A new study flies in the face of everything we know about the music industry. Because it’s wrong

By David Holmes , written on July 6, 2015

From The Music Desk

Whenever a scientific paper or survey reaches a shocking conclusion that contradicts “everything you thought you knew about x,” there’s often a simple reason: It’s wrong.

So it is with a new study that seeks to disprove one of the most common truisms blindly accepted by digitally-damaged futurists: that nobody will pay for music ever again.

This assessment thrives amid protestations from artists and labels that technology platforms aren’t putting enough revenue into the pockets of creators. And while the most vocal opponents to streaming platforms like Spotify and Pandora lay the blame on Silicon Valley greed, the troubling mathematics of the new music industry tell a different story.

The truth is, free or freemium streaming platforms -- platforms that collect all or most of their revenue from advertising -- will likely never lift the industry up to its former, pre-digital glory. For that to occur, tech companies must become willing to charge customers monthly subscription fees. To wit: Based on annual revenue figures from the International Federation of the Phonographic Industries (IFPI), the average paying customer in 2014 created 26 times more revenue for the music industry than the average freeloader.

At this time, only ten percent of streaming music customers pays a monthly fee. And if you were to look at the balance sheets belonging to Pandora and Spotify – along with the royalty statements for numerous artists embittered by their lack of compensation – 10 percent clearly isn’t high enough to bring sustainability to the industry. That leaves industry stakeholders with only two options: Strike less absurdly onerous deals with labels ,or convince more customers to pay. Considering the destructive and insatiable greed of major record labels, that may leave only the second option.

Apple Music, which offers no permanent freemium option, is a step in the right direction. But will a handful of exclusive albums and Apple’s cultural cachet be enough to convince consumers bail on free services like Spotify and Pandora?

That’s what a new report from Altenga seeks to determine. By capturing 857 survey responses from a broad yet young-skewing cross-section of Americans, Altenga concluded that a large percentage of consumers are more than happy to pay $10 a month for instant, ad-free access to tens of millions of songs.

“Some 80 percent of people say they are willing to pay if [services] had no ads,” Altenga’s CEO Per Sjofors told me over the phone.

“Willing to pay” is not the same as “actually paying,” however – otherwise, 80 percent of Spotify’s users would pay for the service instead of the 25 percent who currently do. Under Sjofors’ logic, however, that low percentage Spotify’s own fault for offering a free version in the first place.

“The research pointed to a continuing theme for all American businesses, of underpricing their products and services,” said Sjofors.

The mere existence of free services like Pandora and Spotify’s free tier heavily skews Altenga’s study, rendering it purely hypothetical. It’s not unlike the surveys in the early 2000s that grossly underestimated the prevalence of music piracy because people thought of themselves as more ethical than they really were.

That doesn’t mean the report’s conclusion -- that someday people will pay for music again -- is entirely incorrect. But it does mean its assumptions and methodology are enormously faulty.

We had some of the smartest minds in music and technology at our Pandoland conference earlier this month, and even they had no idea whether users will ever pay for “access vs ownership” of music, the same way they do for video services like Netflix and HBO.

Furthermore, I’m extremely skeptical of the study’s suggestion that some streaming companies should increase subscription fees upwards of $20 or even $25 a month toward the goal of maximizing revenue, even if it means sacrificing users. Because unlike, say, journalism outlets, the content offered across each music platform is more-or-less the same. Therefore, at this still-early stage of the game, maximizing users is far more important than maximizing revenue. And if users can get the same content elsewhere for free or cheaper, they will.

But that doesn’t mean Altenga’s study is a total wash. In fact, there are two takeaways from the survey that, while tangential to the million dollar question of whether or not users will pay, are still enormously instructive to those working in and closely observing this space.

The surveyors applied a methodology known as Van Westedorp’s Price Sensitivity Meter or PSM, which has been in use since the 1970s to measure a number of data points related to a product’s market value. It’s a dynamic model, meaning that it can assign ranges of acceptable prices for each product, as well as “sweet spots” so to speak, which allow the seller to charge as much as possible without alienating huge numbers of listeners – or in the parlance of Van Westedorp, without hitting a “price wall.”

The first thing that jumps out about the survey is that as the price of a streaming service rises between $5 a month and $10 a month, the number of respondents willing to pay these sums holds steady at around 68 percent. Assuming this finding would bear out in the real world, this is enormously significant.

During negotiations with labels ahead of the release of Apple Music, for example, Apple reportedly fought hard to keep the price of its service at just $5 a month – the logic being that if consumers at the height of the music industry didn’t even drop $30 a year on music, how would they convince them to pay $120?

But the labels stood firm, insisting on the $10 a month price point that’s become standard across streaming music platforms, in a move that many commentators – including myself – characterized as short-sighted and greedy.

According to Altenga’s report, however, roughly the same number of consumers are willing to pay $5 a month as the ones willing to pay $10. It’s only in the $10 to $15 range that consumer willingness begins to hemorrhage. That doesn’t mean the labels weren’t operating under the impetus of greed. But whether they knew it or not, they were right to force Apple’s hand here.

The second fascinating finding is that, from platform to platform, a customer’s willingness to pay appears to have less to do with the raw functionality of each service and more to do with whether or not the user is either accustomed to paying for that particular brand or aware that others pay. For instance, in the absence of free options, the report states that between 70 and 80 percent of users would be willing to spend $10 a month on Spotify and iTunes Radio, while only about 50 percent of YouTube and Pandora users would be willing to spend the same amount.

That may sound strange to you and it should. Fundamentally, Spotify and YouTube are the more comparable services, offering “on-demand” streaming wherein listeners can pick and choose which songs to hear as they go along, Meanwhile, iTunes Radio and Pandora are highly comparable to one another, but very different from Spotify and YouTube, offering “lean-back” radio listening that allow users to “set it and forget it,” so to speak, as their primary product. One might assume, then, that the percentage of likely paying customers would be similar between iTunes Radio and Pandora, and between Spotify and YouTube.

But that’s not the case at all. And the reason, I imagine, is that consumers are familiar with paid products offered by Spotify and Apple, whereas the notion of paying for YouTube and Pandora – regardless of whether their products bear similarities to Spotify and iTunes Radio, respectively – feels entirely out of the question for users. This bodes enormously well for Apple, a company that consumers are not only accustomed to giving their credit card to for app and media purchases -- Apple already has over 800 million of them on file -- but users are also accustomed to paying $10 for a single album on its platform. Now that Apple is charging the same amount a month for unlimited, on-demand access to 30 million songs, that bargain may make itself extraordinarily clear to users.

The question of whether or not users will pay for streaming music can’t really be answered by this methodology– because as long as there are free services offered by companies with public shareholders, venture capitalists, or unrelated revenue streams to keep these popular but unsustainable streaming platforms afloat, this question can’t be considered as if it exists in a pure paradigm of supply and demand.

That said, if we assume that the days of free streaming are numbered – a not entirely unjustified assumption considering that rightsholders are increasingly pushing for paid-only services like Apple Music, and considering that VCs will eventually tire of subsidizing Spotify if it can’t figure out a freemium business model on its own – then this is a question the industry will need to grapple with, sooner rather than later. And in that regard, Altenga’s report at least offers some valuable lessons about how these paid arrangements will play out.

And like so many other predictions about the music industry -- and the tech industry in general -- the chief beneficiary of the report’s conclusions is the biggest, richest, and most powerful player in the game: Apple.