The past two weeks have been a watershed of sorts for the digital music industry. No, really.
The industry's broader shift toward renting music rather than owning it continues full steam ahead. However, more subtle signals from companies including Spotify, Apple (AAPL -5.64%), and Pandora (P) could portend that more fundamental shifts might also be underway.
Change is in the wind
The digital music market has long been crowded. A series of moves during the past several weeks, however, is signaling that the digital music market has shifted into a new era of competitiveness, especially among incumbents.
Without question, the most impactful news was that Swedish streaming studmuffin Spotify raised $1 billion in convertible debt, reportedly without much difficulty. Because of the deal's wrenching terms, the move effectively lights the fuse for a Spotify IPO to occur sometime in the next two years -- the sooner the better for the company and its shareholders.
Beyond Spotify though, Apple continued its steady drumbeat of original or exclusive video content development for Apple Music. The world's largest tech company recently added a musically focused TV series from Vice Media. In addition, word has surfaced that Apple is also internally developing a series to focus on the app economy that powers its technology empire.
The series packs plenty of industry power, most notably including musical star will.i.am. Additionally, Pandora reinstated its founder and original CEO Tim Westergren back into the CEO role in a bid to further its presumed pivot into on-demand streaming, and eventual profitability.
Lastly, privately held SoundCloud also threw its hat into the subscription-service ring by announcing its own paid, on-demand streaming product. Like I said, it's been an eventful few weeks. However, piecing a few of these recent storylines together also could speak to a broader trend that could help shape the future of this space.
Video saved the radio service?
Let's start with the notion that the streaming music business doesn't appear to be an especially lucrative segment of the technology or entertainment industries. Unlike digital sales, where online retailers like Apple or Amazon simply take a cut and pass the rest along to the appropriate party, streaming requires services to pay royalties per song to their rights holders. The record labels command a lot of leverage in this process, and price competition for users keeps subscription fees relatively static. Advertising doesn't seem to be a more ideal option either.
To my knowledge, the two largest players in the space in terms of active user bases are Spotify and Pandora, and neither company appears to have even approached turning a profit despite years of impressive user acquisition and sales growth. What's more, I can't find a single example of a highly profitable music streaming service. Economies of scale could offer some relief, but hopefully we can agree that, as a general proposition, the streaming music space is a tough industry in which to make a buck. Could the solution lie in video?
Spotify has reportedly been pitching investors in private over its video ambitions for some time. Apple has long harbored very visible ambitions to create its own video service to "disrupt cable," though its attempts to do so have been repeatedly scuttled. The question I find myself asking, along with some other bright technology journalists, is: Do these recent moves reflect a more earnest shift toward video from Apple Music and Spotify?
It seems pretty clear that online video ads generate far more revenue than the kind of online audio ads Spotify and Pandora serve to their ad-supported listeners. As such, it makes sense on a level that Spotify might have raised its new cash stockpile to begin bidding for online video content above the free clips it serves today. Could we be witnessing the beginnings of a gradual broadening of streaming services' business models?
This is far from certain, but it seems like a shift upstream toward a more-profitable segment of the digital media strata could both broaden the appeal of today's streaming services, while also aligning them with a more profitable segment of the digital media world. It's hard to tell, but this is without question an interesting hypothesis. Hopefully, as the coming months unfold, we'll get a more concrete sense of whether this pet theory indeed has legs.