The exponential growth of Internet bandwidth combined with the ability to significantly compress digital audio has impacted the music industry in numerous ways, for better and worse. Just as file trading created a massive network of pirated music, the ability to stream audio in real-time has allowed for a number of innovative content distribution and promotion methods.

i-0cfbf391b5e2c15a243b2c1c4b2260b3-napsterlogo.gif

Digital music streaming services have been around for over a decade. Companies such as Rhapsody, Napster, MOG, and We7 have experimented with various business models and user experiences, with mixed results. The traditional streaming model was based on an all-you-can consume subscription offering, occasionally supplemented with a very limited amount of downloads. Adoption has rarely met expectations, and long-term sustainable profit has been elusive for most companies.

Now, a new wave of streaming services such as Spotify are emerging. Can they succeed where others have failed?

Changing Consumer Behavior

The lack of adoption of music steaming services has been attributed to a number of factors. First, a culture of ownership based on decades of purchasing physical media has locked many fans into a set way of thinking about music consumption. There are millions of music fans that correlate paying to owning, not just listening.

Then there is the illegal downloads issue. Convincing someone to pay to listen is difficult when they can freely own all the digital files they can find. Recent IFPI numbers estimate that 95 percent of all digital downloads are still illegal.

In addition to having to change consumer habits, logistics have also been an obstacle to user adoption of streaming services. For the majority of the past decade, most services were only available via a computer, thus limiting the number of settings and situations in which a subscriber could use the service. Most streaming platforms have now begun releasing iPhone and Blackberry apps, which adds portability into the equation. Until recently, devices were not able to capitalize on the functionality that these services offer, but thanks to 3G and WiFi networks, the bandwidth finally exists to take streaming music almost anywhere.

i-329b650dbb67acc67fa44c087a534627-imeem.jpg

Subscriptions are not the only business model being used to monetize streaming. A number of ad-supported platforms have come and gone, such as imeem, which was purchased by MySpace late 2009. Imeem and similar sites (including MySpace itself) attempted to use the traditional media advertising model: Provide content for free, but surround it with marketing messages. Typically, this took the form of banners, sponsored promotions, and in-stream audio advertising. This model has also proved difficult to sustain long-term, due to the fact that royalties and bandwidth costs often exceed advertising revenue.

The New Wave of Streaming Services

Currently leading the charge in ad-supported streaming is Spotify. It has combined peer-to-peer streaming technology with in-stream audio advertising. Advertisements also appear on the user interface, raising the likelihood of user engagement. For users who wish to use the streaming service without advertising, and to have the option for higher quality audio, Spotify offers subscriptions in various configurations.

Due to licensing issues, Spotify is only available in a handful of European countries. Founder Daniel Ek previously expressed a desire to open in the U.S. by the end of 2009, but did not succeed. As discussed in a recent article on paidContent.org, the barrier to expansion seems to be licensing concerns, one of which is that U.S.-based labels are no longer satisfied with ad-supported free services and are only looking at subscription models. The most recent numbers show Spotify has 250,000 paying subscribers, compared to a free user base of six million.

The Path to Profitability

Content is key to the success of a streaming site, but adoption is still the ultimate issue. If consumers are focused on owning content, be it physical or digital, paid or illegal, streaming services will continue to have a major uphill battle.

i-343dacf96ee5a36da7c97d5aab328c17-lefsetz.jpg
Bob Lefsetz

In a recent Bob Lefsetz article, he addressed this issue, providing a detailed look at the obstacles standing in the way of mass consumer adoption. He also looked at how other industries have used bundling and focused marketing efforts to influence consumer viewpoints on renting content versus owning. Lefsetz states in his opening sentence that, “The recorded music business must switch to subscription, it’s its [sic] only hope of economic survival.”

His rationale for this belief is that iTunes and other a la carte purchase options are a losing battle regarding long-term revenue. Selling music track-by-track may be better than illegal downloads — but it’s still a poor economic model. By removing value from the album format (and losing its higher price point), the music industry has allowed customers to spend very little money. This means the business requires a much higher number of transactions to be profitable.

Lefsetz argues that by requiring users to pay one amount for massive amounts of music — essentially bundling content the way the cable companies do — the music industry is able to charge a much larger amount of people a higher amount of money. In exchange, these customers get all the music they can consume, across any device they want to use. Instead of paying $10 for storing 10 tracks, they can pay the same amount and have access to millions of tracks.

The continually dropping cost of bandwidth and massive connectivity available has set the stage for a profitable model in subscription-based services. The biggest challenge is to now convince consumers this is the best method for experiencing music. This job falls to the streaming companies and to the labels and artists that license the music. It also requires that the technology continue to offer more and more choice and convenience. In addition, a massive number of free users must be shown the value of converting to paying for listening, through higher quality audio and an ad-free experience.

As with almost everything in the music industry, the optimal streaming business model is still being figured out, but the emerging success of companies such as Spotify is showing a growing level of consumer adoption.

Jason Feinberg is the president and founder of On Target Media Group, a music industry online marketing and promotion company. He is responsible for business development, formulation and management of online marketing campaigns, and media relations with over 1,000 websites and media outlets. The company has served clients including Warner Bros. Records, Universal Music Enterprises, EMI, Concord Music Group, Roadrunner Records, and others with an artist roster that includes Har Mar Superstar, Flipper, George Thorogood, Steve Vai, Robben Ford, Chick Corea, and many more. You can follow Jason on Twitter @otmg