Thursday, October 8, 2009

Analysis: The Cost of Streaming Billion of Songs

Previous posts of mine have been focused around on demand Internet streaming music services and their benefits/impact on the music industry. These services have gained massive attention in the public eye however, they have come at a very hefty cost. (To understand the articles thesis, I will use the example presented in the article). Assume Spotify is streaming 2 billion songs per month. Second, assume 90% are interactive and 10% are non-interactive. Third, the "interactive" royalty rates typical for the U.S. (we will use .75 cents per stream-midpoint of a typical range of .5 to 1.0 cent per stream ). Lastly, the non-interactive rate we will use .093 per stream set earlier this year by the Copyright Royalty Board for non-interactive webcasters. Overall, the blend of the two royalty rates are weighted at 90/10 (interactive/non-interactive), is 0.6843 per stream. Two billion songs per month generates royalties of $13.7 million per month, or $164 million per year considering our numbers above. Most importantly, lets say the company wanted to operate on 40% gross margin. A 40% margin would require about $274 million in TOTAL REVENUE. Spotify could meet this goal by having 1.52 million subscribers pay the $15 a month or it could run 13.7 billion audio ads at $20/CPM. Sure these are all made up numbers but this article shows the harsh reality of streaming music. Streaming music is not cheap however to combat these costs I think the company should focus on technological innovations. In addition, Spotify could transform their business model to a non-interactive business which would save millions. The future of these Internet music services evolve around basic business operation principles. In order to succeed, continuous innovation and massive scale is vital. Offering users a better experience creates interests among music fans. Most importantly, to retain these individuals attention, extra value (selling downloads, tickets, subscriptions) should be offered to ensure profitability.
-Ryan Dolan

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