After years of hemorrhaging money from piracy, the music industry placed its faith in online subscription services like Spotify and Pandora. But a decade on, streaming music appears to be a triumph of hope over experience. Tim Carmody, senior writer for The Verge, says that streaming services and the music industry are clinging to the belief that profitability is ... just over the next hill.
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BOB GARFIELD: It’s oft been said that if content were easy to access and pay for, then people wouldn’t steal it. So after years of struggling with music piracy, the industry placed its face in online subscription services likes Spotify and Pandora. Drop 10 bucks or so a month for unlimited songs, or listen for free if you don't mind the advertising, and you get access to hundreds of thousands of songs. But a decade on, streaming music appears to be a triumph of hope over experience. And Tim Carmody, who writes for The Verge, says that streaming services are clinging to the belief that profitability is just - over the next hill.
TIM CARMODY: These companies have been willing to operate at a loss, with the idea that once they build up the subscriber base, then you get enough total revenue coming in, you get bulk listeners for the advertising, bulk subscriptions that you can actually make big volume deals with record labels. So everybody's been operating under the idea that the money will come, eventually.
BOB GARFIELD: And, just like your TiVo knows that you’re gay, your - streaming service knows that you like R&B or indie rock.
TIM CARMODY: And with that, it can suggest new music and, if it’s an ad-supported service, target some ads.
BOB GARFIELD: You suggested so for that they're just trying to build an audience and worrying about profitability later.
TIM CARMODY: Mm-hmm. [AFFIRMATIVE]
BOB GARFIELD: But investors aren’t gonna wait forever, are they?
TIM CARMODY: There’s been more than $600 dollars invested in these companies just in the last year. The real danger for these companies is there are giants lurking around the corner; there are Apples, there are Googles there are Twitters, there are Amazons that are increasingly interested in getting involved in music streaming. They see its possibility as a service, if not necessarily as a business. How long will they be able to wait before one of these giants comes along and gobbles up the market?
BOB GARFIELD: You suggest that the biggest stumbling block at the moment is the royalty fees that the likes of Pandora and Spotify have to pay to the record labels. They say it's just breaking their back.
TIM CARMODY: Customers are extremely price-sensitive with streaming music. So what Spotify and Pandora and other streaming services are trying to do is they’re trying to offer their entire catalogs as low a price point as possible, and they can't do that with paying an equally high rate to the studios.
BOB GARFIELD: Spotify pays 70% of its revenues to the labels.
TIM CARMODY: It’s easily Spotify’s biggest cost. And so, if there’s gonna be some room for profit there, that margin will have to come down.
BOB GARFIELD: And the labels say that well, no, they're not demanding too much, it's that the Pandoras of the world are so worried about what the consumer will pay –
TIM CARMODY: Mm-hmm –
BOB GARFIELD: - that they're keeping their prices artificially low to build a critical mass of customers. Are they right?
TIM CARMODY: Well, to a certain extent, I think they are. But the question is whether or not the market will still be there, if you don't have that price set as low as it’s been set. The question is that if you move too far off that sort of 8 dollars a month Netflix magic zone, you know, the single dollar digit range per month, if you move too far above that, what percentage of customers do you lose?
BOB GARFIELD: The tension between the record labels and the streaming services reminds me of the Israelis and the Palestinians. [LAUGHS]
Everybody benefits from a negotiated settlement, right? And yet, nobody is willing to make a compromise of essential demands. Why hasn’t it come to pass that the labels lower their royalty demands by, you know, some significant number of percentage points and the streaming services agree to raise their subscription fees to 13 bucks a month plus, you know, a handful of ads?
TIM CARMODY: Really, what I think has happened is everyone's overvalued their assets, and, and to a certain extent they’re all waiting for somebody else to blink first. And the, the last person to blink is probably going to be the consumer because, again, you’re competing against free and you’re competing against even forms of digital music that are much more tested and reliable in the consumer’s mind.
BOB GARFIELD: Here’s a question I’d like to ask, although it's entirely unfair –
TIM CARMODY: [LAUGHS] Those are my favorite kind.
BOB GARFIELD: - and premised on a fantasy. What's gonna happen?
TIM CARMODY: What I think is probably the most likely thing that will happen is that someone, whether it's an Apple or a Google or an Amazon or a Sony, comes along and essentially agrees that we’re gonna run music at a loss and we’re going to support it with these other businesses that we do – in the case of Apple, if it’s electronics, hardware, in the case of Google, it’s advertising, in search and software services, Amazon, it’s retail, and so forth, but we are going to provide this service to add value to the devices and the other services that we’re renting out.
BOB GARFIELD: Not unprecedented. In your piece, you point out that Apple did iTunes essentially as a loss leader. They didn't make a whole lot of money on downloads but they sold a lot of iPods.
TIM CARMODY: Mm-hmm. [AFFIRMATIVE]
BOB GARFIELD: And Walmart sold CDs for just about nothing to get people to the stores to buy –
TIM CARMODY: Tube socks, you know, anything. So if Apple comes out with the streaming service that we expect that they’ll come out with, iRadio will be a version of iTunes and Amazon's version, if they do a version, will be something more like Walmart. And it's a great solution to this problem: How do you make money on the music business? Don't make money on the music business. That's the answer to that question.
BOB GARFIELD: [LAUGHS] Tim, thank you very much.
TIM CARMODY: Thank you.
BOB GARFIELD: Tim Carmody is a senior writer for theverge.com.