Can Ads Drive Mobile Music Revenues?

The ailing music industry is increasingly looking to offset plummeting CD revenues by leveraging phones as digital-age retail counters. But as ringtone sales continue to slide and full-track downloads struggle to get legs, advertising dollars may be the last, best hope for the record labels.

A new report from Juniper Research predicts modest growth for mobile music over the next five years, with revenues rising to $14.6 billion in 2013, up from $11 billion last year. Full-track downloads and streaming services will fuel much of that expansion, according to Juniper, as faster networks and more sophisticated handsets spur consumer spending.

I’m skeptical about even those tepid forecasts for full-track sales and premium streaming offerings, however. Margins from digital music sales are notoriously thin (which is why Apple views iTunes as a way to drive sales for its lucrative hardware), and those margins get even less attractive when songs are accessed over cellular networks, where bandwidth is at a premium and data-heavy deliveries are more costly. Pumping up the price points for the most in-demand tunes hasn’t helped, either, serving only to slow sales of higher-priced tunes. And online streaming services such as Napster and Real Networks’ Rhapsody have failed to draw much of an audience, providing evidence that consumers are uninterested in renting tunes, too.

But free, ad-based services — which have struggled for years — may finally be finding an audience. Pandora, which creates personalized “radio stations” based on users’ tastes, is reporting an 80 percent increase in quarterly ad revenues over last year, thanks largely to usage on the iPhone (5 million downloads) and BlackBerry devices (1 million devices).

Just as importantly, the record labels — which typically demonstrate about as much foresight as a U.S. automaker — are beginning to warm to ad-supported, streaming music-recommendation services in recent weeks. Warner Bros. and Universal Music are restructuring royalty deals with startups like Imeem, and PRS, a UK-based songwriters’ alliance, recently relaxed its streaming rates.

These pacts should have been struck years ago, of course. The mobile phone has the potential to be the digital equivalent of the transistor radio, exposing would-be music buyers to tunes from artists they might never otherwise hear. And, like the decades-old radio model, it can be fueled by advertising.

Ad revenues may be tough to generate in mobile music, especially in a down economy. But on-the-go music recommendation services have the ability to deliver remarkably targeted ads, and to deliver consumers to mobile content storefronts with a single click. Given the dubious prospects for other mobile music offerings, ad-supported streaming services may be the best hope for a music industry in dire need of a hit.

Question of the week

Will advertising dollars play a major role in mobile music revenues over the next three years?
Relevant Analyst
Colin Gibbs

Colin Gibbs

Founder and Principal Peak Mobile Insights

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