With several executive moves and talks of job cuts and restructuring in the last week, there’s already been chatter about the beginning of consolidation in the digital music industry — but this may be more about a battle for scale.
The search for scale became a lot more intense with key executive moves at Rhapsody, Rdio and Muve. Scale is vital, and a rare commodity in digital music. For a licensed service, royalties to rights holders account for the majority of revenue. A service will operate efficiently when it adds enough customers and revenue to cover its royalties and the fixed costs involved in running the company. Without scale, a service burns through cash and can’t gain traction.
Jeff Toig, the Cricket Wireless senior VP behind the creation of subscription service Muve Music, announced he has moved to SoundCloud, the Berlin-based company that offers a popular audio hosting and streaming platform. His team will oversee partnerships with content creators and technology platform partners like Facebook and Twitter and develop new revenue streams.
Scale is one reason Toig was attracted to SoundCloud. He acknowledges that many digital media companies have struggled to build a highly scalable service. But he feels SoundCloud’s 200 million monthly users give it an opportunity to innovate and excel. “This is a business that has already achieved a pretty extraordinary level of scale and continues to grow.”
Toig has effectively switched from a successful but challenging business model to one with fewer hurdles. SoundCloud doesn’t license its content from rights owners. Instead, creators pay SoundCloud to use its platform for hosting and streaming. Because rights owners are clients, they do not dictate terms on pricing and product features that help shape many other streaming services and affect consumer adoption.
Subscription services Rdio and Rhapsody are trying to achieve scale in different ways.
Rdio is hoping its partnership with U.S. broadcast company Cumulus Media will help push it into the mainstream. Cumulus gets a stake in Rdio parent company Pulse Media and a new online platform for its content. Rdio gets the promotional power of a network with 525 radio stations in more than 110 markets through DJs mentioning the service, as well as on-air promotion and live events. CEO Drew Larner puts the value to Rdio at “about $100 million.” Rdio has a similar partnership — minus the equity stake — with Australian broadcaster DMG.
Cumulus can offer the visibility few streaming media companies can afford to buy. “We do need a megaphone to let people know what we’re doing,” Larner says. “Having a media partner like this, who’s vested in our success, is a great asset to help grow the company.”
The pairing also allows Rdio to adopt a “freemium” model in the United States. Cumulus will sell the advertising that will power Rdio’s free listening service that’s expected by the end of the year. A free tier is considered to be an effective way to draw more listeners and ultimately drive subscriptions.
Rhapsody, the oldest of the subscription services, has received an investment from Columbus Nova Technology Partners, a firm with a small portfolio of science and technology companies. In addition, Rhapsody has laid off 15% of its staff and is adding resources to its European operations. As part of the restructuring, Jon Irwin will step down as Rhapsody president and assume an advisory position.
There’s a clear impetus for the changes at Rhapsody: The subscription market has drastically transformed in recent years. Spotify has size, momentum and a seemingly endless line of interested investors. Deezer has global ambitions and the backing of Warner Music Group owner Access Industries. Beats Music, part of the powerful Beats by Dr. Dre brand, is expected to launch later this year.