21 Nov 2015

Let's Face It: The Ad-Funded On-Demand Music Experiment Has Failed

It's been another interesting week on The Net with regards to the music industry's income from streaming services. Or more to the point: The lack thereof. Many different accusations are being made about numerous different parties in the various streaming ecosystems. It is hard to find common threads between all of these, except for "We're not being paid enough".

That lack of common complaints is no surprise, because it is a set of extremely complex interlinked ecosystems, and there are multiple failures happening in parallel. The only way to gain some understanding of all this, is to look at each of the issues separately, one by one.

This post is about YouTube's ad-funded model. YouTube has the largest user base of all the streaming services, but the music industry is increasingly unhappy with the YouTube deal. But are YouTube the "bad guys"? Are they really intentionally screwing the entire music industry? Or is it just an experiment that didn't quite work out? Let's look at how we got to where we are now with Google and YouTube.

Google started off as a search engine, offered for free to the world. To fund the search engine, Google started to experiment with displaying advertisements next to their search results. Advertisers were willing to pay small amounts of money for those displays, and Google was happy with the combined total revenue from that, so everybody was happy. The experiment was a success.

Google then expanded into offering advertising to third parties, by "partnering" with bloggers and website owners. Most of these had been offering their content for free, and welcomed the opportunity to earn some money from their free-to-the-user content. Everybody happy again. Another successful experiment.

Then Google bought YouTube, and expanded the partnering options to makers of videos. This resulted in another type of free-to-the-user content being monetised, with everybody happy all round. But it also got them into trouble with the rightsholders in music, movies and TV shows, because they had by accident also created the opportunity to monetise pirated copyright content. Intially YouTube dealt with this through the US DCMA and EU Safe Harbour provisions, allowing rightsholders to issue takedowns for content they owned.

Then Google decided to expand the YouTube partnering options to the music industry. By doing this, they believed they were doing the rightsholders a big favour by enabling them to monetise their content on YouTube, in the same wasy as they had done bloggers a big favour by offering monetisation.

But here Google missed one very important point: On-demand access to music was not free to the user before YouTube came along. Music had value. Music was being paid for by those that listened to it. People were paying for CDs and downloads. Some people had just starting to pay for on-demand streaming services. The content that Google offered to monetise was already being monetised in various other formats and on various other platforms.

The goal of Google's partnering option was for advertising revenue to replace the users' spending on on-demand access to music. That's all good and well, and noble, and positive, (and "not evil"), and was for many rightsholders an interesting avenue to experiment with.

For Google the move was doubly positive, because it also legalised the vast amounts of music uploaded to YouTube by its users, by offering the rightsholders a share of its advertising revenue in return for a license.

Unfortunately, the advertising revenue turned out to be way below market value. The value of a free-to-the-user view on YouTube is miniscule when compared to the value of a subscription play on Spotify, Deezer or Rhapsody (and many people already deem those subscription per-play values to be much too low).

The people at Google appear to still honestly believe that they are doing the music industry a big favour with the YouTube partnering program. They recently proudly announced that they have generated 3 billion dollars of revenue for the music industry. That's a big sum of money.

But hang on...: YouTube has one billion users. So they have generated $3 per user. Three dollars... for six years of unlimited on-demand access to all the music in the world. Is that really fair value?

Let's compare this to Spotify: Spotify has also recently announced that they have paid 3 billion dollars to the music industry. That equals YouTube's big sum of money. But Spotify's $3bln came from just 75 million users, which equates to $40 per user. What's more... More than 90% of Spotify revenue (ie. $2.7b) comes from its 20 million paying subscribers. That equates to $135 per user. That is 45 times as much as YouTube's per-user revenue.

Google/YouTube's intention was/is to replace rightsholder revenue from music consumers with revenue from advertising. This is clearly not working. The revenue generated from advertising is a tiny fraction of what consumers are willing to pay for music.

From this we can draw only one conclusion: The experiment with ad-funded unlimited access to on-demand music has failed. Badly.