MediaFile

If Spotify fails, blame the Internet’s grim economics

By Kevin Kelleher
December 19, 2011

If anyone has a serious beef with the music labels, it’s Michael Robertson. Robertson took MP3.com public in 1999, only to later to pay tens of millions of dollars to labels that sued the startup, claiming storing songs on servers infringed their copyrights. Fast forward to today: A new wave of music startups like Spotify, MOG and Rdio stream songs from servers with the labels’ blessings. It might all be above board now, but the labels are still bleeding the digital-music services dry.

That was Robertson’s claim in an detailed and elegant jeremiad against the big labels. He claims that Spotify and its peers will never make a profit because of secret, onerous terms that act as a financial straightjacket for the startups, snoop on their users’ data and border on collision. Others were quick to suggest that it’s the music-streaming services that are being stingy. After all, by some calculations, an artist could have a song streamed 4 million times on Spotify and make just $1,200

So who is right? Both. And that’s bad for everyone. Music labels, being greedy music labels, want a profit. Desperate for a piece of a music-streaming market that isn’t going away, they are asking for everything they can in the name of rewarding artists (and investors). But the digital music services like Spotify need a low subscription fee – usually $10 to $15 a month for an all-you-can-eat plan – to build a critical mass of subscribers.

Ten bucks a month for streaming music looks a bit steep if you compare it to Netflix’s $8 monthly fee for streaming video. Or it’s a great deal, if you compare it to, say, the $65 or more that longtime Comcast subscribers pay for cable. But that’s just the problem. Comcast is expensive because it’s cable, and Netflix is cheap because it’s the Internet. We say information wants to be free online, but what we really mean is we want it cheap.

So when we ask who is to blame for the dismal economics of digital music, we shouldn’t point to piracy. That’s a scapegoat that nobody but the labels takes seriously anymore. The true culprit lies elsewhere. It’s just the Internet doing what it does – breaking down the walls and removing the friction that for decades made it such a slog to find and discover new things to hear, to watch, to read.

And we love the Internet for this. We love having several millions songs on tap – playing them when we want, where we want. But the flip side is that this new cornucopia of on-demand music is upsetting the balance of supply and demand that was the standard for decades. The friction-free Internet has brought us so much more music to listen to. But it hasn’t increased the amount of money that people have to pay for it.

We’ve seen this not-so-creative destruction of profits in other areas of content as well – in news, for example. For centuries, the artificial scarcity of the printed page let newspapers and magazines, fairly or not, charge generous ad rates. But the viral proliferation of web pages has driven online ad rates down. Ad budgets expand as prudently as ever, but the ad inventory fructifies at a rate that seems cancerous by comparison.

And we’re seeing this same dynamic elsewhere – in publishing, where Amazon’s 800,000 e-books, many retailing below $10, are undercutting old-school bookstores (kindling glee in the hearts of some e-trolls). We’ll see it in movies and TV shows soon, as so-called cord-cutters forego the procrustean schedules of cable TV for the cheaper and increasingly less chaotic frontier of online video.

This is the unspoken paradox of the web: It makes it so much easier to create, publish and find new songs, books, movies and other creative content. It’s a consumer’s paradise – an oasis of value in an era where the costs of daily goods are rising faster than the wages earned to secure them. But it’s also left more and more creators competing for the same old pile of subscription and advertising dollars.

Normally, this kind of imbalance between supply and demand leads, in time, to a shakeout. There were hundreds of U.S. auto manufacturers that rose and fell in the early 20th century. And even today, consolidation is starting to reduce the number of companies in the solar industry, despite its long-term growth prospects.

Of course, creating content like music is different than manufacturing goods. Pure passion can motivate people to make music even when no profits are involved. For digital-music companies like Spotify, however, profits are a necessity. Their hope is to scale up their subscribers enough to become profitable in time.

But it may well be the grim economics of digital content won’t allow that. And if so, their best hope is to be bought out by one of the music labels exploiting them today.

Photo: Facebook CEO Mark Zuckerberg walks the stage during his keynote address at the Facebook f8 Developers Conference in San Francisco, California September 22, 2011. Facebook unveiled new features that center on the way users listen to music and watch TV, offering tie-ups with the likes of Spotify and Hulu, as it attempts to make media an integral part of its service.  REUTERS/Robert Galbraith

Comments
One comment so far | RSS Comments RSS

Good sir i beg to differ PIRACY indeed does make things more crappy for us the people if you believe it is not the culprit then i do not find this article relevant

Posted by AMystery | Report as abusive
 

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