How To Fix Streaming Music’s Business Model

streaming music servicesOp-ed by David Lowery of The Trichordist.

It’s not that streaming can’t work. It can. It’s that Spotify is a bad business model that has unsustainable economics and exploits artists because it is a wall street financial instrument and not a music company.

We’ve previously published a couple posts on streaming music where we explore how access models and windowing are working for the film industry and could serve as a guide to the record business. We’ve also shown how transactional music purchases have made legal music consumption the best value in the history of recorded music.

The key to building streaming business models that make sense and are sustainable is to increase the subscription fee’s, utilize well thought out windowing models and experiment with new pricing tiers for access bases services.

Historically the music business has employed the use of special markets such record clubs (remember 11 CD’s for one penny). It’s not that record clubs were bad, in fact numerous studies found them to be great source of additional revenue if managed in a way that did not cannibalize front line sales. Now we need to strike the same balance with streaming services.

So let’s get real, the Spotify business model and streaming math just does not work and can not work in it’s current form.

Here are five suggestions to get music streaming back on track as a viable business model.

1) Minimum Payment Per Play

You want to give your service away? Fine, but artists and rights holders are not going to subsidize your business by devaluing our work. All plays pay at paid subscription rates. If you can’t sustain your business doing this, then you need to rethink how your business works. Your bad business model is not our problem. Maybe an unlimited, non-graduated free tier is a really, really, really bad idea. 30 Day trial offer, ok. Virtually unlimited free access, no.

2) Windowing

The music business must embrace windowing to maximize revenues across all distribution channels and platforms. It’s so basic we can’t believe artists and labels are not utilizing this to greater effect. The first 30 days of a new release could be limited to transactional streaming access by the day, week, or the month at different price points. Likewise, perhaps only two songs from an album are made available on streaming platforms for the first year of release. There are many unexplored variations and options.

3) Transactional Streaming

The music business needs to embrace new models such as “transactional streaming” much like VOD exists for film versus transactional downloads or physical product. There is no reason why streaming distributors should have every title, ever released, for one fixed, flat price. Again, new releases in particular should be priced as transactional streams where the consumer can chose between low cost limited access to a new release, or pay more for a transactional download.

4) Tiered Pricing based on Access and Consumer Value Proposition

Just like cable tv and SiriusXM, one possible solution is to create price tiers based on access. For example, catalogs can be curated into genre and lifestyle packages. Creating bundled packages adds value to both the end user and the streaming service. Individual packages can be as little as $4.99 a month, and complete access could priced at $49.99 a month. Again, there are many unexplored variations and options.

5) Move Beyond Stockholm Syndrome

The answer to every attempt to introduce real world economics to the marketplace can not be met with “or else they’ll steal it.” We already know that. They have been stealing it for over a decade (thank you Mr. Ek for your contributions to uTorrent). The film industry is not approaching streaming with a gun to it’s head offering every title ever made on every platform for one low monthly fee. Itunes is the single most successful dedicated online music business ever, and it doesn’t have a “free-tier”.

Isn’t it odd that companies like Pandora and Spotify that are not profitable and don’t support artists are thought to behold some kind gnostic wisdom of economics that defies all logic and reason? Last year Twitter lost $645 million dollars. Record labels have been profitable for over half a century with a sustainable ecosystem that invests in artists and new talent, while also creating hits and stars. It’s time to leave the rainbow unicorn school of economics and faith healing behind and develop real business models based on real economics.

Anyone remember the dot com bubble? Where is mp3.com now? Things can and do change fast in web/tech. Any talk of the “record industry” without MySpace in 2004 and you would have been laughed out to the room. Where is MySpace now? Spotify can (and very well may) quickly become MySpace. So let us all focus on how to make streaming actually work for all stakeholders and not only those with equity… it’s just math.

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  1. A big problem is that the majors aren’t run the way they used to by the people who used to run them. Their business model is unrealistic and skewed because the people in charge don’t have experience in music and they’re being fooled into bad deals because they’re so focused on short term profits instead of long term investments.

  2. This is perhaps the worst edited piece I have read on a professional website. It undercuts the author’s substantive arguments and makes it hard to take seriously.
    On a more substantive note, while I agree that artists should not bear the brunt of bad business models such as unlimited free streaming, getting a critical mass of $10/mo paying subscribers would more than do the trick. $50/mo? New releases delayed 1 year or more for streaming? Come on. While that MAY work to the benefit of some major labels for some artists (ahem Beyonce), this will relegate most indie artists to irrelevance. And it won’t even work, not because of “stockholm syndrome” but because of YouTube.

  3. This editorial is confusing. Spotify pays about 0.25 cents per song play. Pandora pays 0.11. Neither can turn a profit because that’s a large amount to pay. So how are these companies “exploiting artists”? They both pay a majority of their total revenue to rights holders.
    How much do you think they should pay per stream? Do you realize that the per stream royalties are directly correlated to the monthly subscription costs for listeners? Spotify is already at $10/month. To pay the artists more would require raising that rate. How much do you really think people will pay per month for a listening service?
    If your complaint is that those monies aren’t getting to artists, then that’s an issue to take up with record labels and publishers not the streaming services.

  4. Sorry Mp3Michael,
    If it costs $100 to make a product, and it’s sold for $50, it doesn’t matter if the seller is paying 70% of gross. The creator is still at a loss – this is the problem with streaming. It’s not the margins that are bad, but rather the inability to sustain the cost of goods.

  5. #snfu baru: A products price is not set based on how much it costs. It’s set on how much people want to pay. Spotify pays a percentage (exactly the same as iTunes) of their revenue. Why dont people complain about iTunes?
    And please dont say that windowing “just works and all should know”. For some it does and for many others it doesnt change a thing.

  6. So your proposed business model is ‘don’t give customers what they want when they want it’, despite that it is all available for free anyway on YouTube? That sounds like a great strategy for growth.

  7. Again, Sorry Mp3Michael,
    By your logic we should never ever again charge anything for music because people will always want it for free and find a way to get it for free illegally, that thinking is the core problem.
    Lowery is right about Stockholm Syndrome which the film business has grown beyond, and the music business must also to survive.
    The models work. We can see them working with film and tv. One size does not fit all.

  8. Since I’ve been working on this streaming issue since 1994 and hav seen a few things in my days — the one thing that has not been tried with any real push behind it is bringing the artists into the equity ownership of the company. Look, besides a couple of trophy artists the average stockholder does better than the artists in all of these deals.
    So here is where the rubber needs to hit the road. Bring the artists into the ownership behind a company from the very start. IMHO this is the only way it will work and then make it available for the public to back via equity markets vs another funding platform that again the stockholders make more off of then the content suppliers. Yes crowd funding can be great however it’s someone’s business and they are making a living off of your efforts.
    To end this, the company has to reach out to the public and say we’ve gathered the artists, at least the independents, and made them available digital, physical and globally; So, than Buying This(tm) Entertainment and Public Stock — solves this problem and the world get’s more music.
    Wait did that just happen? http://www.wboy.com/story/26802392/max-media-group-inc-announced-new-subsidiary

  9. all these ideas suck and aren’t the solution. the solution is simple, and it’s coming. I am building it. be on the look out.

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