Thu December 27, 2012
Music-Streaming Services Hunt For Paying Customers
Originally published on Thu December 27, 2012 8:58 am
2012 has been a strange year for content creators — authors, producers, musicians. It was a year when the very idea of physical ownership of a book or CD or even a song file became almost passe.
It was also the year in which music-streaming services like Spotify and Pandora launched major efforts to convince people to pay for something they didn't own. But it's been slow going.
Music-streaming services have been trying to win over two types of customers: a younger generation that doesn't buy at all and an older generation that still likes owning physical albums.
Kayleen Fong, 19, doesn't pay for music. Like a lot of young people, when Fong wants to hear a song, she listens for free on YouTube. In fact, she doesn't even think about it as a video site.
Here's her definition: "It's a search engine where you type in my favorite artist, which is The Hollies. They have a video of them and they usually have interviews."
Fong's taste in music may date back to the days before she was born, but her way of getting it is totally au courant. A study this year by Nielsen found that YouTube is the most popular way for teens and young adults to listen to and discover music.
Streaming services also are trying to appeal to an older audience, like Jennifer Taylor, a filmmaker in her 40s who calls herself "a dinosaur."
Taylor still buys music. More than a thousand CDs and hundreds of LPs crowd her San Francisco apartment. She pulls out an album by Brazilian singer Tetê Espíndola.
"I remember buying this. I remember, you know, going to a record store in Brazil," she says. "I used to take these trips to South America with empty tote bags and minimal clothes, so I could come back with tote bags full of 12-inch vinyl records that there'd be no way I could find elsewhere."
As different as she is from 19-year-old Fong, Taylor presents streaming services with the same basic problem: How do you get consumers to pay a monthly fee for something when they won't actually own it and they can probably find it for free somewhere online?
The two major streaming services, Spotify and Pandora, have been trying to lure these people into paying by offering free versions supported with ads.
"You have to have some version of the free or the radio extreme experience so you can get people into the system," says Mike McGuire, an analyst with Gartner. "Then, how do you get them to cross over to become paying subscribers?"
So far, Spotify has only managed to get about a quarter of its 20 million users to pay $10 a month — and it still is not profitable. Its main competitor, Pandora, which has 175 million users, has had several quarters of profitability, but it has had to put the money back into growing the service. And the more users the two streaming services get, the more royalties they have to pay to artists and labels, even if those users aren't paying for a subscription.
This year, Pandora launched a lobbying effort to get Congress to lower the royalty rates. "Because that's kind of their big existential threat," McGuire says. "If those rates go way up, it's going to be even harder for them to generate profit."
McGuire says even if Pandora were to succeed in changing royalty rates, there is still a question of whether these streaming services can hold on until music listening habits change.
"We're in this period of transition where it's not going to be a simple cut-off transition, where, you know, at some point X percent of the consumer base all of a sudden flops over to streaming," he says. "It's going to be a progression. Probably a relatively slow one."
Taylor, the San Francisco filmmaker, was actually surprised by what she found when she began investigating Spotify. She was convinced it wouldn't have all the artists she loves, like that Brazilian singer, but a search brought Espíndola right up.
Taylor isn't planning to subscribe to Spotify any time soon. But the pressure to move over to streaming services is growing. Many computer makers are no longer installing a CD/DVD drive. And rumor has it that this coming year, Apple is going to launch its own streaming music service.