At Cisneros Interactive, under RedMas, we launched the first and only audio advertising network in Latin America and the United States Hispanic market, Audio.Ad. We did this because we are optimistic that users will increase their listening time on streaming services. Just like video/tv is seeing a monumental shift from Linear TV to video streaming (TV Everywhere, Netflix, YouTube, etc), we know that audio/radio is going the same way, and more listeners will stream podcasts, music, and news shows on their desktops and smartphones.
So why do I have such a negative title to this blog? Well, because the most popular companies offering these streaming services have monumental revenues and growth, but are still losing money. Why? Large parts of their revenue is going to music labels and publishers.
Pandora, which happens to be the #1 radio station in the USA in terms of audience (streaming or terrestrial), offers a “customized radio service” which in my opinion is truly fantastic. It is a publicly traded company, so here are their financials: 2015 Revenue of $1.2B, with an operating loss of $170M. In 2014 their revenues were $920M up from $600M in 2013. In 2016 their revenues, mostly from advertising, will probably increase another 20% but the company is still racking up losses. About 50% of its revenues go to pay music rights.
Spotify, is a global company with about 30 million paying subscribers and 70 million free, advertising supported users. Its “on-demand” service is also fantastic. Based on a Wall Street Journal article, “Spotify Seeks to Fine-Tune Music Rights as It Gears Up for IPO”, these are Spotify’s financials: 2015 Revenue of $2B, with a net loss of $200M. Music labels get about 58% of the revenue, and there is an additional 15% that goes to music publishers (songwriting rights).
Don’t get me wrong, there is nothing wrong with music companies getting paid, which obviously allow them to pay artists and songwriters, who are the creators of all this wonderful content. Also, both Spotify and Pandora are valued very highly (Pandora is valued at $3.2B) so investors think these companies will either renegotiate more favorable terms with the music industry or increase so much in scale that they will one day become profitable. I think the second reason is the most expected.
The point of my title is that after several years in business, and with more than a billion dollars in revenues, these companies are still losing money. Margins, when positive, will probably not be big. For two companies who are revolutionizing the music industry and benefitting millions of users with a great service and the music industry as a whole with a new and large revenue stream, the value they will extract does not seem commensurate to their innovative efforts and risk they took.