A coda to my recent post on music streaming:

Despite the growth in Spotify‘s subscribers (and an apparent shift from free to paid-for services), it seams that the company still managed to make a loss. Over-paying for high-profile projects can’t have helped the balance sheet either….

Why is it so hard for Spotify to make money? In part, it’s because streaming has decimated the price point for content. This price erosion began with downloads, and has accelerated with streaming – premium subscribers don’t bother to think about how little they are paying for each time they stream a song, they have just got used to paying comparatively little for their music, wherever and whenever they want it. So they are not even having to leave their screen or device to consume content – whereas, in the past, fixed weekly budgets and the need to visit a bricks and mortar shop meant record buyers were probably more discerning about their choices.

Paradoxically, the reduced cost of music production (thanks to cheaper recording and distribution technology) means there is more music being released than ever before. But there is a built-in expectation that the consumer price must also come down – and of course, with so much available content, there has to be a law of diminishing returns – both in terms of quality, and the amount of new content subscribers can listen to. (It would be interesting to know how many different songs or artists the average Spotify subscriber streams.)

While some artists continue to be financially successful in the streaming age (albeit backed up by concert revenue and merchandising sales), it means there is an awfully long tail of content that is rarely or never heard. Even Spotify has to manage and shift that inventory somehow, so that means marketing budgets and customer acquisition costs have to grow accordingly (even though some of the promotion expenses can be offloaded on to artists and their labels).

Not only is streaming eroding content price points, in some cases, it is also at risk of eroding copyright. Recently it was disclosed that Twitter (now X) is being sued by music companies for breach of copyright.

You may recall that just over 10 years ago, a service called Twitter Music was launched with much anticipation (if not much fanfare…). Interestingly, part of the idea was that Twitter Music users could “integrate” their Spotify, iTunes or Rdio (who…?) accounts. It was also seen as a way for artists to engage more directly with their audience, and enable fans to discover new music. Less than a year later, Twitter pulled the plug.

One conclusion from all of this is that often, even successful tech companies don’t really understand content. The classic case study in this area is probably Microsoft and Encarta, but you could include Kodak and KODAKOne – by contrast, I would cite News Corp and MySpace (successful content business fails to understand tech). I suppose Netflix (which started as a mail-order DVD rental business) is an example of a tech business (it gained patents for its early subscription tech) that has managed to get content creation right – and its recent drive to shut down password sharing looks like it is paying dividends.

Of all its contemporaries, Apple is probably the most vertically integrated tech and content company – it manufactures the platform devices, manages streaming services, and even produces film and TV content (but not yet music?). In this context, I would say Google is a close second (devices, streaming, dominates on-line advertising, but does not produce original content), with Amazon someway behind (although it has had a patchy experience with devices, it has a reasonable handle on streaming and content creation).

All of which makes it somewhat surprising that Spotify is running at a loss?

Next week: Digital Identity – Wallets are the key?