Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions
Business Matters: If Big Radio Had Pandora's Royalty Rate, It Would Owe Billions

As a new year begins, it's enticing to predict massive changes and transformation in the upcoming 12 months. But read on if you want a prediction of only incremental change for the music industry's most-hyped sector.

In recent days, a few friends who work in the music business asked what albums I really liked in 2012. Since just a few came to mind quickly, I pulled out my phone and opened the Rdio app to see what other albums showed up on the "Heavy Rotation" screen. Somewhat to my surprise, these people had not heard of Rdio (they're obviously not reading my posts at Billboard.biz).

It's sometimes easy to get caught up in digital trends when you work in the bubble of the music business and constantly follow products and services that will be standard five or 10 years time. Empathy with average consumers can be difficult. People in the industry must constantly be reminded what the average person knows, thinks and buys.

I recently learned that you can't give the gift of subscription music to just anyone. Although market research (take your pick, they're all pretty much in agreement) says over half the U.S. adult population owns a smartphone, not everybody in my family has one. Reasons vary from age (too young) to price (no compelling reason to pay extra for the features). Since the great value of a subscription service is the ability to take music on the go, ownership of a smartphone is a prerequisite to a growth in subscription services.

You may have noticed over the holiday break that a record number of smartphones and -- especially -- tablets activated on Christmas day. According to Flurry, 17.4 new iOS and Android devices, 51% of them tablets, were activated on Christmas Day. That was a 255% improvement over the 6.8 million devices activated on Christmas Day 2011.

With smartphone and tablet sales on the rise, subscription services are bound to take off, right? Access models are bound to replace the download any day now, right? No, I don't think so.

Subscription services are simply not yet ready for prime time. They have experienced good growth in the last three years and will certainly continue to grow in 2013. The U.S. market has accelerated greatly since Muve Music and Spotify launched in 2011. Investors have put hundreds of millions of dollars into Spotify and Deezer to give their freemium business models the global footprints they need. There are good products out there. But average customers aren't ready for them.

Their numbers are good, albeit relatively small in the grand scheme of things (Netflix has over 30 million subscribers and Sirius XM has over 23 million subscribers). Spotify and Deezer have just 8 million subscribers globally (5 million and 3 million, respectively). Rhapsody, which gets its subscribers mainly from the U.S., and Muve Music, which operates solely in the U.S., have over 1 million and over 700,000 subscribers, respectively. There are a handful of others will fewer subscribers.

Let's keep those numbers in perspective. Spotify had roughly 1 million subscribers at the end of the year in the U.S. Since it started the year with somewhere around 500,000 subscribers, let's figure the company averaged around 750,000 U.S. subscribers. Assuming all subscribers pay $10 per month and not the $5-per-month PC option, that's $90 million in annual revenue. In other words, Spotify generated as much U.S. subscription revenue as the top 18 digital albums through December 23, according to Nielsen SoundScan (at $11 per digital album). Those 20 digital albums accounted for just 8% of all digital album sales. The top 20 digital tracks equal the amount of spending on 750,000 Spotify subscriptions in the U.S. in 2012 (at $1.29 per track) and account for less than 6% of all tracks sold through December 23.

Those numbers represent just one subscription service, of course, but the point should be clear: the biggest, fast-growing subscription service in the world pales next to the U.S. download market. It won't always be that way. Even iTunes had to start somewhere. But it's obvious subscription services have a long way to go before reaching a mainstream audience.

Downloads aren't dead. As Billboard reported last week, digital track downloads were still going strong before Christmas. U.S. digital track sales were up 5% through the week ending December 23, according to Nielsen SoundScan. U.S. digital album sales were up 14% through the same week. The final week of the year should be good. As Billboard reported last week, as many as six songs may have sold over 300,000 units last week. Last year only two songs, LMFAO's "Sexy and I Know It" and Rihanna's "We Found Love," topped 300,000.

It's not that subscription services don't offer a good value, a good product and a good experience. But they are up relatively small companies up against giants. As long as Apple, Google and Amazon are selling downloads, offering storage space for those downloads (Google offers space for free) and mobile devices for streaming those downloads, expect the download business to be where mainstream consumers put their money.

When subscription services can get into every U.S. household through mobile or broadband companies they may stand a fighting chance against "the big three." Until then, I'll be buying download gift cards for presents.

Questions? Comments? Let us know: @billboardbiz

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