Streaming vs. Downloading – The Impending Cash Flow Crisis

Click Here to read the Billboard Op-ed; October 10, 2009 Issue

by Robb McDaniels, Founder & CEO, INgrooves

First it was “fans want to feel it,” then it was “fans want to own it,” now it’s “why own when I can save?”  One of the unforeseen impacts of the global economic downturn on the music industry is the accelerated rate of consumers’ adoption of streaming music.  Wanna save some money while you sit at home looking for a job?  Stream.  Wanna listen to music on your phone while you take care of the kids? Stream.  In your car? Stream.  Why download when I can stream almost anything I want at any time in any place? As streaming becomes more portable, interactive and affordable to the consumer, fans are rapidly shifting their listening habits to embrace this medium that provides instant gratification.  And this means trouble for the already wounded music industry.

Cash flow:  Labels, particularly independent labels, have lived off of cash flow for many years now.  That’s why advances have always been the name of the game – give me (the artist) money now and you (the label) worry about earning it later.  Here’s the issue with streaming from the perspective of a content owner: it takes 150 to 200 plays of a song before the content owner earns royalties on par with one download.  Content owners typically get paid $0.70 for a download and half a penny for a stream.  How long does it take the average fan to stream a song 150 times? 6 months? 12 months?  Longer? There’s the cash flow issue. Money that we were expecting today, we now won’t see for 6 to 12 months, maybe longer in some cases.  This means, as a label or artist, I won’t have money today to finance my new record.  Many labels will also not recoup their advances as quickly and therefore won’t have the cash to fund or market new projects.  Their cost of capital will go up and bonus pools will evaporate (yes, these still exist).  So where do we go from here?

Maybe the answer lies within the “problem,” as is often the case.  Maybe the industry simply needs to unlock the value of this new music experience by embracing the streaming app as its new shiny disc.  See, the value of music has never actually changed, only the value of the experience.  CDs offered a more portable, interactive and consumer-friendly way of delivering music in much the same way that streaming applications do now.  I can stream all the music I want from the juke-box in the sky to my phone, computer or car.  That’s value.  I will pay for the value of portability, interactivity and ease of use.  But you have to make it as easy for me to enjoy this experience as you made listening to a CD.
It’s too bad that the industry continues to stumble over itself when “helping” to set up these new models by making the entire content licensing process overly time consuming and costly.  Want to know why the iTunes App Store is so popular and has already reached 2 billion downloads?  It is available in 77 countries one year after launch.  By comparison the music store is only in 22 countries more than six years after launch, resulting in plenty of money being left on the table. The restrictive nature of content licensing might make sense in the old paradigm but not the current dynamic, global, on-demand media marketplace.  Unfortunately, the music industry is likely going to have to go through a lot more pain before enough friction is removed – and by friction I mean people and systems – and common sense proposals become reality.

Having been involved in the digital music industry since 2001, I am realistic about what may likely transpire.  As such, I am having conversations with our clients now about preparing for this cash flow issue.  Artists and labels need to be prepared to significantly reduce fixed operational and administrative costs.  They need to effectively manage marketing budgets.  They need to leverage the efficiencies of the digital marketplace to generate new sources of income and expand the opportunities for their music.  The global music industry will need to come together like never before to work through this latest transformation and emerge a leaner and more vibrant industry.  At INgrooves we’ll certainly do our part to streamline the licensing process, encourage and support new models, cost effectively deliver content around the world and provide our clients with marketing and strategic support.

I truly hope others will do the same.