Media Forum: Can ads fund free music?

Do Last.fm and Spotify have viable business models, Alasdair Reid asks.

Just about everyone's rooting for the likes of Spotify and Last.fm these days. We all like a bit of music - but, sadly, those with the keenest of appetites are also the people who expect it for free.

The trouble is that "free" is such an utter disaster for the creative industries.

That most exotic and delicate of 20th-century phenomena, the music industry, has been inhabiting a twilight zone for years now - and it would surprise no-one if the sector's decline were to continue its weary way, leaving only mimed Madonna tours and Gorgonzola acts overseen by 50s-style svengalis such as Simon Cowell.

But the commercially funded online music streaming companies such as Spotify, We7 and Last.fm have been starting to promise the best of all possible worlds. They deliver music free to those who want free, funded by advertising; and, for those willing to subscribe, there's an app for that too.

Now, courtesy of last week's announcement from Last.fm, we have all this and television too - Last.tv, which will launch in January 2010, will feature live acts performing in a purpose-built studio, funded by sponsorship plus pre-roll video ads. Spotify has also been looking at launching TV services, starting in its home Swedish market.

Exciting times. Worryingly, though, these developments come at a time when analysts have been rerunning the sums and coming to the conclusion that the numbers don't add up. They now believe, for instance, that to survive these services will have to drive subscriptions revenues forward far faster than they've done to date.

Are they right? Do the online music streaming companies have a viable business model, with a sustainable blend of revenues? Unsurprisingly, Ryan Regan, Last.fm's chief financial officer, says that his operation certainly does - and he can reassure advertisers that advertiser-supported services remain the company's primary focus. He comments: "From a user perspective, the more services that are free, the better - but we obviously believe it's possible to develop other revenue streams too.

"Where TV is concerned, there's an opportunity, in partnership with our parent company (CBS), to become involved in more content creation - and the response we've already had from advertisers about the addition of video advertising opportunities has been fantastic."

Which has to be encouraging, Rob Horler, the managing director of Carat, says - but he feels these companies have some way to go before the market is entirely convinced, especially about the advertiser-funded side of the business model. He says: "Where subscriptions are concerned, they say they have a good story to tell, so the plan is sort of working. Getting on to TV is an important step - though being on the platform is more important from a profile point of view than the revenue it will derive. You don't feel they'd be doing this if they were struggling businesses."

Dave Chase, the head of music partnerships at WPP's music specialist, BrandAmp, agrees with much of that - and, if anything, he's slightly more optimistic. He says: "Spotify's interesting - the 'buy' button is now more prominent, so it's likely that this revenue stream will increase. And there's more of a community interface, which should keep more people within the site. That increases dwell time, so users will be exposed to more of the advertising. These operations are getting there."

Dave Katz, the digital head of trading at MPG's digital arm, Mediacontacts, tends to agree. He says clients now seek to develop specific music-media strategies: "We have seen amazing results for clients who recognise that a combination of conventional digital and radio advertising can generate a phenomenal response. So I'm hoping that most of their new users are willing to accept ads for a free service, rather than paying for the ad-free models - otherwise, we'll find somewhere else for our burgeoning integrated audio adspend."

- Got a view? E-mail us at campaign@haymarket.com

YES - Ryan Regan, chief financial officer, Last.fm

"In terms of ad-supported services, we're on track to exceed revenue projections this year. Site traffic is up by more than 100 per cent and we now have 35 million unique users per month, with a focus on males aged 18 to 34."

MAYBE - Rob Horler, managing director, Carat

"It all depends how you measure success. It's true they've not been doing too badly lately. But have they cracked the whole free-music-funded-by-advertising thing? You have to say the jury is still out."

YES - Dave Chase, head of music partnerships, BrandAmp

"It's always going to be a tough one - but both these companies are in interesting positions. The mix of revenue streams is particularly interesting. So, yes, I think they're getting there."

YES - Dave Katz, head of trading, Mediacontacts

"They have a large, loyal user base, many of whom are engaged with their services for much of their working day. Both services are important to marketers who want intimate conversations with consumers - and you're only a click away from purchasing a product."

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