MySpace Ad-Supported Music: Feasible or Fiasco?
MySpace is now the latest company trying to distribute free ad-supported music. Good luck to them!
This article is part 1 in a 2-part series on MySpace and the feasibility of Ad-Supported Music Services.
Several companies, including LastFM and Imeem, are attempting to build ad-supported music services. I'm a fan of most of these, especially for the service they provide for independent artists. But lets be clear about one thing… these companies are not offering "free music." They’re offering free on-demand radio. There’s a big distinction.
SpiralFrog and Qtrax are trying to develop models for free, downloaded tracks, with the cost recouped through advertising revenues. Those familiar with this site know my thoughts on the subject. (read: Ad-Supported Music Fallacy 1 & 2) It would take more than traditional ad revenues to support the cost of music given the price points set by labels.
But the MySpace story is different, and raises two questions. Can MySpace actually provide even a streaming service supported by advertising when great services like Pandora and Live365 have stumbled. And even if MySpace can, who cares?
Part 1: Who Cares?
Does anybody really want on-demand radio? Well, yes and no. There has been some small-scale successes in online radio, but no major revolutions. LastFM and Pandora continue to be niche services that are successful during working hours, while people are at their desks.
But let’s be realistic -- music needs to be both portable and collectable. Everyone I have ever known has a music collection. Music is an intrinsic component of each individual’s personality. Streamed tracks can't fill this basic quality.
A music collection is like an expression of a person’s unique identity. Over the years, it becomes an archive of who we have been throughout our lives. I still remember my first album – A Wizard/A True Star by Todd Rundgren. It was a gift when I was 10, and when I lost it moving between dorms in college, I replaced that long-outdated work with the same album on CD. Why? Because like most people, I consider music to be the historical artifacts of my life.
So let’s not kid ourselves. Being able to stream free songs on-demand via a website is not an innovation. For many people, it’s not even a product.
Part 2: Financing on-demand radio
As you might imagine, the difference in the cost of broadcasting a song on-demand and downloading the same song is striking.
The RIAA recently increased the fee for online broadcasts to $.0019 per performance of a song. Compare this with an estimated $.75 that labels are receiving from iTunes for a download.
Now I know broadcast music licenses are a complicated business, and the fee structures are never as simple as they appear. No doubt News Corp has been negotiating the finer points of their deal directly with labels, and we have no way of knowing what the final number is. But regardless, the big picture is clear… streaming a song is relatively cheap compared to downloading.
Can MySpace recoup 1/5th of a penny for every song streamed on their site? Simple math shows that a CPM of $2 would reap $.0020 per ad. MySpace likely demands a CPM higher than $2, and they can place 5 ads on a page. If a song lasts 5 minutes, the page can be refreshed multiple times, effectively generating $.05 in revenue for each song streamed. So in short, MySpace definitely has the traffic and the inventory to make more than 25x the license fee for each song. Unfortunately, it’s not so simple.
Part 3: The Problem with Social Networks
MySpace’s overall advertising revenues in the U.S. reached approximately $525 million in 2007. That’s a phenomenal increase from the $190 million earned in 2006. Clearly MySpace is in the best possible position to try an ad-supported service, like music streaming.
But in the same period, MySpace served about 40 Billion monthly pageviews. I’ve seen as many as 5 ads per page, that’s about 2.4 trillion ad impressions for the year. Assuming a current CPM of $2, MySpace should have made $4.8 billion in advertising.
What’s causing the shortfall? Find out tomorrow. I'll be analyzing MySpace's revenue problems in the next installment of this article....
Bill Houghton
in Business Analysis, Internet, Music, MySpace, New Media, Product Strategy, Social Networks, Web 2.0, Web Radio
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Reader Comments (2)
Bill -
I'm glad I found your blog. But, I think your analysis is bit off. Last.fm's new offering (as well as what MySpace is rumored to be doing) is free play-on-demand streaming, not DMCA-compliant "radio".
The royalties for "radio" (limited visibility into what's coming next, personalization and song skips) is fairly low/reasonable today, although the yet-to-be determine (retroactive to 2007) rates will most likely be much higher. That being said, true play-on-demand (user can pick-and-play what they want) has always incurred *much* higher rates. For example subscription services like Rhapsody pay $0.01/play. My guess is that Imeem is paying something close to that too. Based on those numbers, traditional display ads become much harder to leverage to cover the costs... and these sites quickly have to start looking at pre-roll or post-roll audio/video ads to make up the difference (or use it as a loss-leader to upsell to subscription).
Excellent comments. There is a distinction between "click-n-play" and continuous radio. But neither is very interesting.
We don’t know yet what the MySpace product will look like – my bet is on streamed radio like last.fm. Click-n-Play music is not a very compelling proposition for the reasons in my article, plus the fees are higher (as you said). Rhapsody is the largest player in the space, and they’re not having great success. Their 2007 numbers show almost flat growth despite the merger with MTV, and additional distribution relationships.)
But whichever strategy MySpace takes, I still stick with my original conclusion. Even at $.01/play, the service “should” pay for itself. Unfortunately, it probably won't because advertisers won't advertise on MySpace at any price.
I crunched some more numbers in today’s follow-up article. And there is a possible solution. Read the article: "Can Music Save MySpace?"