Music Streaming Companies Cannot be Funded by Advertising

Came across this interesting article on Techcrunch about Music Startups. It might not be directly relevant to the gist of this blog, but in a way it is. Most of the music stream services such as Spotify, Deezer and Imeem claim that their aim is to provide a free service that is funded by advertising. But how realistic is it that they will be able to do this? Let’s take a look at some numbers and calculations.

Techcrunch writes that the music stream companies pay $0.4 – 1 cent each time a song is streamed. Myspace is probably the company that pays the lowest cost in the industry at $0.4 cents. If Myspace is paying around that amount, then it is very likely that most other streaming services – especially the startups – pay at least twice that. So let’s use the Swedish hype company Spotify as an example. Spotify are not commenting on the number of users they have, but it is likely to estimate the total number to around 1 000 000 users. If only 50% of these users use the service once a day, to listen to one song, and Spotify is paying $0.8 cent for each song then they’re paying $40 000 USD per day or a staggering $280 000 USD per week. Sure, they have their premium service, but since the free version is so good (or good enough) there is no real reason for users to upgrade to premium. The monthly streaming cost for Spotify – given the 50% usage out of 1 000 000 users – ends up being roughly $1,1 million USD.

The question is then; can this be funded by advertising? My answer to that would be no freaking way! You have to remember that there are a lot of other costs to have in mind on a monthly basis as well; the servers and employees just to name a few. Advertising and premium accounts will never be able to fund this. The larger they grow, the higher the costs; it doesn’t seem as the in stream from advertising can catch up with the costs of the company; in a way it’s a paradox because it is slowly bleeding to death as it grows.

Let me show you why it seems impossible for a company such as Spotify to generate their major in stream from advertising:

Spotify is doing some banner adverts directly in the music player, but the idea is to use audio adverts that the user cannot get away from unless they pay for the premium version. However, these two formats combined cannot fund the company. The reason is simple; the calculation above doesn’t even allow a radio jingle to take place, it is the mere cost for one single song. If Spotify charges reasonable radio prices in Sweden for example, they would get around $6 CPT (which is the same as CPM) for a 30 second jingle. So for each 1000 users they reach, the advertiser pay $6 dollar. In Sweden we have around 9 000 000 inhabitants. If Spotify would reach 1 000 000 Swedes they would get $6 000 USD for one campaign with 30 second jingles. But the cost for this reach would be $80 000 USD each time the users listen to one track (1 000 000 / 0.8). This in turn means that for one hour (60 minutes) where 1 000 000 users listen to music nonstop, where one track is 4 minutes in average, the cost ends up being: 60 / 4 = 15, 15 * $80 000  = $1.2 million USD. During this hour they might get in four advert jingles (2 minutes in total), so let’s say they make the most of it and get 4 * $6 000 = $24 000 USD. This is still nothing compared to what that hour has drained from them.

As you can see it is a dead end. If they increase their rates the advertisers will just go elsewhere with their budgets, especially in these days where each marketing penny is spent with the most possible caution. Unless they get some truly amazing deals with the record labels, there is no way they will be able to turn this around. In fact – just as TechCrunch mentions – the music stream companies probably don’t even want people to use their service, because they know each new user means a faster death. This is probably the explanation for why Spotify’s free service has been an invitation only-service for ages. No wonder those invitations were given out so sparsely.

To sum it up; music streaming startups are popping up quite rapidly, and they always seem to bring hype. The service is indeed interesting and you cannot blame entrepreneurs when they do what they’re best at. Sadly it almost seems that the aim of many of these stream service companies today is to just build the hype and then sell off to some major company and let them figure out how to turn things around. If not, then it is even sadder because most of these companies will probably bleed out in a very near future.

Soheil Amorpour, CEO @ CPerspective Online Marketing Agency