Business Matters: Did You Know 64 Streams Equals One Download?
Business Matters: Did You Know 64 Streams Equals One Download?

The Transition From Music Ownership to Access Is Gonna Hurt A Lotta Wallets
-- (Editor's note: due to a spreadsheet typo, this article originally stated that 48 streams at 1.146 cents per stream equals the gross revenue rights holders get from a 99-cent download -- the correct number is 64 streams. regrets the error.) .I was a guest on the WNYC program "Soundcheck" Tuesday to talk about Spotify and the economics of digital music. The arrival of this anticipated music service has turned out to be a good jumping off point for a conversation about the economics of digital music.

During the interview I compared the revenue from streaming and purchasing music. These numbers get to the heart of the transition to digital music services - they represent the economic impact of a change from ownership to access. Purchases are one-time events that return a relatively good amount of revenue. Streams result in tiny payouts.

Here is Spotify in perspective: it would take 48 streams at 1.146 cents per stream to equal the gross revenue rights holders get from a 99-cent download. That equation uses the 1.146-cent per-stream payout received most recently by the band The Layaways, as detailed at the blog Digital Audio Insider. The band's average Spotify payout from August 2009 to March 2011 was 0.2865 cents per stream. It would take 244 of them to equal the 70 cents the band would get from a 99-cent download (before the distribution fee). A listener would need over 14 hours to stream 244 songs that are 3:30 in length. However, Spotify's free accounts will allow just ten hours of listening per month after an initial six-month period of unlimited listening.

Given the number of free accounts Spotify has pushed into the marketplace, and since free users can stream an unlimited number of times over the first six months, payouts for the U.S. service could start low and rise over time (this has happened in Europe).

Of course, other companies pay out similar royalties. Pure-play webcasters like Pandora pay out even less - 0.0102 cents per stream in 2011, to be exact. But Pandora generates far less trepidation among record labels and artists. Radio - even Internet radio - has long been seen as a drive of music purchases. Airplay's positive impact on album and track sales is evidence of this cause-and-effect relationship. But Spotify could act as a substitute for purchases - access over ownership, remember? In fact, the licensing requirements for an on-demand service such as Spotify reflects the fact that copyright law views on-demand services as being more susceptible to copying (a substitute for purchases) than Internet radio. Time will tell if Spotify users buy more or fewer downloads, but the physical and digital sales trends in the second half of 2011 will hopefully provide us with some clues.

As the industry shifts from one era to another, companies must adjust to new economics. As I said on "Soundcheck," the per-stream payouts are small relative to what people are used to receiving. We're increasingly living in a streaming world but we want download royalties. When the download market was growing people wanted to return to the boom years of the CD. But in ten years, streaming revenues will be the norm. Just as today's young musicians grew up without CD revenues, musicians of the future will know little else than streaming royalty rates.

Slow On the Uptake: Wall Street on Pandora, Spotify
-- A few weeks ago I asked if investors really understand Pandora and Spotify. If you read enough investing web sites you'll see the two mentioned almost interchangeably without regard to their different business models. (A quick primer: Spotify is an on-demand service and Pandora is a non-interactive Internet radio service. They operate with different licenses and pay different royalties.)

Another piece of evidence that shows poor understanding in the investment community (at least the community represented by online pundits) comes from with the following claim: "The mastermind of Spotify is Sean Parker." As anybody knows who has invested as little as three minutes researching Spotify, the company was founded by Daniel Ek and Martin Lorentzon. Sean Parker invested in the company well after the product was created and launched in Europe.

Analysts who cover Pandora certainly know this bit of information, although I sense they give too much credence to the fact that Spotify and Pandora are competitors. Spotify and other on-demand services are likely to happily live side-by-side with Pandora just as CD, LPs and vinyl records have lived side-by-side with broadcast radio. They operate in different spaces, market themselves differently and have different value propositions.

The Google+ Time-Suck: Organizing Your Circles

-- Now is a good time to consider how much time you plan to dedicate to Google+, the new social network Google debuted a few weeks ago. Because it's not as easy as using Facebook.

If you have used the service, you have probably gone through the process of divvying up your friends and contacts into distinct groups (Google calls them "circles"). While Google's circles obviously mimics the way people associate with people in real life -close friends you see on a regular basis, family members, old college buddies - time will tell if people will put in the time online to organize, group and classify their friends and acquaintances this way.

The amount of time and thought Google+ requests from its users was well articulated in a blog post by Kevin Cheng, a product manager at Twitter who has a Masters degree from University College London in Human Computer Interaction and Ergonomics. Here's how he put it:

"The maintenance required for grouping our friends is too high and too vague. We simply don't have the rules as clearly defined as programs require and even if we did, the parameters change. Your personal tastes change. The influential people change. Even your friends change. Keeping the groups accurate and remembering its members is a challenge."

People clearly spend a lot of time at Facebook. U.S. consumers spent an average of 6.3 hours per month at Facebook in May, according to comScore. But I'd wager very little of that time goes into the "maintenance required for grouping our friends," as Cheng puts it.

In addition, startups are flocking to Facebook with products and services to allow artists to market and sell products on the platform. Google+ does not have that kind of third-party activity behind it. For the time being, however, it's worth your time to familiarize yourself with Google+, see how your friends are using it and consider how it applies to your business.
( kev/null, via Marginal Revolution)

Psssst! Looking for Objective, Reliable and Rapid Music Insight…

-- SliceThePie has reportedly raised $2 million for its SoundOut division. The service charges for "objective, reliable and rapid music insight," according to the web site. In other words, for either $30, $40 or $149 (depending on the level of service) an artist, label or manager can get feedback from fans. The company says the funding came from a number of unnamed private investors and entrepreneurs.
(Press release)

U.K.'s Netlog, We7 Ink Social Media/Internet Radio Partnership

-- European social network Netlog has inked a partnership with U.K. Internet radio service We7 to open a new music streaming service on the platform. Netlog has 79 million users, 5.5 million of them in the three markets in which We7 operates: the U.K., Ireland and Belgium.
( paidContent)