Karibi Dagogo-Jack, MBA Class of 2014
Eighteen months ago, Beats by Dre announced that they had purchased the struggling streaming music service MOG for $14 million. Many tech and music writers rushed to crown Beats the new king of streaming music. Those writers predicted that Beats Music (then called Daisy) signified the end of Spotify, Pandora, and even iTunes. They speculated that Beats would have a grand plan to use their overpriced and overstuffed headphones to direct consumers to their music service and vice versa. They drooled over Dre & Iovine’s candlepower and all the ways that those two music industry stars could leverage their insider status. Most of all, the writers talked about fanfare.
Fanfare – in its various disguises as marketing, user acquisition and promotion – remains the main shortcoming of the streaming music business. The best companies are relatively unknown and the worst are invisible. It seemed obvious that Beats would use their exceptional marketing might to easily overcome their competitors’ first mover advantage, just as they had in the headphone business. It’s telling, then, that just a month after Beats Music’s official launch, much of the fanfare around the company has gone quiet. The Beats Music product is buggy, blocking out new registrants and crashing unexpectedly. Despite being able to cherrypick the best of all their competitors’ features, Beats Music flubbed social integration. They promoted a music recommendation and curation capability that falls short of what’s already available. Beats Music was supposed to be a story about how marketing nous could be an insurmountable competitive advantage, instead it’s started off as yet another cautionary tale about the siren song of the streaming music business.
First of all, the streaming music business is way too sexy. And for being such a sexy business, streaming music is way too easy to enter. All you need is money. (I ain’t saying she’s a golddigger.) Every billionaire bored of optimizing operations at payday loan chains, looks to entertainment or tech as a way to get invites to the cool parties. Streaming music just happens to be a perfect blend of both worlds. It costs the record labels nothing to say yes, so they gladly humor everyone with a business plan and a certified check. As a result, each on-demand streaming service offers up essentially the same content.
Dre & Iovine had to have known this. They had spent decades on the other side of the table, cashing checks from suckers. In fact, MOG was one of those suckers. In its seven years of existence, MOG struggled to distinguish itself from Deezer and Grooveshark and Rdio and rara and Lala and new Napster and Xbox Music and Sony Music Unlimited and Rhapsody and slacker and last.fm and all the other losers circling the drain. In the process, MOG burned through more than $30mm. Then, somehow, Dre & Iovine miraculously swung at their pitch. Actually, it was probably the other way around. Beats has been built on the ability to seduce partners until they can discard them. Their headphones were initially made by a small high-end electronics company named Monster. In fact, it was Monster’s idea to make high-end, celebrity-branded headphones (Iovine & Dre were initially interested in making speakers). When Taiwanese electronics giant HTC approached Dre & Iovine offering billions to replace Monster as the manufacturer, those two used their superior legal team to walk away from Monster and take all of the patents, designs and trademarks with them. Charming.
Maybe Beats’ predatory instinct is what draws them to streaming music. In the end, on-demand streaming music will be a winner-takes-all business. For any streaming music enterprise to satisfy its tripartite mission to make money for musicians, the enterprise itself, and the record labels, it has to reach a critical mass of users. Right now, the largest on-demand service is Spotify with less than 30 million users. That’s far below critical mass of about 500mm. In fact, if all current streaming music service users were combined, they would fall short of the magic number. At 500mm users, streaming music is a $6-10BB industry. That would easily replace the $3-$6BB that iTunes generates (with 575mm registered users).
In the weird world of streaming music math, double the users can be well more than double the profit. Paying users will always generate the monthly subscription fee. However, the users that listen for free in exchange for commercial interruptions become much more attractive as you get more of them. This is due to advertisers seeking mass audience (e.g. a Super Bowl ad) and targeted audiences (e.g an ad in Cigar Afficianado). A streaming music service is attractive to an advertiser when it can demonstrate that it has a large audience and even more attractive if it can demonstrate that it knows exactly who is in that audience. Therefore, ad-supported streaming music is a major draw for advertising dollars at scale. This alone should be enough to incentivize all three parties – the musicians, the service, and the record label – to steer listeners to one major service. However, years of exploitation and backstabbing have made musicians, record labels, and tech companies very wary bedfellows.
One of my favorite records of 2013 was Amygdala by DJ Koze. It’s a techno record that is better at low volume and it urges you to think more than it compels you to dance. Its centerpiece, “Homesick,” is a subtle and beautiful remake of a Kings of Convenience song. “Homesick” is Koze’s 5th-most popular song with less than 247,000 listens; Korn’s 5th-most popular song has well over 7mm listens. To clarify, Korn is the worst band on Earth. Amygdala is the sort of thing that would be gathering dust in a crate in 1998. Or it would be squirrelled away unbeckoned on some faraway iTunes backup server in 2005. In 2013, it was my Spotify frontpage recommendation on its release date. This is supposed to be what tech can bring to music. I’m supposed to get “Homesick” and seven million other clowns are supposed to get “Freak on a Leash.” Musicians are supposed to benefit with or without fanfare.