Smaller music companies find it hard in face of offerings from big technology groups

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Robert Cookson, FT.com 12/13/15

Smaller music companies find it hard in face of offerings from big technology groups

Singers such as Rihanna have embraced streaming services
For record labels, music streaming is big business. They earned $2.2bn from services such as Spotify, Deezer and Pandora last year — a figure that has quintupled in five years. It is also a golden age for music lovers, as listening to songs has never been easier.
But for the streaming services themselves, survival is a struggle. None of the most popular services has ever turned a profit and some people doubt any of them ever will.
Last month, Rdio, a US-based streaming start-up launched in 2010 by Skype founders Niklas Zennström and Janus Friis, filed for bankruptcy — owing its creditors more than $210m. Pandora, a larger rival, plans to buy some of Rdio’s assets for $75m.
A month earlier, French streaming service Deezer aborted an attempt to raise €300m in an initial public offering after investors baulked at its touted €1bn valuation.
The future appears bleak for companies whose sole business is music streaming. An increasing number of investors and people in the record industry expect that digital music distribution will be dominated by a few large, cash-rich technology groups — in particular, Apple, Google and Amazon.
“When you have the likes of Apple fighting against you, it becomes very difficult to survive,” says Mark Tluszcz, chief executive of Mangrove, the venture capital firm and one of the original investors in Rdio. It sold its shares several years ago after concluding that no matter how many subscribers the streaming service managed to attract, it would never be able to turn a profit.
“As a streaming platform, your relative value is nil, because you don’t own the content,” he says. “This is not a good business to be in.”
The fundamental challenge for streaming services is that they are largely at the mercy of music copyright holders — including Sony Music Entertainment, Vivendi’s Universal Music Group, and Warner Music Group. These three record companies alone control about three-quarters of the $15bn-a-year global recorded music market.

To stand a chance of attracting a large number of subscribers, a streaming service must offer a broad catalogue of songs from all three major record companies. That means that streaming services essentially have no choice but to agree the licensing terms demanded by the majors, no matter how onerous.
Even Spotify, the market leader in streaming, is heavily lossmaking. The company has more than 20m subscribers, who pay about $10 a month for on-demand access to a catalogue of more than 30m songs. It also offers a free version of the service, which gives users less control over what songs they hear and includes advertising.
Under the terms of Spotify’s licensing contracts, it must pay out 70 per cent of its revenues in the form of royalties to record labels and music publishers. As a result, while the company’s revenues surged last year to almost €1.1bn, it incurred an operating loss of €165m.
Spotify can absorb its losses for the time being. The company raised more than $500m this year in a funding round that valued the Swedish company at $8.5bn.
But venture capital has all but dried up for smaller streaming companies, and many are disappearing. The number of licensed digital music companies has declined by about 100 in the last three years to about 400, according to IFPI, a record industry body.

Anthony Bay, chief executive of Rdio, whose operating expenses were more than double its monthly revenues of $1.6m, says that “it’s incredibly difficult for an independent company to be successful in streaming, when no one in streaming is profitable”.
Making matters harder for independent operators is that they have to compete against technology groups that subsidise their streaming operations to achieve wider commercial goals. Apple, whose annual revenues exceed $230bn, has long used music as a loss-leader to help it sell devices such as the iPhone, first with the iTunes download store and now with streaming service Apple Music.
“Apple doesn’t care if the margins suck,” says Mr Bay.
Google, Amazon and a number of telecoms companies are also using music streaming to lure internet users into their spheres of influence — and are happy to pay record companies handsomely for the privilege. In the short term, this is boosting revenues for the record industry.
But Mr Bay warns the lack of profits in streaming bodes ill for the sector in the long term.

“There are no healthy industries on this planet where the distribution channels don’t make money,” he says.
Others are also concerned about the way that digital music distribution is evolving.
Lohan Presencer, chief executive of Ministry of Sound, an independent record label, says that “it’s very dangerous relying on companies whose primary business is not music to subsidise the music industry”.
One day, he forecasts, these companies will lose interest in music and they will seek to drive down prices.
Mark Mulligan, analyst at Midia Research, adds that if the record industry is to maximise its revenues from streaming in the future, the market “needs innovation from smaller players”. Allowing the technology groups to dominate, he warns, “locks the digital music market into a very narrow trajectory”.

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