'A Great Alternative': Warner Music Group's CEO Addresses Promise and Problems of Streaming

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Signage for Warner Music Group is displayed at their offices at Warner Bros. Studios in Burbank, California on Feb. 5, 2013.

The "freemium" subscription business model has taken a beating since Taylor Swift pulled her catalog from Spotify because the subscription service offers a free streaming tier in addition to its paid, premium tier.  The latest development: Warner Music Group CEO Stephen Cooper underscored its belief in the controversial business model in a conference call with investors last week.
"The primary reason we participate in the ad-supported tier is because it provides the means for consumers to discover the advantages of the premium offerings, and thus, leads them to become paying subscribers," Cooper said in Warner's earnings call on Thursday. "There is also the fact that the ad-supported, free-to-the-consumer tier -- in conjunction with the attractive price-point of paid subscription services -- makes streaming a great alternative to piracy."

Warner Music Group Revenues Top $3 Billion Following Acquisitions, Streaming Gains

To emphasize the importance of streaming services to Warner's future, Cooper revealed that Warner's streaming revenues were only $1 million less than download revenues in the fiscal fourth quarter, with streaming revenue growing 74 percent in the fiscal year, 44 percent in the year prior.
Although Warner did not release specific figures for either streaming or download revenue in the quarter or fiscal year, it did reveal in its annual filing the amounts by which streaming revenues have grown. Warner's recorded music streaming revenue grew $200 million -- $150 million not counting the Parlophone Label Group acquisition -- in its fiscal year ended September 30th, up from $75 million in the prior-year period. The United States accounted for $106 million of the $200-million gain, up from $32 million in fiscal 2013. International streaming revenue increased $94 million of recorded music growth after growing $30 million the prior year.
Download and physical sales are headed in the other direction. Warner's download revenue declined 14 percent, or $91 million, in the fiscal year, Cooper told investors. Physical sales declined $78 million, or 9 percent, according to Warner's annual filing.


Swift has criticized Spotify for diminishing the value of music. "I think there should be an inherent value placed on art. I didn’t see that happening, perception-wise, when I put my music on Spotify," she told Time.
But free music is about more than perception. Critics contend that streaming royalties cannot support artists and labels in a way that's healthy to the creative process. Indeed, royalties for ad-supported streaming are lower than royalties from the listening of paying customers. The trick will be creating more paying customers.
"We continue to believe that the long-term sustainability of the freemium model is predicated on high levels of conversion from ad-supported free to paid subscription," said Cooper. But the two tiers must be separate in the minds of consumers, he continued. "Of course, in order to achieve those levels, the benefits of paid subscriptions must be clearly differentiated from the ad-supported offerings." In other words, Warner doesn't want consumers to get too attached to the free version.
How can a subscription service differentiate the free and paid tiers? Services like Spotify and YouTube, which now offers the Music Key subscription service, can tweak a number of variables ranging from editorial content to pricing structure. Music Key offers paid subscribers offline listening (and video viewing), for example. Many services have already partnered with audio hardware and automobile manufacturers to integrate services into listening experiences. They have also partnered with mobile carriers in countries around the world.
It's a simple equation: more free listeners equal more paying customers that return more royalties to artists and labels. The question is whether industry infighting will scuttle the freemium model and slow the current momentum of streaming revenues.


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