Tag Archives: music industry

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.

The Music Industry Dreams of a World Without the Internet

This is just crazy.  As part of a lawsuit against LimeWire, the record industry has sketched up the chart above to claim what they think record sales would be without Napster.  Which basically means that they are imagining what their lives would be like without the internet.  And, apparently, in this internet-less world, they are kicking it on 300 foot yachts and frolicking in swimming pools of caviar.  Hard to imagine a chart that would make them look more delusional.  (via Mashable)

Day 19: A Song that You Wish You Heard on the Radio

I’ve been hyping J. Cole on this blog for a while now, and his rapid rise continues to be a bit of a live case study on how to create a music superstar in 2010.  Even though I rarely listen to the radio and haven’t watched MTV in months, seldom does a week go by in which I’m not hit by another bit of original content by or about Jermaine.  And at the heart of this prominence is a blindingly-simple secret to contemporary marketing: make stuff.

Music blogs, much like any other contemporary democratized media outlet, don’t (often) write about an artist because someone pays them or because someone calls them up and convinces them to do so.  Rather, they cover content; their currency is the new.  So, if you’re a brand like J. Cole and want to stay front and center, make stuff.  Lots of stuff.  Freestyles, mixtapes, interviews, concert clips, leaked tracks, make it all.  Focus your energy on being prolific, not on being perfect.  For reasons like those mentioned in the above mini-interview with Just Blaze (awesome producer), don’t be too protective of your content or your brand.  Let other people see you playing around, and let others play around with your content.  But if you’re a contemporary brand, don’t spend so much time talking about yourself.  Just go make stuff.

If I hadn’t been up to 3am playing cards (yes I did win, thanks), I would more formally sketch out the J. Cole case study.  But for now, enjoy his new single (that dropped about a month ago, which means that it will have been released probably four months prior to commercial release), and also enjoy a re-mix no doubt carefully-crafted as Just Blaze described.  Be forewarned: the beat is hot and the lyrics dirty.  I’ll share some softer stuff for my folkier fans in the days to come.

Who Dat, J. Cole

And the hilariously-freestyled Joell Ortiz re-mix, hitting up everyone from Brett Favre to the Energizer Bunny to the Wizard of Oz.

Joell Ortiz – Who Dat (DIRTY)

On the Future of the Music Industry (Book Store Edition)

Could the future of the music industry take seed in a book store?

Prior to seeing Date Night last weekend (another story, for some other time), I spent some time in Barnes & Noble.  Already behind on books I already own, I wandered into the music section.  As I did, I found myself in the midst of a physical manifestation of the strange struggles the music industry is living through as it tries to figure out its future.  Interested as I am in music (and the business of), I wandered about the section of the store taking a few pictures and wondering to myself where this might all be going. Continue reading

From a box of cereal to an invitation

Ceci n'est pas une cd.

Ceci n'est pas une cd.

I don’t quite understand Target.  Perhaps it’s driven by the particular Target closest to me, but while others see fashion and value and affectionate French-inflected nicknames, I see dizzying crowds and uninspired shelves and a parking lot that’s always one left turn away from road rage.  But it’s at this Target that I think I got a glimpse of one of the things that the CD could become.

For years, the music industry sold CDs as if they were boxes of cereal.  They stacked stores high with the boxes, they hiked up the prices a bit every year, and it worked great.  Until it stopped working at all.  And now, as the music industry has tumbled, there’s lots of talk about why the industry doesn’t sell any CDs anymore.  What hope exists for the industry now springs from live shows and merchandise.

So as the industry moves on in these ways, what’s the fate of the CD? Continue reading