“Steve Jobs eviscerated the music industry with the launch of iTunes… and it’s been downhill ever since.”
The stinging words of Pandora CFO Mike Herring at a California investor conference yesterday.
Yep, we really are talking about that Pandora.
Sometimes, you just have to stand back and bask in the chutzpah.
After more than a decade of being lambasted for its pitiful royalty cheques, Pandora is on the offensive. It’s evidently not scared to fight dirty.
Before the Father of Apple came in for a rollicking, it was Spotify’s turn for a ‘value of music’ diatribe.
Pandora CEO Brian McAndrews last week savaged free on-demand services which allow users an unlimited musical selection.
“I would argue that an on-demand on-ramp is one thing; a permanent, free on-demand highway is another,” he wrote on Business Insider.
“The first is good for the long-term health of the music industry. The second is not.”
There are comparisons here to the Donald Trump book of political maneuvering.
Mask your flaws by berating those you wish to paint as enemies.
Shoot enough arrows, we’ll forget you’re carrying a machete.
Pandora’s manufactured fury about the sacrosanct value of music is derived, at least partially, from a place of panic.
As reported on MBW last week, the service has seen an eye-watering $5bn chopped off its market value in little over a year. Investors appear to be growing unconvinced by its promise of long-term profitability.
In reaction, Pandora has adopted a new multi-pronged strategy: a service for artists that provides ticketing (through Ticketfly), market intelligence (through Next Big Sound), promotion (through AMP), commercial radio ad revenue (through its traditional radio tier) and – this bit is crucial – paid-for subscriber income, built using Rdio’s old systems.
Pandora certainly deserves plenty of brickbats for its past behaviour towards songwriters. Yet, whether through design or desperation, it’s now making a sincere attempt to build the first holistic streaming platform, with multiple arteries pumping life into all areas of an artist’s income tree.
To pull this off successfully, Pandora’s going to need interactive licences from many more publishers than BMG, Sony/ATV and SONGS. That’s before it even thinks about how to catch rivals who are already miles ahead in many key territories around the world.
However, Pandora already has 78m active users in the US alone, and that’s a powerful start.
Its immediate problem: almost all of these people aren’t paying anything. The existing paid-for Pandora tier, Pandora One, is a certified flop.
Indeed, it’s a little rich of McAndrews to harangue Spotify for its ‘free on-demand highway’ when the green machine is so much further ahead in terms of a free-to-paid conversion (see below).
Spotify is also giving back significantly more than Pandora to music industry rights-holders, by the way.
In 2014, Pandora accrued $920.8m in revenue. Its overall cost of sales – the vast majority of which were made up of royalties paid to publishers and labels – hit $508m, or 55% of total revenue.
In the same period – based on end of 2014 exchange rates – Spotify amassed $1.31bn in total annual revenue.
Yet Spotify’s 2014 cost of sales stood at a whopping $1.06bn, or 81% of its total revenue.
Again, the vast majority of this figure went to music rightsholders.
In the light of such figures, Brian McAndrews’ argument against Spotify’s freemium model for “the long-term health of the music industry” feels a little hollow.
Not that it matters.
Spotify hasn’t lost the freemium war, but it’s conceded more territory than many thought possible.
The service now seems poised to allow some artists to place music exclusively on its premium tier – whether that’s permanently or ‘windowed’ for release week.
The only way this can logically work in practice if if artists are permitted to decide where on Spotify they want their music to be.
Cue a painful clash between self-value and real value.
As soon as these floodgates are opened, Spotify’s free tier will inevitably become a significantly less exciting place to be.
Yet those weeping for the death of Spotify’s ad-supported bonanza are forgetting something: it’s only for a quirk of recent history that freemium was ever allowed to bloom in the first place.
As sites such as The Pirate Bay (not to mention YouTube) were left unfettered by international lawmakers, Ek’s argument in the lead up to Spotify’s 2008 launch – basically, hi guys, nice to meet you, we’re your best worst option – was cast-iron.
This year, despite all of Spotify’s success, that contention has started to look a little more fragile.
Witness the recent launch of YouTube Red in the US and SoundCloud‘s supposed commitment to introducing a paid-only product. Plus, obviously, the arrival of Apple Music and Jimmy Iovine’s unyielding attack on all things unpaid.
If Ek’s offer of all music, all free, all the time was forever destined to be quashed, therefore, you have to say he’s made the most of it.
By ‘rescuing’ an industry plunged into paranoia and desperation by piracy, Spotify has raced to a near-100m user base (and an $8bn+ pre-IPO valuation) with what hindsight may prove was a once-in-a-generation freedom to dice with price.
Whether or not Spotify should be allowed to continue with its freemium model unencumbered – whether, for example, it could have reached a billion users with a 27% conversion rate – is a moot point.
Spotify might not be delighted that its all-free offering is being curbed by aggressive label licensing, but at least everyone else will have to play by the same rules, as Aurous founder Andrew Sampson found out to his cost ($3m) earlier this week.
So while Brian McAndrews is slating Spotify’s free advantage, Daniel Ek‘s company is already 20m+ active users ahead of Pandora.
Catch us if you can.
In amongst all of the debate swirling around the availability of free music, it’s worth remembering that Apple Music wasn’t the only thorn in Spotify’s side this year.
After a farcical celeb-strewn launch press conference, TIDAL hasn’t garnered the most revered of music industry reputations.
Obviously, Jay Z wanted TIDAL to make him some cash, and he might still be able to flip it to a bigger player for a handsome sum.
But when TIDAL first arrived back in March, Shawn Carter also convincingly played up his role as artist rights warrior.
“We didn’t like the direction music was going,” he told Billboard of his motivations for paying €50m for the service. “We thought maybe we could get in and strike an honest blow… if the very least we did was make people wake up and try to improve the free vs. paid system, promote fair trade, then it would be a win for us.”
Stopped smirking yet?
If Spotify does end up caving on its formerly unbreakable windowing policy, history should not suggest this was Jimmy Iovine’s victory alone.
Because alongside Iovine and major label bosses Lucian Grainge and Doug Morris, there was another larger-than-life character leading the end-of-free crusade – one who also single-handedly gifted a vital straw-man to the paid-for-streaming lobbyists.
In fact, whatever becomes of TIDAL, Jay Z may have ended up sort-of dealing the killer blow to Daniel Ek’s addiction to free.
Here’s a scandalous theory: the new video for Coldplay’s comeback single, Adventure Of A Lifetime, is quite clearly a semi-ad for the new Beats Pill speaker, peddled by the good folks at Apple.
What’s the betting that Apple paid for this hi-tech production?
And what’s the betting that Coldplay’s album, A Head Full Of Dreams, was intended to be an Apple Music streaming exclusive in exchange… before all parties remembered that Chris Martin actually owns 3% in Jay Z’s rival service?
That may have proven a feasible factor in the never-before-seen outcome of Coldplay’s latest album – one of 2015’s biggest releases – being issued on all paid-for services, but not Spotify (for a week).
Chris Martin’s mini-snub of Daniel Ek came just days before we learned that Spotify’s freemium stance was on the verge of crumbling. To the public, this move appeared very much like a political statement regarding, as Jay Z would have it, “the free vs. paid system”.
Was Coldplay’s decision the gust of wind that started a freemium TIDAL wave at Spotify?
In a week where Pandora, of all parties, is accusing Steve Jobs of “eviscerating” the music industry, stranger things have happened.
