Licensing Music Streaming’s All-Of-The-Above Business Model

There’s an old adage in business that there really are only three fundamental business models in the world: I pay, you pay, or somebody else pays. Music streaming services have been built on each of those.

Music has been bundled in with other services at no apparent additional cost (I pay); it has been offered as a subscription service (you pay); and it gangnam1has been made available for free, supported by advertising (somebody else pays). Increasingly, however, streaming services are looking to multiple business models in search of still-elusive profits.

The latest case in point: Pandora. Originally an ad-supported internet radio service, it spent $450 million last month to acquire music concert ticketing and promotion service Ticketfly. This month it dropped another $75 million to buy parts of paid-streaming service Rdio at the latter’s liquidation yard sale.

In a conference call with investors to discuss the Rdio deal, Pandora CEO Brian McAndrews explained the strategy this way:

The music industry’s brightest future lies in the monetizing the entire spectrum of music listening; from ad-supported internet radio to full on-demand paid subscription.

Nobody has the assets to monetize music like Pandora…It is notable that the more than $1.5bn in royalties we’ve paid came from converting listeners from broadcast radio to our superior listening experience, which pays significantly more in royalties to the music industry.

As we look ahead we see the opportunity to match our audience with an offering that best suits their needs, and optimizes the average revenue per user of all music consumers.

As discussed here in a previous post, YouTube is also well -along in trying to be all things to all listeners. With the launch of YouTube Red you can now stream all the music videos on YouTube on either a free, ad-supported basis, or an ad-free, subscription basis. The subscription also gives you access to Google Play Music and an audio-only YouTube Music app.

Apple Music offers ad-supported internet radio, through Beats 1, as well as a on-demand streaming for a fee. Apple also of course continues to offer paid music downloads through the iTunes Music Store. Spotify offers both ad-supported on-demand streaming as well as an ad-free paid tier. It wouldn’t be surprising if Spotify were to start feeling pressure to layer on additional options, such as off-line listening and live programming.

The reasons for the growing popularity of all-of-the-above offerings are not hard to discern. To date, no one business model for music streaming has proved particularly, if at all, profitable on its own. With largely comparable libraries of music, moreover, it’s difficult for services to differentiate themselves. So, once customers are in the door you want to be able to meet as many of their music listening needs as possible. Finally, the shift from a high-margin sales-driven music economy to a low-margin access-driven one has put a premium on offering as many points of access as possible.

Problem is, an all-of-the-above business model is a very awkward fit with traditional licensing practices, as well as with basic copyright law on which the licensing system is built.

As a business matter, content companies have historically been loath to grant different types of licenses to the same licensee. Not only does it add ambiguity to the accounts receivable, it encourages monopsony by making it more difficult for more vertical, specialized customers to compete. Content companies generally do best when rights are kept discreet and multiple distributors compete within each channel.

Evolving consumer habits and preferences, however, are making that licensing model harder to sustain for music companies. If it turns out the only way to make money in the music streaming business is to “monetize the entire spectrum of music listening,” as Pandora’s McAndrews put it, streaming licenses are going to have to get more comprehensive and, inevitably then, more complex.

Crafting all-of-the-above streaming licenses without losing pricing power will challenge the ingenuity of music company lawyers. But it’s also, unfortunately, likely a formula for greater opacity into the already-murky realm of royalty payments for recording artists and songwriters, despite the enhanced ability to track every use of a song or recording provided by digital technology. As multiple types of rights fees get bundled into a single licensing deal with a streaming service, teasing out what is rightfully due to whom under prevailing royalty rates and individual contracts can only get harder.

Bringing light into the murk won’t be easy, either, given music’s complex web of compulsory licenses and rate-setting proceedings. The structure of copyright law in general, in fact, with its collection of distinct and separable rights (reproduction, distribution, public performance, etc.) is premised on the licensing of discreet uses of individual works. Copyrights can be conveyed in toto, but they’re designed to be exploited in detail. As far as music is concerned, its a round hole for an increasingly square peg.

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