Cloud & Services

Can online music services ever really succeed?

Subscriptions to music services are expected to more than double by 2017, but because those services pay 60 percent to 70 percent of their revenue to record labels and artists, the entire sector is intrinsically unprofitable, according to a new report.

The report, from industry analyst firm Generator Research, offered an analysis of the top services, including Pandora, Spotify, and Rhapsody.

The report states that unless the services can monetize their user base by entering new product and service categories, or they can sell themselves to a larger company that can sustain them, they’re doomed to fail.

“We cannot see any conceivable market scenario where the music industry would buy any of these players, let alone the whole sector,” said Andrew Sheehey, co-founder and chief analyst of Generator Research, in an email reply to Computerworld.

Generator Research’s analysis shows that no current music subscription service can ever profitable, even if it executes perfectly, because the music industry will never agree to significantly reduced royalties.

“For a listed company like Pandora this would mean that the company would need to be taken off the public market (as has happened with Dell),” the analysis stated.

Roads to profitability

One method that subscription services might be able to achieve profitability is to upsell mobile deals or bundles to subscribers. For example, a select package of mobile services would be sold through the music service provider, the report suggests.

Bundled services will likely begin to surface when the music subscription market reaches a certain critical mass. Then, users will see the arrival of a kind of “super bundle” where, for an additional monthly fee, paid-for downloads, for example, would be bundled with the base subscription offer.

“Services like iTunes Match and Google and Amazon are already heading in this direction,” Generator research states.

Music subscription services could also sell anonymous user behavioral data to advertisers and ad platforms that could use that information to better target their advertising, the report said.

Growth industry

The number of subscribers to both paid and unpaid music services is expected to more than double over the next three years, Generator Research stated.

pandora listening hours

Pandora listening hours -- online versus mobile.

The company estimates that last year, there were 767 million individuals worldwide using a music subscription service. Of those, 36 million paid for subscription-based access.

By 2017, the number of subscribers overall is expected to leap to 1.7 billion, with 125 million of those users paying for the service to access premium features while avoiding ads, the researchers said.

The increase in paid subscriptions means revenues earned from music subscription services will represent $2.9 billion, and “will be by far and away the most important source of growth that will, at last, allow the music industry to return to a period of growth, albeit modest.”

From 2013 to 2017, the total revenue earned by all record companies worldwide will increase from $16.7 billion to $17.2 billion, or 3.2 percent. Yet, revenues from physical formats will fall by $2.09 billion and revenues from digital download sales will fall by $663 million. Revenues generated from performance and synchronization rights will increase, but only by $322 million, the report states.

pandora cash flow

Pandora's cash flow compared to other music streaming services

Seeing marked growth by subscribers, private investors over the past decade have injected more than $1 billion to create a music subscription market. However, the only beneficiaries of those investments to date have been the music industry and users.

“Music subscription services providers are all losing money, and that is going to remain the case until they find a way to monetize a worldwide user base,” the report states.

“Putting to one side the quality of the actual service, which most users would rate very highly, the facts show that Pandora—when viewed objectively as a business—is in dire straits,” the report stated. “We are at a loss to know why the company’s stock has performed so well, especially over the last 12 months.” Over the past year, Pandora’s stock price has jumped from $11.48 to $37.95.

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