Spotify, Pandora and the profits problem for streaming music ...

Spotify is one of several streaming music services expanding rapidly, but at great cost

Streaming music service Spotify reported its financial results for 2012 this week, and they're a useful way to take the pulse of a business model ??the combination of ad-supported and subscription-based streaming music ? that the music industry is looking to for a revival in its fortunes.

Spotify's revenues rose 128% year on year to ?434.7m (around ?377.9m) in 2012, but its net losses increased from ?45.4m in 2011 to ?58.7m in 2012 as the company invested heavily in new countries and features for its service.

The company has never made a profit, and its losses have increased every year, although it's also true to say that its losses as a percentage of its sales have been decreasing.

In the technology world, a still-young and rapidly expanding business posting losses isn't unusual, and it's unlikely to spook many investors.

That's a good thing, given that (as it admitted in its financial results filing) Spotify may need to raise more money in the short-to-medium term to fund more growth, and hopefully profitability.

Yet Spotify has one foot in a creative industry ??music ??where a heated debate is raging about how well (or rather, how badly) streaming music pays off for musicians.

See the recent decision of Thom Yorke and Nigel Godrich's band Atoms for Peace to remove their albums from streaming services, and criticise them for benefiting major labels and big acts far more than new artists. The fact that Spotify is losing money may increase the tension rather than defuse it.

Its fiercer critics regularly accuse the company of being a lossmaking scheme geared entirely towards a lucrative acquisition or IPO that will enrich its shareholders ??company executives, venture capital firms and major labels ??while leaving artists out in the cold.

There is history here. CBS bought online radio site Last.fm for $280m in 2007: a deal that likely made major labels determined never to see a digital music service reach such a valuable exit without them having a stake again.

More recently, streaming radio service Pandora went public in 2011 with a valuation of $2.6bn, yet has since been sucked into an angry war of words with representatives of music publishers, songwriters and artists over the royalties they earn from its streams.

Critics point to Pandora's unprofitability ??it reported net losses of $14m in 2008, $28.2m in 2009, $16.8m in 2010, $1.8m in 2011 and $16.1m in 2012 ??while noting that executives including co-founder Tim Westergren have been making lots of money selling shares since the IPO.

(Again, this is not unusual ??and if anything, applauded ??within the technology industry. But in the context of ill-tempered rows about how much artists and songwriters get paid, something of a hot potato.)

Personal radio service Pandora has been criticised by artists and songwriters

The financial results of Spotify and Pandora pose two key questions about their business models: whether they're sustainable for music creators, and whether they're sustainable for the companies themselves.

Spotify has been clear about the fact that it pays around 70% of its revenues to music rightsholders, who are then responsible for passing this money on to artists and songwriters according to the terms of their contracts which ??this is the music industry, remember ??vary considerably in transparency and fairness.

There are lively and important debates going on around whether the shift from downloads to streaming is better for big labels and artists than new talent, and the extent to which streaming cannibalises piracy rather than CD and download sales.

Even so, the more users Spotify and Pandora sign up (and more importantly, the more users they persuade to pay for their services), the more money they'll make, and the more they'll pay out to music rightsholders.

Scandinavia offers some encouraging signs in this regard. Sweden and Norway both saw overall recorded-music revenues grow in 2012, and again in the first half of 2013 ??a huge turnaround from more than a decade of declining sales and widespread piracy.

But it's the second question ??whether Spotify, Pandora and the rivals who don't have to declare their financials publicly (yet) can survive long enough to spark similar turnarounds in bigger music markets such as the UK and US ??that deserves just as much attention.

Opinions vary on how quickly the world will move from ownership of music ??whether CDs and vinyl or downloads ??to access to it through on-demand services like Spotify, Deezer and Rdio and personal radio services like Pandora, iTunes Radio and Nokia Music.

It's likely to be slower than the early adopters think, but there's a consensus that it will happen. The pressure is building to ensure that streaming music's numbers add up for both artists and the digital services providing it.

If not, then what? Deep-pocketed technology companies are lining up to provide streaming music in order to sell devices and/or ads: Apple, Google, Amazon, Samsung, Sony, Microsoft.

Headphones-maker Beats (rumoured 2013 revenues: $1.4bn) is preparing to launch its Beats Music service too. Perhaps the economics of streaming music don't have to add up on their own, if they can be subsidised by other parts of the providers' businesses.

But musicians yearning for Spotify and Pandora to go bust should be careful what they wish for: is a future for music as a big-tech loss-leader much more appealing?

A future where Spotify, Pandora and their rivals are able to balance their books, continue to invest in new features AND find more ways to help talented musicians make a living ??which will involve promoting tickets, merchandise, special-edition music and crowdfunding campaigns as well as paying out more money for streams ??seems more positive.

Source: http://www.theguardian.com/technology/2013/aug/01/spotify-pandora-streaming-music-profits

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