Rankings: Spotify Leads the Streaming Music Scene

1Executive Summary

If the music business’s last decade was all about a transition from physical products to digital ownership of music, the current one could well be about a shift from owning song files to having access to streams via a subscription to a massive library of songs. It’s been promised for some time that music fans will be able to hear any song, anytime, anywhere, for a flat monthly fee. Only in the past several months, however, have device proliferation, inexpensive storage and bandwidth, and pervasive broadband coverage made ubiquitous access a reality.

New services are springing up to compete with incumbents, which are just beginning to break into the wireless mobile sector, and the new market for music subscriptions is taking shape. Several key factors differentiate the players; some have significant free components that allow ad-supported streams, while others bundle MP3s or give them away as free teasers. Some include Internet radio stations built around an artist or a song. Prices vary from $5 to about $15 monthly, depending on a number of factors.

Market History

Taken en masse, music subscriptions look like an increasingly credible alternative to Apple’s iTunes, which still dominates the digital music market by focusing on ownership of downloadable song files. Historically, though, consumers haven’t embraced music subscriptions as warmly as expected. Neither Rhapsody (in the process of being spun out by longtime parent company RealNetworks and minority owner MTV Networks) nor Napster (acquired in 2008 by Best Buy) ever reported 1 million paying subscribers, despite being launched early in the last decade.

Why has it been so difficult for such models to gain traction?  For starters, consumers have always viewed music they like as something to own; getting music buyers to convert to streaming audio doesn’t compare directly with convincing filmgoers or DVD renters to watch movies online via Netflix. Moreover, a downloaded MP3 file can be burned to CD, e-mailed to a friend, shared via a thumbdrive, and even edited on the desktop, whereas streams are less malleable. Playlist sharing and social music services have made streaming services more appealing, but most consumers haven’t yet demonstrated that they’ll pay for those things — especially as free options have improved over time.

The magic bullet, most of these services seem to believe, is mobility. On-the-go access is a pleasure, but if consumers haven’t yet shown that they’ll pay as little $5 each month for all the music they can play on the desktop, will they pony up close to $15 to add a mobile component? Some analysts have been bearish, and Rhapsody continues to bleed subscribers despite the new availability of its mobile apps. In a research note last fall, JPMorgan’s Vasily Karaysov wrote that Rhapsody’s subscriber base “reflects the existing demand for a subscription-based music service irrespective of the device on which it’s available.”

Today’s Marketplace

But both desktop products and mobile applications are improving, and investors are showing confidence in new entrants with varying models. Spotify, which has bent the ears of 7 million users in Europe – 250,000 of whom are paying for its premium version – has taken in $50 million, with its most recent round at a $250 million valuation last summer. MOG, which doesn’t have a free component beyond its free trial, has earned the backing of Menlo Ventures, Balderton Capital and two major record labels. What’s more, Warner Music chief Edgar Bronfman Jr. reiterated his enthusiasm for innovative subscription models last month, while expressing that the label is finished working with free ad-supported music models.

Prices are falling, with desktop services going for about $5 monthly and mobile ones for $10-$15. A massive library is imperative; for an all-you-can-eat service to be worth the money, it’s got to have everything consumers will want. Much of the enthusiasm for Spotify centered on its user interface, and most of the newer companies are taking cues from iTunes’ user-friendly design. Some companies are giving away MP3s or free streams, while most include Internet radio functions and social discovery components. And the mobile factor may be the biggest differentiator of all.

All digital music services that cost money also compete with both licensed and illegitimate free options, in a marketplace that increasingly views access to songs as free. Consumers have repeatedly demonstrated a hunger for free music that’s coupled with an aversion to pay walls — an issue that even plagues Spotify itself, since its conversion rate of free to paying customers isn’t high enough to offset the cost of song licensing. MOG’s David Hyman told me recently that the company simply assumes that music is free, and tries to build something else people will pay for. That’s about as realistic a philosophy as I’ve heard, especially coming from someone trying to crack the subscription nut.

Rankings

In assessing the subscription music marketplace, I’ve isolated five key differentiators among several offerings in the field: price, library, user experience, free vs. paid incentive, and mobile offering.

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Figure 1. Comparison of streaming music services in 10 categories. Click image to enlarge chart

However, the products themselves won’t be the only factors that determine which players will win in the marketplace. History is not easily forgotten, and despite changes in the landscape, current market position comes into play, as well. Some have deep-pocketed parent companies, while others have taken in large amounts of venture funding. Some have been around for years, with hundreds of thousands of customers and distribution deals with retailers and carriers, while others are freshly launched or still on the brink, with a kind of momentum stemming from a sense that they’re next-generation services that will surpass the incumbents.

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Figure 2. Ranking of streaming music services. Click image to enlarge chart

Spotify has provoked sufficient European enthusiasm for its attractive product, coupled with high investor confidence, to warrant the top rating, although questions concerning the launch of its U.S. product keep it from outpacing incumbents Rhapsody and Napster by a larger margin. The inspired MOG product and mobile-oriented Thumbplay, also well-financed, figure to grab significant market share. Zune‘s relatively frosty consumer reception and high cost doesn’t bode well for it, although its association with Microsoft and existing customer base prop up its score here. Meanwhile, the enjoyable Grooveshark is almost exclusively turning out to be a free service rather than a moneymaker, and Play.me lags far behind, with only two major labels on board. The wild-card entrant remains the unlaunched Rdio, created by well-connected serial entrepreneurs who have kept it under wraps thus far.

What to Watch for

Whether consumers warm up to the idea of paying to rent music by the month will also depend on what Apple does with its acquisition of Lala.com, which approaches cloud-based music with a philosophy that consumers still want to own their music, whether as a stream or a song file. (See also Kevin Tofel’s analysis here.) My conversations with Lala management before the acquisition showed little enthusiasm for the subscription model, which Apple has never embraced. Apple is already in a position of dominance in digital music, and if it can create a compelling cloud-based service, consumers might not bite for new subscription services any more than they did for the old ones.

In addition, while most of these services are still primarily standalone offerings that consumers sign up for on the Web or via mobile apps, they won’t always be just that. Mobile carriers and handset makers see them as valuable partners for bundled access models, in which they charge for music services along with device purchases or connectivity fees. Alliances with key carriers could drive a shakeout, while acquisitions may loom as smaller companies fail to keep up. Already, Verizon has a distribution agreement with Rhapsody, Google was said to be contemplating a partnership with Spotify for its Nexus One phones, and Om also suggested last year that Nokia might buy Spotify. Thumbplay, which offers other mobile entertainment, could be a target for a cellphone provider as well.

Download the comparison chart as a PDF.

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12 Comments Subscribers to comment

  1. Great overview of the options. I’ve been hoping for a subscription service as easy to use as iTunes forever — would you say Spotify is that?

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  2. Great overview, Paul. I confess that I am still not quite taken with services like Spotify though, and I know a lot of friends who also don’t find subscription services appealing. Maybe Apple will be able to make a difference, I don’t know — either way, it will be interesting to see what happens.

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  3. Thank you for the overview. In Norway we have two competing music services namely spotify and wimp. Many users in Norway is reporting that the main challenge when everything is available is to decide what to listen to. I am a user of both spotify and wimp, and are experiencing some very interesting differences. Spotify have a great user interface with an amazing iPhone client. Their new client make it easy for me to connect with friends on Facebook to be inspired from their playlists when deciding what to listen to. Wimp have partnered up with Norways leading music store and media companies, and are inspiring me by giving me editorial advices on what to listen to. Wimp also have a better music catalog when it comes to local music, but lacks an iPhone client.

    I have not made up my mind, but when all content is available I think the key asset will be how the applications are performing in recommendation and inspiration.

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