An Industry Insider Explains Why Streaming Music’s Already Profitable

By Thomas McAlevey, CEO of Radical.FM. This article was originally published on Radical.FM's blog.

Just how bright is the future of the music industry really?

A new generation has spoken and Access (streaming any music in the world from ‘The Cloud’) will win out over Ownership (collecting a finite number of songs as CDs or files) just as Personal Radio (interactive Internet radio streaming) is replacing AM/FM.

This is no longer debated by the informed, but accepted as a matter of time. Yet how often must we read that leading streaming music services like Pandora and Spotify are still losing money despite tens of millions of users and hundreds of millions of dollars invested? Journalists world-wide extrapolate from this semi-truth that it is impossible for legal streaming to make money, when the fact is that Pandora and Spotify could be profitable today.

That’s not speculation. I know streaming. When Tim Westergren (the founder of Pandora) still thought his future lay in licensing the Music Genome Project to AOL, I was in Sweden running one of the world’s first On-Demand services, Tomsradio.com. And while I was negotiating the royalty agreements for Tomsradio with IFPI, one of our listeners was a teenage tech-whiz growing up in Stockholm named Daniel Ek; Mr. Ek is now CEO of Spotify. But Tomsradio was ahead of its time, so we froze the service and I roamed Africa for a few years producing the film Adventuress Wanted while the streaming industry caught up to us. Since my return to the US the old team has been developing our new service. I’ve negotiated directly with all major music labels so I’m privy to the undivulgable numbers that reporters guess at. And after we took Radical.FM live on iPhones and Androids this summer I decided that it was time to set the profitability story straight: Pandora and Spotify consciously prioritize growing market share over making money.

Now if Tom Yorke, David Byrne, Taylor Swift, or any other artists with more creativity than business acumen read this, please refrain from using my knowledge to fuel idiotic arguments about how the new streaming paradigm is ruining the music business (though you may want to review your label contracts). Artists must accept that today’s streaming royalties are sufficient to make a lucrative music industry for all parties concerned once the market matures (see Streaming Services Lift Music Revenues in Sweden), or doom themselves by demanding higher royalties that will stifle the music industry’s only significant growth sector, and entire future. Streaming services should in turn acknowledge that today’s royalty rates can support viable-if-not-cushy long-term business models. Current total royalty burden is about 50% of gross revenues for mature PurePlay (Personal Radio) services, and about 70% for On-Demand (Playlist) services. This rate is required to fairly compensate artists, composers, and rights holders – a prerequisite of recreating a thriving music industry.

Fact one: Industry leader Pandora could be profitable tomorrow if it increased commercial load by an amount that would still leave it dramatically less cluttered than its FM radio counterparts. But Pandora knows that increasing ads will reduce usage since internet savvy music consumers are less tolerant of interruptions than the baby-boomer FM radio audience.

Fact two: Spotify was profitable years ago in the only mature streaming market in the world (see Spotify Profits in Sweden). If they chose today to stop aggressively funding international expansion Spotify would break even overall in the world tomorrow. If they then chose to cease loss-leading with their free On-Demand service (designed to fuel the growth of their core subscription sales) Spotify would be profitable in all of its markets immediately.

Pandora and Spotify have sufficient scale already to make money, but in both cases their fear of stagnating growth outweighs their current need for cash. As long as investors will allow it, they will choose to lose money today in the hopes of shoring up a safer tomorrow; a fool’s game as I’ll point out below. So now that you know the truth about the current music industry’s single biggest (and sometimes self-sustained) myth, what’s in the cards for music this century?

Well, analyst Bob Lefsetz will do one of his classic 180s when he realizes that Playlist services like Spotify will never overtake Personal Radio like Pandora because the majority of people are not interested in picking their every song manually. But On-Demand streaming will continue to replace the $5B US physical and digital sales with all-you-can-eat playlist subscriptions (see Music Sales Down but Streaming Making Up). On-Demand will not be profitable as an ad-supported platform and subscriptions will continue to cost about $10/month. Apple will release iBeats and make it available cross-platform early on, eventually replacing downloads completely. Pandora survived iTunes Radio because creating a good personalizable endless music stream is complicated. Spotify will not be so fortunate. On-Demand is essentially a search motor coupled to a music library and Apple can do that as well as anybody. With several hundred million music lovers’ credit cards on file, Apple will offer one month for free and eclipse Spotify’s user base by month two.

Pandora will weather that storm too, but be challenged by a new generation of Personal Radio services that will be quicker to innovate. Pandora’s complex Music Genome project is difficult to modify and integral to their current lead. In 2015 Radical.FM will introduce the most social streaming advancement ever conceived, speeding the demise of ‘radio’ as we once knew it. The new Internet Radio services will handle news, talk, and sports as well as music, and they will reach profitability without having to approach AM/FM ad loads. They will continue to be primarily ad-supported, with a minority of users opting for commercial-free subscriptions. Terrestrial radio will fight desperately before yielding the last of her $18B in annual ad revenues (US alone, more than three times total combined music sales) to the far superior Personalized Radio streaming services. AM/FM transmitters will go dark completely by the late 20s, becoming a fond memory of a dying generation.

Pundits like Lefsetz will do another about-face when it is revealed that the Highlander-Effect of Internet (“there can be only one”) does not apply to music the way it might to Search or Social; multiple Personal Digital Radio services will coexist profitably. PONO will fizzle because even die-hard Neil Young fans don’t really want to carry an extra device when smartphones will deliver the same quality (WIMP already offers FLAC streaming in Scandinavia). Vinyl’s novelty cool factor will survive the Hipsters but will never clear a fraction of a percent of the total music pie.

Musicians everywhere will rejoice when they realize that streaming radio shares the massive ad revenues with them that terrestrial radio never did in the US. Then well-fed artists will create great new songs for innovative streaming services to distribute to happy consumers who whole-heartedly support a born-again music industry, one more glorious and lucrative than ever before. The skies will part, the sun will shine again, there will be music everywhere, and… well… the future’s so bright I gotta wear shades!

From the Hot-Seat, Thomas McAlevey, CEO, Radical.FM

Bio: Thomas McAlevey is CEO of the recently launched streaming music service Radical.FM. Possibly still best known as the founder of Sweden’s biggest rock radio station, Bandit, Mr. McAlevey sold that station to RTL (one of the world’s largest media groups) in the late '90s – Bandit Radio is still on the air today. McAlevey pioneered streaming music with Tomsradio in 1999. He is also an award-winning film-director behind the entertaining feature length documentary Adventuress Wanted.

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