Music Industry in a Tailspin: Will Streaming Music Services Ever Turn a Profit?


ADOTAS — It’s been over a decade since the first iPod emerged on the scene, disrupting the music industry and prompting the inevitable shift towards digital. When it was first introduced, this pocket-sized music player went head-to-head against the now legacy playback formats that previously dominated the recording industry, including CDs and vinyl records. While the sound quality of an mp3 file will never match the fidelity of a record due to file compression, the added convenience of being to carry one’s entire music library in his pocket has forced the hands of music execs and fueled the development of new music business models for the transmission and playback of our favorite beats.

In 2012, consumers spent $5.6 billion worldwide on digital music, an increase of 9 percent, just now offsetting the decline in CDs and other physical ways to provide music. Last year the industry had its best growth since 1998, albeit a miniscule 0.3 percent, according to the International Federation of the Phonographic Industry, which represents the recording industry worldwide.

The recent growth of online music streaming services like Spotify and Pandora points to the fact that there’s a huge audience ready to consume music-related content, and yet, paltry revenue figures from these firms indicate that companies haven’t yet found the right mix of advertising and music content to turn a profit. As of now, people just aren’t clicking on ads enough to pay for the music licensing fees needed to keep the business afloat.

According to the IFPI, despite the weak financial performance of music streaming services, music subscription services are expected to have crossed the 10-percent mark as a share of total digital music revenues in 2012 for the first time.

In an effort to ramp up a more aggressive advertising strategy, Pandora just announced that it has hired Tommy Page, former record company executive from Warner Bros. Records and most recently the publisher at Billboard, as its VP of Artist and Brand Partnerships. Page’s immediate focus is to expand artist development programming through both branded content, such as the Legends & Icons series and Off The Map, as well as live music experiences like Pandora Presents and the upcoming “Live on Pier 26, Hudson River Park ” summer concert series that will feature headline acts such as OneRepublic, Fun. and The Specials.

The hiring is a signpost to Pandora’s expansion into branded content and offline experiential marketing.

“I joined Pandora because I believe in the opportunity to connect artists and listeners in way that hasn’t been possible until now,” said Page, a recording artist in his own right. “The future of brands in advertising is a 360 degree model. Advertising is no longer just about putting a name on a product – it’s about creating an experience. Pandora integrates artists and brands by offering unique, organic and authentic opportunities to reach fans through experiences both online with customized content and in the real world through concerts. Creating these experiences is important because it hits passion points with fans, engaging them deeply with brands.”

Google, Amazon, Apple Enter the Ring

Music-centric companies are not the only ones looking to tap into the revenue potential of listening to our favorite tunes on demand. Technology giants Google, Amazon, Facebook and Apple are among the powerhouses sounding out top recording industry executives about building out their own respective streaming music services, according to sources. The stakes are high for Apple in particular, which  is in talks with music service iRadio, whose iTunes store currently owns 63 percent of the digital music market, but it is up against a new breed of music services that don’t require downloads or a credit card. The reluctance of consumers to pay 99 cents to download a music file could threaten iTunes’ supremacy.

Microsoft is already promoting its Xbox Music service and their entry aims to catalyze an industry shake-up and propel music streaming further into the mainstream.

In January, Beats Electronics, the startup co-founded by recording legend Jimmy lovine and hip-hop performer-producer Dr. Dre, and backed by Universal and Warner Music, announced a new streaming subscription service dubbed “Daisy” to take on Pandora and Spotify starting this summer.

“ITunes was great, but it needs a step forward,” lovine, chairman of Universal Music’s Interscope-Geffen-A&M Records, told the AllThingsD conference in February. “There is an ocean of music out there that people want.”

If harnessed correctly, music content services should be able to provide the optimal advertising opportunity for brands to get in front of a captivated audience with a targeted message.

“People are already passionate about music, so it’s about incorporating that into their ad experiences to form a deeper connection with the brand,” said Dan Merrits, CEO of music ad firm F#. “This ultimately creates a lasting association that often improves awareness and drives purchase intent.”



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