Features

Post Pandora, can Australia turn its music streaming exodus around?

Eight audio streaming services have left the Australian market in less than four years. Mumbrella’s Zoe Samios examines the factors behind the exodus, and asks whether the end is nigh - or if it's just a massive bump in the long road ahead.

In just over three years, eight audio streaming services have left the Australian market.

Deezer was the first to exit in 2014, arguing there were too many audio streamers. Telstra’s music service Mog was the next victim, quickly followed by Nova’s venture with Rdio in December 2015. In early 2016, JB Hi-FI’s service closed after four years, before SCA, Sony and Universal’s Songl and Guvera, which shut up shop later that year.

And in July last year, Pandora abruptly closed its operations, as did SoundCloud.

Pandora wasn’t a small music streamer. In fact, in the US, it is arguably one the the biggest.

Pandora shut down on July 31 2017

Although Pandora’s exit came at a loss for more than 30 staff and Australian listeners, Chris Freel, CEO of UnLtd sees the consolidation of the market as inevitable, and needed for others to survive.

“It wasn’t that Australian and New Zealand wasn’t returning for them, but the actual size, and what it potentially could have returned was probably not, it was probably a blot on the landscape of the big, the large organisation that they are in the US, when you talk about $1.5b as an ad base there,” Freel says.

“Australia is a bit of a test bed where everybody comes here because it’s pretty similar to the US or the UK, from a western civilisation perspective, and it’s a good place to open a new office or launch or be there.”

So why are so many streaming services struggling to get past the testing phase? Is it simply that advertisers are taking too long to invest? Or is the business model is fundamentally flawed?

Is licensing streaming’s kryptonite?

Delving into the commercial structures of music streaming services, things become murky very quickly.

The concept – delivering music to consumers through a subscription fee, or with advertising support – seems simple.

But like radio, licensing is a major part of the model, and paying major music labels for access to music is the streamer’s kryptonite.

UnLtd’s Freel says consolidation is inevitable

Freel says licensing arrangements aren’t favourable for streamers. Despite streaming services’ low subscription fees, record labels, for the most part, are still making sizeable amounts of money from them.

He says the model doesn’t “stack up”, making streaming services completely “unsustainable”.

“Streaming is driving and fueling all of that revenue growth, or the majority of the revenue growth in the music industry,” Freel says.

“They have to pay the labels and artists. That makes margins very, very tight for a streaming company, not only to be able to make money, but to break even.”

Geraint Davies, IHeartRadio Australia’s chief operating officer, tells Mumbrella that despite originating from a traditional radio business, IHeartRadio also suffers under the licensing arrangements.

Geraint Davies says licensing arrangements make it difficult for streamers to make money

“The business model at the moment is heavily towards the label and the licensing for the music to stream. The problem with it is it’s still very small dollars per track. The label doesn’t have all the costs anymore of distribution of hard copy. It’s very difficult to make money when 70% of your revenue is going to the licensees.”

UnLtd’s Freel – who was Pandora’s former sales boss – believes the problem originated from streaming services jumping the gun, hoping to get as many listeners to their platforms as possible.

Arguably, negotiations with music labels should have occurred earlier on, but as Freel sees it, this didn’t occur because the streaming companies started out as tech companies. But he doesn’t believe it’s all bad.

He points to Spotify’s long term deals with Universal, Sony, and Warner Music, where one of the core negotiating points was the reduce the amount of “hard cash” paid back into record labels.

“They had to come to an agreement with those record labels that meant that the cost per stream, or whatever it is that they were paying, was lower than it was initially,” he says.

Freel’s interview was well before the lawsuit that Spotify now faces for copyright infringement. US-based Wixen Music Publishing is currently suing Spotify $2b for allegedly playing 10,784 of its songs through Spotify without a licence or compensation to the music publisher.

But what the latest news for Spotify underpins is the struggle of these music streaming services to make a profit. Simply put, $12 a month is not enough to make money for all the music on offer.

In 2016, Spotify’s financials revealed a €$539.2m (AU$821.47m) loss. Revenue increased from €1.93bn (AU$2.94b) to €2.93bn (AU$4.465b).

The company generated €2.64bn (AU$4.02b) from premium subscriptions in 2016, and €295m (AU$449m) from advertising – 89.9% and 10.1% of its overall revenues respectively.

It has also said it had agreed to pay more than €$2b (AU$3.04b) record labels over the next two years.

According to The Information, Spotify’s revenues soared to €1.9bn in the first half of 2017. The service’s full 2017 results will be posted sometime around the middle of this year, but revenues are expected to grow significantly.

Pandora’s Q3 2017 results posted revenue of US$378.6m (AU$482.56m), with US$275.7m (AU$351.40m) of that from advertising revenue. Subscription revenue for the US was $84.4m (AU$107.5m).

Net loss was $66.2m (AU$84.3m) for the third quarter, higher than $61.5m (AU$78.3m) the year prior.

Apple does not provide a breakdown of its streaming service Apple Music to the public.

These numbers are international, but what they indicate is that margin, as opposed to revenue, is the issue.

Nicola Lewis, Mindshare’s chief investment officer, outlines some of the costs, particularly when launching an Australian operation.

Lewis says streaming services will have to look at the business model

“There’s obviously internal costs they have to consider: staffing, tech, data costs, there’s office set up costs. When you take all of that, and if you can’t balance it on merit in terms of revenue return, then that’s when you have to look at the business model,” Lewis says.

Where do profits come from? Ads, subscriptions… or nowhere?

So far, audio streaming services have been based on one of three models: advertising, subscription or a hybrid of the two.

Locally, Pandora was advertising-based and was hoping to roll out subscriptions, but Spotify and Apple Music both started as subscription-based models, with a guarantee of no ads for all subscribers who paid a fee.

With margins tight, costs increasing and revenue paid every time a song is played, it becomes difficult to make a profit.

And even though Spotify’s model appears a success, it continues to struggle. Last week it announced it had 70m subscribers. The company, which began in Sweden in 2008, now has more than 70 million users paying AU$11.99 a month.

 

“In the Australian market, there’s been nearly 13 different providers and the majority of those have been reliant on advertising or subscription. Really that standalone business model is not necessarily sustainable, and having a blend of a paid model and an advertising-led model is commercially a good way to go and that’s what Spotify do,” Amplifi’s Earnshaw explains.

“Providers which offer a free service and a paid service are going to be those that prosper in the future.”

But do streaming players need advertising-led models at all? When looking at broadcast streaming services, such as Netflix and Foxtel – it’s an all or nothing deal. The user pays for the service and gets what they are given, or nothing at all.

It could be argued those who don’t bother to subscribe aren’t engaged with the medium, making the advertising – which runs should the user chose not to subscribe – redundant.

But Lewis says there is value in a hybrid model, as it opens up potential for a lot of streams. She disagrees with free usage equating to a lack of engagement, arguing there are a number of reasons people may or may not subscribe.

“It will be financial, it will be whether you have the propensity to dislike advertisers or prefer not to have advertising, if you are happy with advertising, appreciate advertising and the advertising is targeted in the right way.

“We know consumers like advertising that is personalised to them, then it makes the non-premium or the non-subscriber proposition palatable,” she adds.

Spotify is a prime example of where a streaming service can go, given enough ubiquity.

Andrea Ingham, Spotify’s director of sales in Australia and New Zealand points to the streaming service’s “innovations” in events, home entertainment and automotive in the US.

Ingham: “There are certainly extensions, innovations, and evolutions of what Spotify can offer”

“I can’t see our business model changing drastically, but there are certainly extensions, innovations, and evolutions of what Spotify can offer, and we’re really good at doing just that,” she says.

“Ubiquity is key to this and our partnerships play an important role in achieving ubiquity. We have partnerships with most major home entertainment and automotive brands and have (most recently) announced a partnership with Xbox One,” she says.

“Watch this space”.

The culmination of radio and streaming

As it stands, only one traditional ‘radio’ company in Australia has a streaming service that still runs: ARN’s iHeartRadio. It launched in 2012 and since then has attracted 1m login users to its platform.

Why does it work? IHeartRadio’s Davies says the attraction to a combination of streaming and radio comes from the realisation music alone isn’t always the “biggest attractor”.

“We are coming from a programming perspective of radio, which is ‘keep you listening’. We have a skillset which is more about keeping you engaged where I think the streamers, particularly Spotify, have got to build the thing [themselves].”

Anthony Xydis, chief marketing officer at ARN, adds: “It’s very hard to transition audiences away from that habitual, uplifting product just because you want to be in that space. You have to find your niche. They [other streaming services] are taking longer than what they probably imagined. I can’t speak on their behalf, to get more traction with their radio-like products because for many, it’s not a radio-like product.”

ARN’s Xydis says its hard to transition audiences away from a habitual product like radio

But as with any streaming service, there are challenges. And while IHeartRadio has seen a “three fold increase” in usage of its Pandora-like offering since the streamer left the market, its biggest problem is that listeners do not have to go to the app to listen to radio content.

Davies adds: “Our big problem is how great radio is as a format. It’s so easy to get to our content. You are only using iHeartRadio because you are travelling or you prefer digital sound to FM. So you only still have about 10% of listening to our broadcast stations online because FM is so good.

“Commercialising [iHeartRadio] when 85% of your listening is on an analog broadcast spectrum is hard,” Davies says.

Do agencies understand what’s at play?

When media agencies were first confronted with the concept of digital, they were resistant. They underestimated the capacity of digital, and when it did finally take off, they suffered profusely from a reluctance to invest earlier.

While traditional media organisations turned a blind eye, new digital players such as Mashable and BuzzFeed pushed forward.

Ashley Earnshaw, chief investment officer at Amplifi, says there’s positive sentiment from agencies on music streaming, but says the market “needs to accelerate”.

Earnshaw: The market “needs to accelerate”

“Agencies value the data you can get from streaming, the insights from a consumer point of view and increasingly the agencies are understanding how streaming can complement more traditional channels and further that pertains to radio,” he explains.

“There’s some uncertainty about how streaming can fit within the overall marketing mix and the way we are giving clients that clarity certainly from a Carat point of view and a Dentsu Aegis Network point of view is that frame of reference around an audio stack.”

The concept of an audio stack allows for the planning and buying of audio itself, and allows for more investment in streaming. Earnshaw says Dentsu has begun working with this concept, in order to tackle the space as a whole.

He says agencies are doing a “disservice” to clients if they aren’t looking at the broader audio space.

“The streaming services and the radio networks have to enable agencies with product and insight into their platforms and the capabilities, but agencies’ roles is to be the guiding light for their clients in communications and to keep them at the edge of what’s going on and the capabilities in this space.”

Spotify’s Ingham, says what clients and agencies don’t understand is the brand offering.

“On-demand and particularly on-demand audio are relatively new to Australia – amongst other forms of more traditional media – so the greatest challenge is definitely education,” Ingham says.

“Our job is to enable brands to get a better understanding of harnessing an on-demand, audio-first offering.”

As Earnshaw mentioned, one of the capabilities or benefits of the streaming services is the data it collates through premium and non-premium products.

Lewis says that data will be a “win” for streaming services. She points to Spotify’s recent efforts, and the hiring of Dan Robins.

“They’ve made a big first step and they’ve started with Dan Robins at the helm starting to organise their data so that we as an agency and clients can buy certain segments.That’s great, but they aren’t bespoke.

“If we can really start to understand the consumer, whether they are a premium subscriber or not, then that becomes really powerful.”

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