Deezer, Spotify and the Streaming Gold Rush

The music streaming world is one full of contrasts and inconsistencies.  At one end We7 and MOG sell for peanuts;  in the middle Rhapsody, Sony, Rdio, Wimp, Rara and others continue to steadily build a market; and at the other end Deezer and Spotify are sucking in investment with the force of a black hole. Spotify’s investment is well documented, but this week Deezer confirmed their seat on the fast train with a $100m investment from Access Industries, which also just happen to own Warner Music.

Leaving aside for a moment the intriguing fact that the two streaming global super powers are European, Deezer has managed to slip beneath the radar of the often US-skewed digital music world view by pointedly deciding to ignore the US market (for now).  Like a canny general who decides to march around a heavily fortified stronghold and thus effectively leave it stranded behind enemy lines, so Deezer expects the streaming war to waged on different shores.  They are both right and wrong.

The US is Saturated and Yet Potential Remains Untapped

There is no doubt that the US paid streaming market is overly catered for at present, and that Deezer would struggle to get any foothold.  Also there is clearly a much bigger scale opportunity in the remainder of the globe.  However, and somewhat paradoxically, the US market should also have much much more space, plenty enough for Deezer, Spotify and the rest to flourish in.  The problem is that the $9.99 streaming monthly subscription is not a mass market value proposition and it is not about to suddenly become one. We have had the product in market for over a decade, if it was going to hit hockey stick growth we’d have seen it by now.

To be clear, this is not to say streaming music is not a mainstream proposition, but that the $9.99 streaming subscription is not.  And that is a problem, because it is clear that for the economics of streaming to add up (for artists, services and labels alike) scale is key.  Pandora’s Tim Westergren has made the case for lower statutory streaming rates to drive scale, it is probably time to start a parallel dialogue for on-demand streaming.

But lower wholesale rates alone won’t fix the problem.  The market still desperately needs more mobile carriers, ISPs and device companies to start hiding in their core products some or all of the cost of subscriptions to consumers.  Cricket Wireless, Telia Sonera, France Telecom and of course TDC have all made solid starts but more, much more, is needed.

Price Is the Biggest Barrier to Streaming Going Mainstream

If streaming is to go mainstream the price point (for streaming with full mobile device support) has got to get towards $5, through a combination of bundling and rate discounting. Until then Spotify’s and Deezer’s gold rush millions will achieve little more than saturate the high end aficionados that the $9.99 price point appeals to.  Currently both companies look remarkably similar in terms of user metrics (see figure) but while they pursue somewhat distinct geographic priorities they will continue to find those few per cent of aficionados in each market.  Things will get really interesting when they reach $9.99’s adoption glass ceiling.

Apple: the Elephant in the Room

And of course there is an elephant in the room: Apple.  Apple have played their hand cautiously to date, conscious of their hugely influential role in the digital market and indeed in the music industry more broadly.  If they get their streaming play wrong (and there will be an Apple streaming play eventually) the results could be catastrophic for the music industry.  Apple’s 400 million credit card linked iTunes accounts dwarves Spotify and Deezer so it is understandable that the they each want to make hay while they can.  But the streaming pricing problem still needs fixing, and soon.

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10 thoughts on “Deezer, Spotify and the Streaming Gold Rush

  1. Streaming is now a part of the music rights landscape and should be embraced as an additional income stream. However, much is made about these companies and the investment funds they are attracting and their payment models, but what about the rights owners and artists. How is their compensation going to improve, as without their talent and rights, the streaming companies would be valueless?

  2. @rightsman – its a catch 22 as without streaming companies rights owners and artists get less money. Download growth is stalling, revenue is stalling but without streaming piracy would expand.

  3. Regarding the pricing question, I would just like to point out that the $9.99 tier is presently locked in place by record labels, who refuse to draft deals with music services that would allow for a more flexible pricing structure. At present, any company going below $9.99 will loose their margin and make losses. Simple as that.

  4. Good article, Mark. But what about the bigger elephant in the room– YouTube. It’s free to listen and free to post as an artist (unlike the subscription or download services). Ad revenue goes to the right’s holder of the song. Correct me if I’m wrong about that.

    I’m in the USA and if you ask anyone under 25 how they discover or listen to music it starts on YouTube and leads to purchase on iTunes or as a CD or vinyl. Spotify? nope.

    As a producer, I go to YouTube when I’m in the studio to research or find a reference. For a new indie artist, there are upfront fees and other restraints that keep the artist from aligning their music with aggregators who place the songs on Spotify/Deezer whereas every concert or new song can be posted to YouTube by a 10 year old.

    Maybe the upfront money paid by the artist/label to be on these mp3 services are a good barrier to entry, but then, once the music has fewer sales, the artists/labels will remove songs/albums from these services. That wouldn’t happen on YouTube. YouTube will have historical value and lead to a better value for listener’s time spent on one’s library.

    Spotify made the mistake in the USA of aligning with Facebook and requiring Facebook membership. That was a red flag. But even now, as they lift that restriction, why would we want to pay to have our listening limited–whether by number of repeats or what’s available. The sound quality on YouTube is as adequate as Spotify. The video is a trivial part–you can just post a title.

    The public is being dinged hundreds of dollars a month in $2/$5/$10 chunks for all kinds of services. It gets old fast and those services get turned off. Spotify appears to be another Zynga business model. Hype, IPO, investors go to the bank, stock share plummet.

    My comment on Deezer’s not trying to enter the USA market… I think it’s a smart move. Neil Young’s Pono device, largely backed by Warner, leads me to predict that Deezer will be headed to higher fidelity streaming. Outside of the USA, higher fidelity has more importance and (at least initially) could give Deezer an edge… probably leading to being purchased by Warner. Hardware devices can provide growth that makes sense for content providers.

  5. I personally don’t think 9.99 is too much for streaming services. Let’s not forget that CDs and Vinyl are far more expensive and that only gets you one album. 9.99 a month for millions of songs is also not too much to encourage people to continue illegal downloads. I know several people who stopped downloading because 9.99 is a great price and a streaming music services is much easier to use / locate music than torrent sites. They are also happy to not have to worry about legal concerns.

    YouTube is a big draw for the youngest generation. I work in a high school and the students are always talking about YouTube when discussing music. Streaming services do have advantages such as discovery, ease of use, and far more depth of content.

    Requiring a Facebook account was a stupid move by Spotify…IMHO. I have lots of friends who do not have a Facebook account and will never get a Facebook account. Hope you are correct that this requirement is going away.

  6. rightsman – the compensation of artists is a complex and well documented issue that is as determined by artist contracts with their labels as it is the commercial terms services enter into with labels. What seems to be clear though is that scale is important. The amount of revenue per stream is markedly lower than income per download, so you need lots of people listenign to lost of music to make the model fulfill its potential.

    Pete – agree that streaming some much needed momentum to digital revenue, with downloads struggling to translate outside of the iTunes ecosystem

    Elsie – yes, fully understand the price point is determined by wholesale rates. The point I am making is that it is time for rights holders to start thinking about whether they are ready to start looking at reduced wholesale rates to help drive cheaper consumer prices and thus larger scale adoption.

    Cookie and John – I agree entirely about the YouTube aspect, and your points are well made. See this para from a previous post http://musicindustryblog.wordpress.com/2012/09/24/why-losing-free-customers-is-a-good-thing-for-spotifys-business-model/

    And all of their cases are challenged further by an uneven playing field. While all those music services have to charge for mobile access and have some gaps in their catalogues, YouTube provides unlimited access, on all mobile devices, with the world’s largest music catalogue, with video, for absolutely no cost at all to the consumer. As far as streaming goes, there is one rule for YouTube, and another for the rest. Until that anomaly is fixed, the rest will be swimming against the tide.

  7. @rightsman – while I understand your point of view, the economics need to be sustainable for these digital music business to both survive and to continue to grow; lower content costs -> more sustainable business model -> resources and capital to develop better offering to appeal to and engage more users plus more flexibility on pricing -> increased user base -> more streams -> more revenue for artists and rights holders.

    @cookie – Would artists be satisfied with the content revenue stream just from ad revenue on Youtube? I don’t have any specific numbers, but I doubt it. Younger consumers use it because it is free, but my assumption is that the monetization is so low for artists/rights holders, that in the event that it becomes the primary/only way to consume music content, the sustainability of the music creation landscape will evaporate. In my opinion, stremaing services can provide a better music consumption experience to all users, aka the mass market and not early adopters of that are currently using streaming services, such that people would be willing to pay something >$0 (YouTube), but less than the current $9.99 (streaming), but @elsiemonk mentions, the services do not have the flexibility to adjust pricing for their offerings for various reasons.

    And regarding Spotify requiring Facebook to use the service, while I understand the reasons while this strategy was not well liked, it the free distribution Spotify received via Facebook Open Graph (as users broadcast their usage of the service and what they listended to on it) was massive and generate a huge amoung of free promotion and new users for their conversion funnel, which led to explosive user growth all at no direct cost. I hope people at least understand why the company proceeded in the direction.

  8. Thank you, Josh for your thoughtful reply. For a record label, Spotify and other mp3 or streaming distributors are not free. To use their service requires you sign up to a digital aggregator. Costs vary from a yearly fee of $29-59 per album per year or upfront fees and percentage of sales. Most small labels are not going to see the return on that investment from yearly listening on streaming services or what might be subsequent mp3 sales.

    If you’re going to promote a product and direct traffic to a site, we believe it’s makes more sense to drive traffic to sites (like YouTube) where have at least the potential to monetize and better yet, why not promote people to your own site where you can place ads simply with Adsense or other ad mechanisms. Why send fans to Facebook where Facebook gets the ad eyeballs? For that matter, why send people to iTunes (for example) where you don’t get the customer sales information. Apple owns the customer. The label should own their customers.

    In 2007, we debuted our record label Blue Coast Records. http://bluecoastrecords.com We took the opposite approach of making downloads less expensive and instead, focused on customer development combined with releasing a higher quality recorded product. We charge $40-50 per album ($4-5 per single) and release in high resolution pcm and super resolution audio called DSD–the future format.

    At this point, you’re probably thinking “I would never pay that much for an album”. Which is fine. That tells me you’re not my customer, no biggie. Our focus initially is the audiophile community, who have adapted to our higher prices where they get a quality recording and customer service.

    We built our own distribution system for delivery called Downloads NOW! where we create MicroStores for other labels. Here’s one we recently released for the San Francisco Symphony.
    http://sanfranciscosymphony.downloadsnow.net/mahler-1

    In two weeks, we have generated more revenue for SFS than their whole year in downloads with this title. If you notice, we have Adsense and are collecting revenue from the ads. We’ve also incorporated our own discover module for other albums to be seen. Still, our own label generates 70% of the revenue from artists no one has ever heard of, except our customers.

    The secret is customer development, ownership of the sites, email addresses and sales information. Bootstrapping for 5 years, hasn’t afforded us the ability to do more than offer a few free downloads, build a mailing list and engage with our customers. We can do and believe other labels can too.. they just need the tools.

    With diligence to new product releases and regular newsletters, we’ve gone from 1 to 22,000 registered members. We have token Facebook and Twitter accounts which has 350 fans/followers by comparison. We feel it’s better to direct energy to sales/service over social. Our direct and private customer service delivers more impact, loyalty and additional sales that a post on Facebook.

    My point is this… Spotify appears to exist as an investor game using music as the bait. iTunes exists to sell hardware. Labels are paying for parking their music at these huge music garages with hopes a customer will find them. We advocate the label own the parking lot, even if it’s small.

    It will be interesting to see what happens with Coke as a new investor in Spotify.

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