If you read the headlines about the Apple-Beats Music deal, you’d think that the music industry is going to move away from downloads….yesterday. You’d think that unless Apple inked the deal, Pandora and Spotify would take over the helm of music as we know it. You’d think that people, in a complete 180-degree turn, now want to rent their music–even abandoning the digital music they’ve already collected.
As with most media, especially entertainment media (and politics), the key is to step out of echo box into the sunlight of fact and reason. First, take a look at the image above, provided by the Music Industry Blog. It pretty much provides context around downloads versus streaming. 200 million for Apple versus 18 million paid subscribers for all other Pandora-type streaming services combined.
Now lets define streaming. According to the RIAA (next to the skinheads, one of my favorite organizations), streaming is defined as Pandora-type services, streaming radio such as SiriusXM, and other non-subscription services like YouTube and free streaming products (Spotify Lite). When you add satellite radio into the mix, it’s easier to understand why streaming services are growing. The headlines scream “Pandora” and “Spotify”, when they should be yelling “Pandora” and “SiriusXM”.
Next, let’s look at the numbers:
On the second page you’ll find the magic. Turns out that CD is still the player, with $2.7 billion in sales in 2012, and $2.4 billion in 2013. Compare that to singles and album download sales of $2.5 billion in 2012 and $2.8 billion in 2013. These figures, as you see, don’t include kiosk, music video, or ringtones/ringback sales.
And the streaming services? The future of music? The new “Shiva, God of Death” for downloads? $1.032 billion in 2012 and $1.4 billion in 2013. A billion dollars is strong; but if you combine downloaded singles, albums and physical media sales, then streaming is a trend with a lot of catching up to do.
Now, let’s look at royalties. It’s inside ball, as they say, but it is very important. Artist royalties is the number one thing putting upwards pressure on the monthly costs of Pandora-style streaming services. Here’s a great quote to provide context, from MarketWatch.com:
Bette Midler is angry, and you won’t like Bette Midler when she’s angry.
The singer lashed out at Pandora P -0.40% last month after the streaming music provider paid her $114 in royalties for more than 4 million song plays. She’s not the first to complain; last year, members of Pink Floyd accused Pandora of “tricking artists,” while the Talking Heads’ David Byrne called Internet radio “unsustainable as a means of supporting creative work.”
Yes, you can read that Pandora paid $500 million in royalties. Here’s an article from an artist (remember “Low” from the 90′s?) who says–and provides paperwork–that Pandora paid him $16.89 for 1 million plays. Along the way, he makes a great point about Pandora-style streamers:
Why doesn’t Pandora get off the couch and get an actual business model instead of asking for a handout from congress (legislation to lower royalty rates by 85%) and artists? For instance: Right now Pandora plays one minute of commercials an hour on their free service. Here’s an idea! Play two minutes of commercials and double your revenue! (Sirius XM often plays 13 minutes and charges a subscription).
Lastly, let’s look at Apple. First, I believe that had iTunes Radio gotten off the ground, the Beats deal would never had been thought of. But it didn’t and we are here.
Next, iTunes Radio is a good service. I’ve used it. I don’t use other Pandora-style streamers. Why? We pay $25 a year for iTunes Match. What’s the deal with that? iTunes Match scans my library (169.4 gigabytes) and matches it in the cloud. Which means I can stream 99% of my music to any of my devices–Mac, iOS, and AppleTV. Apple has the pieces in place. The Beats deal gives them some glitz and branding. It gives them the opportunity to repackage and tweak some great products under a bleeding-edge brand name.
So what will happen with iTunes Radio? Back to the Marketwatch article for a glimpse into Apple’s strategy:
So when Apple AAPL +0.09% rolled out iTunes Radio last fall, it was a sea change. Tim Cook and Co. not only offered to pay more in performance royalties , they threw the labels a slice of advertising revenues to boot. Songwriters were offered a 10% cut from Apple — more than double what they receive from Pandora. That was in addition to less tangible benefits, like integration with the iTunes Store, independent licensing deals (not possible with Pandora), and the ability for artists to get paid directly and avoid large Performance Rights Organizations like SoundExchange.
In return, Apple got exclusivity. Earlier this month, Coldplay, which pulled its catalog from Spotify last year, pre-released a new album on iTunes Radio. The Black Keys did likewise. December’s Beyoncé album was an iTunes exclusive, and the Los Angeles Times reported in March that Apple is pressuring the major labels for more such deals. They have no reason to refuse. Pandora’s royalty rates may be protected by the courts, but there’s more than one way to skin a cat.
I see Apple using Beats as a way to introduce a hybrid subscription/streaming model. For a monthly fee, you can listen to iTunes Radio; as well as take advantage of a fixed number of downloads. Streaming radio is a 21st century way to sample music, like AM/FM used to be before the conglomerates (er…conglomerate) ruined radio. I may be wrong.
But it follows that at the end of the day, people prefer owning to renting. The sales figures bear it out.
The costs to rent music will increase. Either Pandora and her sisters pay more royalties, or they have to take measures to build their subscriber base. Does that mean more commercials for free listeners? If so, will they abandon that platform for one that doesn’t play as many ads? As the monthly rate increases, what’s the magic number that reminds people renting is a bad deal? Is it $15/month? Is it $20? Because at some point, you could take the rental money and simply buy what you listen to. It makes sense; to me at least. How about you?