Revisiting “Are Digital Music Services Scalable”

With Rdio basically dying off and sold for parts, Beats Music dead and Zune finally taken off life-support, I thought it was a good time to revisit the article I wrote a year ago about digital music services.

In any “new” industry, there will always be a pioneer that basically proves the worthiness of a business model (or at least some aspect of it), after which they will continue to grow with ‘copycats’ (I’m using the term loosely here) following in step to see on whether they can build something for the new industry. As time has proven time and time again, the greatest beneficiaries of a new industry are not necessarily always the pioneers, as in the case of the smartphone, it took Apple to basically turn the market around although many players have dabbled in that market before with some success.

And just like in any other industry, growth spurts witnessing the birth of many similar-modeled businesses will continue for a time, until the business model itself will prove itself (or not) as something sustainable in the longer term. Bankruptcy and consolidation is unavoidable, whether it is triggered by government oversight or regulation, or the fact that the business model itself does not scale as well for multiple companies. Or perhaps in the case of music services, contracts like these simply don’t allow for a variety of company sizes.

Spotify continues to dominate the music streaming market due to their deep pockets (I mean, what else could it be?) while Apple and Google have their own streaming plays. While Rdio is probably the first of the more ‘international’ music streaming services to stop operating, there are probably many other regional- or local-based digital music services who are probably operating at a loss or defunct. That said, even Spotify is yet to be profitable. The winners of this game? Not even the artists, but the recording companies who own the masters of the songs. Yet, even when we say ‘recording companies’, it simply does not paint an accurate picture of what is actually going on, as with any other industry, there are big companies and there are small companies, with differing influence. And even they are trying to figure out what to do next.

So recent events have apparently confirmed what I postulated last year, that digital music services — to an extent — are not scalable. You either have to run a very lean ship to be sustainable, find multiple revenue streams (not be a pure consumer-facing play), or expand with no end using other people’s money with hopes of an IPO or acquisition down the line.

Why is it always a question of streaming vs downloads?

Another angle to this problem is the generated revenue itself. Warner says streaming income is overtaking downloads, while some high-profile artists, most recently Adele, have shunned streaming services in favor of supporting download services like iTunes. While it’s totally up to the artists — as it should be — to decide where they want to sell their music, thinking about one business model versus the other, I think, is counterproductive.

Artistes and musicians today, on differing scales and revenues, already enjoy a much more diverse choice of revenue streams: live shows, merchandise, experiential packages, games/apps, and so on. The increase of “screens” enjoyed by the fans must also be serviced by content produced by these artistes and musicians, so it should never be a discussion around streaming vs downloads, for instance.

If the music industry were to learn something from the movie industry, it wouldn’t be something like this, but making separate release windows for downloadable content and streamable content could be similar to how movie studios break down their release dates to cinema, then to DVD release or streaming services, and lastly TV. This could become the norm, instead of the exception, as some artistes have already done this before.

[Digital] music services will need a ‘big brother’

We have yet to see how Apple Music will fare, and I have no idea on how much money Google Play Music is actually making. But there is no doubt in my mind that they will thrive on, as both Apple and Google do not depend their livelihood from those services. That said, the services are needed for, at the least, customer retention, so they’ll definitely run their services properly. Deezer has some relations with Warner Music, Sony Music Entertainment is part of Sony, and Universal Music is part of the French conglomerate Vivendi. Rdio had Cumulus Networks as an investor, which was more of a strategic deal rather than an investment deal. Spotify? Spotify currently stands alone, and I would think they would have better chance to sell themselves to a ‘big brother’ rather than getting to IPO stage. But who will they sell to?

Simply put, if it doesn’t have Spotify’s scale (and as mentioned in the previous article, even Spotify would be under scrutiny here), a music service is bound to need a ‘big brother’ — a network or ecosystem of sister companies — to keep it afloat and either enhance the service, or make the service as part of a bigger experience. The multiple consumption “screens” that users now have simply doesn’t have space for standalone music services, or will not have. Consolidation in the industry will either be caught up with consolidation with other entertainment-driven services, or a consolidation of consumer offerings (for instance, instead of paying separate prices for Netflix, Hulu, Spotify, and so on, users can pay one price to enjoy everything).

As has happened with the major labels, who basically consolidated from 5 major players to 3, the digital-based entertainment industry will further consolidate, either through acquisitions, technology purchases and so on, and the ones with the largest consumer base (and sustainable business model, of course) will win. Naturally this would not include services serving special niches or market segments that by scale do not make sense for these giant companies to do, but niche companies like these will have limited room to grow anyway.

So what’s the takeaway?

For users — get used to more services shutting down or consolidating in the future.

For artistes/musicians — get your music on as many platforms as possible but do not expect a big payday. Your superfans will probably spend more for exclusive merchandise anyway (well unless you have the capabilities to become an international artist, of which you will definitely need an international-level music marketing company).

For aspiring music services — consumer-facing business models will simply not scale enough for you to be profitable (unless you’re Spotify). Find other ways of making money and target for sustainability over scale.

- This article has been republished with editing and permission from Ario Tamat. Original source is from Medium.

Ario is a co-founder of Ohdio, an Indonesian music streaming service. He worked in the digital music industry in Indonesia from 2003 to 2010, and recently worked in the movie and TV industry in Vietnam. Keep up with him on Twitter at @barijoe or his blog at http://barijoe.wordpress.com.