What does 2018 hold for Music Streaming Services?
The world is saying “show me the money.”
It is impossible to overstate how dramatically the landscape of how we consume media has been altered by on-demand streaming.
From something that seemed like a wildly impractical pipedream in the early years of the century, the growth of streaming services has been rapid and has drastically altered the accepted pillars of how content delivery has functioned up until this point. In the case of video streaming services, the path ahead seems clear enough. Having gained subscribers initially by amassing a large amount of content that was individually of low value but cumulatively worth the sign-up fee, the major services have gone on to become major players in the creation of content in their own right. The process has evolved seamlessly into a profitable part of the media landscape.
Music streaming services have thus far, not made the same jump into profit. Despite their ubiquity and importance to how people are listening to music, they have not been able to leverage the same momentum to make the moves that Netflix in particular has been able to with video. There are some key reasons for this which we’ll cover and some possible outcomes that we’ll look at too. 2018 has the potential to be a crunch year for the music streaming industry and there is the possibility that some of the key players are running out of time to make this system work.
All killer no filler
One of the key reasons why Music Streaming services have struggled to emulate the business model of their video brethren is down to their content. In the early days of Netflix, it was perfectly OK to handover less than a tenner a month for some nostalgic (and frequently terrible) movies and the MacGuyver back catalogue because there was no precedent for anything else and we were also conditioned that this is ‘how it is’ with video content. A major film will come out at the cinema before slowly working its way down the video food chain until it reaches a point where it is largely available anywhere. People will demonstrably pay a premium to gain access to this material at an earlier point. Streaming services have dropped into this model effortlessly.
Music streaming services have never made use of this model though. From the launch of Spotify over a decade ago, the vast majority of the music industry’s output has been made available to it. You can listen to an album on the day it is released on the majority of streaming services. As such, there is little in the way of scalable content for streaming services. Sure, they have gradually added some holdouts – Pink Floyd, the Beatles etc – but this isn’t comparable to the evolution that video services have undertaken. Effectively, there is no easy upsell for music streaming services – even exclusivity which has been tried at various points by Tidal doesn’t seem to be terribly effective.
From the launch of Spotify over a decade ago, the vast majority of the music industry’s output has been made available to itThis situation came about because the music industry was in (and to an extent, remains in) a different place to video when it comes to piracy. The continued reliance on a 35 year old format has ensured that, were I feeling nefarious, I can access pretty much any album on the day of release, at a quality level indistinguishable from the original, for nothing. Faced with this reality, the record labels have felt that streaming services were the least worst option. This is great news for us as consumers but unfortunately, having got used to a good thing, we might have to deal with a significant problem.
The magic money tree
The cold, hard truth of the music streaming service business model at present is that it has always struggled to be workable. Spotify is currently valued at around 19 billion dollars but despite this huge sum, the company has never made a profit and has instead largely survived on investor capital. Looking at my own history with the company, it isn’t hard to see why. Since becoming a Premium member in August 2009, I have handed the company roughly £1,200. In that time, I have given Sky getting on for eight times that amount. This makes Spotify exceptional value for money but does rather illustrate why one of these companies is extremely profitable and the other isn’t. Spotify has continuously argued that there is a ‘critical mass’ for Premium membership where everything starts to click into place but even with by far the largest market share of any streaming service, this has yet to be reached.
This only becomes more pronounced once you move from the biggest fish in the pond to the smaller ones. Tidal, which started in 2017 with a $600 million shot in the arm thanks to US company Sprint buying a share of it, is apparently once again in trouble despite their business model actually being considerably more efficient that Spotify (ie, in terms of revenue to subscriber ratio). Qobuz too has required outside investment and hasn’t yet hit the black. At the moment, no streaming service has successfully turned their model – be it market share or USP into something that reliably makes money. For now, investors and wealthy backers have made up the difference but it seems unlikely that this will continue forever.
So, what are the options?
2018 is shaping up to be a crunch test of two distinct business models and a third option which is not so much a model as it is a strategy specific to some contenders in the streaming service arena. These are as follows:
The growth option
It seems clear that Spotify will continue with plans to try and achieve its critical mass approach. The company has been making bullish projections and is quite correct when it states that globally, the streaming market still has a lot to give. The company is well equipped to capitalise on this too. With the largest share of the market and an upcoming public issue of stock, they are the closest of any of the organisations to reach this potential milestone.
Spotify has achieved this by developing a platform that is still the best of its kind and we at AVForums still feel it is the best way to augment your existing music collection and for music use. Put simply, it works across a huge variety of platforms and features like the discover weekly playlist are brilliant. Spotify is the household name in this and have managed not to do anything to really annoy their user base.
With the largest share of the market and an upcoming public issue of stock, they are the closest of any of the organisations to reach this potential milestoneThe challenge for Spotify is that they are realistically running out of time to make this work. The public issue could be taken to mean that their existing sources of credit are running shy of giving any more money over and Apple Music is eating into this competitive advantage with every passing month. There are also a number of ongoing royalty spats that will need to be resolved before too long. As rivals get bigger, the pressure on Spotify to finally abandon their free tier will also become harder to ignore. Nevertheless, (much) cleverer people than I are involved in this and it is possible that Spotify stands on the cusp of becoming the clear streaming service option.
The niche option
With Spotify closest to being the clear mass market option, the choices available to some rivals are less clearcut and this is where exploiting a unique selling point makes more sense. This approach is best exemplified by three different services – Tidal, Qobuz and Deezer.
Tidal and Qobuz are going after the quality option but doing so in different ways. Having both launched with the option of lossless, CD quality audio, both companies are now pursuing this further but in slightly different ways. Tidal has very publicly thrown its hand in with MQA and integrated their ‘Masters’ into their streaming platform at no extra cost to the user. Combined with Tidal’s handle on exclusives, this means that the Masters have become some of the most readily available high res content on offer to the public and something that adds value to the product without altering how it works for people who aren’t as interested in the highest possible quality.
Tidal and Qobuz are going after the quality option but doing so in different waysQobuz has taken a different approach. Their Sublime and Sublime + options are separate tiers to their lossless offering and while there is a degree of high res content being made available via the streaming platform itself, the main pull of these subs is that they reduce the cost of the high resolution downloads from the partnering store. This plays on the desire of many people to own some of the music they consume and it must be said that the Qobuz store offering is excellent. The detractors to this approach are the high upfront cost (Sublime and Sublime+ are only available annually which must help revenue but will put some people off) and the increasing subset of people that don’t feel they have any need to own the music in question.
Against this, Deezer has done something different again. While the company has staggered launching a lossless ‘Elite’ tier, it has thrown the bulk of its energies into a policy of becoming a key regional player in specific genres and locations. This sounds a little odd – technically the differences in the libraries of all of these services are pretty small – but by clever curation and paying attention to the requirements of their clientele, Deezer can make that body of content more accessible and appealing than it might be on another service. It is worth noting that Deezer’s revenue/profit gap is already amongst the more manageable of the services in the market. We will be taking a look at both Deezer and Qobuz Sublime+ in coming months so we should be able to ascertain how well these approaches work out for the user, technically if not financially.
The waiting game
It won’t have escaped people’s notice that for two streaming services in particular, another option exists. Apple Music and Amazon Unlimited don’t have to make the same appeals to investors that the independent streaming services do. Neither of these organisations is wondering where their next $100 million is coming from and a different approach to the business of conquering music streaming is open to them. At this point, we move from the evaluation of stated business models which is what this article has done so far and move into the theoretical.
At times, it has looked like neither of these two companies (or indeed Google who are also not short of a few bob and also active in the sector) has truly hit the nail on the head with their streaming options. Apple Music is capable but weirdly uninspired and while it has been steadily accruing subscribers, there is still a surprising gap to Spotify in the quality of their offering. Amazon too has been a little ‘safe’ in their activities so far in marked contrast to their more aggressive approach with on-demand video.
It is perfectly possible though that both companies are quite content for this to be the case. All they are doing currently is making Spotify burn through its cash reserves while being prevented from hitting the numbers that it needs to hit. Only once they have cause to actively pursue a larger user base will either company wheel out their big guns. In the meantime, both Amazon and Apple are not under anything like the same pressure financially.
Apple Music and Amazon Unlimited don’t have to make the same appeals to investors that the independent streaming services doIn terms of who is placed to do best from this, the conventional wisdom would favour Apple – after all, betting against them for the last fifteen or so years hasn’t been terribly smart. The company has vast reserves of money, an ecosystem where Apple Music comes pre-installed and they also have the technical expertise to do things both in expected ways but very well, or indeed in wholly unexpected ways. Whatever happens, I suspect that Apple Music is going to solidly increase its user base this year and it is possible that they might surprise us with something unexpected.
It is Amazon though who I suspect might be the eventual winner in this fight to the finish. The reasons for this are down to a few separate factors that are individually minor but combine to something more compelling. The first is that Amazon’s on demand platform for video could be augmented for audio without a huge amount of effort – and there is a lot of their hardware out there. As well as the various Fire and Kindle equipment in circulation, the hurry to get Alexa integration into third party products, gives Amazon a potential ‘way in’ with a number of third party companies. In many ways, Amazon is better placed to challenge Spotify’s ‘works everywhere’ dominance than Apple.
There are also various things that Amazon does already that could be modified to better serve on demand streaming services. If Qobuz’s approach, balancing streaming and purchases is shown to have legs, the most capable online retailer on Earth is unlikely to struggle to match it – and do so with physical media as well as downloads should the end user require it. The company has also shown, it has no issue with upping quality when called upon to do so with video, so if there is an increase in demand for quality audio (and much as I’d like there to be, I urge you not to hold your breath), it is unlikely to struggle to make this work for them. Above all, Amazon’s investors seem more content to keep going with lower revenues than Apple’s do which means they could well be prepared for their model to work on smaller numbers than Apple might be.
What does this mean for us?
In the short term, the news is only good. You, the paying subscriber, is something all of these organisations need so it is unlikely you will find yourself paying more or having your usage options curtailed. There is currently an option suitable for almost everybody.
The longer term is less clear though. We have already lost quite a few names in on-demand streaming and it is possible that the next year could see another big name fall. This is an industry which is all or nothing in a way that video isn’t and that is going to make for a very gruelling fight to the end for the company that wants to be the last one standing.
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