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Google Snags Songza, But Will Streaming Ever Be Profitable?

By  +Follow July 3, 2014 3:53PM
Tickers Mentioned:

Songza, Spotify, Pandora, Sirius, Streaming Services, Streaming Music, Club Songza

Online and mobile music streaming has reduced the clutter of CDs at home, but has increased the clatter around selling songs. On-demand and streaming services such as Spotify, Pandora (P) and Songza rely on advertisers’ sponsorship to fund their services, and while they all offer subscription service, most listeners expect music to be free. Given this trend, and the fact that subscription-based Sirius XM Radio (SIRI) is currently the only profitable music-streaming provider on the market, all free streaming services face little prospect of profitability.

As the largest streaming radio option, Pandora is a good indicator of where streaming profitability is headed, and the road appears to lead to a dead end. It earns yearly revenue of more than $500 million, but its gains in revenue are matched by proportionally high licensing fees and other costs. A bleak analysis conducted by Generator Research in 2013 concluded that the streaming business was "inherently unprofitable" in its current state. According to analysis and projections, "no current music subscription service — including marquee brands like Pandora, Spotify, and Rhapsody — can ever be profitable, even if they execute perfectly.” 

Streaming Services Provide Data, Not Profit

In their current state, all streaming services face the challenge of ever finding profitability. Music listeners are used to getting all the perks with none of the price, and the trending expectation is that music will remain free. While Songza offers Club Songza subscription for $0.99 per week, which removes ads and doubles the skip limit to 12 songs, few users opt in. Most people are used to the influx of advertising on all platforms and are relatively willing to endure a few ads for free personalized playlists. Club Songza is only a year old and user data is unavailable, but if its proportion of paying subscribers is anything like Pandora’s, only 3.6 percent of its users are willing to put down money for those perks. This represents annual subscription revenue of $10.2 million, most of which would likely be redirected to licensing fees for new tracks in efforts to continue boosting listenership.

For More Than $39 Million, What is Songza to Google?

Google (GOOG)  has entered the music streaming arms race, but not for Songza’s direct prospects of profitability. For listeners who want quality playlists created for them, Songza is the most effortless personalized option. Each playlist is hand-selected (the latest buzzword is ‘curated’) by DJs and music experts based on listener data, and fares far better in reviews than competitors such as Pandora. This is largely in part to its wide catalog size, and at 20 million tracks it is in close pursuit of Apple’s (AAPL) iTunes Radio, which is just above 25 million.

Google’s strategy appears to center on acquiring the best platform for personalized listening. Similarly to Netflix’s (NFLX) creation of microgenre categories, Songza combines listeners’ data with handcrafted playlists by music experts. Songza’s tracks add to the YouTube and Google Play catalogs, but its most valuable feature is its user data. Google’s goal is to capture customers in the streaming market, and while Songza alone may show poor prospects of profitability, its ability to attract customers to Google’s entire range of products is its most valuable benefit. For example, if Songza’s popularity takes off, consumers may be more drawn to Google Chromecast knowing it provides access the streaming service.

While Google’s acquisition of Songza may attract more users away from competitor Apple’s iTunes Radio, the musicians providing their tracks to the streaming services still earn fractions of pennies. Artists signed with independent labels have historically gotten the short end of the stick when it comes to royalties, from vinyl sales to mp3 downloads to streaming. Of a reported 1.71 billion hours of listening on Pandora Radio, 44 percent of songs played were from indie artists. However, these artists earn 12% of a penny each time a song is streamed. Free streaming that primarily relies on advertising for its revenue cannot be profitable for either the service provider or the artist. Who really profits is the label middleman — companies such as The American Society of Composers, Authors and Publishers (ASCAP) that collect royalties from Pandora and its competitors pocket large fractions of the payouts, and distribute the remains among musicians and performers. The larger the band, the smaller the fraction that goes to each member.

Spotify is the latest service eyeing an IPO. Given analysts’ concerns of profitability, streaming services are unlikely to turn a profit comparable to that of subscription radio champion Sirius XM unless major overhauls are made to either subscription services or the royalties paid per track streamed.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.

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