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Why 2017 Is The Year Of Reckoning For The Streaming Music Business

Can Spotify make a profit? Will Tidal and SoundCloud survive? Streaming music is on the verge of its moment of truth.

Why 2017 Is The Year Of Reckoning For The Streaming Music Business
[Photo: Flickr user myrockethasnobrakes]

There are few industries more paradoxical than streaming music. On the one hand, it’s exploding: The boom in paid subscriptions is driving the music industry’s first real growth in over a decade–in fact, streaming now makes up more than half of its revenue. At the same time, streaming music is an incredibly challenging, tight-margined business. For all the industry excitement around streaming, a critical question remains: Is this a viable business?

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The year 2017 is shaping up to be when we find out.

Just look at the landscape. This week, Pandora CEO and cofounder Tim Westergren decided to step down after 15 months as the struggling internet radio pioneer’s chief executive. Earlier this year, Tidal lost its third CEO in two years when Jeff Toig left the company. Both music companies had recently taken investments from other firms (Sirius XM and Sprint, respectively) that injected cash, but fell short of the all-out acquisitions most people expected, and that many believe would be necessary to keep these money-losing services from drowning.

Other independent players like SoundCloud and Rhapsody/Napster continue to lose money. as well. Deezer canceled its IPO in 2015, opting to raise more funding and bide its time on going public. Even iHeartMedia, whose streaming business is bolted onto a well-established legacy radio business, is teetering on the brink of bankruptcy, thanks to slowing revenue growth and mounting debt. Virtually none of the stand-alone streaming music services are profitable, with the apparent exception of China’s Tencent-owned QQ Music, which benefits from its scale and unique negotiating muscle with music companies.

So what’s the problem? At its heart, streaming music—whether monetized via advertising, subscription fees, or something else—is not a great business. Companies like Pandora and Spotify are making billions of dollars in revenue. In 2016, Spotify brought in $2 billion, while Pandora earned $1.39 billion. But profits are elusive–both companies lost more than $300 million apiece last year–primarily because the cost of licensing the music itself is so incredibly high.

In the last quarter of 2016, as an example, Pandora spent $38.3 million on product development—in a year when the company was busy launching a major overhaul to its core product by adding an on-demand subscription tier to keep up with Apple Music and Spotify. It spent $133.5 million on marketing and sales–it’s hard to scale a latecomer product in a competitive market by word of mouth, after all–and another $46 million on administrative costs. But at the same time, it spent a whopping $212 million on music licensing and royalties—for any streaming music company, this line item is always far and away the biggest cost on its balance sheet. And Pandora only made $392.6 million in revenue that quarter. The math doesn’t leave much room for profits.


Related: 7 Ways Streaming Music Will Change In 2017

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It’s not all bad news, of course. Spotify and Apple are both growing their subscribers at healthy clips. Spotify, which boasts 140 million listeners overall, has about 50 million paying subscribers. Apple Music has 27 million paying subscribers. Amazon–which has at least made a dent in the music hardware business with its Echo device–is presumably doing okay, but it’s hard to tell, because the company will never, ever (no matter how many times I ask) share subscriber numbers.

The overall growth in music subscriptions means good news for record companies, who are collectively seeing their first double-digit revenue growth in nearly two decades, thanks to streaming. But questions continue to linger about how the streaming revolution will pan out for artists, to whom these growing music royalties don’t always trickle down. And without a shift in the basic economics of licensing and streaming music, or inventive new sources of revenue, the streaming companies themselves are mostly losing money.

Not even Spotify, the market leader, is profitable. It’s certainly hoping to get there as it readies itself for a public listing on the stock market later this year. Once Spotify goes public, we’ll get to learn much more about the inner workings of the music streaming business, thanks to public filings. But for now, suffice it to say: It’s a tough business.

That leaves Apple—a company with an $800 billion market cap that could afford to run its music service at a loss for the next century. And many of its competitors—Amazon Music, YouTube, Google Play, and whatever music-related product Facebook is clearly cooking up—are, likewise, music services run inside tech giants that make their profits selling phones, consumer eyeballs and, in the case of Amazon, literally everything else. If music services from these technology goliaths ever do turn a profit, we may never know; such companies are free to lump their streaming businesses in with other revenue sources in their quarterly financial reports.

But again, any of these giants could get away with never turning a profit on music. Whatever this means for listeners—do you really want to rent all your music from a company that has a thousand other departments and priorities?—it certainly doesn’t bode well for the independent music streamers out there. If the competition is able to sling money around with little regard for profitability and outspend your cash-strapped startup, why bother innovating and coming up with the next smart business built around music?

[Photo: Flickr user Robert Brook]
It’s kind of insane, really. There’s apparently just something about music and our innately deep, human affection for it that drives people to launch companies around it. (Not that ride-sharing startups or food subscription services race to profitability overnight either, but many of these music companies have been operating for well over a decade.) In its own less extreme way, it’s reminiscent of the way musicians themselves put it all on the line—sometimes, damn near starving themselves—for the chance to make a career out of this thing they love, economics and rational decision making be damned. Indeed, people like Pandora’s Tim Westergren and SoundCloud’s Alex Ljung were musicians before they were entrepreneurs. And both, together with their respective cofounders, had great ideas for music services that fulfilled real needs–for personalized radio and a user-generated audio platform for creators, respectively. In the process, each became its own major force in both streaming music and culture.

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But just because people care about music doesn’t make it a good business. That’s a lesson that almost everyone in the space is learning right now, to varying degrees. One or two of them may be gone—or under new ownership–by this time next year. We might have some kind of Facebook-branded music service. Spotify will likely be publicly traded. Either way, the landscape will look different. By then, we’ll be a lot closer to answering that big question: Is streaming music a viable business, or are these people slightly out of their minds?

About the author

John Paul Titlow is a writer at Fast Company focused on music and technology, among other things.

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