Wednesday, January 15, 2014

Is Verizon's Victory A Streaming Music Killer?

(Photo credit: Wikipedit
Bobby Owsinski/Forbes

Until yesterday I was hopeful about the future of the music business. Today not so much. All the indicators and predictions showed the growth of music streaming to not only offset the decrease in download sales, but even some long lost CD sales as well. There was actually hope for a recovery, and a real chance to see some much needed growth. Now the future is uncertain.

That’s all because of Verizon’s court victory in the U.S. Court of Appeals against the Federal Communication Commission’s so-called Net Neutrality law, which required Internet Service Providers to treat all Internet traffic equally. That seems innocent enough on its surface, but without that law in place, ISPs can now charge extra for either high-bandwidth or speedier delivery. This affects streaming media companies like Netfilx that specialize in video (especially), but can also affect just about every streaming music provider as well.

It’s All In The Margin

Streaming music is an extremely low margin business to begin with. Between paying huge licensing fee advances to the music labels, there’s the cost of paying the copyright holder and publisher, as well as bandwidth, storage, and marketing costs. None of the major players make money right now, as they all jockey for position in hopes that the future economy of scale will bring a large enough market to break into the black. Sure there’s advertising and subscription income right now, but that’s still slowly creeping up to the break-even point.

As a result, companies like Pandora and Spotify that are just hanging on hoping that the costs stay static while the user base grows. That’s all well and good, since the majority of music consumers are still virgin territory, having not experienced streaming or not yet made a choice of a preferred service. New services like Beats Music (set to launch next week), YouTube Music (set to launch “soon”), and Slacker (set the enter the US market “soon”) see the space wide open, while Pandora and Spotify have big leads in market share at the moment, but we’re still early in the game.

Charging For What We Now Get For Free

Now imagine one or more of the big ISPs like the aforementioned Verizon, AT&T or TimeWarner Cable now either charging the customer or the streaming service for the privilege of using their network for something other than transferring email and browsing the Web. No matter how small the cost, it may very well be too much for many services to survive, as it will cause the retail price to rise to the point where streaming adoption slows enough for them to run out of cash, and keep investors dubious because of the increasing costs. That could just about put the brakes on any promising recovery that might be in the making for the industry .

Okay, boo hoo, the market takes it’s toll and only the strongest survive. The problem is that we’ll only be left with companies that are in the streaming business almost as an aside – Google and Apple. Music is not the core of either business, so they could absorb higher costs without flinching.

Of these two, Google will get hurt the most. YouTube, which it owns, is now the number one way that consumers discover music online, and it’s a primary music consumption vehicle for teens. You can almost see it being throttled back already with new cost restrictions being imparted.

The ruling might even cause the rumored YouTube Music streaming music service to stop in its tracks. In fact, could the Verizon case be a factor in delaying its introduction thus far?

Obviously it will take some time for the effect of the ruling to trickle down, so we might not see much change in the short term. The long term effect can be ominous though, as online music, and all streaming media, will ultimately take a hit that very well may completely change our consumption patterns. These are the good old days. Enjoy them while you can.

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