Can Spotify and Hulu Move Forward Without Killing The Businesses They Rely On?
Can Spotify and Hulu Move Forward Without Killing The Businesses They Rely On?

Traditional media wants to embrace streaming content. But for Spotify and Hulu, two leaders in on-demand music and TV, popularity with consumers often equals infamy with the media executives who rely on albums and primetime ads to make money.

Streaming is clearly a wave, if not the wave, of the future, as the race to the cloud has shown. But reluctance by content owners to fully promote, cooperate with and popularize new distribution has caused the process of monetizing it to lag behind. Call it " The Innovator's Dilemma," the disruptive technology of today's media. It wants to move forward - but doing so could kill the businesses that support it.

Spotify needs to strike a balance: It must nudge users to stream music rather than pirate-without discouraging them from buying it or becoming paying subscribers. Major labels fear the free, ad-supported service hastens the shift from CDs and digital downloads to streams without making up the financial difference. Thus far, they have deemed conversation rate of free to paid users-the latter category passed 1 million users in March -as being too low.

Hulu faces a similar issue. The Internet television provider, now three years old, grew more popular than its media parents imagined, bringing a shift to web viewing habits faster than they expected.

To curtail Hulu and keep audiences loyal to their TV sets, its network owners, Walt Disney Co., News Corp. and NBCUniversal, have considered delaying the availability of latest episodes and wedging more ads into the programming-moves Hulu CEO Jason Kilar states he is against, as they do not align with his vision for the future of TV.

"Hulu is not burdened by that legacy," he wrote, inciting tension among the company's owners.

Spotify also remains at odds with its backers. It gained a massive following in Europe, and executives-many of whom have been using Spotify from the start-have no doubt it will be popular if it comes stateside. They are, however, worried that it offers too much free music. Had the uptake in premium subscriptions been higher, labels would likely be more satisfied with Spotify.

Like Kilar, Spotify CEO Daniel Ek is caught between old media's past and future, vying to grow his audience without compromising his product's potential. In April, he trimmed its free offering to 10 hours a month, a change that could make Spotify less threatening to labels.

However, in limiting Spotify further-as a means of hedging their bets-labels may have spoiled "the magical equation that allowed it to gather over one million paying subscribers in Europe," says technology writer Eliot Van Buskirk at Evolver.fm. They now run the risk of sending consumers back to the p2p networks Spotify was designed to wean them from.

This creates a scenario where everybody, artists and labels included, loses. It begs the question: Can traditional media embrace the future without also endangering the businesses they rely on?

Take Clear Channel, for example. Late this summer, it will enter the web-based, custom radio market with its iHeartRadio update. To compete with services like Pandora and Slacker, the radio giant bought the subscription music service Thumbplay, which had been developing the technology.

Soon enough, listeners will be able to "build custom radio stations just like they do with Pandora," says Bob Pittman, Clear Channel's chairman of media and entertainment platforms, told the Los Angeles Times last month.

iHeartRadio-like Spotify and Hulu before it-is an attempt by Clear Channel to tame the chaos of the web. It aims to lead consumers to rethink their experience of broadcast radio and may cause them to desire more from the radio stations its parent currently offers.

While it is true that Pandora does not have local news updates and DJs, it does something important that broadcast radio does not: It reflects and adapts to the needs of individual users.

Asked if Clear Channel will feel threatened by iHeartRadio if it grows too popular, Ethan Kaplan, a former Warner Music Group exec and editor of the Black Rim Glasses blog, drew a parallel with how labels feel about Spotify. "Of course they will [feel threatened]," he says. "It is in the nature of legacy entities to enforce status quo and their existing hegemony rather than embrace disruption."

Due to "billions of dollars" in ad profits from broadcast radio, Clear Channel can "afford to invest and grow" an online audience, says Pittman. But-like the major labels and TV networks-it cannot renovate their products in a way that endangers that revenue stream.

We're back to "The Innovator's Dilemma": Traditional media wants to embrace the future (Spotify and Hulu) but it also needs to protect the present (albums and primetime ads), which results in it undermining the services it once endorsed. Labels and TV networks won't kill themselves to live.

Left to their own devices, Hulu and Spotify would do what they need to do to move their businesses forward. In the process, though, they could gain leverage and market share needed to dictate terms-like Apple does-and no traditional media executive wants another Apple.

This is a major reason why labels and TV networks are opposing Spotify and Hulu's efforts to gain power: No content provider will risk having another tech giant determine its fate. Since both services need incumbents as stakeholders-and that business is a consortium-it is much harder to move it forward. The consensus needed to satisfy everyone forces Ek and Kilar to temper their vision.

In May, Hulu and its owners entered negotiations to extend the service's content licenses for several years. According to writer Peter Kafka at All Things D, if signed, the new deal will "put to rest" any idea Hulu's backers want to kill it off. Early reports suggest though, that under the new terms it may have a larger ad load and receive shows several days later.

Like with Spotify, this change may spoil "the magical equation" that made Hulu popular.

Time will tell. For Clear Channel, piracy is not a concern. But if custom radio grows while broadcast declines, similar measures-like more ads and delaying shows-may be taken.

Today, Clear Channel still gets criticism for homogenized stations- a charge it has not denied. ("We're not in the business of providing well-researched music. We're simply in the business of selling our customers products," CEO and founder Lowry Mays told CNN.) Customized web radio may win over such critics. Which brings things, almost comically, full circle …

"If you look at where broadcast radio is going, it looks like they're trying to become what online radio used to be," Jonathan Sasse, a marketing exec at Pandora competitor Slacker, recently explained to the Los Angeles Times. "What we're trying to become is what broadcast radio used to be, which is radio that's expertly programmed and tailored to you."

Slacker still provides custom radio. But more so, it seeks to emulate broadcast staples like WRXP and KCRW by empowering DJs and letting them play edgy songs and talk about music.

Ironically, as Clear Channel tries to create the future, some web radio is now focusing on its past.

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