Streaming Services Have 99 Problems. And They Are…

This may be the year that streaming music slayed the download. But can streaming overcome its worst enemy, itself?

Here are 99 problems the fledgling streaming music industry now faces…

Problems With Content.

(1) Streaming services have millions of songs, and almost every track you can imagine.  But the cost of acquiring and maintaining that catalog is astronomical.

(2) Not only that, these costs are variable and subject to the whims of the content owners themselves.

(3) And, they don’t include everything: remixes, mash-ups, live versions, and derivative works are generally not available on services like Spotify.  For that, a fan has to go elsewhere.

(4) Major rights holders – ie, the major labels – have negotiated ownership shares in Spotify (and perhaps other streaming services) as a condition of their licensing partnership.  That increases their power, not to mention their ability to steer the direction of the streaming space itself.

(5) Not only that, major catalogs (or minor catalogs) can switch ownership hands.  That can introduce completely different negotiation terms, or even pullouts.

(6) Not only that, major labels demand massive, upfront advances as a condition of their participation.  These massive investments are often in the millions, which may not make sense at all within the financial model of even a succesful streaming service.
(7) Then again, major licensors generally make less from streaming platforms (especially if it is ad-based).  Which leads to more aggressive demands for advances and ownership shares.

(8) Which also means that substantial catalogs can disappear overnight, if the content owner becomes unhappy, decides to force a renegotiation, or even favor a competitor.

(9) Oh, and major labels don’t pay their artists.  And when they do, it’s usually not the proper amount (see ‘Problems With Artists’).

(10) But don’t worry: streaming services say they ‘pay the labels, not the artists…’

(11) And one other thing: if the major labels don’t like your streaming service, they’ll sue the crap out of it.  So play nice, okay?

(12) Artists are often reluctant to give platforms like Spotify early access to their releases.  Most recently, chart-toppers Daft Punk, Vampire Weekend, and Queens of the Stone Age all handed iTunes juicy exclusives.

(13) There are still huge holdouts on Spotify (though recent licensing moves by mega-bands like Pink Floyd and Metallica are encouraging signs).

(14) Some of these mega-holdouts will join, but only if they receive a massive advance of their own.  Which is exactly the rumor surrounding Metallica.

(15) But content owners, including major labels, have serious problems of their own.  Pound-for-pound, streaming pays far less than downloads (and much less than physical goods).  Which means their revenue base keeps eroding.

(16) Worse than that, most content is enjoyed on YouTube, which is predicated on DMCA takedowns protocols.  Which means, labels pretty much have to accept mediocre licensing terms or focus on removing their content non-stop.  And, if companies like Grooveshark ultimately win in court, the majors could be focusing massive amounts of energy policing DMCA takedowns.  Indies and smaller artists have little chance of effectively patrolling distribution and access in that environment.

Problems With Free.

(17) Fans have a built-in expection that music will be free, and freely available.  In fact, a recent study conducted by MTV indicated that younger listeners consider paying for music a nice gesture, and a favor to their favorite artists.

(18) YouTube, easily the largest source of music consumption (by a large multiple), is completely free.  And a major competitor to paid services.

(19) And, so is Grooveshark, which focuses on free access and DMCA takedowns instead of directly-licensed content with premium subscriptions.

(20) Speaking of Grooveshark, this is a company currently fighting for its life in court against all three major labels.  But then again, Grooveshark could win.  Which would open the floodgates on a raft of similar, free, DMCA-based services.

(21) These Grooveshark clones would not only focus on free, on-demand access, but they could more easily spread this free access across a number of portable devices (currently, both Apple and Google block Grooveshark’s apps, based on complaints from major label content owners).

(22) All of which means, a paid subscription can easily be viewed as a listening luxury, now and in the future.  It’s hard to get them to actually pay.
(23) Come to think of it, almost everything is available somewhere else, multiple times over.  If it’s not on YouTube, it’s on Grooveshark.  If it’s not on Spotify, it’s on BitTorrent.  If Spotify doesn’t have it, iTunes has the exclusive.

(24) Which means that fans often have to hunt around for the hottest, just-released content.  It’s rarely in one, reliable place, every time.

(25) But financing massive numbers of free, ad-supported users can be extremely expensive.  Spotify, for example, has multiples more free users than paid.

(26) And ad-supported doesn’t pay the bills.

(27) It’s also unclear if enough of these free users will ultimately transition to paying subscriptions.  Currently, Spotify officially counts 6 million subscribers (going on 7), which still represents a very small percentage of the addressable consumer potential.

(28) On that note, the level of users that abandon streaming services is extremely high.  In a recent study, researcher Mark Mulligan found that more than 70 percent of registered user accounts on services like Spotify are completely abandoned.  Deezer, which now boasts 4 million subscribers, had an incredibly similar problem.

(29) Which brings us to a very serious problem with ‘freemium’ access models.  Mulligan notes that services like Spotify are currently hyper-focused on growth over content, but the ship must be steered on a different course to avoid a financial iceberg.  “Currently Deezer and Spotify are in growth stage and are more focused on acquisition than retention, but sooner or later they’re going to have to recalibrate their metrics if they want to move towards sustainable financial models,” Mulligan said.

(30) Which means that subscription-only, paid-only models like Rhapsody are likely to remain stunted, simply because they don’t have the mega-cash to acquire all those free users.  Or, bankroll all that churn.  “Any subscription service – especially a nice-to-have like music – is going to be vulnerable to churn,” Mulligan stated.

(31) On that note, successful competitors like Muve Music have decided to avoid direct subscriptions entirely, because they don’t believe they work.  Instead, Muve focuses on far bigger bundles involving pre-paid mobile subscriptions (that include voice, text, internet access, etc.)

(32) All of which further pushes down the price that consumers are paying for music (see ‘Problems With Free’ and ‘Financial Problems’)

(33) And invites a grinding, slow-moving decline in the price and perceived value of streaming subscriptions.

(34) Streaming services themselves may be encouraging and growing this ‘problem of free’.  Services like Deezer and Spotify, for example, which aggressively offer free, ad-supported tiers, may be training users that free access is the prefered and always-available route.

(35) All of which makes it extremely difficult for companies that decide not to subsidize free access, like Rhapsody or Google Play Music All Access.  In fact, Google’s launch may have been dead on arrival, partly because of a lack of a substantial free, ad-supported tier.

(36) Then there’s the deeper question: do users really want on-demand more than non-interactive radio?  Enter Sirius XM Radio, which isn’t freemium but is the largest music subscription service in the world – by far.  At present Sirius XM Radio boasts 24.4 million subscribers – which isn’t a problem for Sirius, but could signal a problem for everyone else.

(37) And, BitTorrent.

(38) And one little problem with YouTube: it’s really hard for smaller artists and labels to recognize preferential payouts on the use of their music.  Which is one motivation behind Jeff Price’s new company, Audiam.

Financial Problems.

(39) Very few streaming services (subscription or otherwise) actually make money.

(40) It’s entirely unclear if streaming services will ever make money, especially sustainable profits over a longer period of time.

(41) In fact, many of the most successful services (Pandora, Spotify, and Deezer) are actively delaying profitability in the name of hyper-growth.  Which is an extremely speculative gamble.

(42) Both Deezer and Spotify have hundreds of millions in investment, and neither has displayed anything close to profitability.  Which suggests that these services are part of a broader bubble around streaming music.

(43) Even worse, services like Spotify may not care about profitability at all.  Instead, the presence of hundreds of millions of dollars of investment capital (and investors like Goldman Sachs) suggests that Spotify could be a Wall Street flip, not a profitable, long-term business.

(44) Actually, Pandora is a Wall Street flip, with little-to-no profitability and lots of internet-style ‘growth’ (Also see ‘Problems With Internet Radio’)

(45) But the scuttlebutt on Wall Street is that Pandora effectively burned the IPO prospects for other music tech plays like Spotify.  Because instead of producing sustainable profits, Pandora has mostly delivered a flimsy company to investors (and the stock price refects that). (Again see, ‘Problems With Internet Radio’)

(46) All of which brings up a growing problem for the music industry: some of the hottest companies – which include streaming services – are oftentimes short-term flips designed to get investors rich in the shortest amount of time possible.  Not, longer-term plays that will benefit artists, fans, or (non-major label) rights owners very much.  Ask yourself: who’ll still be around in 5 years?

Problems With Artists.

(47) Artists receive very little compensation from streaming services.  Other formats, like downloading, pay much higher amounts.

(48) Artists make a lot more from downloads, which would explain the rash of iTunes exclusives (and Spotify holdouts, for a week or years).  Apple gets it first, pays more, and offers far more transparency.

(49) On that note, artists generally have no idea what they should be getting paid by services like Spotify.  Transparancy is a major, and ongoing issue.

(50) Compounding the problem, services like Spotify refuse to open their books to artists and rights owners that demand it.  This is essentially the opposite of transparency.

(51) A large amount of streaming payments may never find the right content owner.  In fact, services like Kobalt are actively working on the problem of identifying and directly royalties to the established owner(s).

(52) Songs are often written by multiple authors, which compounds the difficulty of this problem.

(53) But even if all the money flowed properly, per-stream royalties are amazingly low.  Spotify argues that the ultimate payout over time is actually higher than an iTunes or Amazon download.  But most artists are extremely skeptical of that claim (and rightfully so).

(54) But even if that claim is true, most artists would prefer their cut upfront, not over a period of months, years, or even decades.

(55) On Spotify, artists cannot selectively license premium subscribers (thereby enjoying a better per-stream rate).  That has led to massive holdouts from massive artists like Adele.  And, until recently, artists like Pink Floyd.

(56) All of this creates a low-trust, insecure licensing environment between artists and streaming services.  And, an easy opportunity for outside parties (whether Apple or Samsung) to dangle juicy amounts to secure important exclusives ahead of streaming services.

(57) It also makes it highly likely that services like Spotify will experience heavy ‘windowing’ in the future, as artists and labels seek to maximize the initial payouts on their releases.

Problems With Competition.

(58) The streaming music space is extremely oversaturated.  Which means it’s difficult for services to differentiate themselves, and really hard to acquire exclusive content without spending lots of money.

(59) It also means that attrition is almost guaranteed in the coming years.  Just recently, Rhapsody CEO Jon Irwin predicted a shakeout ahead (at New Music Seminar), which creates a highly-unstable environment for licensors, subscribers, and investors.

(60) Which also means that fans are likely to lose large amounts of content (ie, their collections, playlists, and favorites) as one or several of these services go out of business.

(61) And, maybe experience difficulty getting their pre-paid, annual subscription payments back.

(62) All of which could breed a less secure, less solid consumer perception around streaming services.  All it takes is one major implosion…

(63) Hyper-saturation also makes awareness extremely difficult.  Even Rhapsody, an application that has been in the American market for more than a decade, lacks adequate brand name recognition.
(64) Apple may launch a streaming service, or something that is extremely competitive with existing streaming services.

(65) And be afraid: Apple now has more than 500 million registered users, all of whom have credit cards on file.  This eclipses even the largest streaming competitors, including Spotify, Pandora, and Deezer.

(66) Which introduces the competitive threat posed by existing, previoulsy-downloaded collections, which are now being iCloud-enabled.  Many fans have been accumulating these collections for more than a decade, and may prefer to pay Apple to simply cloud-enable their favorites.

(67) On a price scale, Apple’s Cloud Drive may be more attractive (consider $25 a year, versus $120 a year for Spotify).

(68) Actually, Apple is already in competition with streaming giants like Pandora: in just a few months, Apple’s iTunes Radio hits the market.

(69) But wait, there’s one more gigantic competitor: Daisy, aka the new subscription service from Beats by Dre.  Which also has a ton of investment cash.

Problems With Fans.

(70) Fans are often impatient and testy: their subscriptions, or ad-based participation, can end in a minute.

(71) And, there are several competitors trying to lure them away every single minute of the day.

(72) Fans can easily get turned off (or deactivate a subscription) if content isn’t available, which is almost inevitable for a streaming subscription service.  These missing releases are like potholes: even if the road is generally paved well, you can suddenly hit one.

(73) They are likely unwilling to pay substantial premiums for subscription accounts.  Anything greater than $10 a month could generate a problem, even though it offers access to milions of songs, embedded apps, and near-complete ubiquity across numerous devices.

(74) Many fans, justified or not, feel that they can’t afford streaming services.  And, if they have a tough month or can’t pay their bills, their premium access gets cut off.

Streaming Radio Problems.

(75) The biggest streaming radio service, Pandora, is currently at war with both artists and content owners.

(76) That opens all sorts of tricky situations ahead, including increases in rates or flat-out refusals to license to Pandora (on the recording or publishing sides, or both).

(77) Others, like Sony/ATV, have increased their payouts by directly negotiating with Pandora.  All of which is likely to encourage other publishers and rights owners to do the same, and potentially dramatically increase Pandora’s (and streaming radio’s) royalty obligations.

(78) Which brings us to the publishing disparity problem. Publishers, led by Sony/ATV and NMPA president David Israelite, argue that labels and recording owners are unfairly receiving far greater royalties per internet radio stream.  Which means, they are highly likely to take steps to remedy this situation, and dramatically change the costs faced by providers like Pandora.

(79) In all of this, some of the largest songwriters in the world are receiving pennies for millions of plays.

(80) Pandora, despite these wretchedly-low payouts, argues that its publishing payouts are too high.  And, they’re suing performance rights organization ASCAP to lower the rate.

(81) BMI, ASCAP’s competitor, is suing Pandora back to demand a better rate.

(82) Throughout all this, Pandora founder Tim Westergren is telling artists that lower rates will benefit them more.  Because it will grow Pandora, which means more exposure and opportunity for artists to make money (that is, elsewhere).

(83) Which is funny, because Tim Westergren has already cashed out $15 million in Pandora shares.  Which sounds like good ol’ capitalism, but wreaks of ridiculous hypocrisy when Westergren tries to convince artists they should be making less.

(84) But other Pandora executives are also cashing out like crazy, which raises serious question of whether these executives believe in their own company.  Or, even internet radio itself as a sustainable business model.

(85) And, whether anyone besides about 10 people will be making any substantive earnings off of Pandora.  Which means, artists are essentially subsidizing the insanely wealthy, secure lifestyles of executives like Tim Westergren, not to mention an obsessive focus on hyper-growth over profitability.  All while being told they’re getting paid too much in royalties.

(86) In that artist-unfriendly environment, artist-friendly executives like Jeff Price may soon help artists figure out how to remove their content from Pandora.  Which could lead to meaningful content gaps.

(87) Pandora pays recording royalties to SoundExchange, which distributes the money equally among label and artist.  The only problem is that SoundExchange isn’t that great at distributing the money received, which means it’s generally holding on to hundreds of millions in unpaid royalties.

(88) Which means that capital that is sorely needed by services like Pandora is locked up in unpaid accounts, upon which SoundExchange (not Pandora) draws interest.

(89) In that environment, Apple has negotiated direct licenses with major rights owners.  But this invites a number of new problems, including potentially lower per-stream payouts for content.

(90) Apple’s direct payment system also re-aggravates age-old issues with major labels.  The first of these problems is that major labels rarely pay their artists.  And when they do, it’s often suspect and incorrect (see ‘Problems With Artists’ and ‘Problems With Content’).

(91) Which means that despite all of its accounting problems and massive unpaid royalties, SoundExchange is actually better for major label artists than a direct, Apple-negotiated deal.

(92) On top of all that, Apple’s direct negotiations with major labels also includes healthy advances.  Which, of course, are rarely distributed back to the content owners (ie artists, publishers, etc.) themselves.

(93) And when it comes to indies, Apple has shown little willingness to negotiate.  Instead, independent labels received pre-determined, non-negotiable, and markedly inferior terms to the major labels.

(94) Furthermore, indies have not been offered major label perks like healthy advances and shares of advertising revenue.

(95) Merlin, the organization charged with negotiating for the indie labels and fighting on their behalf, wasn’t even at the negotiation table for iTunes Radio.  Which means, Apple has been able to essentially negotiate whatever they want.

Other Problems.

(96) It’s actually possible to list 99 problems being experienced by streaming music services.
(97) It’s probably possible to list 99 more.
(98) You initially laughed at this post.
(99) You are now crying.