The Future of the Music Industry: Selling Audiences to Advertisers
Uncertainty rocking both the broadcast radio and record industries has opened an enormous opportunity for recording artists and record labels. Growth for the music industry will come from expanding the overall online radio audience and ad pie at the expense of broadcast radio.
When important trends are viewed through the lens of the music/radio consumer, the future of recorded music monetization is revealed. The majority of revenue flowing to artists and labels will soon come from advertising, not the sales of MP3s, CDs or subscriptions.
CD sales have been in decline for years; now, suddenly, MP3 sales are collapsing:
According to Asymco analyst Horace Dediu, 2014 iTunes download music sales “might drop by an additional 40 percent.” Happening concurrently with the MP3 sales crash is broadcast radio’s downward spiral in Time Spent Listening. Simultaneously, Pandora, Spotify, and other non-broadcast, IP-delivered radio/music services are enjoying
astonishing growth. By next year, 170 million people will listen to Internet radio, up 10 million listeners from this year.
Ad-supported and subscription streaming services have tripled revenue paid to artists and labels, growing from seven percent to 21 percent of digital revenues in the last four years, according to the RIAA. Strengthened by investments of more than $432 million dollars just last year, streaming radio services like Pandora and Spotify are booming, while broadcast radio struggles. And many of broadcast radio’s top ad-sellers have jumped ship to these Internet radio companies, helping to capture the dollars now fueling an important growth category for the music industry.
Forty-four percent of online radio listeners say their online listening comes mostly at the expense of their FM/AM listening. Seventy-five percent of people age 12 to 24 listen to online radio monthly, and almost two-thirds of them listen weekly.
In fact, radio broadcasters are not only seeing their FM consumers listen less, but, according to Triton Digital, at any given moment among online listeners (Monday-Friday, 6 am to 8 pm), Pandora has more than three times the audience of all of the thousands of radio stations owned by Clear Channel (iHeart), CBS (Radio.com), Cumulus, Entercom and the next six broadcasting companies combined. Borrell Associates predicts “time spent listening” to pure-play mobile services will grow by 38 minutes over the next four years — while broadcast radio will decline 42 minutes over the same period.
Arbitron’s (now Nielsen Audio) own data shows a steady “Average Quarter Hour” rating decline of “Persons Using Radio” over decades. In 2009, Arbitron apparently stopped releasing the national AQH rating data, perhaps because there was a severe decline from the previous year, conceivably triggered in part by the launch of Nielsen’s Portable People Meter (PPM) ratings system, the rise of Pandora and other non-broadcast competitors, both and/or other factors.
Whatever the cause, it’s significant and cannot be overstated. Sources close to Arbitron confirm that a recent (Spring 2013) AQH rating of “Persons Using Radio”has dropped to a new all-time low of approximately 9.2 (down from 13.2 just five years ago), and off by a full point from 2012’s 10.3. Red warning lights are flashing brightly.
As the broadcast radio industry flounders, its uncertainty and forecasted weak growth opens a significant opportunity for the recording industry.
As a legacy medium, broadcast radio execs are trying to hold on to a whopping $16 billion in annual advertising revenue.
The hit songs provided to FM stations by artists and labels are the life-sustaining blood supply that enable broadcast radio’s $16 billion in revenue. Yet artists and labels have virtually zero participation in that $16 billion.
In lieu of paying labels and artists performance royalties, an arrangement between record labels and radio broadcasters going back many decades “compensates” labels with airplay, which in turn used to help sell 45s, albums, 8-tracks, cassettes, CDs and MP3s. Sales trends suggest that the final era (MP3s and CDs) of selling billions of dollars of music to consumers is coming to an end.
Labels and artists should seize this moment and position themselves once and for all to fully realize their share of the advertising revenue that will transfer from FM radio to online radio. But greater label and artist participation in ad revenues won’t come from bickering over royalty rates.
In the mid-1970s, when the audience of FM surpassed AM, advertisers followed the audience from AM to FM. Today AM radio is a caved-in relic of the mighty revenue generator it once was. If history repeats itself with FM listeners moving en masse online, it will be a loss of epic proportion for broadcast radio, yet the obvious path forward for artist and label revenue expansion.
If artists and labels go on the offensive, fully embracing streaming services (who help replace diminishing MP3 and CD revenue), and also innovate by developing audiences themselves through their own branded offerings, they will exert far more control over two critical assets that advertisers want: Large audiences and big data.
Online radio offers advertisers data-driven, advanced technology delivering more efficient ad buys — an area where broadcast radio lags.
Eighty-eight percent of Pandora’s revenue is derived from advertising, not subscriptions. The future will tell whether or not the subscription model offered by Beats and Rhapsody has legs. Meanwhile, the time-tested business model most widely embraced by listeners is ad-supported radio.
As broadcast radio (and its fledgling online offshoots) treads water, it’s inevitable that a sizable portion of its $16 billion ad empire will follow the audience as it migrates from FM to online radio. Clip Interactive’s SVP/Labels Michael Fischer suggests that “record companies and artists need to go all in. That means embrace and cooperate with existing streaming services to further expand their audiences.” At the same time, they must build their own unique audio media strategies and online radio brands to attract listeners with dazzling original content.
The future of revenue for recorded music isn’t going to come from selling music to consumers — it will come from selling music audiences to advertisers.
Candidly, the faster online radio’s audience grows, targeting and absorbing an even larger share of FM radio’s audience, the more quickly ad revenue will flow to artists and labels, because advertisers follow the audience. FM broadcasters have shown scant interest in (and had minimal success with) creating a noteworthy audience online. And it’s clear, with a few limited exceptions, that they will never pay artists and labels FM broadcasting performance royalties.
Influenced by debt and other rising pressures, broadcasters are stuck with high commercial loads, which inadvertently sweeten the appeal of their online radio competitors. Dramatically lower commercial loads, instant gratification via 20+ million songs on demand, custom personalization made possible by infinite “channel space” and patented technology, original content, interactivity and perpetual innovation are driving online radio’s meteoric rise. FM radio has had paltry impact in countering those threats, which cumulatively have inflicted a severe blow to its Time Spent Listening.
The simple truth is that while TV and other businesses have adapted to disruptive digital changes, the rise of Internet radio competitors has been met with a wholly insufficient response from broadcast radio. Their lack of a strong, meaningful reply is on one hand disappointing and sad, but on the other, it presents a remarkable opportunity for artists, labels, pure-plays, listeners, advertisers and content producers to prosper.
Award-winning audience development strategist Paul Goldstein creates breakthrough content for new media companies, celebrities, brands, record labels and radio groups. Find more information on his website, TheContentIsKing.com.