by: Keith Jopling
Whatâ€™s the Future for Ad-Funded Music Services?
I recently gave a short talk at the IAB entitled â€œWhat could happen if the music market truly opened up to advertisingâ€? The point of the talk wasnâ€™t to answer that questions exactly (who could?), but to explore why â€˜ad-fundedâ€™ music is less of a buzz these days. It was an opportunity to reflect why ad-funded hasnâ€™t delivered on the heady expectations back when it all started in 2005/6.
The IAB event was back in May and since then there have been one or two developments and fresh comment. Most significantly, the UKâ€™s number two ad-funded music streaming service, We7 was bought by Tesco for Â£10.8m â€“ presumably in time, re-positioning the ad-funded pure-play music service to something of added-value to Tesco music buyers (and presumably, no longer funded by ads). Watch that space.
I also read something from Alexis van de Wyer, President of AdsWizz Inc, suggesting that Spotify had taken its eye firmly off the ad-funded ball and become too focused on premium subscriptions and partnerships for its API platform. Iâ€™m not one to doubt the brilliance of Spotifyâ€™s strategic plays but I thought this was an interesting viewpoint (even if it was a thinly disguised sales pitch from an advertising salesman).
In its early stages Spotify would wax lyrical about â€˜new advertising productsâ€™ and various forms of innovation in online advertising. But did it sometimes feel like there really wasnâ€™t much advertising on Spotify, or for that matter, innovation in ad formats? With several strategic shifts since it does to some extent look as though Spotify has accepted that ad-funding isnâ€™t a primary revenue model â€“ but more a springboard to other revenue streams (the so called freemium model).
Wherever this takes Spotify, the other question is â€“ where does it leave ad-funded music as a â€˜sectorâ€™.
The IAB talk highlighted a few facts of note, as follows:
- The UK online advertising market was worth Â£4.8 billion in 2001 (the IABâ€™s official figure)
- The UK online ads market grew by 14% year-on-year
- The BPI reported ad-funded music revenues to labels (therefore trade revenues at the labelsâ€™ agreed share) of just Â£11.4m in 2011
- From the BPI figure â€“ adding in publishing and partner shares â€“ the IAB estimated a total figure for ad-funded music in the UK of circa. Â£40m
Thus, musicâ€™s share of the online advertising market in the UK is well under 1%. As a share of revenues to the music industry (to labels anyway), ad-funded is just under 4%. And it hasnâ€™t grown since 2010.
Why is ad-funded music so small and why is it no longer a growing revenue model?
In a way this is more a European problem. With Pandora generating $250m in advertising revenues in the 2011 and label-backed Vevo bringing in $150m, there are at least two cases studies of success across the pond (provided Pandora can keep it up!).
By mapping the existing music service landscape, itâ€™s possible to make some observations:
- In music streaming â€“ Spotify and â€˜3rd generation players like MOG (also now acquired) and Radio have shifted away from ad-funded
- In music video ad-funded is still the primary model (for You Tube, Muzu and Vevo for example)
- In discovery there is a range of models, but the latest buzz start-ups like Soundcloud and Songkick have stayed clear of ad-funded
What mapping current services doesnâ€™t show is the number of promised or planned ad-funded services that have never materialised â€“ including high-profile flops like the notorious Spiral Frog and Qtrax. More recently Oz-based Guveraâ€™s arrival to market seems protracted even though it is still raising investment.
Is there opportunity to re-energise the sector? What is its real potential in Europe?
The IAB seems interested in this space and continues to examine it, so we may hear more views from the advertising camp. But there are at least a few possibilities:
- In video â€“ original programming and digital music channel creation â€“ exemplified in the UK by the massive successes of SBTV, UKF and the more recent indie play Noisey.com
- Format Innovation â€“ audio ads have lagged behind other formats such as display and didnâ€™t quite live up to early expectations, but perhaps there are breakthroughs still to come here
- New markets â€“ with brands now becoming publishers and â€˜Content Strategyâ€™ the buzz section of digital marketing plans, itâ€™s only a matter of time before online sync services such as Cue Songs or others can crack-open a scaleable new way to license music to the millions of small scale uses in corporate video, blogs and other branded content
Ad-funded has places to go then, but isnâ€™t the buzz it used to be. But then part of the music industryâ€™s â€˜problemâ€™ is the apparent need to pin big hopes on the next panacea. Currently, itâ€™s cloud services enjoying some time in the sun. But whatâ€™s really unfolding is a patchwork economy for music, thatâ€™s far more interesting to view as a whole.