Rent vs. Own: The Streaming Music Debate Continues

    by Jason Feinberg
    February 5, 2010

    The exponential growth of Internet bandwidth combined with the ability to significantly compress digital audio has impacted the music industry in numerous ways, for better and worse. Just as file trading created a massive network of pirated music, the ability to stream audio in real-time has allowed for a number of innovative content distribution and promotion methods.


    Digital music streaming services have been around for over a decade. Companies such as Rhapsody, Napster, MOG, and We7 have experimented with various business models and user experiences, with mixed results. The traditional streaming model was based on an all-you-can consume subscription offering, occasionally supplemented with a very limited amount of downloads. Adoption has rarely met expectations, and long-term sustainable profit has been elusive for most companies.

    Now, a new wave of streaming services such as Spotify are emerging. Can they succeed where others have failed?


    Changing Consumer Behavior

    The lack of adoption of music steaming services has been attributed to a number of factors. First, a culture of ownership based on decades of purchasing physical media has locked many fans into a set way of thinking about music consumption. There are millions of music fans that correlate paying to owning, not just listening.

    Then there is the illegal downloads issue. Convincing someone to pay to listen is difficult when they can freely own all the digital files they can find. Recent IFPI numbers estimate that 95 percent of all digital downloads are still illegal.

    In addition to having to change consumer habits, logistics have also been an obstacle to user adoption of streaming services. For the majority of the past decade, most services were only available via a computer, thus limiting the number of settings and situations in which a subscriber could use the service. Most streaming platforms have now begun releasing iPhone and Blackberry apps, which adds portability into the equation. Until recently, devices were not able to capitalize on the functionality that these services offer, but thanks to 3G and WiFi networks, the bandwidth finally exists to take streaming music almost anywhere.



    Subscriptions are not the only business model being used to monetize streaming. A number of ad-supported platforms have come and gone, such as imeem, which was purchased by MySpace late 2009. Imeem and similar sites (including MySpace itself) attempted to use the traditional media advertising model: Provide content for free, but surround it with marketing messages. Typically, this took the form of banners, sponsored promotions, and in-stream audio advertising. This model has also proved difficult to sustain long-term, due to the fact that royalties and bandwidth costs often exceed advertising revenue.

    The New Wave of Streaming Services

    Currently leading the charge in ad-supported streaming is Spotify. It has combined peer-to-peer streaming technology with in-stream audio advertising. Advertisements also appear on the user interface, raising the likelihood of user engagement. For users who wish to use the streaming service without advertising, and to have the option for higher quality audio, Spotify offers subscriptions in various configurations.

    Due to licensing issues, Spotify is only available in a handful of European countries. Founder Daniel Ek previously expressed a desire to open in the U.S. by the end of 2009, but did not succeed. As discussed in a recent article on paidContent.org, the barrier to expansion seems to be licensing concerns, one of which is that U.S.-based labels are no longer satisfied with ad-supported free services and are only looking at subscription models. The most recent numbers show Spotify has 250,000 paying subscribers, compared to a free user base of six million.

    The Path to Profitability

    Content is key to the success of a streaming site, but adoption is still the ultimate issue. If consumers are focused on owning content, be it physical or digital, paid or illegal, streaming services will continue to have a major uphill battle.

    Bob Lefsetz

    In a recent Bob Lefsetz article, he addressed this issue, providing a detailed look at the obstacles standing in the way of mass consumer adoption. He also looked at how other industries have used bundling and focused marketing efforts to influence consumer viewpoints on renting content versus owning. Lefsetz states in his opening sentence that, “The recorded music business must switch to subscription, it’s its [sic] only hope of economic survival.”

    His rationale for this belief is that iTunes and other a la carte purchase options are a losing battle regarding long-term revenue. Selling music track-by-track may be better than illegal downloads — but it’s still a poor economic model. By removing value from the album format (and losing its higher price point), the music industry has allowed customers to spend very little money. This means the business requires a much higher number of transactions to be profitable.

    Lefsetz argues that by requiring users to pay one amount for massive amounts of music — essentially bundling content the way the cable companies do — the music industry is able to charge a much larger amount of people a higher amount of money. In exchange, these customers get all the music they can consume, across any device they want to use. Instead of paying $10 for storing 10 tracks, they can pay the same amount and have access to millions of tracks.

    The continually dropping cost of bandwidth and massive connectivity available has set the stage for a profitable model in subscription-based services. The biggest challenge is to now convince consumers this is the best method for experiencing music. This job falls to the streaming companies and to the labels and artists that license the music. It also requires that the technology continue to offer more and more choice and convenience. In addition, a massive number of free users must be shown the value of converting to paying for listening, through higher quality audio and an ad-free experience.

    As with almost everything in the music industry, the optimal streaming business model is still being figured out, but the emerging success of companies such as Spotify is showing a growing level of consumer adoption.

    Jason Feinberg is the president and founder of On Target Media Group, a music industry online marketing and promotion company. He is responsible for business development, formulation and management of online marketing campaigns, and media relations with over 1,000 websites and media outlets. The company has served clients including Warner Bros. Records, Universal Music Enterprises, EMI, Concord Music Group, Roadrunner Records, and others with an artist roster that includes Har Mar Superstar, Flipper, George Thorogood, Steve Vai, Robben Ford, Chick Corea, and many more. You can follow Jason on Twitter @otmg

    Tagged: downloading music music industry napster spotify streaming
    • This is a topic I am very interested in, but even as a semi-informed consumer I have no idea what most of this discussion means. Could you expand a little on the basics of what these various services do so we can better comprehend your conclusions? Like in Layman’s terms what does Spotify do? Does peer-to-peer streaming mean we get to select the songs we hear? Or is it like Pandora. I can’t believe I’m the only one out here who doesn’t know what every single one of those services do. Thanks!

    • Stephanie Pounds

      How would the artist be compensated in the streaming model? Right now I *think that the artist wants on Pandora so people will hear her music and go buy it in iTunes. But if the “buy it in iTunes” part goes away, how will the artist make money?

    • I have been a Napster subscriber for a couple of years and LOVE it. I’m able to listen to nearly anything on a whim and not worry about the cost of downloading individual songs. The renting concept is great for me. My listening preferences change all the time, so why drop $10 for an album I may only listen to for a week before finding a new favorite? My favorite aspect is being able to build playlists based on whatever I decide to base them on and having oodles of music to choose from. I’ve found many of new favorite artists through Napster that I never would have found listening to the radio. Frankly, I just don’t get why i-Tunes is so popular. It just seems crazy expensive if you ask me.

    • Angie

      I’m not sure what I think about this. Right now I listen for free on Pandora. I like to be able to build my preferences, but it is limited. It’s the reason I won’t pay. If I can say “play this song and this song” and so on, I may be interested. But to just have it be random and I can only remove songs…no I won’t pay for that.

    • One thing that is very important to remember about the “cloud” and streaming services… one minute your favorite artist has their entire catalog available for streaming and the next minute it is gone or labeled “for sale only”. A good example of this is both the Nine Inch Nails and Bruce Springsteen catalogs… at least on Rhapsody, they were both freely available for streaming for years and only recently are they for sale only.


    • Hi all, thanks for the comments and feedback.

      Greg – at a basic level, this is all about a user logging on to a site and choosing what they want to hear (like having the song in your iTunes library) but not actually downloading and storing the file. On most services – all of the ones I’ve described here – you do get to select the songs you hear. Whether you have to listen to / see advertising and the quality of the music typically depends on whether or not you are a paying subscriber.

      Stephanie – there are a number of payment methods, but most typically involve a fraction of a penny per stream, or as you described, linking to the track for purchase. Some are also splitting advertising revenue.

      Susi – very useful feedback! I agree completely, and I think more people will find the same results if they just try the services.

      Angie – any of the pay services allow you to listen to exactly what you want, in the order you want, as much as you want. There is only randomness (e.g. the service suggesting music you may like) if you enable that function.

      David – Good point, but fortunately that is a fairly uncommon occurrence. Far more artists are allowing this than disallowing it, especially as adoption (and revenue) grows.

      Thanks again for all the comments and questions!


    • Alyx

      Pandora and Napster are two totally different businesses and therefore fulfill two different needs. I love them both, for very different reasons. Pandora is great if I want to just ‘listen’ to music and not worry about picking out my songs. Instead I create the station and Pandora does a bang up job of matching my current mood.

      Napster is more for when I looking for something specific or need to create some content for my media players to take on the go. And I support both accordingly- Napster with monthly fee and Pandora with the ads and links to buy songs. Now if Pandora would sync up with Napster, it would be golden.

      But a bigger issue- the RIAA and the music industry has made it very clear you don’t own the songs anyway. They want to nickel and dime you with license fees and DRM that just gets in the way. If I did own the music they wouldn’t restrict how I could play/copy/burn the files. Also the whole album concept is poor also- how many of us will not spend the premium on an album because we have been burned by only one song being worthwhile while the 10+ others just kind of suck! Give me added value to buy the whole thing (live content, interviews, graphics) and then maybe I will consider it.

    • As an independent artist and music publisher I believe the more options people have the better it will be. Let the people vote with their feet.

    • I totally agree with you Pete – give people choice, let the fans dictate how they want to experience and engage with an artist. Obviously it needs to work for both sides, but as the new music biz continues to evolve, we’re finding many options that give fans choice and let artists feel they are getting a fair deal.

    • Greg B

      I would suggest an alternative approach but somewhat similar to the cable approach. First, I would recommend a required fee to be charged to all users via their internet access provider. This fee would then be split amongst the owners of the tracks based upon the number of downloads. This would require some level of infrastructure but I believe this is the way to go.

    • Simon

      Really interesting article looking in some detail at the different models, and options that can be adopted. I personally think there needs to be more incentive for people to subscribe to the services. Placing occasional 30 second adverts doesn’t provide that incentive.

      Wayne Rosso discusses some similar issuses in this article for The Music Void http://bit.ly/bvOmFa

    • Larry

      While virtual music has a lot of benefits ( I can make an 80 minute CD compliation in minutes on computer vs hours with physical formats) I am still wary of digitizing an entire music library and forsaking the physical format.
      Last summer, my Toshiba laptop’s hard drive went south, taking thousand of hours of music with it. Had I not a) had back-up copies on flash drives. b) still had the original source material CD’s (purchased, not pirated), I would have been up the creek and had to have started from scratch.
      My current third back-up system is a 1T external hard drive. (having found the “back-up discs I dutifully made being dubbed unreadbale). Digital is grand, but I’ll always have a physical copy just in case.

    • Really interesting article but i didn’t agree with you.

    • Maybe one day the record companies will realize they are fighting a loosing battle with people downloading media.

      • Doctor Who

        Maybe you are an idiot who does not know the difference between stealing and stealing under the false term borrowing, because that is what this is.

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