Music wants to be free (and ad-supported)

03Jun07

Fred Wilson posted yesterday about the opportunity around free, ad-based streaming of music. I agree with him for the most part, although I do think there could be a good market in downloads too (at least until true mobile broadband becomes ubiquitous), particularly if DRM is removed, prices are lowered, and sales are tightly linked with discovery.

Two additional points are worth noting. First, the free, ad-based model for music delivery is already bigger than the commerce model. Consider that radio is a ~$20bn industry (in the US alone) compared with the US recorded music industry at just over half that. But, as Fred suggests, I think this will shift even further in favor of free over the coming years.

Second, on-demand delivery of music (as contrasted with radio-style streaming under the DMCA’s compulsory license for webcasting) is tricky from a business standpoint. I heard last week that LaLa is seeking to do deals for on-demand streaming and intends to cover these costs through CD-swap sales. Michael Arrington notes:

They say that if they can get each user to buy one CD per month on average they will break even. That may be true, but the average music buyer in the U.S. buys two CDs per year. So LaLa will have to get heavy music buyers to the site to move that average up.

Likewise, imeem is supposedly seeking to strike deals with the Majors for its on-demand streaming (which unsurprisingly resulted in a suit by Warner a few weeks ago). While perhaps the indies would be more flexible, I doubt the Majors would consider a deal which did NOT include a per-track minimum that’s roughly comparable to what they receive from Real, Napster and Yahoo today, which is $.01.

This means that imeem would need to earn a $10 CPM for each song streamed (i.e. every 3-4 minutes) just to cover its obligation to the labels (i.e. move the decimal point three places to the right). I’m skeptical this is achievable today. And, even if it were, the likely thin margins that result aren’t terribly appealing from a business perspective. It’s just tough to make this model work given a fixed per-stream minimum.

OTOH, if the Majors were willing to license content for on-demand streaming under an advertising revenue share – with no or a much lower minimum – I think they’d realize huge potential revenues, with more people listening to more music from destinations all over the internet.

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One Response to “Music wants to be free (and ad-supported)”

  1. Rags, a good friend and ex-Live365 colleague, makes the (difficult) business case for the ad supported and on demand model in a post yesterday, raising some excellent additional points:

    http://www.ragsgupta.com/weblog/2007/06/the_free_music_.html


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