Guest Post: Forget the Rhetoric, Streaming Music Is Already Profitable

A new generation has spoken and access (streaming any music in the world from ‘the cloud’) will win out over ownership (collecting a finite number of songs as CDs or files), just as personal radio (interactive Internet radio streaming) is replacing AM/FM. This is no longer debated by the informed, but accepted as a matter of time. Yet how often must we read that leading streaming services like Pandora and Spotify are still losing money despite tens of millions of users and hundreds of millions of dollars invested?

Journalists worldwide extrapolate from this semi-truth that it is impossible for legal streaming to make money, when the fact is that Pandora and Spotify consciously prioritize growing market share over profitability. That’s not speculation. I know streaming — and I’ve negotiated directly with all major music labels, so I’m privy to the secret numbers that reporters can only guess at.

Fact one: Industry leader Pandora could be profitable tomorrow if it increased its frequency of commercials, even by an amount that would still leave it dramatically less cluttered than its FM radio counterparts. But Pandora knows that increasing ads will reduce usage, since internet-savvy music consumers are less tolerant of interruptions than the FM radio’s baby-boomer audience.

Fact two: Spotify was profitable years ago in the only mature streaming market in the world. If the company chose today to stop pursuing international expansion, Spotify would break even overall tomorrow. If they then chose to cease loss-leading with their free on-demand service (designed to fuel the growth of their core subscription sales), Spotify would be profitable in all of its markets immediately.

Pandora and Spotify already have the scale necessary to make money, but in both cases their fear of growth stagnation outweighs their current need for cash.

So, now that you know the truth about the current music industry’s single biggest (and sometimes self-sustained) myth, what’s in the cards for music this century?

Playlist services (like Spotify) will never overtake personal radio (like Pandora), because the majority of people are not interested in picking every song by hand. But on-demand streaming will continue to replace the $5 billion U.S. physical and digital sales with all-you-can-eat playlist subscriptions. On-demand will not be profitable as an ad-supported platform and subscriptions will continue to cost about $10 per month. Apple will release iBeats and make it available cross-platform early on, eventually replacing downloads completely. Pandora survived iTunes Radio because creating a good personalizable endless music stream is complicated. Spotify will not be so fortunate. On-demand is essentially a search motor coupled to a music library and Apple can do that as well as anybody. With several hundred million music lovers’ credit cards on file, Apple will offer one month for free and eclipse Spotify’s user base by month two.

Pandora will weather that storm too, but be challenged by a new generation of Personal Radio services that will be quicker to innovate. Pandora’s complex Music Genome project is difficult to modify and integral to their current lead. The new Internet Radio services will handle news, talk, and sports as well as music, and they will reach profitability without having to approach AM/FM ad loads. Terrestrial radio will fight desperately before yielding the last of her $45 billion in worldwide annual ad revenues to the far superior Personalized Radio streaming services.

Musicians will rejoice when they realize that streaming radio shares the massive ad revenues with them that terrestrial radio never did in the U.S. Then well-fed artists will create great new songs for innovative streaming services to distribute to happy consumers who whole-heartedly support a born-again music industry, one more glorious and lucrative than ever before. And the skies will part, the sun will shine again, there will be music everywhere, and… well… the future’s so bright, I gotta wear shades!