What's The Future for Music Streaming Services?

Here’s an interesting question: can independent music services such as Spotify, Pandora, and MOG survive long-term? Or are they doomed for failure? That is a question many people (and investors) are wondering. It’s a good question too. The terms that music services have to agree to in order to have access to a record label’s catalog have long been unknown (due to strict non-disclosure agreements), but that has recently changed as more insiders have started to talk.

For quite some time, I have been wondering how bad the deal terms are for music services such as Spotify and Pandora when negotiating with record labels. And now, after reading an article on GigaOM, it is apparent that the deals these companies are signing are horrific (at least for them) and that the terms will significantly impact each firm’s profitability. However, unfortunately for Spotify, MOG, Pandora, and the rest, they need to sign-on as many labels as possible if they want any chance of being successful (or well, popular) because customers will go to the place where they can find and listen to the music that they want to hear.

While the question of whether or not these independent music services can survive or not is an interesting discussion of debate, I think there are two better questions to be asking:

1. In order to survive and be profitable will these music services have to expand their product/service line to be more than just music?
2. Even if the independent services could survive can they truly successfully compete against Apple, Amazon, and now Google?

For question 1, a product area which would make sense for services like Spotify to expand (or at least consider expanding) into would be the digital music player market. Apple is still selling millions of iPod’s every year. Granted, while going after the iPod will not be an easy task, a low-cost music player with built-in access to Spotify would be brilliant. It doesn’t have to be extremely fancy, but it does need to be sexy/sleek and it needs to be able to connect to a data network and have access to stream the music.

Sell it for $99 or at some price where you can make money from it (but it needs to be cheaper than an iPod) and bundle in a data package similar to how the Kindle 3G offers “free” data from Sprint. Presto! Now you have a new revenue stream and you are seriously competing with Apple.

The first music streaming service to do something like this will be the clear winner (in my mind). As they say, you need to be in it to win it. There is no way to compete with Apple by piggy backing off iOS with an app on a device that already has a built-in music solution. It just won’t work long-term.

As for question 2, it’s tough to say at this time because I think there is a lot that can be done (such as my idea above) that isn’t (or hasn’t) been done yet. However, I think it is clear that if things stay the way they are right now, I do not see these independent services being very successful.