Before the BusinessWeek.com article by Douglas MacMillan on consumers' use of streaming services as substitutes for purchasing, I was the only one (as far as I know) to point out this harmful downside to free, ad-supported services.
In December 2008, I wrote that streaming services are not a boon for record labels because of two key reasons. First, they are a poor way to monetize recorded music assets. Here's what I wrote in December:
Consider a song sold at iTunes. The label collects about 70 cents (ignoring publishing and distribution). A typical on-demand streaming payout would be, realistically, around half a cent per stream. That means the song must be streamed 140 times to generate the revenue of a single track purchase. A sale results in an immediate 70 cents while streaming spreads out that revenue over time (the time value of money dictates that money now is better than money later). The sale of an entire album results in revenue equivalent to 1,400 streams. The buyer would have to spend about 5,600 minutes -- over 93 hours -- listening to music on a playlist site to generate the same revenue generated from the purchase of a digital album.
Second, they allow purchasers to forgo purchases for free streams. To paraphrase Dr. Liebowitz of the University of Texas at Dallas, each minute spent listening to a low-revenue streaming service is a minute that is not spent listening to purchased music.
In addition, I wrote that labels' excitement for streaming services misses a key point. While these services may induce someone to switch from file-sharing to free, legal listening, they can also induce a person to switch from purchases to free, legal listening. That is what MacMillan found.
Researchers and industry consultants say online music sites are being used by a growing number of listeners as a substitute for purchasing music, rather than serving as a catalyst for more purchases. (San Francisco-based graphic designer Gitamba) Saila-Ngita's experience shows that the sites allow music fans to spend much less money than in the past. "Most of this is substitutional. People go to [the Web] instead of buying records," says Jay Rosenthal, senior vice-president and general counsel for the National Music Publishers' Assn., a Washington (D.C.)-based trade group that represents publishers of songwriters and composers.
While the article lacks much hard data and offers only scant anecdotal evidence, I think it's on the right path. Streams are substitutional, as Rosenthal stated. Plus, the article offered a bit of evidence of a streaming service's ability to upsell to MP3s. The upsell, if achieved, is the silver lining for streaming services like Pandora, MySpace Music and Imeem. In theory, listeners use the services to find music they like and this discovery leads to purchases. To the contrary, the growth of download sales indicates the incredible amount of music discovery taking place on the Internet is not leading to a net increase purchases. These people would have bought music in the absence of an Imeem or a Pandora. Per capita spending on music is dropping as online discovery continues to grow.
MacMillan has information on the number of webstreams and MP3s sold by Lala.com.
Palo Alto-based Lala, a startup launched in 2007, shows how the music industry is struggling to profit from this new approach to music. Lala gives people the option of either paying 99¢ to download one song or paying just 10¢ for a Web-hosted song that they can access from any Web-connected PC. Lala users can also stream any song in the catalog once for free, and keep up to 50 songs in their online collection.
So far, little money is changing hands. For every 1,000 songs streamed at Lala, users pay the 99¢ download fee for only 72 of them. They pay 10¢ for only 108 out of 1,000. The remaining 820 songs are played for free.
(I should note the article does not differentiate between song uploaded to Lala.com and streamed, for which labels do not receive payment, and streamed songs that are not in the user's permanent collection. If the track was already purchased and added to a person's Lala.com collection, there is not going to be a future ten-cent webstream purchase or $0.89 MP3 purchase.)
There is no doubt that music is moving toward access-based revenue models. Streaming is part of that shift. The shift may be inevitable. Giving consumers additional options may be the right thing to do. At the very least, streaming revenues are an acknowledgment that the boom years of the CD were far above the industry's historical norms and will not be revisisted. But the bottom line is labels need more revenue than less, and pushing consumers toward lower-revenue models may harm the record industry's chances for a soft landing.