How to Make Ad-Supported Streaming Work: Diversify, Says New Music Seminar Panel

Jon Hamm
Justina Mintz/AMC

Jon Hamm as Don Draper in season 7, episode 10 of "Mad Men."

A panel on how to grow the ad-supported streaming (freemium) industry that took place today (June 22) at the New Music Seminar business conference in New York was put in an uncomfortable position the day before it began, when Taylor Swift capped off weeks of criticism towards Apple for that company's plan to take a three-month royalty vacation. Swift's music doesn't appear on ad-supported streaming services, partly over those types of services' payouts and partly as an act of protest on her part. Swift's withdrawal of her music from Spotify's free tier, announced in another blog post several months ago, led Spotify CEO Daniel Ek to defend the two-pronged model his company relies on. As well, the model has drawn criticism from industry leaders since the start of the year.

When talking about ad-supported streaming and its contribution to the bottom line of the industry as a whole, executives are essentially trying to solve an age-old problem: How do you get the right ad in front of the right eyeballs at the right time? If a media provider can do that more effectively, that provider can charge more, and the value of the industry grows incrementally. The difference these days lies in the technology delivering those advertisements; words like "granular," "data-driven" and "disintermediation" have a tendency to pop up in conversations like these. Indeed, a Times report from Cannes around the advertising confab currently underway there described new ad tech as a focal point of the event this year.

The panelists -- Doug McVehil (svp of content/programming for Vevo), Jonathan Dworkin (svp of strategy/business development for MixRadio), Steve Savoca (head of content for Spotify), Owen Grover (svp and general manager for iHeartRadio) and Chris Phillips (Chief Product Officer for Pandora) -- led by moderator Theda Sandford (Republic Records) disagreed on little, praising each other's place in the industry and efforts to innovate within it. The agreements make sense considering the panel lacked a dissenting opinion -- namely, one of a paid-only company like Tidal, or Apple Music.

In fact, MixRadio's Dworkin summed up the conundrum early: "It's very challenging to make a purely ad-supported business work right now." A look at the disparity between revenues from Spotify's paid and free tiers illustrates that point -- subscriptions generated 91 percent of the company's revenue last year.

Pandora brought in $732.34 million in ad revenue last year, compared to $199.46 million through subscription payments. The numbers are impressive. "You need scale," said Phillips. "There's a trend in advertising to eliminate wasted ads. One option is to turn on a bunch of ads. We're using science to avoid that." Pandora's scale is significant, and the higher-quality its ad offerings, the more effective its streaming model.

Spotify, meanwhile, has an impressive conversion rate from free to paid users. "We believe its critical for there to be an upsell path," Savoca said, "We recognize that the business itself is moving in this direction. The lion's share, a vast amount of people, come to our paid tier through the free tier. The model is simple: No free, no paid, no $3 billion to the industry," he continued, referencing the $3 billion in royalties his company has paid to the recording industry since its founding.

It seemed the answer to the panel's central question is diversification. Missing out on advertising dollars (and Taylor Swift's most recent record along with those dollars) makes as little sense and not offering music fans a paid option. As Grover said to the audience, "[iHeartRadio's] platform spans mediums." The better to scoop up mercurial dollars with a collection of pitchforks.


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