Ad Supported Music? (#2)
Why Ad-Supported Digital Music is a Fallacy
(This is part 2 of a 2-part article on the proposed strategy of Ad-Supported music downloads.)
Despite the release of Spiralfrog, Qtrax, and various ad-supported music services, it’s not possible to fully subsidize music via traditional digital advertising. The size of the digital music market is simply too large to be subsidized by the online advertising industry.
Let’s look at some numbers:
1) Online music sales in the US totaled an estimated $2.9 billion in 2007, according to the IFPI. That $2.9 billion figure represents 1.7 billion single track downloads in 2007.
2) However, IFPI estimates that 20 illegal tracks are downloaded for each legit. That’s a total of 34 billion illegally downloaded tracks. Assuming a revenue potential of $.75 per track, the illegal digital music market is about $25 billion. Or a total of $29 billion for the total digital music market. That’s a lot of cash to replace with advertising.
3) Meanwhile the total payout from all Internet advertising across all markets and platforms is about $20 billion, as reported by MediaPost.
Can a $20 billion industry subsidize a $29 billion industry? Not likely.
The numbers are actually even worse for the ad-supported music model. Growth in digital music downloads will outpace the growth in online advertising by 2:1. Digital Ad spending is capped by the amount of time users spend online versus other media such as TV and radio. So one can assume that it will never gain more than about 20% of total ad spending. But the growth in digital downloads is not so limited, and will dramatically escalate if digital downloads become free, legal and convenient.
Lets look at it from the advertiser's perspective.
Assuming each downloaded MP3 has a price point of $1.00 ($.25 for the retailer, and $.75 for the label), each track needs to generate at least that much in advertising revenue to make the business viable. That’s a $1000 CPM if only one ad subsidized the download. If CPMs on a highly-targeted web site averaged $10, the user would need to be exposed to 100 ads for every download. Ouch – that makes for an onerous user experience, indeed!
As always, this is a numbers game. If music labels dropped their price-point by half, and the CPMs on the site rose to $20, then the user would only need to view 25 ads to recoup the cost. Better, but not good enough to compete with P2P sites. (Actually, it's unbelievable that a site could insert so much new inventory and still maintain a high CPM -- but I'll be generous and assume the site has such fantastic targeting and conversion potential, that the CPM was justified.)
If 25 ads are needed per download, and there are 35 billion downloads, that's almost one trillion ads bought/served to subsidize digital music. It’s doubtful there’s this much demand in the ad marketplace. And if the Google and Yahoo bit the bullet and created that inventory, we would no doubt witness a radical devaluation of keywords and display inventory across the web. Either way, it's a disastrous business proposition.
Sites may extract some non-standard ad value from each user. For example, each company may require that you sign up for e-mail newsletters that deliver advertising messages over time. Sites might track user behavior on the site, and then sell the data to various online marketers. There may be interstitial ads, co-registration programs, cross-promotional relationships. But even with all these various revenue extraction techniques, it’s still seems unlikely that a company can extract the cost of a song solely via advertising.
Is there an alternative? I think there is, and I'm itching to share some ideas. If you stay tuned, it will be featured in an upcoming article.
Bill Houghton
in Business Strategy, Business Analysis, Internet, Music, New Media
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Reader Comments (4)
Good analysis but it is not correct because it is based on some fundamentally incorrect assumptions. You are assuming that ad-supported downloaded music is Internet advertising -it is not. The successful ad-supported music downloads will sell the time spent listening, thus viewing Internet ads has nothing to do with the model. Similarly, the advertising revenue for ad-supported music will come primarily from overall advertising growth as well as taking some share from other media - primarily radio. Also, no one is saying that all music will be ad-supported.
This is all explained on my blog Ad-Supported Music Central http://ad-supported-music.blogspot.com/
I agree there may be some never-before-seen ad models that have not yet appeared in the marketplace. But I'm currently concerned with the current strategies of SpiralFrog, QTrax, and Baidu. These models rely on online advertising, which is unsustainable for the reasons I stated.
I have my own solution to this issue... which I have not yet posted. Stay tuned, and all will be revealed!
The only way that advertisements will truly be beneficial are to tie them to a tangible product that consumers want and are willing to opt-in their personal information which allows the ads to be highly targeted and dynamic.
TurnItUp Media, a new music destination all ready has this solution and is currently working with various ad companies to publish. We have created a new ad-based model that will provide users the ability to download 100% DRM-free Digital Music downloads which are of course, completely free to them. All they have to do is watch a highly targeted video ad based on advertisers’ campaign settings and the users’ profile. We use our customized blended marketing technology to guarantee the best ad placement for each song a user downloads. After watching the ad, users are then required to enter in a digital security code which will then unlock the downloaded music file.
What does TurnItUp Media offer to the advertiser? A guaranteed ad view every single time a user activates a song. We also do not charge anything extra if a users clicks thru either. Good by click-thru rates and cost per clicks and hello Cost per Download!
To put it as simple as possible, advertisers will only pay for what they use!
http://www.TurnItUpMedia.com - Get Turned On!
All of the above perspectives have validity, if, if, if.
What has not been factored in, yet, to my knowledge, is supply and demand. There are simply way too many producers of product, musicians/songwriters who thanks to having no barrier to getting a decent recording made, simply spew so much stuff out there that the buying public cannot find that one perfect snowflake in a blizzard of content.
To do that, there needs to be an industry capable of filtering out the mundane, the ordinary. That used to be the many hurdles that was the old music industry. Today, there are just too many choices, too much supply, so folks just opt out and give up trying to find music. Its way too difficult and time consuming.
Add to that, there is no 'community' at the local level. Nobody walks into work raving about that hot new song from XXX band, since they all did not listen to the same source that morning (radio for the newbies out there). So no common gathering point, no market focus.
MySpace, Face Book, you name it, social networking sites do a lousy job of monetizing 'friends'. They are not concentrated enough, local enough.
Here is a freeby bit of advice. As a parent, I would love to be able to zip-code limit MySpace, etc. I would like to at least pretend that I can drive to anyone's home that I, or my kid, met through a soc net site. If we did that, we could build local community and if we build local community, we can once again market everything effectively.
Of course if that can indeed be done already, my apologies for being duh about it. It just never jumped out at me and that is essentially a problem not on my end I think...
In business there is a saying, 'Never confuse activity with productivity'. I think this fits the internet way too well.
With a grain of salt, I offer this...
Paul Bailey