Spotify May Not Spur Music Sales; But What If It Makes Music Consumers More Valuable?

from the lifetime-value? dept

There was some news a few days back about how people who use Pandora end up buying more music, while people who use Spotify do not. Of course, if you understand these two services, this should be completely obvious. After all, Pandora is like radio -- with a bit of randomness, and no real way to just play what you want. Spotify, on the other hand, is designed to replicate your music collection -- a cloud-based iTunes. Unfortunately, those who focus too narrowly on the idea that music sales is the music business may find this news as further support for moving away from services like Spotify. On top of that, I've heard from people who were at the conference where this "research" was announced, and it turns out that the guy presenting it never mentioned Spotify at all. It's just that the press is assuming he meant Spotify.

However, either way, just looking narrowly at music sales is a mistake. As we've discussed, selling music is not a very good business any more, but that doesn't mean that there aren't good music business models -- it's just that selling music probably isn't one of them.

With that in mind, it's worth taking a look at a recent report put out by Will Page, an economist for PRS in the UK -- and the guy who put out that report last year showing that the music industry was actually growing, not shrinking, when you looked at all the component parts. In his latest report, Page takes on the question of "average revenue per user" (ARPU) when it comes to the music consumer out there -- with a specific look at Spotify (and, unlike the NPD report that's getting all this press, Page actually has real info about Spotify).

Around here, we're used to hearing about ARPU in the context of telcos. It's a stat that telco execs and Wall Street money folks obsess over. Five years back, we warned why the telcos obsessive focus on ARPU was dangerous, and could lead to bad long-term strategic decisions. Page's report effectively suggests the same thing is true in the case of the music business. With the move to various music services, such as Spotify and Pandora, there is a sudden push to look at "ARPU" of music consumers as well -- and if the average music buyer in the UK spends £63 on music, and Spotify can get them to sign up for a £120 plan, that seems like a pretty good thing. Right?

But, as Page notes, the real story is a hell of a lot more complicated than that. What if Spotify is picking off just the "top users" who were actually spending £150 per year? Or, what if it's getting people who didn't buy music at all to pay for subscriptions? Then, any direct revenue is incremental, and the pricing could really matter -- since lower prices could bring in a lot more total revenue by bringing new "buyers" into the market. Furthermore, just focusing on the ARPU from direct payments for music (sales or subscriptions) misses a big part of the story. Live shows are a large and growing part of the market, but don't make it into such calculations. Merchandise and other direct-to-fan offerings also probably aren't included in many of those calculations. And, in fact, we've heard that Spotify is looking to enable those other business models as well -- and isn't just focused on the obsolete metric of "music sales."

As such, services like Pandora and Spotify shouldn't necessarily be judged on how much they contribute to plain old music sales, or even direct ARPU -- but how much they drive people to spend money within the music ecosystem -- and then figure out where that money goes, and whether or not it's allocated in a way that benefits or harms the various players in the space. If Spotify helps make every other aspect of the music industry more valuable, but depresses the market for direct music sales, that shouldn't be seen as a bad thing at all.

Once again, it reminds us of the necessity to not get too narrowly focused on a subsegment of the market when trying to figure out what's happening -- but to explore the larger ecosystem of how much money is being generated around music -- and then we can look at where it goes and what it funds. That is, we shouldn't be worried about how much people spend on horse carriages, but on transportation. So remember that whenever you hear numbers being thrown around about how much money is being made or "lost" in various industries. If you don't look at the overall ecosystem, you often miss what's happening.


Reader Comments (rss)

(Flattened / Threaded)

  •  
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    Devilish Presley (profile), Feb 26th, 2010 @ 12:03pm

    @ Mike

    RE: The linked post..

    "Admittedly, there are some facts that could potentially temper the results: including claims of the rather uneven distribution of live revenue (big acts get a lot, others perhaps not as much) and worries that without enough support for smaller acts they won't ever be able to get big enough to make that kind of revenue. So, the fear is that it's all just "legacy acts" that are touring and making money, rather than new acts being encouraged the to get big. This is a charge some others have raised in the past, and it certainly bears watching, though I believe, pretty strongly, that it's an issue that works itself out as various additional business models get developed"

    We would really appreciate some more on:
    "as various additional business models get developed"

    Specifically in relation to smaller independent artists who wish to reamin so. And no we don't swallow the thing about rungs disappearing etc...

    Cheers.

     

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      Suzanne Lainson (profile), Feb 26th, 2010 @ 2:47pm

      Live music in UK

      Here's some info about live music in the UK. Attendance at the smaller venues has gone down. Attendance at the larger venues has gone up, suggesting that the more established acts are getting the live music dollar.

      http://www.culture.gov.uk/reference_library/publications/6603.aspx/

      During this period [2005-09], the number of licences with provision for live music has increased, the proportion of adults attending live music has grown and there has been an increase in the number of professional musicians. However, this growth has been concentrated at medium and larger venues, and there has been a fall in the adult population who attend music at smaller venues.

       

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        Devilish Presley (profile), Feb 26th, 2010 @ 3:17pm

        Re: Live music in UK

        Cheers Suzanne, that was interesting. We think the smoking ban started the decline at smaller venues, the bigger acts mopped up a lot of the gravy (maybe because they are touring more) - and the recession really did finish a lot of places off. Also, it has to be said, a lot of small venues in the UK are pretty grotty!

         

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      vivaelamor (profile), Feb 26th, 2010 @ 4:16pm

      Re:

      "Specifically in relation to smaller independent artists who wish to reamin so. And no we don't swallow the thing about rungs disappearing etc..."

      While I have no advice to offer about live gigs, I would like to voice disagreement with the whole notion that live gigs are the way to go for everyone. It may not work or appeal to everyone but depending on your audience you may find that there is more money to be made by concentrating on producing new music rather than performing live. Here are some ideas on that front (apologies if any of these seem blatant rip off's; any coincidence highlights the fact I haven't gotten around to reading Mike's whole Approaching Infinity series):

      • More music. Personally I'd rather bands spent more time producing new music than touring. Obviously not going to work for everyone, everyone should know by now how much people hate filler so it seems a good choice only for the genuinely prolific.


      • Split releases up, while not a new idea I believe that it is underused. Even if you don't produce more, you can keep people focused on you by offering less more often.


      • RtB. If you can't come up with new material every other day then put some real effort into the other merchandise. A new song every other week with coinciding merchandise, for example.


      And that would be the tip of the iceberg. More discussions on producing more, please!

       

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        Devilish Presley (profile), Feb 27th, 2010 @ 6:43am

        Re: Re:

        "While I have no advice to offer about live gigs, I would like to voice disagreement with the whole notion that live gigs are the way to go for everyone. It may not work or appeal to everyone but depending on your audience you may find that there is more money to be made by concentrating on producing new music rather than performing live"
        ------------------------------------------------------------
        Whilst we totally agree with you it isn't the way to go for everyone in every genre, we are trying to put our own experience of CwF RtB from the perspective of a fully functioning "live" Rock 'n' Roll band - having done over 300 shows and four independently released albums.

        There are indeed millions of words being produced by pundits on hundreds of forums and sites about playing live, but very few or none deal with the specific question we are seeking to get an answer to.

        When any band reaches a certain level they have to face the choice of either remaining independent or selling their arses to a label, and getting ripped off in the process.

        Also if they DON'T believe that filesharing is wrong, and they DO believe that people should not be criminalised and that draconian measures to "police" the internet are stupid and wrong. Well pretty much kiss goodbye to any label wanting anything to do with you.

        So taking aside your very valid point about producing more content - which is nowadays fairly cheap as is the means of promoting it online - a "live" act has far larger overheads than a "home based" artist.

        How do you finance the upfront costs of touring before you reach the level at which you are viewed as a "going concern" by potential sponsors/patrons?. We have in fact already done this - by or own efforts - but what about those who can't/won't do that? If part of the appeal of an act is in their "live" performance AND we have found "live" is the best way to truly CwF in a lasting and sustainable way - is the future going to be bleak for bands who can't/won't finance their own art to the point at which they reach critical mass?

        Is this a slight flaw in the CwF RtB formula as it applies to "live" acts who have spent no time on a label and benefitted from their marketing budgets?
        -----------------------------------------------------------
        "More discussions on producing more, please!"

        We do think all artists will have to produce more content than ever before, and you are right - product has to be more varied and broken up in a wider variety of choices for the fans. Just doing a CD with 12 tracks every few years is as dead as a dodo. However some need to guard against too much disposabillity in what they create or they might fall foul of the "create buzz - new mp3 - buzz dies - mp3 is deleted" syndrome. That is not lasting or sustainable for everyone or every genre.

        Good luck to you in all your endeavours.

         

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          Suzanne Lainson (profile), Feb 27th, 2010 @ 10:35am

          Re: Re: Re:

          How do you finance the upfront costs of touring before you reach the level at which you are viewed as a "going concern" by potential sponsors/patrons?

          The typical route is to play in ever expanding circles. Local, then regional, then add a new region, then another region, until you are touring nationally. Generally an artist or a band plays about 200-300 shows a year.

          The hard part is when you have a day job but want to tour too. There's usually that point where you have to decide either to keep the day job and limit touring, or drop the day job and probably not have enough money for a couple of years. The people most able to do that don't try to maintain much in the way of a place to live. Either they have multiple roommates to split rent, or they have spouses/girlfriends/boyfriends to pay rent, or they store their stuff with parents and crash at home when not on the road.

          I see a lot of talented musicians who never quit their day jobs because the financial realities are just too great. As the Camper Von Beethoven folks are saying even most of them have day jobs and not enough money coming in so they are trying to get sponsors to help pay for their trip to SXSW.

          Rarely do musicians get financially solvent doing it on their own when they start out. So without someone putting in some upfront money, you are talking about a process to build up a fan base that can take years. And in terms of sponsorships, not only are more musicians asking, the recession has led a number of business to cut back on that. So it's kind of a double whammy.

           

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            Devilish Presley (profile), Feb 27th, 2010 @ 11:06am

            Re: Re: Re: Re:

            Cheers again Suzanne.

            It was kind of a hypothetical question, 'cos we have in fact already taken that 'ever expanding circles' route in the UK and we have also toured out in Germany, Poland, Slovakia, France, Holland etc etc. We have achieved enough CwF to already have folks sponsor us. But we had to do it oursleves and we just wonder how many others can or will do that. And does this show a slight flaw in the whole CwF + RtB theory as it pertains to emerging or new artists that are primarily "live" acts rather than studio based?

            As you say many are faced with a "double whammy".

             

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              Suzanne Lainson (profile), Feb 27th, 2010 @ 11:37am

              Re: Re: Re: Re: Re:

              It was kind of a hypothetical question, 'cos we have in fact already taken that 'ever expanding circles' route in the UK and we have also toured out in Germany, Poland, Slovakia, France, Holland etc etc.

              Yes, I saw that you had done it. But it's such a relevant question. I've seen those artists who have to decide whether to quit their day jobs in order to tour.

              Where trying to do live music becomes a major financial issue is with women who have kids. I knew one woman who was able to build up her career when she was single and childless so she was able to amass enough fans before she then had kids.

              I knew another who was trying to build up a career, but she already had a kid, so she had to turn down some gigs because by the time she paid a babysitter, she would have lost too much money.

              Another woman had her mother raise her child so she would be free to pursue music.

              Since most bands don't turn a profit, it's hard to find investors. Family and friends who give you money to get started is probably the most common route, though it's often just enough to make a CD rather than hit the road. Sometimes you can get someone to give/loan you a van, but that doesn't pay for fuel. For places to stay, it's usually sleeping in the van or crashing on floors for awhile, often a period of years.

              Kickstarter has turned out to be a good model for some to raise money, but most of the requests are pretty small. Just enough to complete one project rather than to fund an entire tour. And the Kickstarter blog has said that the projects which seem to do best are those where the artists already have a network of friends and fans to tap into.

               

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    NAMELESS.ONE, Feb 26th, 2010 @ 12:54pm

    AS we get more time

    we all get into things like music and art and creation , this will NO matter what they try and do lower its value.

    ANY TWIT can see that as man gets more free time he can create more. AND i will add it is a blatant LIE to say one must be paid to create. THIS IS AMERICAN LIES.

    AND i gave you an example of a business model, one could charge 10% extra on your costs to make a search like engine PUT the bands in and have them ..(PAY or do themselves) there own site to give out the music free and post tour dates.

    IN OTHER WORDS FREE MUSIC AND YOU MAKE CASH OFF TOURS/BARS
    lazy good for nothing sit on your butt gets nothing.
    PARTY on tour or not waste money on tour or not.
    as OZZY eats a prime rib steak over a kitchen bigger then the house i live in and cries how they ripped him off for touring then OK OZZY, help people like me doing this for the artists DON'T BE a WHINER.

     

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      Devilish Presley (profile), Feb 26th, 2010 @ 1:16pm

      Re: AS we get more time

      Yeah lets go and get that Brummie bat eating OZZY, we'll show him that CwF + RtB really means Connect with Fist = Reason to Bleed... hell I don't even have a kitchen, I don't even have a house - and if I wasn't vegetarian I'd steal his steak.

      What a rotter that OZZY!

       

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    identicon
    Alex, Feb 26th, 2010 @ 1:57pm

    we all get into things

    we all get into things like music and art and creation , this will NO matter what they try and do lower its value

     

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    identicon
    Grammah Monster!, Feb 26th, 2010 @ 1:59pm

    I finds me an errors!

    Again, Mike is completely offbase:

    "Pandora end up buying more music," Is redundant.

    The world "Coarse" means "rough" or "crude."
    While "Course" means "direction" or "plan." Which course?

    Next, the subject "sales" conflicts with verb "is.". A bester construct would be "Music Sales Are"

    And to "Assume" means "to accept without proof." "Presume" means "to accept before proof is established." is it bester to use presume in this sentence?

    Then, "Strategic" means "overall plan," especially used in connection with war. Tactical means "specific plan or action used to carry out a strategy." Is tactical a bester word?

    Please avoid contractions in formal writing. But if you must, "As we've discussed" would be better as "We have discussed" and "Music isn't one of them" should be "is not one of them" There are about ten of these in this article alone.

    Then, the subject "report" conflicts with verb "last." It may be better rewritten as "the report last year"

    "is true in the case of the music business" is very wordy. Why not use "is true for the music business"

    And, "to get not" is a split infinitive. Can you find a better word choice?

    Then on to "whenever you hear numbers being thrown around." Seems that is an incorrect verb form.


    For more daily grammah tips, go to http://www.grammar-monster.com/index.html or join this facebook group- http://www.facebook.com/home.php?#/pages/Taylorsville-UT/Daily-Grammar/36339933998

     

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      vivaelamor (profile), Feb 26th, 2010 @ 4:23pm

      Re: I finds me an errors!

      Surely there is a bester way to draw traffic; perhaps using paper and crayons?

       

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    •  
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      Alan Gerow (profile), Feb 26th, 2010 @ 6:31pm

      Re: I finds me an errors!

      You do realize that TechDirt has the HTML nofollow tag added to links in the comments. So, while you're spamming the comment boards with bad grammar advice and worse spelling, the links you are adding are not going to do an ounce of good for Google rankings.

      Not to mention your inability to understand basic grammar and blatant disregard for even attempting to spell anything correctly means no one reading your comments will take the links seriously.

      So, Google doesn't care about your links and neither does anyone else.

       

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    Suzanne Lainson (profile), Feb 26th, 2010 @ 3:13pm

    Where the US entertainment dollar goes

    This might also be of interest. We are shuffling our entertainment dollars around, but in terms of percentage of household income, it has remained about the same. The total dollar amount has gone up because we have more households now.

    Analysis: Recorded Music's Share of Consumer Spending: "Entertainment spending has not changed much over the decades. According to the U.S. Department of Labor, entertainment spending was about 4% of total income in 1950 and 1960, spiked to 8.6% in 1972, and then dropped and level off to around 5% since 1984."

     

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      Mike Masnick (profile), Feb 26th, 2010 @ 3:19pm

      Re: Where the US entertainment dollar goes

      This might also be of interest. We are shuffling our entertainment dollars around, but in terms of percentage of household income, it has remained about the same. The total dollar amount has gone up because we have more households now.

      Indeed. We've pointed exactly that out in the past whenever people say the industry is declining. It's not.

       

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        Suzanne Lainson (profile), Feb 26th, 2010 @ 3:45pm

        Re: Re: Where the US entertainment dollar goes

        I absolutely agree that we will have music. It is and will be everywhere. I think that as the technological tools become available, we'll have more people making it themselves and fewer being fans in the traditional sense.

        So my concept is that the music dollars will go to music creation applications and local events and venues where people can entertain themselves, their family, and friends. Music will continue to democratize until we are all doing it.

         

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    identicon
    Benjamin Wade Inman, Feb 26th, 2010 @ 3:25pm

    Industry Economics

    Finally someone else that understands the economics of industry. So many people are too focused on a single aspect of the music industry when there are so many other areas that are benefiting from streaming.

    I haven't been a huge fan of streaming, mostly because of personal consumption preferences. I like the ownership option personally. However, now that thee are more choices in the marketplace, consumption is subjective.

    Consumers are now presented with music consumption options to fit their lifestyle and personalities. It's important that major and independent labels understand that. Thanks for a great article!!

    Regards,

    Benjamin Wade Inman
    Managing Partner
    ZONG Music Partners LLC
    Nashville, TN
    a music marketing firm
    info@zongmusic.com
    http://www.twitter.com/zongmp
    http://www.myspace.com/zongmusicpartners

     

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      vivaelamor (profile), Feb 27th, 2010 @ 3:24am

      Re: Industry Economics

      "I haven't been a huge fan of streaming, mostly because of personal consumption preferences. I like the ownership option personally. However, now that thee are more choices in the marketplace, consumption is subjective. "

      Same here; having music on my computer I can then stream it down to the living room stereo system via a Squeezebox server. While the Squeezebox itself supports streaming, streaming at FLAC quality directly over the internet would be a bit of a bandwidth hog.

      Plus, streaming services are likely to have a usage point you get to where you're paying more for the streaming than you are for the actual music. Pure supposition, but it stands that having the music permanently on your computer gives more options for supporting the artist than constantly streaming their music.

       

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    Martin Rigby, Feb 27th, 2010 @ 9:20am

    Spotify & Music Sales

    Well done - an excellent and balanced piece. The labels are worried that East As Much As You Can streaming services, even paid-for ones like Spotify's premium version, hollow-out sales to high spending customers.

    I'm more sanguine - I think that people use Spotify to refresh love of music and maybe as an alternative to ownership for music that's on the edge of their current tastes. But I also believe it's a powerful discovery tool letting people to sample albums in advance and make more informed purchase decisions.

    Human beings are magpies and Spotify lets people identify the silver trinkets that they want to have in their music collections, and which they'll then use for social interraction - but that's another story...!

     

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    Devilish Presley (profile), Feb 27th, 2010 @ 12:39pm

    @Suzanne.

    Well we are self-employed so the job issue is easier, no boss to appease. We know one Canadian band whose original singer quit touring to have a baby and her sister took over the role of lead singer, a pretty novel approach to that problem, mind you they are on EMI so perhaps a little more financially secure.

    "And the Kickstarter blog has said that the projects which seem to do best are those where the artists already have a network of friends and fans to tap into."

    Doesn't suprise me one little bit. I feel sure the message for the future is that home based artists who don't do it live will have a slight advantage over the bands who go out and perform.

    Times are going to get harder for live bands but we are still positive and to quote a fellow Londoner.

    "You gotta be able to go out there and do it for yourself. No one's gonna give it to you" - Joe Strummer

     

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    Derek Kerton (profile), Feb 27th, 2010 @ 7:56pm

    correction

    Mike,

    "Five years back, we warned why the telcos obsessive focus on ARPU was dangerous"

    You mean SEVEN years back!:
    http://www.techdirt.com/blog/wireless/articles/20030529/141659.shtml

     

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    identicon
    Steven Finch, Apr 5th, 2010 @ 1:54pm

    Music Distribution

    If your in a band and want to get your music onto Spotify then check out RouteNote (http://routenote.com). They are already the leaders in the UK for digital music distribution.

     

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  •  
    identicon
    Jay, Aug 25th, 2010 @ 9:17am

    The Music Voids speaks to Steven Finch, CEO and Co-Founder of RouteNote, a company offering an alternative and affordable music distribution service to artists.

    Read the exclusive Q & A here: http://www.themusicvoid.com/2010/08/exclusive-q-a-with-steven-finch-ceo-and-co-founder-routenote/

     

    reply to this | link to this | view in chronology ]


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