Internet radio companies are at risk?

The music industry has been involved in a financial roller coaster since 1998. At that time, music companies spent large amounts of money in building music artist careers, expecting substantial revenues out of recorded music sales. In 1998, recorded music sales were around $38.6 billion. In 2008, they dropped down to $18.4 billion, and in 2010, they went down drastically to $15.49 billion.

The arrival of digital music and its revenues helped the music industry debacle, with a third of the recorded product sales but it hasn’t been enough. The rise of music companies such as Pandora and Spotify have opened a new window for the music business. Nonetheless, specialists are not too excited about the projected future.

Pandora is an Internet radio company based on music recommendations for users, streaming licensed music for free. The value of this company is beyond its financial statements. Investors have to consider the long-term customer base and market share to know the true value of the company. According to Elliot Weiss from the Music Business Journal, Pandora’s business model concerned many capital investors in 2011. Royalties were one of the biggest concerns; they were paid every time users stream music.  Almost 50% of the company’s revenue was used for royalty expenses for record labels and music artists. According to experts, Pandora should have negotiated these royalty fees but due to the delicate financial situation of record labels, these negotiations did not seem to end in a good deal for Pandora. The second concern relies on the main revenue of the company, advertisement.  Unfortunately for Pandora, advertisement rates for mobile devices are cheaper and provide better returns for brands than Internet ads. Most Pandora customers use the service with smartphones and tablets, resulting in less revenue for the company.

Specialists also feel very skeptical about music companies like Spotify. Back in 1999, the company Music Maker went into the public market at $14 per share and experienced a big jump of 71% the first day. Although the company was not experiencing any profit yet, investors believed in its future. Sadly, in 2001 the company liquidated their assets. Launch Media is other good example. The collapse of music companies in the capital market is mostly due to high spending on marketing and promotion, with no secured returns.  According to Weiss, the challenge for future music companies is to design business models where users are willing to pay for products, making a direct profit for the company.

Starting music companies is a though business, but many innovators and visionaries are ready to take the chance. However, it’s important that music companies find ways of earning revenues from other channels, not just advertisement. The other possibility is to execute outstanding strategies to increase advertisement incomes, which can turn into more profit for the company. Music companies’ success will be measured on these strategies. These companies should be alert to their surroundings, every second a new idea is landing in the business world, looking for acceptance and investment.