You’ll Never Make Money with a Music App

I’ve said this a million times and i’ll say it again for the record.  If you’re a music internet application and you have full music streams, you’re not making any money.

I was reminded about this again today when i read this article about Spotify:

Spotify’s 2012 results are out today, with Reuters reporting that the private company had revenue of 435 million euros, and a 58.7 million euro net loss.

The revenue figure is impressive, more than doubling 2011′s 190 million euro tally. However, the company’s net loss widened in the year, even as it saw a dramatic expansion of its top line from 45.4 million euros to the aforementioned 58.7 million figure.

For some background, Toby and I founded the music company Qloud back in 2006.  We had 20 million monthly users, did over a million streams a day, and were acquired by SpinMedia.  But, given that kind of traffic, there was still no way we could make money.  Let me explain why:

  • If you need music for your product, you need to sign contracts with the major music labels. There are 4 of them. These labels require upfront payments of around a million dollars a one or two year deal (at least at the time they did). Your payments to them are then debited out of those upfront payments.   So, you need a good amount of capital to even get started.
  • The major labels have seen big tech companies receive big payouts (such as Last.fm’s $200 million exit) and are upset that tech companies are making money while their business erodes.  As a result, they want equity in any company they do a deal with so they can share in the upside.
  • The major labels do not think the success of your company is due to your product chops or your ability to market well.  No, they believe your success is due to the quality of their content.
  • This is the most important one: Your contract with them is for one or two years.  If you report a profit at the end of the term, they will interpret that fact as their cut is too small and you can expect to pay more in your next deal.

That last point is the key point. You’ll never make a profit.  They will never allow for it.  You’ve signed a deal with the devil and unless you can have a product that doesn’t rely on a mainstream back catalog of music (i.e. eMusic), you’re screwed.

So, while i love Spotify and Rdio and use them all the time, don’t expect them to IPO any time soon, or ever.

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