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Rdio's collapse another nail in the coffin of the 'digital economy'

Money for *distributing* (nearly free) jam is a terrible idea

Analysis The “digital music economy” now resembles three bald men fighting over the same hairbrush.

It’s hard to think of a better emblem for where the current “plantation era” of internet exploitation has led us than digital music. And it’s hard to imagine a more perfectly shitty outcome for creators, and ultimately for consumers who love music. You’ll run out of bullets before you’ve run out of blame for this sad situation - because there’s so much of it to go round.

This week streaming service Rdio filed for bankruptcy protection, selling its assets in a fire sale to Pandora.

However, it is two recent data points that should trouble anyone interested in growing the economic value of cultural stuff. Neither come from Rdio.

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Rdio was where the Skype billionaires Niklas Zennström and Janus Friis placed their cash. Around nine months after Spotify launched in the UK, Rdio made its debut in the USA. That gave it a brief window before its much-hyped Scandinavian rival made its US splash. Spotify eventually opened for business in July 2011. This year, Apple and Google have entered the streaming music market, although both have really been “soft launches”, and neither has yet turned on the spigot. Apple has yet to launch a desktop client, while Google has yet to take YouTube Red, which bundles Spotify-style streaming with video, global.

Rdio’s app was thoughtfully crafted, and Rdio tried to do the right thing by creators, at first, by insisting money changes hands for access to all the world’s music. It had strong social features and valued the art more highly than Spotify, which was mocked for being “an Excel spreadsheet”. But none of this ultimately counted.

The company was banking subscription income of $1.5m every month, but had expenses of almost $4m a month, according to one report. Ad income was negligible. That meant Rdio was losing over $2m a month, which goes some way to explain its accrued debt of over $200m. By comparison, Spotify has raised over $1bn in funding, and with Apple and Google muscling in, Rdio felt the squeeze on smaller, less well capitalised players.

The arrival of the two 800lb gorillas also prompted French rival Deezer to pull its IPO at the end of October. Deezer’s financial position is healthier than Rdio’s: with losses of “only” €8.96m on revenue of €93.2m in the first six months of 2015. But it turns out that 4 million of Deezer’s 6.8 million subscribers are “dormant” or “inactive”.

In one respect this is neither a surprise, nor even a bad thing.

Gyms depend on inactive or irregular subscribers too, and their economics would collapse if everybody turned up at once. So would ISPs. Music industry sources tell us that the inactive but paying subscribers bump up the royalty pool. But what’s alarming is that the number of active subscribers is so small. For all that expenditure, the streaming habit hasn’t caught on.

Pandora in the US could get only 3.3 million of its 20 million users to pay. Spotify claims 25 million paying subscribers, but that has been inflated by its seemingly-perpetual £1/$1 a month for three months offer. Apple may reach 10 million cumulative subscribers by year end - impressive in this world, but not in the larger music production picture.

The BPI’s chief executive Geoff Taylor highlighted another data point last Friday. Taylor said that UK labels make less money from YouTube - the internet’s undisputed No.1 music service - than they do from vinyl. And vinyl’s revenue contribution to what until recently was a £1bn-a-year sector was a mere £12.1m in 2013.

“It looks like between 8 and 15 per cent of any given market want to pay with their own money for a music source,” one source familiar with the royalty returns from digital music services told us.

Why does this matter?

It isn’t as if people have stopped listening to and enjoying music. They probably do so more than ever - and derive enormous value from it. But that love isn’t turned into cash. And you can't pay the rent with love. Anyone putting a cultural artefact (or news) into digital bits needs to find an answer to this, because it goes far beyond music.

The reason this matters has been articulated by many artists, including David Byrne, and Radiohead founder and producer Thom Yorke and Nigel Godrich. They argue that they actually do well from services such as Spotify, but the minuscule revenue returned to artists is too small to allow them to develop. Artists are already encouraged to be their own marketers and promoters, leaving little time for developing their craft. The economics of the internet today will force far more to find a day job. The established critics view often gets misrepresented by interest groups so let’s explore it a moment.

“Streaming suits catalogue, but cannot work as a way of supporting new artists’ work …” Godrich has argued. “Spotify and the like either have to address that fact and change the model for new releases or else all new music producers should be bold and vote with their feet.”

If these artists were being remotely "selfish", they'd take the money without complaint. They're thinking of the future.

The threat of piracy has also had a more subtle effect than many people realise. It isn’t so much a case of pirates stealing directly from artists purses. It’s the consequences of keeping piracy mainstream. Huge tech companies which need music enter a negotiation with the threat of piracy as their trump card. If you don’t like our offer, they explain, we’ll get your music anyway. So the incentives are all astray. You’d think Google would want to market the hell out of YouTube Red, but its interests aren’t lined up with those of the legitimate digital economy. Google keeps the illegal supply chain alive.

There are a number of ways to nudge powerful market actors to do The Right Thing, and license at fair rates. Taylor highlighted amending nineties-era laws that created the user-generated content services loophole, or “safe harbour”. Huge tech companies can drive down the cash they pay creators by knowing the odds are stacked in their favour.

Punters also want easier ways to pay, and quite reasonably, are reluctant to invest their own expressions (playlists and favourites) into a proprietary non-portable format. Why can’t you take your playlists from iTunes to Spotify and vice versa?

So much power has accrued to the distributors of things, that both the consumers and the producers have been sold a pup.

When after six years of digital streaming music hype, the global income from music is less than half of the wage bill of one modestly successful Premier League team, something has gone horribly wrong. ®

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