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Music industry sucks life from subscription services

Lucas Mearian | Feb. 17, 2014
Music subscription services, such as Pandora and Spotify, are the fastest-growing segment of the music industry, but since they hand over 60% to 70% of their revenue to record labels, they will inevitably fail unless something changes, a new report shows.

Subscriptions to music services are expected to more than double by 2017, but because those services pay 60% to 70% of their revenue to record labels and artists, the entire sector is intrinsically unprofitable, according to a new report.

The report, from industry analyst firm Generator Research, offered an analysis of the top services, including Pandora, Spotify and Rhapsody.

The report stated that unless the services can monetize their user base by entering new product and service categories, or they can sell themselves to a larger company that can sustain them, they're doomed to fail.

Pandora's cash flow compared to other music streaming services

"We cannot see any conceivable market scenario where the music industry would buy any of these players, let alone the whole sector," said Andrew Sheehey, co-founder and chief analyst of Generator Research, in an email reply to Computerworld.

Generator Research's analysis shows that no current music subscription service can ever profitable, even if it executes perfectly, because the music industry will never agree to significantly reduced royalties.

"For a listed company like Pandora this would mean that the company would need to be taken off the public market (as has happened with Dell)," the analysis stated.

Roads to profitability
One method that subscription services might be able to achieve profitability is to upsell mobile deals or bundles to subscribers. For example, a select package of mobile services would be sold through the music service provider, the report suggested.

Bundled services will likely begin to surface when the music subscription market reaches a certain critical mass. Then, users will see the arrival of a kind of "super bundle" where, for an additional monthly fee, paid-for downloads, for example, would be bundled with the base subscription offer.

"Services like iTunes Match and Google and Amazon are already heading in this direction," Generator research stated.

Music subscription services could also sell anonymous user behavioral data to advertisers and ad platforms that could use that information to better target their advertising, the report said.

Growth industry
The number of subscribers to both paid and unpaid music services is expected to more than double over the next three years, Generator Research stated.

The company estimates that last year, there were 767 million individuals worldwide using a music subscription service. Of those, 36 million paid for subscription-based access.

Pandora listening hours — online versus mobile.

By 2017, the number of subscribers overall is expected to leap to 1.7 billion, with 125 million of those users paying for the service to access premium features while avoiding ads, the researchers said.

The increase in paid subscriptions means revenues earned from music subscription services will represent $2.9 billion, and "will be by far and away the most important source of growth that will, at last, allow the music industry to return to a period of growth, albeit modest."


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