Online Radio / Music Streaming needs a better Business Model

Over the course of the semester I’ve been writing about developments in the streaming services sector of the music industry.  These services have seen expansive growth in terms of revenue, but to date have been unable to make a profit.

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Many critics believe that the main issue contributing to this problem is the high cost of music royalties. (In 2012, Pandora paid 54% of its revenue for “content acquisition, while Spotify CEO Daniel Ek has recently stated his company has paid over 70% of its income to the recorded music industry).   The cost to license music without a doubt contributes to the net losses of these services, one must consider the business models they employ and evaluate the effectiveness of these strategies.  Consider the following charts:

Distribution of Spotify’s revenues from 2009 to 2011

Pandora’s revenues from 2007 – 2012 by source

Pandora’s revenue sources 2007 to 2012

Granted, the Spotify chart displays distribution of revenues by percentage and the Pandora chart displays total revenues by each source, but the message is clear in both cases – Both services (as well as the majority of similar services) heavily rely on advertising dollars, and far less on subscription services while attempting to subsidize their extremely large group of free users.  It’s no question that online radio and streaming services have brought about the new age in music consumption where access is replacing ownership, but as it stands today, the most popular services have yet to made a profit, while copyright holders (labels, artists, publishers, etc) feel they aren’t compensated enough for their works available on these services. One thing is clear, however, that being both online radio/streaming services and copyright holders need each other in order to succeed – A business model that satisfies all parties involved is clearly needed for the music industry to witness growth in the digital age

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