In October, I gave this presentation on why streaming has failed to a group of executives and academics in Vienna. That led to this interview with FutureZone, a massive technology publication and one of the ten biggest sites in Austria.
Patrick Dax, FutureZone: They say that the business models of music streaming services are unsustainable. Why?
Paul Resnikoff: There are many reasons. For starters, there are extremely variable costs for licensing content. It doesn’t matter how many paying subscribers these services have, the cost of licenses will increase with them. This makes it very difficult to operate profitably.
But it has also proven difficult to increase the number of paying subscribers. Streaming services have some paying subscribers, but compared with free, ad-supported users, the number remains very low.
And paid subscribers deliver the real money.
Dax: Why have freemium models experienced so much difficulty in music?
Resnikoff: The reason is that the free offers are too good. There’s no reason to pay. If you offer me a stylish moped for free, then ask me to pay to upgrade to a small motorcycle, I’ll probably reject the motorcycle because the moped is good enough. This is exactly what’s happening with freemium models for streaming services.
But the analogy starts blurring when you consider YouTube, which offers a greater selection of music videos for free with far greater flexibility to share and a much bigger network effect. Maybe it’s not as good looking, but it’s the cheapest, best ride in town.
Indeed, YouTube is the largest platform for the consumption of music on the net. Everyone is there, but no one is paying.
Dax: The revenue for artists of streaming offerings are low. What can you earn with Spotify, etc.? How can you earn money with streaming?
Are you kidding? How can artists earn money with streaming? A high percentage of contracts between major labels and their artists include clauses that effectively stipulate that musicians will not be paid for streaming. The labels argue that they license their entire catalog and not individual artists, and then use legalese to argue that they’re off the hook on paying artist royalties.
The result is that the only artists who get money for streaming from the majors are the really big stars. Labels meet these demands to keep these artists happy and productive.
These payments have nothing to do with the actual streams. They benefit only a few musicians.
Dax: Many labels have financial and equity interests in streaming services. What impact does this have?
Resnikoff: The major labels have high equity stakes in many of these services. Matt Mason of BitTorrent recently stated that the majors have already given up trying to sell music. Instead, they exchange access to their catalog in return for upfront payments and equity stakes to earn giant paydays. When there’s an exit or liquidation event, for example when Apple paid three billion dollars Beats Music, these deals work out well.
Dax: What future do you see for services like Spotify & co.?
Resnikoff: You mean, will Spotify even exist in five years from now? At this point, we don’t know. The reason for this is that Spotify simply isn’t large enough. Spotify has about eleven million paying subscribers.
We don’t know if that is enough for survival over the long term.
That said, there are a number of ways this could work out. One scenario is that Spotify goes public and the founders and stakeholders become very rich. There is also the possibility that they are acquired, by giants like Amazon or Google. In that latter scenario, Spotify could continue for long periods without making money, just like YouTube. There would be a lot less pressure on the business model.
Dax: Was making money on the sound recording just a historical episode?
Resnikoff: Once upon a time, we had the perfect environment to control the flow of money towards sound recordings. You had to go into a store and buy physical media. These physical media contained a limited number of songs, which were bundled into one album. And industries that successfully bundle their products can reap great profits.
On top of that, the media and promotional channels were manageable. All these factors have enabled the recording industry to reap healthy profits for decades. Stepping into the 80s and especially the 90s and early-2000s, the CD was an important part of that profit flow.
These days, many CDs are still sold, but streaming is starting to seriously cannibalize almost all other recording formats.
This has now been statistically proven with the exception of vinyl, which is largely successful because of nostalgia.
Dax: How will musicians earn money in the future?
Resnikoff: Do you see a future in which musicians – and I mean the broad masses of musicians – could ever earn enough money to live or earn? Some do, including Daniel Ek, the CEO of Spotify, who believes that that his service will help artists across the board soon to a middle class income.