On-Demand Music Streaming is Winner-Take-All, Right?

This is a quick full blog post that is a follow up to a question I posted on Quora. One thing I’ve been thinking about is whether the battle between Spotify, Deezer, Rdio, Beats Music, and the various other competitors from Google, Amazon, and others will result in a winner-take-all scenario. I have a few basic thoughts on the space and am curious to hear what others think – I’m including my basic views on the space below:

  • All properly-capitalized providers have access to the same basic catalog of music content – From what I’ve seen, most, if not all, on-demand music companies can negotiate or simply license access to the same catalogs of music content on roughly equal terms.
  • While UI / UX is a differentiator, most UI / UX and design innovations can and will be copied by competitors – While companies can innovate around and within design and UI, anything innovative and interesting will be copied by a competitor and hence cannot be a long-term differentiator or advantage for any well-capitalized company in the space.
  • Consumers care about price and no provider will get a sufficiently differentiated pricing agreement such that they can differentiate in terms of end price to the consumer – Ultimately, consumers do have a fixed budget for what they will spend on music and the price of unlimited or limited on-demand music offerings has a firm ceiling in terms of what consumers will pay. And given the nature of licensing terms and catalog access, no company will be able to get preferential licensing and access terms for any reason other than scale and usage. There is no “club deal” to be done by any provider on the long term. This does not mean that some companies cannot afford to lose money in the short term to secure market share, but I do not see a model for a long-term price advantage for a single provider.
  • Eventually, the winner will be the company that can spend the most on customer acquisition and afford to wait out the content owners (labels) until their rivals wither – If no single player can get preferential economics when multiple players exist and all players have access to the same underlying content catalog, the winning company will be the one that can advertise the most and acquire the largest consumer base. I don’t believe most consumers, particularly those with budget constraints, will subscribe to multiple services. In the end, most consumers will subscribe to one service and one service only.

When I add all of this up, it seems to argue to me that there will be one major winner in on-demand music streaming. The one wildcard in this space is companies like Google and Amazon for whom on-demand music streaming can be marketed as a loss-leader. Given Google’s interest in both the Google Play ecosystem and Android and Amazon’s larger ambitions in boosting both Prime and its own content ecosystem around the Kindle and other content, both of those companies could make the decision that subsidizing on-demand music as part of a larger offering makes sense. I’m not sure that’s a good idea, but I believe it is possible and potentially aligned with their larger strategies.

I am by no means a music expert but interested in the space. And I feel that Internet radio is fundamentally different given the licensing rules and nature of the experience. The one thing I do think that is potentially interesting is seeing some of these streaming providers becoming effectively “labels” in that they have preferential licensing and distribution terms for breakout content.

Feel free to leave a comment below or send me your thoughts on Twitter (@chudson) or Quora.

  • euwyn

    I agree that serving the “base” catalog of music is turning into a commoditized service and that there’s a race to the bottom in terms of pricing, but I don’t see that leading to a winner-take-all market. As you mentioned, I think it’s likely Google and Amazon will continue to boost their streaming efforts to promote their own platforms, but that also means that their services will tend to cater to their own users. As long as streaming providers can figure out how to earn sufficient revenue, there could be easily a dozen or more major streaming services that cater to the general public – kind of like the ISP market, except that they’d be differentiated by platforms, rather than geographies.

    It would be interesting if one of these streaming providers can establish a competitive advantage with meta-products and services that would give it strong network effects. Spotify has obviously been trying to do this with their social sharing, collaborative playlists, and app ecosystem but I’m not convinced they’re anywhere close to having established themselves in this regard yet.

    One interesting idea for a company is one that licenses the “base” music catalog and sub-licenses content to startups and innovative players with more flexible terms. It’s not a great analogy, but the closest thing I can think of right now is Betable, with how they share their gaming license with content providers. No idea if rights holders would be amenable to anything like this at all.

    In terms of music startups, I actually think the most interesting opportunities lie in the “meta” layer, 8tracks, Mindie and the like, that give users more interesting and personalized ways to share music. An emerging opportunity also lies in house/electronic music, where there is currently a growing groundswell of great content created by “bedroom DJs” getting posted on YouTube and SoundCloud – tracks that would be found in the base catalog.

  • http://www.charleshudson.net chudson

    Euwyn,

    I guess I just feel that Google and Amazon can afford to subsidize on-demand streaming costs for their users for a really long time, regardless of whether that business makes sense on a standalone basis. That doesn’t mean that customers will gravitate toward those services just because they are available, though.

    As for smaller on-demand providers, I don’t think that they will be able to afford the customer acquisition spend required to build a brand and acquire customers. Or to do pre-load / install deals with carriers and handset manufacturers that will get them distribution. So can I see some small providers hanging on and making money? Sure, but similar to the ISP business, many people have ended up on the pipes with the best combination of access and market presence.

    I am an investor in 8tracks and I think that the companies you mentioned at the end of your comment are the ones that have a chance for success – they’re doing something other than competing on marketing efforts and catalog access. To standout in this space, you need something unique and hard to copy. Curation is one. Access to alternative, non-label content is another.

  • euwyn

    I think we’re actually in agreement if we both see a future where there are a few dominant providers and users subscribe to one.

    8tracks is awesome! This is tangential, but as a user of music apps I’ve been noticing two distinct modes of using them: (1) discovering and (2) sitting back and consuming (at the gym, in the car, etc). I’ve been struggling to find the right tools to accommodate both modes. I love the sets concept of 8tracks, but I’d like to be able to save or bookmark tracks I find and listen to them anywhere, even offline. I feel like can (and maybe should) do only of those things well.

    Perhaps there’s an opportunity for a user-centric playlist – a simple dataset of songs I like that the different music services I use can write and read form.

    I give 8tracks API access, it writes and updates my playlist, then I can open up Spotify and Spotify can see which of those tracks it has in its catalog (I’m ok with the fact they may not have everything, and I’m not even thinking about how to properly id songs, etc). May be a bit of wishful thinking from a consumer’s standpoint, but I would sure love this. Just random idea that just popped into my head, from a personal gripe!

    [Note: Just spoke with a friend, and he said this reminded him of Last.fm. But this service has stagnated and importantly, never really opened up its data.]

  • Tim Rosenblatt

    What about the fact that music companies have an incentive to keep multiple players around so that they can have a better bargaining position? A winner-take-all scenario grinds their profits down. Not to mention that (as you’ve pointed out about messaging apps), using one service doesn’t mean you are unable to use another (a way for the consumer to deal with exclusivity agreements).

    As soon as one company becomes too strong in the space, the music companies have incentives to do exclusive content deals and take other actions to explicitly block a winner-take-all scenario. Exclusivity also helps the streaming services in lead gen. Seems like there’s an incentive for the industry to work together to seduce consumers away from a winner-take-all.

  • http://www.charleshudson.net chudson

    Tim, I think you’re right. The labels certainly benefit from having multiple players. I think the tension is that it might make sense to do an exclusive deal with a distribution partner that has a commanding market share. But in a world where four services have 25% market share each, doing an exclusive deal with one provider deprives 75% of consumers of that content. In the end, I suspect the labels would be better off distributing to all players. And there are some things about the nature of catalog licenses that would make it hard (and dangerous from a regulatory standpoint) to be too cute on that front.