As Spotify preps for its long anticipated stock market listing, an investor in the digital music company has told his financial backers that streaming music is definitely the business, that it can only boom from here, and that’s good news for everyone. Except traditional radio.
David Fiszel, founder of New York-based Honeycomb Asset Management, bigged up all things Spotify in a letter to his investors sent late last year, and which has now been seen by Business Insider. In it he states: “We believe streaming music will continue to grow at rates that far exceed investor expectations, with its market size quadrupling from $10 billion to $40 billion over the next eight years”.
It’s no secret that streaming music is a tricky business to be in for the loss-making service providers, what with the complexities of music licensing, the monthly royalty obligations to the music rights owners, and the costs of aggressive global growth. The aggressive global growth is required because – under the current model – streaming music is a scale game, with the business model being employed by the likes of Spotify only viable at massive scale.
If you want to be pessimistic, you can question whether even market leader Spotify can reach the kind of scale required to finally become a profitable business.
However, optimists reckon it can. And, once it’s there, the high barriers to entering the streaming market will assure a small number of key players dominate. That means they’ll ultimately be able to demand much better terms from a music industry by then utterly reliant on a small number of dominant platforms, while also starting to charge for the e-commerce, data and marketing services that are currently provided free of charge.
Obviously those with a stake in Spotify have to be optimists, especially as the stock market listing looms. “The music industry is reaching a key inflection point on both top-line and profitability”, reckons Fiszel.
“The streaming music business model is fundamentally more attractive than the previous model”, he adds, concluding: “Growth is open-ended and the ‘total addressable market’ is larger than investors expect”.
Noting that streaming has already taken the recorded music industry back into growth after fifteen years of (initially steep) decline, Fiszel says “we are still in the early stages of this evolution”. And everyone’s a winner because streaming means the average consumer is now spending more on recorded music than in the physical era.
He’s relying on Goldman Sachs – another Wall Street player whose gushing optimism about the streaming market is well known – for that last claim. “Per Goldman Sachs research” he writes, “the average consumer used to pay $50-60 per year to purchase five CDs. In the digital world, many US consumers are paying $120 per year for a $10/month subscription”.
That’s when he provides that super-glowing conclusion that “we believe streaming music will continue to grow at rates that far exceed investor expectations, with its market size quadrupling from $10 billion to $40 billion over the next eight years”. Yeah, maybe.
If you’re not sold on all this optimistic speak yet, think about the rise of the voice-activated smart speakers and how they are going to further the reach of the streaming music services! Oh, and the internet-connected car. Don’t forget the internet-connected car! “Connected cars of the future will see streaming music as a replacement for terrestrial and satellite radio”, Fiszel adds, delivering the one bit of doom in his letter, aimed at the traditional radio sector.
So, that’s all nice isn’t it? If only it can halt the flow of billion dollar mechanical royalty lawsuits in the US, maybe Spotify’s glass of water really is half full.
By the way, if you want to know how streaming music is licensed, and how money flows through the system to artists, ‘Dissecting The Digital Dollar’ is now available in printed form.[from http://ift.tt/2lvivLP]