One of the biggest questions of 2009 has been: What will it take for ad-supported music to work? The answers are pretty clear in this Q&A with Robin Kent, founder of consultancy Rebel Digital and former CEO of failed ad-supported music site Spiral Frog, at Music Ally. Kent's overview of the market portrays interactive, ad-supported music as unsustainable.
" The problem with advertising is that the majority of the money goes to search - in the US 70% of ad dollars go to the top 10 sites - Google, MSN, AOL etc - and something like the top 89% of the ad dollar 25 billion goes to the top 50. So for a startup site to be able to deliver significant ad dollars is impossible regardless of what types of models...A good CPM (cost per thousand) would be 70 cents in the US. If you have a website with a lot of ad space you're pretty much filling your site with network ads and you're in the sub dollar range - if you're a big site with a lot of impressions you're using a lot of Google AdSense dollars coming in at 4 or 5 cents then your average CPM drops below 50 cents."
If that's the best revenue an ad-supported site can muster, and if free users are going to outnumber paid users 20 to one, a non-interactive model is the better option. The royalty rates for non-interactive services (webcasters) necessitate far less revenue than do on-demand rates. In the U.S., the 2009 per-performance rate for pureplay webcasters is $0.00093, about one tenth of the penny-per-stream rate charged for interactive streams. One thousand streams at $0.00093 results in more expense than could be covered by a $0.70 CPM. But it's far more manageable than the $10 CPM required by a penny per stream ($0.01 x 1,000 = $10.00).
Can sites achieve more revenue that the paltry $0.70 CPM described by Kent? As I have written before, labels should be firm on their rates or risk encouraging less-than-optimal revenue models in the future. If labels drop rates, music services will have less motivation to seek out more revenue. Labels obviously have to walk a fine line between allowing the market to grow and enforcing a minimum price for their product. The goal is to nurture the young marketplace until it comes to a tipping point, a size that will allow one or more companies to prosper. Kent describes this later in the Q&A:
"If we fast forward five years when Internet advertising is bigger, advertisers are being more creative, something could pop up and could surprise everyone. By then the music industry situation won't have got any better: they can't stop piracy, so they'll be more open...Some of the services today have got to try and survive in the hope that they will prosper in the years to come."
That could be a long five-year wait. The demands of labels and the levels of achievable revenue are not in sync. Not yet. In the near term, this imbalance could exist if a company's investors are likely to have an exit. Kent said he thinks services' main ambition has been to be acquired by Google. Regardless of the buyer, the hope for an eventual acquisition has made the on-demand, ad-supported model more palatable. But as the investors of iLike and Imeem have found, an exit might not be a profitable one. And potential suitors are few and far between right now. In the absence of cashing out, music services are going to have to be more fundamentally sound. And labels are going to have to walk that fine line between being supportive and supporting the value of their music.
Follow Billboard senior analyst Glenn Peoples on Twitter at twitter.com/billboardglenn.