment Strategy: Labels have traditionally frontloaded projects with the goal of making back their investment in the first weeks after release. If streaming continues to make up a larger portion of sales, resulting in more money over a much longer period of time, then labels will have to rethink how and when marketing dollars are spent to promote a record and bring it more in line with the sales cash flow. Streaming services could look at ways to offset this timing issue. All streams are not created equal. The fact is that new releases or popular songs are the engine that drives music fans to streaming services. It's only after they arrive at the streaming services that they discover and listen to other songs. The acts that are responsible for driving the traffic and usage could get a higher fee for their pro rata share, which will help offset the new release marketing costs.

8) Integrated Social Tools & Filters: The casual fan has trouble sorting through all the noise. Yes, social media integration does provide an amazing amount of recommendations, but most of my friends aren't experts; they only think they are! Let's bring back the DJ – the tastemaker – much like Turntable.fm did most recently. These talented people can help us save time and navigate us through the world of disinformation and allow us to define what pop culture is.

9) ISP Cooperation: While there has been some recent progress with ISP cooperation, I believe that the access model should inspire them to become more aggressive. Remember, all that content is moving across their mobile networks (predominantly) and they stand to earn billions in data and usage fees. The technology exists to easily monitor this and steer consumers to legal models. One of the biggest issues is that some music fans think they are actually buying from legal services when then spend $0.10/song on downloads from some Russian based service (they don't know they are in Russia) but artists never see a penny.

10) Let's Remember To Ask "What's Next?": Innovation cycles are only condensing so let's not spend too much negative energy debating the merits of the streaming access model; before long the next big thing will be staring us in the face, and we'll have to adapt more quickly than we are now. There's some group of kids in a basement somewhere that could care less about items 1 through 9 above. They only care about connecting artists and fans…wait a minute – isn't that what the industry is supposed to be doing?!?!

The recent growth and adoption of streaming music services like Spotify, Rhapsody, Rdio and MOG is another transformative event in the generational shift from physical to digital consumption of media. We are now slightly more than half way through that shift, and we have seen the recorded music industry sales decline by 50%, with labels and artists losing the ability to monetize the music experience. However, these new platforms – and the rest of the ecosystem that supports them – represent a real opportunity for the industry to embrace the functionality they provide, reclaiming the relationship between artist and fan in a meaningful way.

The ideas expressed herein are not the only ones out there and are not meant to be proprietary. I am only trying to think outside the proverbial box and come up with ways to get us all on the right track towards a healthier and more robust industry that continues to deliver great music to fans while efficiently serving the artist community.

Thanks for reading.

Robb

P.S. The irony of releasing this commentary on Groundhog Day should not be lost on industry veterans that have been through the tape, CD and download format changes!