The music industry has been following Pandora’s IPO with baited breath and has largely been encouraged by the degree to which the financial markets value one of the few true gems of the digital music space. But it doesn’t all smell of roses. Indeed Pandora’s Tim Westergren has made no secret of his concern over how large a share of his revenues are accounted for by royalty payments: they are by far the largest single cost and following a (very) brief spike into profitability Pandora remains unprofitable, despite massive consumer adoption.
The debate about royalty payments and music service profitability is well documented – profitability remains a wishful daydream for Spotify and even Apple only just break even on iTunes. But a quote from Pandora’s CTO Tom Conrad opens up an intriguing new angle:
“The figure that surprises most folks is that about 80 percent of music consumed each week comes from music radio. Only 20 percent comes from owned music. We’re really focused on defining the future of radio. That’s the mainstream opportunity.”
If streaming is the future of music consumption it raises some big questions because there are inherent tensions and contradictions in the current situation:
1. Digital music is a low margin, often loss-making business for services
2. Streaming services (including iCloud etc.) are helping driving a paradigm shift from ownership to access
3. Yet those often ad-supported streaming services (especially semi-on-demand services like Pandora) don’t generate enough income for the music industry.
The irony is that the more successful they become in terms of listening hours and user adoption the more rights owners feel concerned about them cannibalizing higher value ownership based transactions such as downloads and CDs. And in turn the more tempted they may be to hike royalty fees.
Radio has always played a dual role for the music industry: it has been the best discovery service out there but also the single largest competitor to music sales. The paradox is that many music fans wouldn’t buy as much music if they didn’t have radio and yet also many radio listeners would buy more music if they didn’t have radio.
The future of music consumption is going to become increasingly access-based. There’s simply no escaping the fact. And yet the current digital music value chain is not prepared for it. Something needs to change, and soon. More common ground needs to be found between rights holder and services but also new types of services are required that throw the out-dated distinctions between ownership and listening out of the window.
The future of music will be access based, but access has to mean much more than streaming alone.
Music Industry Blog 
I think we must distinguish between casual fans and core fans. For the mainstream, built up of casual fans, access is all they’ll really need. Once services like Rdio and Spotify go mainstream, you will see that the casual fans flock to the more convenient and cheaper option of streaming music, and having a select amount available for offline play. Those are the people that listen to Pandora as well. It’s not a revolutionary product. It’s just online radio. It will be replaced by better products in the next few years. For the core fans there will always be physical products they will want to own, whether it’s a cd to get signed at a concert, of a fancy special way to release an album (like the limited edition gummy bear skull sculpture with usb drive that the Flaming Lips recently release). There is a core and a casual fan in all of us. I’m a core fan of a few bands, and a casual fan of many. I will buy music releases by those artists that have managed to build a relationship with me and release in a format that I find attractive, and I will stream everyone else. Pandora not the shape of the future, but merely a deeply flawed business that offers us insight into the behavior of the casual fan.
Spent nearly an hour with a subscription media client last week discussing why “access” matters so much in media — especially in music. Ended up tying it to my academic work (from my dissertation, no less), to explain that our brains have a “surveillance function,” a part of us whose job it is to be on the lookout for new things — threats and opportunities. Music listening fits nicely into that part of our brains — we want to make sure we are aware of new stimuli, we don’t want to be left behind socially, so we actively survey the horizon for new and emerging trends, including those we have to defend against to protect ourselves (say, Lady Gaga, for example ;). We will never settle for listening to owned music simply because it will never satisfy this deep part of us.
This Music Matters interview between Universal’s Rob Wells and Omnifone’s Rob Lewis sheds more light on the topic from a rights holder perspective. Check out the video 9mins 30seconds in;
http://www.billboard.biz/bbbiz/industry/digital-and-mobile/watch-universal-s-rob-wells-vs-omniphone-1005239062.story
Wesley – I agree entirely with the necessary distinction between casual and ardent fans. Indeed it is implicit in my point about the radio paradox.
What I think is important is that in the last decade there has been an irrefutable decline in spending on recorded music. Granted this has been offset to some degree by the rise in spending on live, sync, merch etc. But the fact remains that the music industry is in dire need of a successor product to the CD. (Neither 0.99 downloads nor are 9.99 streaming subscriptions it). The lack of something truly revolutionary has left a digital vacuum which has been filled to date by free, both illegal and licensed. YouTube has become digital music’s killer app despite lacking audio fidelity, clean metadata and true portability because it just works. Spotify and Pandora just work (and some). And thus they have pulled in not just the digital masses but also the aficionados. (And before anyone says aficionados don’t use YouTube for music consumption; teenage music aficionados use it in their droves).
The danger is that the longer this goes on, the more that ‘casual’ music consumption patterns will become synonymous with digital music as a whole. In fact we’re already a lot of the way there.
Finally, access based consumption doesn’t just mean casual consumption. Look at Rhapsody: an aficionado enclave yet almost entirely access based consumption.
James – as you know, I’m a big fan of your behavioural and psychological analysis of what drives people to choose media and products. Those not familiar should read James’ fantastic Forrester report ‘What People Really Need’. http://www.forrester.com/rb/Research/what_people_really_need/q/id/53803/t/2
It’s interesting to hear you apply some of that thinking here and it certainly resonates. It does a good job of helping understand why music aficionados find value in radio. But I think it helps explain passive music listening. One of the reasons why radio is so successful and why music is so often ‘just on’ in the background while people do other things and consume other media. It’s background but not static background. It’s the difference between a white painted wall and a really wildly patterned wallpaper! It allows casual listeners to meet their desire to survey the music landscape without having to truly dive in.
Mark,
Here’s the thing. The music consumer doesn’t have a problem right now, merely an imperfect product. That’s all that matters in terms of having momentum to change direction for the music industry. There is not incentive for a consumer to change their behavior, unless you offer a more convenient, better priced and better developed product. And the customer is in control. No one cares that there is no successor to the CD. Matter of fact, the vast majority of people doesn’t miss the CD and they feel digital music (stream or download) is indeed a decent successor. Spotify, even in it’s rough state and with it’s poor UI, has proven to be a successor to illegal downloading, and I think Rdio could do that too. Pandora is a weaker product altogether, and Rhapsody isn’t “it” either. The customer’s movement away from purchasing music is not a problem for anyone but the old right’s holders. YouTube as a music player is an AWFUL product, yet very popular. Instead of complaining about this, rights holders should be creating a better product. It’s like stealing candy from a child at this point. They are equity holders in Spotify for example, that is a good first step.
ps I would recommend using the Disqus plug in to handle your comments. it’s wonderful!
The Currency of ‘the music business’, if you will, is Songs.
The Songwriters are ones who hold the keys to this universal treasure.
Not some ‘application, that will come, and also go, as Micepace has almost gone,
as Faecebook and Twitter et al, will also pass..
These techinical ‘applications’, are momentary trivialities, distractions at best.
Music is an Echo of the Word, the Eternal and infinite Beginning, the Breath of the Universe.
(Correction)
The Currency of ‘the music business’, if you will, is Songs.
The Songwriters are (the) ones who hold the keys to this Universal Treasure.
Not some ‘application, that will come, and also go,
as Micepace has almost gone, as TwitFace et al, will also pass..
These techinical ‘applications’, are trivialities, distractions at best.
Music is an Echo of the Word, the Eternal and infinite Beginning, the Breath of the Universe.
Re: ‘what drives people to choose media and products’?
Don’t we buy, (and buy into) whatever we are given by the machine?
Ergo, the product of whichever part of the machine has out manoeuvred another part in ‘the marketplace’?
To understand the differences and benefits, nay advantages of Radio one might look at the fundamental difference between Sight and Hearing.
Sight is ‘male’ – penetrating and focussed, and takes the Viewer into his or her own sense, – it separates,
cuts away.. – it isn’t shared.
Hearing is ‘female’, receptive, our ears and the correlated auditory parts of the human brain which decipher and re-encode this information are able to process vastly more complex and disparate information than our eyes and visual cortex.
More importantly, Hearing allows the Listener to remain part of, and the experience of hearing is shared..
People can sing along together to a song on the Radio, or just hear, and continue to be part of their environment, People watching screens, are consumed and absorbed by the screen itself.
Note to James McQuivey: “our brains have a “surveillance function,” a part of us whose job it is to be on the lookout for new things — threats and opportunities”
– The Eyes, Our vision is an evolutionary adaptation, that inherited part of us which is ‘the Hunter’ –
this is why YouTube is so popular – We hunt visually. See?
Our hearing is also an inheritance, essentially for communication and defence.
We survey, yes, the horizon, as it were, for prey. Sadly, just Youtube sensation, as it happens these daze.
We listen.. for danger, and to each other.
Correction: Re: ‘what drives people to choose media and products’?
Don’t we buy, (and buy into) whatever we are given by the machine?
Ergo, the product of whichever part of the machine has out manoeuvred another part in ‘the marketplace’?
To understand the differences and benefits, nay advantages of Radio one might look at the fundamental difference between Sight and Hearing.
Sight is ‘male’ – penetrating and focussed, and takes the Viewer into his or her own sense, – it separates,
cuts away.. – it isn’t shared.
Hearing is ‘female’, receptive, our ears and the correlated auditory parts of the human brain which decipher and re-encode this information are able to process vastly more complex and disparate information than our eyes and visual cortex.
More importantly, Hearing allows the Listener to remain part of (and connected to, their environment),
and the experience of hearing is shared..
People can sing along together to a song on the Radio, or just hear, and continue to be part of their environment,
People watching screens, are consumed and absorbed by the screen itself.
Note to James McQuivey:
“our brains have a “surveillance function,” a part of us whose job it is to be on the
lookout for new things — threats and opportunities”
– The Eyes, Our vision is an evolutionary adaptation, that inherited part of us which is ‘the Hunter’ –
this is why YouTube is so popular – We hunt visually. See?
Our hearing is also an inheritance, essentially for communication and defence.
We survey, yes, the horizon, as it were, for prey. Sadly, just Youtube sensation, as it happens these daze.
We listen.. for danger, and to each other.
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The real problem with Pandora is that it’s just another “Gatekeeper” for the major labels. Pandora refuses to program your music unless you have a physical CD for sale,and I find that rather Ironic for an “internet” radio station to require 20th Century technology in a 21st Century environment. If you run a forward thinking internet record label and don’t produce physical CD’s, then you’re not getting programmed on Pandora. It’s got to be the dumbest thing they do. Instead of being a catalyst for new music discovery, they’re just part of the “good ole boy” system that stifles innovation and restricts trade.Why don’t they just play music on it’s merit? Until they do,Pandora sucks.
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New changes in technology does however create problems for musicians trying to sell their albums, check it out http://www.musiccontracts.co/blog/technology-in-the-music-industry/
Artists need to learn how to adapt along-side with technology to become financially successful.
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