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

Studies

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.

Filed Under: arpu, ecosystem, lifetime value, music, music sales
Companies: pandora, spotify