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Music Services Are Having a Moment

The competition among startups for consumers' ears (and dollars) is growing fiercer as new contenders enter the market and established players face the complicated challenges of the music industry.
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In a lot of ways, 2013 was a year of false starts for streaming music services. iTunes Radio, the hotly anticipated entry from Apple, debuted to little fanfare. Turntable.fm called it quits. And Rdio suffered a massive bloodletting. But if music lovers have their way, 2014 could be far more disruptive.

Music subscriptions accounted for $1.2 billion in 2012, according to a recent report commissioned by Vivendi SA's Universal Music Group. Only one-third of the world's consumers have actually used music streaming services, however, and only 10 percent paid for them. The theme for 2014, then, will be achieving wider adoption.

New Competitors and Revenue Streams 

The market is set to explode, with dozens of companies unveiling their answer to Pandora and Spotify, including YouTube, Beats Music, and Deezer, a U.K.-based service launching in the U.S. Many of these will diverge from familiar models such as Spotify, which charges $10 a month for unlimited access to a catalog of 20 million songs, and Pandora, which generates stations based on users' choice of artist of genre. This new crop of startups also will sell complementary hardware such as smartphones, smartwatches, and headphones.

Beats will enter the fray this month, bringing with it a curated experience courtesy of tastemakers like Nine Inch Nails frontman Trent Reznor (the company's creative director) and hip hop producer Dr. Dre (one of its co-founders). It also claims to offer superior sound quality. Given that Beats Electronics practically owns the headphones space, it’s not hard to imagine the company, which raised $60 million in funding last year, embedding its products with the streaming service.

This year more streaming music companies will make deals with mobile carriers, says Jim Donio, president of the Music Business Association, a Marlton, New Jersey-based nonprofit that promotes music commerce. "Consumers need to be able to go from their car to their home and have access to everything," he says. Spotify inked an agreement with telecom company Telia back in 2009, and Jimmy Iovine, co-founder and chief executive of Beats Electronics, tapped AT&T for an exclusive deal last summer. 

Cars, too, will become a critical piece of hardware, as automakers eye startups that can increase their brand's cachet. 

Another way in which music streaming startups will compete is by employing what Frank Johnson, chief executive of Seattle-based MediaNet Digital, a company that assists music startups with technology and licensing issues, calls "the Beyonce tactic." Much in the way the singer's surprise record release on iTunes generated thousands of sales quickly, big artists or indie acts with large followings will take advantage of exclusives, being careful not to launch on every service simultaneously, he says.

Operational Challenges

The fierce competition will prove difficult even for the market's established players. Johnson predicts listeners will move away from pure-play services like Spotify, whose vast catalogs tend to overwhelm casual listeners, in favor of niche, customizable experiences like Beats that don't solely rely on computer-generated algorithms. iTunes radio will need to find ways to innovate, he says, while Pandora, which has struggled with helping listeners bookmark songs in the past, may consider linking up with other services to bolster its offerings.

Speaking of partnerships, Pandora might find itself shaking hands with lawmakers for a change, says Matt Pincus, founder and chief executive of Songs Publishing, a music publishing firm. Music rights holders ASCAP and BMI may start setting artists' royalty rates before services begin streaming their music. As a result, startups like Pandora will spend less time negotiating in court.

Pandora may find itself in court for other reasons, however. In December a rate court ruled that the company doesn't have a blanket license that includes the songs of publishers who have withdrawn their digital rights. Universal Music Publishing Group, BMG, and Kobalt planned to withdraw their digital rights as of January 1st, and Pandora needs to strike deals with them, which won't come easy. "What I keep saying is, 'Don't underestimate the operational challenges, they're enormous," says Pincus.  

IMAGE: Getty Images
Last updated: Jan 6, 2014

JILL KRASNY | Staff Writer

Jill Krasny is a staff writer for Inc. magazine, where she covers the intersection of entertainment and startups. Prior to Inc., she was a writer for MTV and Esquire and an editor at TheStreet. She is a graduate of the University of Southern California with a degree in communication. She lives in New York City.




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