Why Music Startups And Ad Networks Suffer From “Flavor Of The Month Syndrome”

Guest post by
Joey Flores

(@earbits) of sidewinder.fm, a music and tech think tank. Flores is a reformed ad network guy, and co-founder
and CEO of Earbits.

Last week, I was out in Indiana, chatting it up with one of music's respected tastemakers. I had just presented Earbits to several local business leaders, talking about the potential of our platform to become a streaming service
of scale. Said tastemaker, a well-known blogger and host of his own show on Sirius, told me that it didn't seem like any streaming service has ever had staying
power. There was always a flavor of the month, phenomenal growth, and inevitable atrophy when the next big service came onto the grand stage.

I couldn't disagree with his observation, but I don't think it has anything to do with being a flavor of the month, or fickle consumers. It has everything
to do with being a commodity business and not having enough competitive differentiation.

Why I Left the Ad Network Business

I was in the ad network business for about a decade, until I got so disenchanted with it that, now, whenever a former colleague talks lead generation or
affiliate marketing with me, my eyes glaze over.

Why did I become so disenchanted?

I hate the ad network business because it's constantly mired with new startup ad networks who emerge on the scene; license the same technology and secure
all of the same advertisers that every other network has; drop their margins down to 5%; and steal everyone's affiliates with their higher commissions.
Then they inevitably realize their bloated commissions aren't sustainable.

These ad networks ultimately have to return to the industry's average 20-40% margins, but only after they've stolen all of your publishers, who have no
real reason to be loyal to any particular network. Then, those same publishers rush off to find the next startup ad network willing to shoot themselves and
everyone else in the feet by offering unsustainable commissions on commodity offers. This continues endlessly, driving down margins for the entire
industry, with disloyal affiliates being the primary beneficiaries.

Music streaming services have, historically, been similar.

The Next Hot Music Service

No discredit to Elias Roman and team — I hope they know how much I respect what they've done so far — but let's use Songza as an example.

Songza
is definitely a media darling right now. They're executing on a great new concept and quickly gaining traction and credibility in the streaming
marketplace. Their playlists are different, the way you choose them is different, and plenty of people prefer their curating over industry giant Pandora.
I've had a lot of people tell me so.

But while there are a lot of people who love Songza's playlists, there is an even bigger group of people that would switch from Pandora to any solid radio
service that doesn't have commercials. Unfortunately, just like an ad network can't be sustained on 5% margins, every streaming service of scale will
eventually find a commercial-free format unsustainable. As they add two, three, and then five commercials per hour, a recently funded streaming competitor
will enter the market to replace them as the commercial-free alternative, unexpected to turn profits in their audience-building stages.

Activity-based playlists are unique. So was Pandora at first. But at the end of the day, do these features provide enough competitive differentiation to
keep users loyal once the commercials start rolling and another fledgling service emerges as a safe haven for the millions of listeners trying to avoid
commercial interruptions?

Mainstream Music, Alone, Is a Commodity

My friend the tastemaker was right. Most streaming services don't seem to have staying power, and from the outside, it looks like fickle consumers moving
from one trendy product to the next. But I would argue otherwise.

I say that music consumers are not fickle. They've spoken loud and clear about what they want and they've continued to use services that meet their needs.
They want their music, they want it free, and they want it without commercials. They're not running to the newest service because it's so innovative. After
all, most of them are just presenting the same catalog of music in a slightly different format. They're leaving because commercial interruptions make for a
bad listening experience, and at some point, every mainstream music company buckles under the pressure of royalties, and monetizes using commercials.

Just like every ad network seeks out the ever-elusive "exclusive advertiser," who will let them and only them control the market for their affiliate
program, streaming services keep looking for that silver bullet feature that will keep them relevant for years to come. But it's not features that will
keep users loyal to a streaming service, it's aligning your revenue streams with your product — something no major streaming service has come close to
figuring out.

—

Joey Flores is a reformed ad network guy, and co-founder and CEO of Earbits.com, a music streaming service designed to
help artists with fan acquisition and marketing through guaranteed consumer exposure.