Trapital - the price is wrong

the price is wrong

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Hey! What a wild, wild past few days. Thankfully, the Silicon Valley Bank depositors can still access their money and that the government stepped in. I’m still weary of the ripple effect but we’ll see.

I’m getting ready to head to Austin for a couple of days during SXSW. As a heads up, I’ll be sending out the next memo on Friday instead of Thursday, so stay tuned for that.

Today’s memo is about a growing industry topic: what’s the right price for music streaming? The quick answer is “probably more than $9.99 per month,” but the more rationale answer is broken down in today’s memo. Let’s dive in.

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a pricing problem

The tension continues to build in music streaming and it’s getting messier.

The major labels and their shareholders want streaming services to raise prices. Many of them have, except Spotify. The standalone audio service likely fears that increased rates would slow growth, increase subscriber churn, and reduce revenue (which means less money going back to rights holders). And while the record labels are also exploring new ideas on how artists should be paid, external advocacy groups are pushing on major labels and streaming services to disclose deal terms which studies say include price fixing, payola, kickbacks, and more.

There’s a lot going on, but it’s not too surprising given how we got here.

the ghost of Napster’s past

It may seem drab to tie yet another music industry issue back to Napster, but it’s hard not to. Spotify took off because it put a consumer-friendly and legal business model around the piracy-influenced consumer behavior. It met people where they were at.

The challenge with this model are the razor thin margins. It’s no coincidence that major streaming services (not named Spotify) are largely customer acquisition plays for the big tech companies they sit under. Sure, these services still manage P&Ls, but the stakes are different. They follow the broader, uneasy, consumer tech trend: media has become more valuable as content marketing than as a standalone business.

Meanwhile, the record labels want to maximize the music itself. They don’t own the live entertainment side of the business, which the record label’s music helps sell. And since streaming makes up 65% of recorded music revenue, there is incredible pressure from everyone for Spotify to raise those prices.

Music’s tension has become a classic business strategy dilemma. Suppliers have exerted power over their distributors. Distributors have pushed back on the levers they can control. And since consumers pay distributors, not suppliers, there’s inevitable pushback on pricing.

the inability to raise prices

Last year on the Trapital Podcast, Spotify’s former chief economist Will Page talked about how the $9.99 per month streaming price dates back to the Blockbuster rental card. As he points out “we keep offering more and more, but we’re charging less and less.”

Last week, Warner Music Group CEO Robert Kyncl gave a talk at Morgan Stanley where he pushed for streaming services to raise prices with inflation and proposed $13.25 as a potential monthly price. Universal Music Group CEO Lucian Grainge has expressed similar.

Despite Spotify’s understandable focus on growth, the fact that the price is still $9.99 in 2023 is quite cheap. When cheaper family plans and less expensive rates in other countries are factored in, Spotify’s average revenue per user is below $5.

If we factor in the replacement cost of buying a new computer every time a bad virus was downloaded through peer-to-peer filesharing, we could make the case that Spotify may be cheaper than Limewire was!

It’s a tough spot to be in. If Spotify’s podcasting strategy had gained more traction to date, it may have raised rates by now. It also pokes at the lifetime value (LTV) and customer acquisition cost (CAC) ratios that Spotify and other software-as-a-service (SaaS) subscription models have largely focused on. The promise of this metric is to be able to raise prices over time, especially as the service gets better.

But even though the service is getting better, and CACs are naturally rising over time, the inflation-adjusted price keeps getting lower. Its LTVs are likely decreasing.

A streaming service’s pricing power is only realized when it actually raises prices.

distributing the wealth

Even if the right price is agreed upon, there are concerns around how that payment is distributed by the rights holders. The major record labels have explored concepts like user-centric payouts with SoundCloud and Tidal. In his Morgan Stanley talk, Kyncl shared the idea of a streaming “multiplier” if a fan starts a music listening session with a particular artist. It’s similar to an idea he and other execs pushed for at YouTube under the code name Project Bean. It never came to fruition, but the idea was to rethink payouts.

In music though, the bigger issue in payments may lie in the NDAs between major record labels and digital streaming providers.

​A new study from Public Knowledge highlights a few areas that we’ve discussed in Trapital before: Major record labels likely get preferential treatment on streaming through algorithmic plays and playlist favorability.

If low-stakes payola is sending expensive gifts to the program director at Hot 97 for more radio play, then these are high-stakes in comparison.

The study also highlights the lack of clarity on advances paid by streaming services to major record labels, lower rates in exchange for favorable playlist treatment, how record labels distribute ad revenue, and the distribution of “breakage fees” from advance money that the streaming services didn’t recoup.

This section highlights it all:

It’s hard to solve for one payment issue without looking at them all more closely.

if the record labels owned distribution

As long as the distributors and suppliers are separate companies and streaming margins are thin, this dynamic likely won’t change. Even if the deal terms are made public and alleged payola ends, the tension between growth and price will still remain.

This brings up the idea of major record labels distributing their own music. If the majors had their own services, they could set their own rates and let the market decide. “Universal Music +” could implement user-centric streaming and use that as a selling point for artists. If “Warner Music +” wants to price itself at $13.25 and test out streaming sessions multipliers, it can do that with its own music.

It’s a huge undertaking. But if the record labels want to ensure that their music is elevated above the hobbyist tracks, lofi study music, and meditation tracks, then it may be best.

As the streaming video services has showed us though, there are plenty of challenges with their model too. Consolidation is rampant. Only a handful of video streamers may exist by this time next year.

But if this shift ever happened, there would be less finger pointing on the common point that “music is undermonetized.” If the supplier controls the value chain and set the prices they deem fair, then the market would decide what its willing to pay.

It’s all a long shot, but it would be fascinating to see how it plays out.

Hope you enjoyed this memo. If so, please share. Forward this email to someone who should read it. Text it to a friend. Drop the link in the group chat.

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​https://trapital.co/2023/03/13/music-streaming-has-a-pricing-problem/​

money moves

• the future of music and gaming​
• the end of Silicon Valley (Bank)​
• pushback on Canada’s bill to feature more Canadian artists from Will Page and Lyor Cohen​

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