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Streaming Music: Will a Viable Business Model Emerge?

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Music streaming has yet to challenge downloads (iTunes) for digital music dominance, yet a number of companies, including Lala, Pandora and Spotify, have been gaining in hype and popularity, if not in revenue. Is there a business model for streaming that can make everyone happy, including consumers?

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									                                                 DIGITAL MEDIA
                                                 Streaming Music:
                                                 Will a Viable Business Model Emerge?




                                                 Lead Analyst
                                                 Josh Bell

                                                 Contributing Analyst
                                                 Michael Gartenberg




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use of clients. All opinions and projections are based on Interpret’s judgment at the time of publication and are subject to change.
Published January 2010. © 2010 Interpret, LLC
Streaming Music: Will a Viable Business Model Emerge?

Catalyst:

Music streaming has yet to challenge downloads (iTunes) for digital music dominance, yet a number of
companies, including Lala, Pandora and Spotify, have been gaining in hype and popularity, if not in
revenue. Is there a business model for streaming that can make everyone happy, including consumers?

Executive Summary

Overall Interpret Insight:

Digital music sales have yet to make up for revenue lost from the decline in CD purchasing. As record
labels continue to look for alternate revenue streams, music-streaming sites are beginning to pick up
steam – according to Interpret’s New Media Measure, streaming is up 17% over the past six months.
Interpret believes that a dominant leader can emerge from the fray, simply by keeping it simple for
consumers.

Core Questions:

    •   What is the current landscape of music streaming?
    •   Will streaming cannibalize downloading or other means of music consumption?
    •   How can streaming sites better appeal to consumers?

Key Insights:

    •   Despite the growth of streaming (21% of consumers in the past 3 months), not as many
        consumers are streaming as downloading (29%), and both still trail CD buying (34%) in terms of
        the sheer number of consumers listening to music. Interestingly, consumers who stream music
        spend the most time listening to music in a week – almost an hour more per week versus those
        who download (10.9 vs. 10.1 hours/week).
    •   Streaming and downloading are not cannibalizing each other. About half (46%) of streamers
        also download, and a successful music site should have streaming and downloading working in
        concert with each other.
    •   Many streaming sites offer plans that allow unlimited streaming but limited downloads,
        different plans for time spent streaming, or downloads that you can keep and transfer until you
        cancel your subscription. There is too much fine print, and the streaming sites are alienating
        consumers by making things too complicated.
    •   The key to success for any streaming site comes down to one thing – ease of use. Although not
        a streaming site, iTunes has had a great deal of success not only because of the iPod, but
        because they have made things simple for their consumers. For the most part, a song is 99
        cents and an album is $9.99, some are more expensive and some are less, but if you want a song
        or album you know how to get it.
Market View

Most would agree that the digital music revolution began over a decade ago with Napster, which
allowed consumers to download music for free. While iTunes helped make downloading music
legitimate, the music industry has yet to figure out a way to make enough revenue from downloads to
mitigate the losses from declining CD sales. The labels have turned to music videos, with the launch of
Vevo and partnerships with YouTube, as well as “360 deals” which allow the labels to make money from
artists’ concerts and merchandise sales. While we may have yet to see the repercussions of these deals,
music, whether in physical or digital form, remains the labels’ core product and main source of revenue.

On the digital side, no one would argue that the market leader in paid downloads is iTunes. Despite
some initial hiccups – including the consumer-derided digital rights management (DRM) – iTunes has
become the go-to venue for downloading music legally. Manufacturing a nearly ubiquitous digital media
player has certainly factored into their success, but Apple has created a very powerful digital store that
accounts for the vast majority of paid downloads. Despite the success of iTunes, the record labels are
becoming increasingly paranoid about diminishing returns from music sales, striking the aforementioned
comprehensive deals. The most enigmatic music revenue stream, however, may be internet streaming.

Pandora (www.pandora.com) would likely be considered among the market leaders in music streaming,
boasting about 20 million users a month, at least in part by making a successful con
								
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