Online Subscription services, music streaming sites, and internet radio have become a major source of what I like to describe as “new sources of revenue” for musicians and record labels. Sites like Spotify, Pandora, Rhapsody, and a host of others all over the world have revolutionized the way consumers listen to music today. Up until the last 10 years or so, music consumers predominately listened to music via terrestrial radio stations, television channels that played music videos (MTV, VH1, The Box, etc.), and purchased physical copies of music media to listen to at home or other personal music playback devices. Compared to the freedom we consumers experience today, those days we were limited to what we were exposed to on those media outlets. Major radio playlists and music video shows on TV were predominantly dictated and controlled by large corporate companies. These companies picked and chose what WE were essentially ALLOWED to listen to. Buying music was and still is great! But not only are music stores becoming increasingly hard to find, everyone has their economic limitations based upon how much you could spend on purchasing music at any given time. Then came the digital revolution. This was when music became readily available online via file sharing or purchasing downloads through platforms like iTunes. For most of the 2000’s and up until now, music fans started to download the music of choice rather than walking into a store. Fans were able to purchase much of their music selections from their own home, and now even over their smartphones. Over the last few years we have had a new advancement in technology take hold of not only consumers, but record labels. On-demand or Online Music Subscription services, also known as (in some cases) internet radio, have become an increasingly popular and easily accessible way for consumers to listen to music. These are sites which offer either pay or free subscriptions to consumers where they could stream music at will. Pandora and Spotify have been the most successful recently, claiming the largest domestic market share of music consumers. Other companies have noticed the trend of increasing streams of revenue coming from online subscription sites and internet radio, and have wanted to jump on the bandwagon. Recently, internet giant Google, and tech revolutionary Apple have decided to enter into this flourishing market.
A major headline this week in the music business world is Google inking a deal with music giant Warner Music Group to license its music catalog for two of Google’s music services that will be launching later this summer. Google has announced it will be offering two subscription services soon. One through YouTube and the other through its “Google Play” platform (formerly known as the Android Market; a digital application distribution platform for the Android platform that was developed and is maintained by Google itself. Google’s service allows its users to both browse and download music, magazines, books, movies, television programs, and applications that were published through Google.) The big news regarding this is that Warner Music group is the first label to make a deal with Google. A spokesperson for YouTube issued a statement this week, stating “While we don’t comment on rumor or speculation, there are some content creators that think they would benefit from a subscription revenue stream in addition to ads, so we’re looking at that.” Google is also in talks with Universal Music Group, Sony/BMG, and other labels to solidify an agreement similar to the one they have with Warner Music.
Google had in fact announced last month that they were releasing an on-demand music streaming service this summer, with two separate music services available. But no details or label partners were announced until this week. Executives at Google are aware of the intense competition they will face from other companies who have had a head start in the on-demand music subscription service market. Spotify, Rhapsody, Muve Music, Slacker, Samsung Music Hub, Sony Music Unlimited and Rdio are among the current players fighting for dominance. Later this summer, the much anticipated and hyped Beats Electronics music subscription service will re-launch a revamped MOG service, branded as Daisy. Jimmy Iovine, head of Interscope-A&M-Geffen and Chairman of Beats Electronics, claims they will be able to win the largest market share due to the fact that they will be incorporating the “human element” in its service (for more info, read my previous blog on Beat’s Daisy Music Service). Music business key players speculate that Google will be coming in with several dominating advantages. These include having YouTube and Android on their side. The strength in those advantages is contingent on a few key factors. For one, YouTube currently attracts 800 million unique viewers per month. That is MUCH more than the estimated tens of millions of people worldwide who are currently using other free and paid streaming music services. Secondly, Google’s Android operating system currently powers 68.4% of all the smartphones purchased last year. Compare that to the 19.4% of smartphones that are powered by the Apple’s iOS purchased last year. Google’s current plans include offering ad-free subscriptions tiers for YouTube viewers. Google plans to also offer another service from its Google Play platform (which currently sells music downloads like iTunes and has a free scan-and-match function that lets its users stream songs from their music library through any Internet connection). The plus for Google Play subscribers is that the music service will give you access to a library of licensed songs that the user currently doesn’t own.
Warner Music Group has always been somewhat of a pioneer in the digital music and internet field. They declined to join Universal and Sony/BMG in creating VEVO (which is an online music video network, sort of like a modern day MTV). Instead, Warner Music created its own YouTube channel called “The Warner Sound.” VEVO has since become one of the more popular channels on YouTube. The Warner Sound channel on YouTube features music videos from Warner Music’s own artists. Since its inception, The Warner Sound has consistently ranked among the top 5 most frequently visited YouTube channels. After holding out for almost a year, Warner Music finally started to sell music on Google’s music store in 2011.
Record labels have gotten over their initial fear that online subscription services would cannibalize their music sales. The International Federation of the Phonographic Industry released a recent report that shows an overall growth in music revenue for the first time since 1999. The IFPI report stated that much of the increase in music sales is attributed to the growth and development of digital music services. The growth is pretty significant, increasing by 23 new digital services since last year. Currently there are about 500 digital music services in the world.
Apple’s foray into this market has come with its share of hurdles and speed bumps. With Apple’s iTunes currently being the leader in music downloading, one would speculate that Apple would be able to come in and completely obliterate its competition. Apple historically releases new products and services with an incredible amount of success. But they have not been faring well with the negotiations with record labels for the royalty to use their song catalogs in Apple’s Online Radio Service.
Apple first tried to license music for their new streaming service in time for the release of its iPhone 5 launch. But they failed to do so due to intense pushback from the music businesses largest music publisher, Sony/ATV. Apple is currently attempting to license music once again, but so far their results are not much different then before. Apple’s initial licensing offer was $0.06 for every hundred songs that are streamed. That’s half the fee that is paid by Pandora, one of the online music streaming service leaders. That is also less than a third of the $0.22 paid by other streaming services affiliated with online broadcast stations. Currently the highest fee paid is by Spotify, at $0.35 per hundred songs streamed.
I imagine the music industry would love to have Apple Radio in the Online Streaming Service fold. Apple might have a tough time generating revenue at $0.06 per hundred songs streamed. But Apple can make up for any lost revenue by their mobile advertising platform. Apple has iAds, which offers the company another revenue source aside from the revenue created by the subscribers of the on-demand music service (iAd is a mobile advertising platform developed by Apple Inc. for its iPhone, iPod Touch, and iPad line of mobile devices. It allows third-party developers to directly embed advertisements into their applications. The iAd platform is expected to compete with Google’s AdMob mobile advertising service). I am pretty sure that record labels will want a piece of the ad revenues and a fat upfront payment from Apple.
Apple’s new Internet radio service will come with a buy button that allows its listeners to purchase a song that is currently being played. Once the buy button is clicked, the internet radio station will link the listener to iTunes where the purchase can be made. Labels will benefit from the ability to link a purchase to the Internet radio service. Record labels and publishers receive a share of the $25 annual fee that is paid by the subscribers of the internet radio service. But major record labels don’t seem too keen on any of Apple’s strategy, making it extremely difficult for Apple to launch its internet radio station. According to the New York Post, one label executive said “Whether or not the labels are buying it is another story.” Another major label executive said the label would not go below the $0.12 cents per stream statutory rate that is currently paid by sites such as Pandora.
The trouble Apple is encountering in securing a license from labels to stream music on its upcoming service brings to light the many difficulties that could arise from accepting a “per-stream royalty below the pure-play statutory rate of 0.12 cents per stream.” Major record labels and music publishers fear negotiating a rate below what is set by the Copyright Royalty Board for internet radio and online streaming services. They are concerned that this would set a new precedent that could have some major negative ramifications that in-turn would affect future negotiations for other online subscriptions services and internet radio. The current set of statutory royalty rates expires at the end of 2014. There would be a long-term impact as well, because a decrease in statutory rates in 2015 would have a ripple effect that would drastically change the future of the music industry. The whole statutory rate topic is a hot button for music asset holders. Record labels, artists, and music publishers support the current rate and do NOT want to see changes to continually occur. But online radio/on-demand music services want to play less.
Apple’s forthcoming internet radio service, which rumor has it might be called “iRadio” (expect anything else, iTunes, iPhone, iPad, etc.), is still in the works. Insiders have only seen presentations of it that describe its features, but no demo has been released. Word has it that Apple will officially release it this summer. Hopefully all of this will be ironed out by then, so we as consumers can have another amazing service to access music at any time. The beauty in all of this is the battle for the consumer dollar. Each company will try to compete with one another to create the best service at the lowest price. Who benefits? Everyone! Consumers will be able to access music at any time, at the lowest price available. Artists will be able to have their music heard by their fans, without letting high dollar amounts detract fans from purchasing their art.