Killing The Golden Goose: Copyright Holders Demand More Cash Even As Streaming Music Services Struggle To Be Profitable

from the because-that's-how-it-always-works dept

For years, we've pointed to the legacy entertainment industry's history of trying to kill the golden goose any time a new and successful service has come along that actually helped drive them into the modern era. These services never actually come out of the industry itself, and thus are almost always hated (often with a passion) by the legacy players who failed to innovate, and now fear the potential alternative power in their industry. It's no secret that the legacy record labels and studios maintain their position by trying to control every aspect of their market, rather than by innovating to what the public wants.

In the music space, there have been a growing number of complaints from industry insiders about just how unfair it is that companies like Pandora and Spotify are successful. You see complaints that these services don't pay enough and a search for regulatory changes to demand more cash from these companies. And yet, Pandora and Spotify are both having tremendous difficulty reaching anything approximating profitability -- in large part because the existing costs of the music they stream is so ridiculously high.

John McDuling at Quartz has a good overview of the state of the streaming music space, which (among many other points) highlights this problem:

Spotify, by contrast, needs to negotiate directly with content owners (record labels and publishers) and maintain a huge library to satisfy all of its users’ different tastes, even though a large proportion of those songs are apparently never played. So its royalty costs are fixed at a high proportion of its revenues.

Ultimately, this means Pandora has a much leaner cost base than other services do. It paid out around 50% of its revenue in royalties last year. For Spotify, that figure is closer to 70%.

And yet, Pandora is still not really making money. Since its IPO in mid-2011, the company has eked out a quarterly profit just twice (Wall Street is expecting another small profit when it reports earnings on Thursday, July 24). Over the last two financial years it has racked up more than $75 million in losses. And despite these losses, content owners (record labels and publishing companies), perhaps envious of its growing user base and elevated share price, have been aggressively trying to squeeze more out of it in royalties. For some, this offers evidence of structural flaws in the Pandora business model.

It doesn't seem like a structural flaw in the business model, so much as the legal regime that assumes that it's the content alone that is the value, and that the service has no value at all. The legacy content guys see any profits at all as a sign that they're somehow being screwed over and underpaid, and thus they have to angrily demand more and more. It's happened over and over again. Remember how popular ringtones were? Part of the reason they went out of style was that the industry desperately saw it as a place to get ever more money from. Ditto for music video games.

The industry systematically overvalues the content and undervalues the service. That's not to say that the content shouldn't be paid for. But it's incredible how long a history we have of the legacy recording industry consistently smothering innovative new services with oppressive costs, frequently driving them out of business. They consistently kill the golden goose because they hate the idea of any outsider having success, even as they fail to innovate.

Filed Under: compulsory licenses, cost of goods, golden goose, music industry, overvalue content, profitability, streaming, undervalue service
Companies: pandora, spotify