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Within the past decade we have seen the rise of digital music services such as iTunes and Amazon. Physical music sales started to decrease, and digital downloads started to surpass all other outlets. This was mostly due to being able to download a single song instead of having to purchase full albums. But now, another music service is starting to rise up and compete with these digital downloading services, and many record executives call it the future of music.
Streaming music from “the cloud” has become a very popular choice for many music listeners all around the world. Services like Spotify and Grooveshark allow you to listen to any of their songs at any time for free. You can also upgrade your service for a small monthly fee to remove ads and increase your benefits as a customer, which includes such perks as offline and mobile access. This allows listeners to have thousands of songs without the hassle of having to store it on your computer or purchase individually. The deal is even better for heavy music listeners.
But many music journalists and writers have reported that they might not be able to keep this popularity up while being controlled by major record companies. As reported by Gigaom.com (among others as well), these services are getting the low end of the deal in their relationships with the record companies. These deals include the record company getting one of the following (which ever is largest I might add): Pro-rata share of minimum of $X per subscriber, per-play costs at $Y per play, or Z percent of total company revenue, regardless of other business areas (Michael Robertson, Gigaom.com). To break it down, the record companies take whatever deals makes them the most money, thus leaving the music streaming companies hanging.
They also require equity in the company and initial payments from the streaming services, among others. This is extremely detrimental to these companies because they are getting a heavy portion of their profits split with the record companies, and no company can keep up this type of relationship without eventually being sucked completely dry. At the same, these companies solely rely on the record companies to supply their music, which is obviously what the whole business model revolves around. This makes it so they can’t just move on to a new supplier like another business would. These record companies essentially have a monopoly on the music streaming industry, and can create these heavily one-sided relationships.
Now we understand why the top record executives say this is the future of music, because they are able to run the companies while making a substantial profit off of them. It will be interesting to see the future of these companies and how they will adjust to the market and their relationship with the record companies, but as we see it now, major changes are going to have to be made in order for them to have a future.
http://gigaom.com/2011/12/11/why-spotify-can-never-be-profitable-the-secret-demands-of-record-labels/