Skip navigation
Perspectives on building technology businesses and AcceleratorIndia from Cartezia

Content owners cannot rely on Ads to compensate for declining Music revenues

Tuesday, March 31, 2009

The collapse of SpiralFrog, one of the early ad-supported music services, could be the first of many such closures. Founded in 2006, SpiralFrog, based in New York, promised to offer music free to the public from its website supported by advertising revenues. The launch of SpiralFrog was hailed as a watershed and some even expected it to challenge Apple's hugely popular iTunes paid music download service. Some even argued that SpiralFrog's business model could be the answer to illegal file sharing.

The failure of SpiralFrog highlights the fact that this ad-supported business model has yet to be proven. SpiralFrog is the second ad-supportedservice to shut down in 2009, following Ruckus, a service that catered to college students. Does this mean that the ad-supported business model cannot survive in the long run? While it has clear benefits such as reduced piracy and fewer digital rights management issues, the model has struggled to separate the value of the advertising from the content and offer it at a price that the record labels and the end consumers can both agree on.

The challenge this model needs to overcome is that the size of the current advertising market cannot  fully subsidise the revenues lost to illegal downloading and file-sharing. At its peak in 2000, the annual music industry revenue from physical music sales was $14.5 billion. Based on 2007 numbers, physical music sales amounted to $7.9 billion with digital sales contributing another $2.8 billion. That’s a very big difference to make up. The worsening global economy has put further pressure on ad-pricing and ad revenues making it even more difficult to sustain the revenue growth of the last three years.

On the basis of available evidence, the ad-supported business model cannot support and sustain digital music sales. If record labels are to fully realise the monetization potential for their content, they need to embrace newer channels to reach their customers. Nokia’s ‘Comes With Music’ and Sony Ericsson’s PlayNow are tentative steps in the right direction for the major labels. With the mobile internet expected to drive the next wave of consumer growth, based on a combination of device availability, network speeds, content availability and consumer interest, the mobile channel will be a significant contributor to digital music revenue growth.

To benefit from these new channels, however, the music labels will need to review their pricing and profitability expectations. A similar move is already happening with movie downloads in South Korea, where there is rampant online piracy of DVDs due to the availability of superfast broadband. Warner is aggressively pricing each movie download at $2 to $3 per movie with release windows very soon after the movie release. Having missed the opportunity in the first internet wave, the music labels now have a second chance to be relevant by getting their strategy right for the mobile internet.