Tag Archives: iTunes

Get Rich and Die Trying: A Look Inside the Music Industry’s Collective Death Wish

Money in fist

When you love music as much as I do, it’s hard not to be troubled when you see the entire industry careening toward economic collapse. It’s even more troubling when it’s so evident that the industry is bringing its demise upon itself.

The clubby collaboration between the major record labels and Spotify has placed the entire music industry on top of a precarious investment bubble, and in so doing has left the industry on the teetering brink of economic implosion.

Spotify’s most recent round of funding a few months ago valued the company at $8.4 billion. The entire US recording industry was valued at $6.972 billion at the close of 2014. Though Spotify has yet to make a profit (their net loss tripled from 2013 to 2014), its valuation is based upon the growth of its customer base. It’s valued like a tech company, not a traditional music or entertainment company. One might think this is healthy for the industry, a sign that the music industry has embraced technology and is receiving valuations that acknowledge as much.

But here’s the first problem.

One of the reasons why tech valuations can be supported is economies of scale: as a customer base grows, a company not only gains a greater hold on the market but its costs go down (as calculated per customer).  But that is not at all the case with Spotify.  Sure, there are some tiny tech-based economies of scale as it relates to Spotify’s servers and whatnot.  But nearly 75% of their post-tax revenue is paid out to record labels, and these royalty costs do not go down at all as Spotify grows.  As Spotify grows, more songs are listened to, and their cost base goes up.

Here’s the second problem.

Spotify’s insistence on the freemium model locks it into chasing customers that just aren’t profitable.  A paying Spotify customer generates 26 times more revenue than a user of the free service, and although the percentage of Spotify users is stuck at around 25%, paying customers account for 91% of the company’s income.

But won’t the freemium model convert users to paying customers over time?

Here’s the third problem.

The average customer spends about $48 per year on iTunes.  Given iTunes scale, you can consider their average customer to be a pretty good proxy for an overall average customer (probably even spendier than your average customer, given that they are customers who are still buying music to begin with).  So, if you are betting on people to convert to the paid tier of Spotify and other streaming services, you are expecting your average person to nearly triple their yearly expenditure on music.  And you are expecting people to do this despite the fact that there are going to be legal and free alternatives available to them… with the second most popular alternative (second to YouTube) provided by Spotify itself!

For paid (read: profitable) streaming services to succeed, the pricing is probably going to need to come down by half. And, as it turns out, Apple tried exactly this. In the early days of their negotiations with labels, Apple had planned to charge $5 per month. But the major labels wouldn’t allow this. Subsequently, Apple tried to dig in its heels at a $7.99 monthly charge, but once again the major labels wouldn’t sign any agreements below $9.99 per month.

Why are labels not trying to steer this boat away from what is obviously an iceberg of permanent unprofitability?

And here’s the fourth (and biggest) problem.

The major record labels, collectively, own about 20% of Spotify.  That means that they have a stake in Spotify that is worth about $1.7 billion, and they have seen this stake double in value just since September of 2013.  So, despite the fact that Spotify is unprofitable and is contributing mightily to the persistent unprofitability of the entire music business, why on earth would the labels care?  They are getting significant royalty payments that Spotify has to pay regardless of profitability, and with their collective 20% stake in Spotify they are riding the valuation that is predicated upon the false hope that the company will some day become profitable.

This intertwined interdependency of the music industrial complex risks ruining the economics of the music industry permanently.

So how can the industry innovate and pull out of this death spiral? This very question is the fuel for future blog posts.

Stay tuned.

Happy Valentine’s Day, Music Lovers

 

 

 

 

 

 

 

 

 

 

As the latest move in their systematic attempt to flaunt every iota of existing record industry convention, Radiohead just announced that their new album will be coming out this Saturday.  In a business where pre-release leaks have become the wink-wink way to drum up enthusiasm for the months running up to a release, there is absolute radio silence on this release.  Nothing.  The C.I.A. couldn’t manage this kind of security if they were releasing a record and yet one of the biggest bands out there has chosen this sneak attack.

As if this weren’t enough, Radiohead has also chosen to opt out of iTunes with this release.

So, as they have many times before (remember that they were the inventors of the pick your price play), Radiohead has dared us to decide whether they are genius innovators or just megastars who are insanely indifferent to incremental financial success.

 

30 Words of Music, Day 4: feat.

There is one fact, among many, that proves that the designers of the iPod were not much for hip-hop.  Apple’s user interface, while rightly lauded, freezes when faced with four little letters: “feat.”

The marking “feat.” has nothing to do with marking and everything to do with symbolizing the free-flowing collaboration that defines the spirit and the composition of modern music.  If you glance the back of any hip-hop record, I’d guess that at least a third of those songs “feat(ure)” some other artist.  Featuring someone isn’t the sign of some side project, but rather emblematic of the fact that from its early days hip-hop culture has come up with a spirit of dynamic intermingling that sets it clearly apart from its one-band-per-record rock brethren.

A terrific new example of this is the following song, “Hard Times.”  Originally by Baby Huey and the Babysitters (here’s to awesome band names), this track is now performed by John Legend and The Roots– incredibly successful individual artists/bands in their own right.  But wait, there’s more– while John Legend takes lead lyrical duties, it features Black Thought– the vocal lead of The Roots.

Hard Times (Ft. Black Thought), John Legend and The Roots

Got that?  Your iPod won’t.  You see, anytime one artist features another, the iPod is trained to recognize that combination as an entirely new artist– linked only by alphabetic proximity.  Scrolling through the artist tab is to ramble through an endless series of permutations, and to be reminded of the many different ways that cultural perspective shapes all sorts of little experiences.

While we’re on the topic of the iPod-baffling alchemy at the heart of so much great music, here’s one more track off of Wake Up!: the new record from John Legend and The Roots.  It’s the song that John Legend was born to sing, Continue reading

Day 18: A Song that You Hear Often on the Radio

Is radio disappearing or re-appearing in a different form?  Is it bit of nostalgia or a needed antidote?  A lingering habit for aging baby boomers, or something ready to be seized by youth?  As I think about it, a bit of all of the above.

A music fan since my youth, I have more awesome radio-centric memories than I can recall.  As many did, I got my start with mixtapes mashed together from live radio recordings: the first few seconds always missing as you leapt across the room; the last few seconds always polluted by the inevitable DJ chatter.  I had my yearly ritual of counting down live the top songs of the past year, pen and list in hand as if I were documenting some sort of draft.  And, as I’ve documented, much of my college years were spent over a radio mic.  If anyone is cheering for radio, it’s me.

In a hasty bit of blogger research, I tracked down an Arbitron research study from last month on the future of radio.  The findings were largely what you’d expect: huge drops in the percentage of people who think of radio as the most essential medium (strange to think that there still are 14% who still view radio in that way); and massive drops in the percentage of people who turn to radio to learn about new music.  All of these stats had the demographic skews that you’d expect: if you followed the data out the window you’d ship radio off to the AARP and forget about it.

But as we think about radio’s future, the first step is to define what radio actually is today. Continue reading