Facebook’s digital music partnership sparks industry optimism

Mike Swift Mercury News 10/15/11

Facebook CEO Mark Zuckerberg is already a rock star in Silicon Valley. The next year will likely determine whether he becomes a rock star in the music industry as well.

That industry, suffering from declining sales and revenue, is counting on Facebook’s plans for digital music sharing to give it a boost.

By allowing Facebook’s more than 750 million users to see what songs their friends are listening to, and then instantly click on those tracks through Facebook-integrated music services like Spotify, Berkeley-based MOG and San Francisco-based Rdio, the hope is that people will discover new music they would be willing to pay for, either by subscribing to a streaming service, attending a concert, downloading tracks from iTunes, or perhaps even engaging in the quaint behavior of buying CDs.

“Facebook could be a tremendous outlet to supercharge people’s awareness of these services,” said Rdio CEO Drew Larner. “Subscriptions could be the driver to get revenue moving in the right direction, so the music industry can move back toward where it was. Will it ever be where it was? I don’t know about that.”

It’s been nearly a month since the announcement at Facebook’s annual developer conference of its partnerships with Rdio and other music services. That’s too soon for a definitive answer about whether Facebook will reboot the music industry. There are early signs for optimism, as well as pessimism.

The industry, which saw U.S. music sales and licensing revenue plummet from $14.6 billion in 1999 to $6.3 billion in 2009, needs to find an answer to still-declining sales of CDs, and the fact that just 44 percent of U.S. Internet users say recorded music is worth paying for, according to 2009 data from Forrester Research.

“We are bringing people back to paying for music again,” Spotify CEO Daniel Ek said last month when he and Zuckerberg took the stage at the conference to announce the marriage of social networking and digital music.

Still, for most artists, the revenue for streaming services is tiny, as little as a third of a cent per stream. Increasingly, they are dependent not just on selling recorded music, but on merchandising and concert tickets. In that sense, digital music on Facebook will be critical, said Aaron Ray, a partner with The Collective, the Beverly Hills management company for acts like Linkin Park, Counting Crows and Alanis Morrisette.

“There is definitely going to be a huge benefit to the artists, because the amount of conversations going on is going to increase substantially,” Ray said. “That is definitely going to help new bands. People who are friends of mine, who say, ‘I’ve never heard of this; I want to see what Aaron’s listening to,’ they definitely wouldn’t have found out about that without Facebook or Spotify.”

Bruce Houghton, editor of the music industry news site Hypebot.com, said: “Almost anything that brings the consumption and discovery of music back into the legal and monetizable realm is worth exploring.

“We don’t have a choice,” he added. In terms of people’s expectations of being able to listen to music free online, “they let the cat out of the bag a long time ago.”

The man who opened that bag, Sean Parker, is also the man who connected Zuckerberg and Ek. It was Parker who helped disrupt the music industry in 1999 when he and Shawn Fanning launched the free online music sharing service Napster, which quickly grew into a service where millions of people were swapping music online. The federal courts ultimately shut down that business model, and Parker went on to become Facebook’s founding president. He is now on Spotify’s board.

The integration of Spotify and Facebook “is very similar to what I dreamed of 10 years ago” with Napster, Parker said at a lavish party in San Francisco the night of Facebook’s f8 developer conference, where pigs roasted on a double-decker spit, and the talent on stage included Jane’s Addiction, The Killers and Snoop Dogg.

For any online music service to succeed now, Parker said, it has to be easier and better than swapping copyrighted tracks online. “Solving the piracy problem can’t happen unless you build a service that is more convenient than piracy,” he said.

Services like Spotify, MOG and Rdio are often called “freemium” services. At least initially, they allow users to access their multimillion-song catalogs for free, but offer a premium subscription service at prices ranging from $3.99 to $9.99 a month that provide access without advertising, or with enhanced features like access from a smartphone. Unlike Apple’s (AAPL) iTunes, listeners don’t actually own their digital tracks, but instead rent access.

The partnership with Facebook, announced Sept. 22, is helping Spotify already. The Sweden-based service already has seen a 25 percent jump in paying subscribers, to 250,000, in the U.S. and eight other countries, according to a source with knowledge of the company’s subscription base. Other music services are also optimistic. “It’s creating more subscribers, and it’s on a fairly steep curve,” said Slacker Radio senior vice president of marketing Jonathan Sasse.

But Inside Facebook, a research firm that tracks the social network, released a study this week showing that none of the top 20 musician pages on Facebook have seen any appreciable growth in the rate of new Facebook Likes since f8, said Josh Constine, the lead writer for the research firm. That’s critical, because bands like Linkin Park, with 35 million Facebook Likes, rely on the social network to alert fans to concerts and new music.

Constine said the problem, however, is that Facebook does not make it easy to find the Like button on an artist’s page from the link that recommends friends’ music.

“Just because in these first few weeks that Facebook musicians’ pages aren’t growing significantly, I don’t think that’s necessarily a reflection of how the music-sharing partnership will reflect on the music industry,” Constine said. “I think seeing music sent from your friends is going to make people listen to more music, and spend more time using music services like Spotify. In the long term, people listening to more music is what drives those other revenue streams for artists.”

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