This guest post from 8Tracks founder and CEO David Porter seeks to distinguish between the two main variants of music streaming service: internet radio stations and on-demand music subscriptions. Given that so many articles out there confuse music fans by lumping these two very different beasts together, we’re in favor of clarifying the situation, which is why we asked for (and were granted) permission to repost this here.
Recent media coverage of the digital music sector has tended to lump all types of music streaming — notably, the radio-style delivery of Pandora and the on-demand access of Spotify — in the same bucket.
In fact, these two primary types of music consumption are quite different in terms of:
- Value proposition
- Market size
- Business model
- Royalty expense
There’s way too much to cover in one post, so I thought it’d be useful to drill down on each of these points of differentiation in a series of shorter entries. Let’s start first with the value proposition.
One helpful way to think about online music services is to consider their historical analogs. Internet radio — what Pandora, Clear Channel’s iHeartRadio, 8tracks, Songza, Slacker and others offer — is designed to function just like regular (terrestrial) radio: listeners pick a category of programming (e.g. music of a format or genre, for an activity or mood, or that “sounds like” one or more artists), hit play, and then tune in passively.
People who listen to radio — whether delivered over the air, via cable, satellite or internet — benefit because music has already been selected, reducing their time and effort. Listeners can be lazy. Unlike the 30-60 minute format of television or the 90-120 minute format of film, the five-minute format of music lends itself to “packaging” so that a listener doesn’t have to keep returning to his device time and again to pick another track. While the album accomplishes this objective to a certain extent, radio offers longer listening and greater variety.
Because radio is programmed by people or algorithm for long-form listening to a variety of artists, it is also the primary means for music discovery (for listeners) and promotion (for artists). This has always been true of traditional radio, albeit less so since the homogenization of the airwaves in the wake of deregulation in 1996. And it is even more true for internet radio, where spectrum isn’t scarce. Pandora plays a wider variety of music than terrestrial radio, and 8tracks extends even further down the Tail, with two in three tracks streamed from independent labels or artists.
As internet radio becomes increasingly ubiquitous, more artists have the opportunity for meaningful exposure, and more listeners have the opportunity for meaningful discovery.
While internet radio is the heir to terrestrial, cable and satellite radio, on-demand streaming—what Spotify, Deezer, Rhapsody, Rdio, Daisy/MOG and others offer—is the natural successor to older forms of interactive listening. From vinyl to (ahem) 8-track to cassette to CD to (most recently) digital download, sound recording formats have evolved relatively quickly over the last 50 years. But across all of these formats, the objective is the same: listeners pick a specific song or album or artist, hit play, and then tune in on demand, whenever and as often as desired.
People who listen to a CD, download or on-demand stream benefit from tuning into exactly the music they already know and love. Physical formats for recorded music are purchased and “owned” in the normal sense; digital downloads are sometimes purchased and may be hosted locally or in the cloud. A listener can stream a file she’s uploaded to a “music locker” in an on-demand manner. However, the most widely used on-demand services are those that offer a large, pre-populated catalog of music and require (or seek) a subscription rental fee.
The most voracious music consumers no doubt stand to see the most value from on-demand subscription services: rather than pay $1 for a track on iTunes or Amazon, they can instead stream it — and pretty much any other track that comes to mind — fully gratis on Spotify (subject to ads) or for $5-10 per month on any of the other on-demand services. The relative value proposition to an artist depends on how much a listener tunes in, as the rumored magnitude of Spotify’s sound recording royalty ($0.003 per play) suggests that ~200 plays of a given track would be required for an artist to earn as much revenue as they would from the sale of a download. By way of comparison, Last.fm scrobbling indicates I’ve listened to Moderat’s A New Error more than any other track, for a total of 144 times.
Radio (Pandora) makes it easy to listen to a particular style of music, with less control but the ability to be lazy; once I’ve discovered new music through radio or friends, I can listen to exactly that track or artist, whenever I want, on an on-demand service (Spotify). The former promotes the sale or rental of music, while the latter — a rental model itself—largely replaces the need for listeners to purchase downloads on iTunes or another digital music store [ed. note: I agree].
In my next post, I’ll highlight the size of the markets for these two types of music consumption.