Greetings from London! I’m here for the first-ever UK spinoff of FastForward
, where I’ll be moderating a panel about challenges & opportunities facing the modern songwriter. Outside of the conference, I’m excited to hone my pseudo-British accent and explore the local music/art/food scene (I’ve already had some of the best Indian food in my life here).
As always, if you’re new to Water & Music, please introduce yourself simply by replying to this email—would love to get to know you better! :)
Today’s subject line is inspired by a recent blog post on Hacker Noon
called “The Subscription App Paradox
.” The author, Alan Marsden, argues that the healthy subscription businesses of the future will serve smaller, more loyal customer bases, while being unfazed by a higher customer churn:
Developers will chase the revenue curve and customers will think hard before every download. Customer churn will be a market norm with reduced numbers paying, but remaining committed to the product. The paradox is profitable growth through fewer paying customers.
The wording of this paragraph makes it seem like the music industry’s biggest nightmare. I can hear execs asking already: At this crucial financial inflection point in our history, why would we want fewer people to hear our music and give us money? Especially considering that Spotify, which has more and more power and influence in the industry, is expecting to go public later this year, a shrinking user base doesn’t exactly make for an attractive Wall Street narrative.
To be fair, Marsden is writing primarily for an audience of software engineers, not music professionals. Few apps outside of music are forced to pay as much as 80% of their royalties to third-party rights holders, in addition to all the remaining marketing/operations costs. In such a climate, recruiting more paying users seems to be an imperative.
Yet, some smaller music companies seem to act as if they are no longer exempt from the subscription paradox. David Porter, Founder and CEO of internet radio/mixtape platform 8tracks
, recently told Vulture
about his decision to limit free plays on the platform, bringing the premium subscription option front-and-center:
It was a conscious decision to reduce the size of our audience, our revenue base, and cost base. But it was a gamble that we would reduce our costs by more than our revenues and essentially force profitability at the expense of growth.
This outlook, profitability at the expense of growth, puts an interesting spin on the futures of the larger streaming services as well (Spotify, Apple Music, Pandora, SoundCloud, etc). Some folks are giving these past few months the misleadingly gleeful name “Summer of Streaming” because Pandora and SoundCloud were so close to failure. I think what happened with those two services in particular is that they got too big before even having a sustainable business model that served the needs of a loyal customer base in the first place (in contrast to Spotify, which, despite still also not making money, is better at user retention).
When Pandora and SoundCloud first launched their monthly subscriptions, I remember them feeling like uninspired also-rans—and investors and markets subsequently acted when the companies failed to deliver on their promises. Hence, as terrible of a PR move as it became, SoundCloud’s decision to lay off 40% of its staff sort of made business sense, in terms of immediately reducing costs.
One of my favorite examples of a company thriving off the subscription paradox is The Information
, a tech journalism publication that I’ve shared often in this newsletter. The company puts all of its content behind a paywall, but is profitable because its reporters actually do really smart tech writing that delivers on its promises to customers—which, while totaling only around 10,000 subscribers as of December 2016, include 10 out of the 11 most highly valued tech companies.
Then again, it’s not like The Information also has to pay 80% of its revenues back to these same tech companies, so it can afford to have much fewer users.
The questions in my head are endless: Do you think 8tracks can become more profitable with a smaller but paying user base? Are the larger streaming services special snowflakes that should be “exempt” from the subscription paradox because of their unique business models? If so, how in the world are they going to make money? Should labels just be content with getting less money (obviously not)? Should we be charging more for music subscriptions (maybe)? Should free streaming just go away altogether
I’d love to hear your thoughts/ideas/feedback/criticisms, as we all hope for a day when the music streaming world looks slightly less chaotic.