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Is music streaming becoming a mighty river?

Bishop Cheen. SNL Kagan Media & Communications Report (May 20, 2013).
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Public investors who may pay attention to the music business tend to own multimedia/tech big caps such as Google, Apple Inc., Amazon.com Inc., Sony Corp., Vivendi SA and/or supplier small caps such as digital storage company Fusion-io Inc. The music business has always been lumpy, just like any content-driven business (i.e., networks, movies, video games, comic books), because one hit can turn around a whole company. [...]it's Google's second shot, having launched an online music library in 2011 that pretty much went nowhere.
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I was struck on a few levels this week as news percolated about Google Inc.'s new subscription music streaming service, Google Play Music All Access.

How can the music business be so bad if so many big players want to distribute content? Is the music streaming business already overcrowded, or about to be? Can the heretofore beleaguered music content business also benefit in a sustainable way? And do investors care?

My short answers are (a) the music business is not inherently a bad business; (b) streaming is not overcrowded; (c) more distribution is a good thing now and longer term; and (d) public equity investors do not really care that much about the music business right now because there are so few direct plays they can make. The longer answers are more complex, perhaps less assured, as longer answers tend to be. I'll take the last question first because it is the easiest.

Music investors do care, but not universally. They are currently bimodal -- fixed income and private equity -- with not much available right now to excite public equity investors. There are few music stocks around now -- except for digital streamer Pandora Media Inc., close cousin RealNetworks Inc. and event company Live Nation Entertainment Inc. Recall that in 2010 Warner Music Group Corp. went private and EMI Group went bankrupt (and is in the process of being sold off in pieces to its rivals).

Public investors who may pay attention to the music business tend to own multimedia/tech big caps such as Google, Apple Inc., Amazon.com Inc., Sony Corp., Vivendi SA and/or supplier small caps such as digital storage company Fusion-io Inc.

The music business has always been lumpy, just like any content-driven business (i.e., networks, movies, video games, comic books), because one hit can turn around a whole company. Hits or not, music is still caught in a long transition from physical to digital, and thus is likely to remain somewhat unstable. That makes it very tough to model and bet on as a public equity investor. Still, it appears to be pretty enticing for strategic operators and venture investors.

Music is a big business and still growing in distribution. (Artist development, music publishing and performing are another set of stories for another blog.) Worldwide -- including concerts and publishing -- music generates about $70 billion, with recorded music accounting for about half at $35 billion, including digital distribution's $15 billion, or nearly half of all recorded music. In North America the scale is similar--about $27 billion of total revenue, nearly $13 billion of recorded music, including about $6 billion of digital. Streaming is said to account for roughly 10% of digital music revenue, according to a February 2013 estimate by the International Federation of the Phonographic Industry.

Given the stats above, it is little wonder that Google is in the game. Actually, it's Google's second shot, having launched an online music library in 2011 that pretty much went nowhere. Google is also developing another music downloading/streaming service in conjunction with YouTube that may be market-ready later this year. Therein, I suspect, lies Google's ultimate goal -- the bundle. You would think that if anyone could put together a true all-access consumer service that combines movies, TV shows, ad hoc video, video games, photo streams, photo tools, music, recording studio, plus cloud storage, it would be a $300 billion market-cap behemoth.

Content can always benefit from more incremental distribution, if it is not cannibalistic and the economics are direct. By definition, streaming does cannibalize some unknown amount of downloading and physical sales, but nobody can say right now how much because all distribution is in transition. Streaming economics are somewhat transparent, but not consistent. The Library of Congress' Copyright Royalty Board (three members) sets streaming rates every five years. The royalty rate for webcasters is now about 0.21 cent per play. Broadcast-affiliated online radio services such as CC Media Holdings Inc.'s iHeart radio reportedly pay 0.22 cent per play; privately held Spotify pays roughly 0.35 cent; and Pandora pays about 0.12 cent per play on 100 plays (up 0.01 cent since 2012), with rates set to rise to 0.14 cent per play in 2015.

It's a crowded field with more coming. Pandora serves some 200 million users with most of the listeners opting for the free, ad-driven service rather than the premium $4 per month subscription. Spotify became available in the U.S. in 2011 and reportedly has 24 million regular users, including about 6 million premium subscribers, at $5 to $10 per month. IHeart, which just surpassed 30 million users this month, is free but streams radio stations, or custom artist and genre streams. Rdio has been hailed by critics as the best of the subscription services -- it is global, serving 18 countries and growing, but does not disclose the size of its user base.

On deck is Apple's delayed streaming service, which is reported to be multitiered pay and ad-supported. Negotiations with the big three music companies have been taking longer than anticipated because Apple has been trying to keep royalty rates down by offering stakes in the advertising component of the service. The labels are naturally more enamored with contractual royalties than cyclical advertising. Amazon is also said to be thinking about expanding its downloading business to a full-access cloud and streaming model.

Another contender is said to be Daisy, a streaming service being developed by Beats Electronics, the same company that makes Dr. Dre headphones. Daisy recently secured a $60 million investment from Access Industry chairman Len Blavatnik and other tech veterans. Blavatnik, you may remember, also bought out Warner Music three years ago in a $3 billion LBO. The developers say Daisy will be artist-centric and will highlight cultural context. I'm not sure what that means right now.

All I know for sure is that everything sounds good to me when I wear my Beats.