Demand for Online Music Services Is On The Rise, But So Is Uncertainty About Their Businesses

Posted by: Peter Burrows on March 31, 2009

I’m a huge fan of online subscriptions, particularly music services such as Pandora and Rhapsody. I realized just how much I’ve come to rely on such services this weekend, when I briefly considered giving away boxes of hundreds of CDs I stored in my attic soon after I began paying my $15 monthly fee for unlimited streaming access from Rhapsody a few years back. It was a shock to look at all those CDs, and feel nothing—none of the love I used to feel when buying, playing or admiring them as they took up space in my crowded home-office.

Now, all I care about is having access to music. So long as that’s the case, I could care less about owning it—whether on CD or as a digital download.

Evidently, I’m not alone. Today, market watcher NPD released the latest evidence that tomorrow’s customers—today’s teens—are less interested in owning music.

Teens(age 13 to 17) acquired 19 percent less music in 2008 than they did in 2007. CD purchasing declined 26 percent and paid digital downloads fell 13 percent compared with the prior year. In the case of paid digital downloads, 32 percent of teens purchasing less digital music expressed discontent with the music that was available for purchase, while 23 percent claimed to already have a suitable collection of digital music. Twenty-four percent of teens also cited cutbacks in overall entertainment spending as a reason for buying fewer downloads.

Interestingly, the culprit stealing those sales wasn't piracy, NPD reports that:

The downturn in paid music acquisition was matched by a downturn in the quantity of tracks downloaded from peer-to-peer (P2P) networks, which fell 6 percent in 2008. The number of teens borrowing music, either to rip to a computer or burn to a CD, fell by 28 percent.

Rather, teens are flocking to streaming sites. Says NPD:

More than half of teens (52 percent) listened to online radio in 2008, compared to just 34 percent in 2007. Downloading or listening to music on social networks also saw a large increase -- from 26 percent in 2007 to 46 percent in 2008; satellite radio listening among teens increased from 19 percent in 2007 to 31 percent in 2008.

"With popular music sites like Pandora, imeem, and MySpaceMusic complementing offerings by terrestrial and satellite radio, more teens may be getting their fill of music and feeling less compelled to buy music or share it with others," according to [analyst Ross] Crupnick. In fact a recent NPD MusicLab survey revealed that 54 percent of teens who heard a song they liked on MySpace Music were likely to simply listen to that song again on the site, compared with only 1 percent who claimed they would click through and buy the song on AmazonMP3, which is MySpace's online partner for purchased music downloads.

But there's a big problem: Most of these music sites aren't making money. Pandora seems to be in relatively good shape (pending negotiations over royalty rates for online radio), but SpiralFrog recently went under. iMeem is up for sale, bankers tell me. But although it has raised more than $50 million in funding, these sources say it may not be worth more than $10 million. There are rumblings that even MySpace Music, despite huge popularity, hasn't nailed the business model yet.

Which raises the question: How can consumers (including this one) commit completely to a cloud-based way of life when it comes to media? Over the years, this was one of the main arguments I heard from Apple, as to why subscriptions were a lousy deal for consumers: Because if service provider went out of business or decided to jack up prices (or start charging for what had been free), consumers may be left with no music library at all.

In the past, I discounted this argument, on the assumption that market economics would ensure the survival of good services. Increasingly, that assumption feels flawed. Given the dire straits of Rhapsody owner Real Networks (it's market cap of $307 million is less than its $370 million in cash), who knows what will happen to the subscription service I now rely on every day.

And it's not just music. Consider Kodak's recent decision to start charging for storage on its Kodak Gallery photo-sharing site. I'm not a Kodak Gallery user, but our family does use Shutterfly to share photos with family members. Will it start charging us $5 or $20 bucks a year for storage, too? In that case, I may want to change horses and move to Flickr or some other offering. But will they be any better?

Of course, unprofitable or struggling businesses need to figure out how to make money, and that will likely involve more paid services. But they must also think about the overall online user experience--which includes giving consumers a migration path should they need to radically revamp their terms of service (or go out of business). In the long run, Kodak would be better served by giving an out to customers who don't want to pay up, say, by agreeing to transfer their pics to another photo site or back to their PC hard drives.

As for my CDs, they're staying in the attic for now.

Reader Comments

We7Steve

April 1, 2009 8:36 AM

In the race to create digital music models there are two sides to the equation 1)User acceptance - will people use the different legal services ie with ads in the case of ad funded models and 2) What is the sustainable economic models that can satisfy basic business needs of growth, sustainability and profitability

The great news is that user acceptance is an outstanding success, people want legal music more than ever before, that is shown by Pandora, iMeem and ourselves We7, a UK on-line jukebox where we deliver great free music, we signed up 500k UK users in a little over 90 days. Now that user acceptance is massive it means that real metrics are evolving that are showing the 'art of the economic possibilities'. These metrics show that traditional recorded economics will not work but they also show that with some flexibility and latitude and the possible scale that the internet delivers that we are moving much closer to a understanding of what economic models can become real.

We should not dismiss the potential opportunity while the industries go through this important transition period and move toward the ultimate ever present on-line jukebox of all music.

Steve Purdham
CEO - We7
www.we7.com

Ryan

April 3, 2009 11:43 AM

Peter - great to hear that you're a longtime Rhapsody user.

The rise in streaming and apparent shift in consumer behavior toward embracing the "access" model is encouraging. The goal here needs to be about growing the overall music business, and if streaming and/or access models can be that driver, all the better.

Per your comment about RealNetworks being in "dire straits" - I'd have to counter that with $370 million in the bank and no debt, Real stands to be around for many years to come.

Ryan Luckin
PR for Rhapsody & RealNetworks

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Bloomberg Businessweek writers Peter Burrows, Cliff Edwards, Olga Kharif, Aaron Ricadela, and Douglas MacMillan, dig behind the headlines to analyze what’s really happening throughout the world of technology. Tech Beat covers everything from tech bellwethers like Apple, Google, and Intel and emerging new leaders such as Facebook to new technologies, trends, and controversies.

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