Recent headlines about cloud-based services have breathed new life into a mobile music industry that has long failed to live up to its hype: The NPD Group last week reported that seven or eight million iTunes users would pay $10 a month for a cloud music service that gave them access to their music libraries across devices and platforms. Apple is building a service out of the ashes of Lala in what appears to be a transition to a cloud-based iTunes. Android 3.0 (Gingerbread) is expected to debut with Google Music, and Microsoft is making music a key component of its upcoming Windows Phone 7. Those behemoths will join veterans like Rhapsody and Thumbplay, and startups MOG and Rdio. The future of mobile music is so bright all these providers must be wearing shades. Right?
No. In fact, they should all grab flashlights and start hunting for viable business models.
Mobile carriers and record labels have pinned their hopes on mobile music since before the bottom fell out of the lucrative ringtone market. Sprint became the first operator to launch full-track downloads in 2005. At the time, Ovum was predicting the U.S. music download market would be worth $1.5 billion by, well, now. Verizon Wireless followed Sprint early the next year with its own V Cast Music, which was such a debacle it was overhauled 18 months later but still appears to have few fans. No other premium offering has made a dent.
There is no shortage of reasons for those failures (Sprint initially charged $2.50 a song!). Full-track services are substantially different than the cloud-based, subscription offerings that are coming to market; the former is an extension of the decades-old model of buying and maintaining possession of content; the latter usually enables users to “rent” vast portfolios for a monthly fee. But the economic flaw in both business models is the same: Delivering music to on-the-go users (via downloads or streaming) costs more over cellular networks than it does over the fixed-line Internet. And most music lovers aren’t willing to pay the premium.
While there’s an undeniable consumer movement away from syncing tunes and toward the cloud, the track record of online streaming services is only slightly better than carriers’ offerings. Yahoo two years ago killed its music service; Napster last year was forced to launch a $5-a-month plan along with its struggling, higher-priced offerings; and RealNetworks and MTV recently spun off their Rhapsody business to focus on projects that actually make money. Even Spotify, which has become a favorite in Europe, has repeatedly pushed back a U.S. launch as it struggles to build a solid business.
Adding mobile to the value chain only makes the business case that much more difficult to prove. Operators who shoulder the cost of delivering content over their networks want a piece of the pie, but margins in the subscription-music business are already razor-thin. And as AT&T’s data calculator shows, consumers on a metered billing plan (which soon will be most of us) can rack up usage pretty quickly listening to tunes on the go: Enjoying just one hour of streaming music every day eats up nearly half of the monthly data allotment on AT&T’s high-end plan.
There are alternatives. Kevin earlier this month reviewed a few services that upload users’ personal music libraries and stream them to handsets, and mSpot trotted out a similar — but flawed — free offering a couple weeks ago. Pandora, which serves as a personalized Internet radio, appears to finally be turning the corner financially. Also, Wi-Fi is always a great alternative — when it’s available. But delivering music via cell networks is simply too expensive to be the foundation of a business.
So startup service providers will have to continue to experiment with business models that couple premium offerings with ad-subsidized services, and will have to convert many of those freeloaders into paying users. Meanwhile, record labels could help themselves immensely by moving beyond per-song royalty structures and using the content itself to monetize concert tickets, t-shirts and other goodies. Those labels should also drastically lower royalties for players like Pandora, which exposes users to new music and makes it easy for them to buy what they want to keep. Because only one thing is certain in the world of mobile music: The old business models simply don’t apply.