February 11, 2014
Although the music subscription service boom seems to be the latest development in the digital music evolution, Peter Csathy saw it coming over a decade ago. As President of Musicmatch, he was offering on- demand streaming and music subscription services in 2002. Few were interested then. Judging by the deluge of music subscription entities today, few aren't interested now. As CEO of Manatt Digital Media Ventures, Csathy offers his perspective on the streaming climate now and how it should evolve to succeed.
How does your career as a business consultant and a venture capitalist fit into the digital music business?
At this point in my career, I almost feel like a godfather in the digital media business. I'm seeing a lot of things going on now that started off back in the day when I was representing NWA. This type of venture is how I cut my teeth in the business. I've always been a music guy; after NWA I went into the studios and did a variety of things on the business side, progressively making bigger and bigger deals.
When the Brave New World of the Internet hit, I helped lead one of the first digital music innovators called Musicmatch. I was President up until Yahoo bought it for $160 million. We literally were the first ones who believed in on-demand streaming and subscription music services; we did streaming demonstrations with labels back in 2002-2003. Back then, nobody really believed in it. Since then, I've run two other digital media companies. At Manatt Digital Media, I get to bring all of my experiences and contacts together for the benefit of companies on the media and music side. More entrepreneurs understand the power of subscription streaming services. Manatt Digital Media is both a great platform and personally satisfying.
Are you surprised that streaming, as a viable business, has come on so strongly within the past year or two?
Actually, I'm surprised how long it took to get here. This goes back to what I believed over 10 years ago at Musicmatch. From a consumer standpoint, subscription streaming services are a tremendous value proposition. You pay a monthly rate for all the music you ever wanted. Back then, we started with 500,000 tracks. Now streaming services are offering up to 25 million tracks. Offering that value proposition for consumers entices them to listen more and ultimately discover more new artists -- and that's a great benefit with subscription services.
The persistent criticism of streaming services comes from the artists, who believe they're getting a paltry return for their efforts.
Certainly for large acts and well-known bands, it's more problematic than it is for smaller, lesser-known bands. The retail business we all grew up with has been tremendously impacted over the last 10 years -- and now you have downloads declining while subscription services are rising. For major artists, if you looked at it purely from a retail download vs. a subscription play, there's no question the economics are challenging, but those will be addressed over time.
But if I'm a younger band, I'm going to try all these options available to me - including subscription services -- because the world has changed. I'd be willing to do something unique for a subscription service; that's an opportunity to differentiate myself from other young artists and create more visibility. A business and a band's success largely depend on how smart they are and how aggressive they are to seize the day. You've got to work at it. Experiment in it. This is not a passive business.
Most of the highly successful bands in the past were able to earn significant passive success. They got their songs on the radio, where they got played a lot and that sold a lot of records. That certainly doesn't happen as frequently today, yet everybody has to still work towards that end. But the reality was that the great majority of artists didn't get on the radio back in the day -- and they always had to work hard for any success. The majority of artists don't sell significant retail downloads in any event. For new bands and young artists, being part of a subscription service may not be any more impactful on the revenue side at first, but those services have the potential to foster deeper listening and discovery.
At least today, there are more tools at their disposal and more ways to reach consumers. That's what's so exciting. People don't have to be in their houses, their cars or even in front of a computer to hear music; they have mobile devices to provide a variety of true listening experiences 24/7. That's a pretty cool opportunity for a young band to try to exploit.
Look at it in a holistic way: I'm a consumer and I like an unfamiliar song that a streaming service played for me. Once I discover that song, I look for more songs by that artist, and if I like them, I'll probably buy tickets to go to that artist's concerts shows and buy the merchandise. I am engaged directly with them; the subscription services are an essential access point into that artist. A portal. And by enlarging the artist community, you increase consumer engagement.
However, in the wide-open world of the Net, where there are many thousands of bands and records available, isn't the chance of a new band getting discovered much like being a needle in a much bigger haystack?
It's true you're in a big haystack, but before the dawn of these new subscription services, most unsigned bands couldn't even get that far. A subscription service is just one access point. As an artist you have to be very entrepreneurial today -- that's the reality - and a subscription service is another important access point. For younger, essentially unknown artists, it's a positive thing for them because it gives them chances they wouldn't have had otherwise. I listen to subscription services that have enabled me to discover new bands and as a result, I've gone to their shows -- and I don't think I'm alone in doing that. You may want to look at it as a needle in a haystack, but I see it as a portal to generate additional revenue streams. For young artists, I see subscription music services as being an important and exciting new opportunity to expand my fan base and overall community.
Currently there's a plethora of competing music services. How do you expect the consumer to choose one over the others?
The different services will be jostling with one another to differentiate themselves and a lot of marketing dollars are being spent. It's a dangerous game to play. For example, Beats Music ran an ad during the Super Bowl; that's a lot of money to differentiate you, especially considering the overall challenging economics. But you must find a way differentiate yourself when you're essentially offering the same catalog of music. Beats Music's big play is its partnership with AT&T. Now that's powerful.
Do you foresee a shakeout of sorts in the music streaming field?
I absolutely think there will be a consolidation in the industry. There's no question about that. So how do you win when the economics are largely the same for each subscription service? As I said before, it's really about distribution and the effectiveness of the user experience. The service must achieve critical mass and catch the fancy of the consumers. Let's face it: With success in any business, some serendipity is also involved -- which you can't control. But there will be a consolidation and the ones that succeed will partner effectively and provide a better, easier-to-use and more engaging service.
Better service such as...?
For me, the one big missing piece is doing better online/offline integration. You have services that are great brands, but very few do much in the physical offline world. That's a real opportunity for some services to distinguish themselves and add new revenue streams. There's an iTunes Radio festival in London that's a month long; every day there's a new show. iHeart does their massive event. There's no reason, in my view, why some of the other well-known services shouldn't enhance a sense of engagement with the customer through special events and festivals that not only create new revenue streams, but provide real opportunities to differentiate them from others and engage with their customers in a deeper way.
One other piece to consider is a social impact component to deepen engagement even more. You can get users to care more about your service if they see that you're trying to make a difference in their world -- mobilizing troops is a different form of engagement. When people get passionate about music, they get behind the bands and brands. If you tie in with what they're passionate about in their lives, they'll get behind you.
Currently, consumers do have a choice between computer/algorhythmic programming of Pandora and Spotify vs. the human programmers behind Beats Music. In your eyes, is one necessarily better than the other?
The more choices, the better -- as long as the consumer experience is a good one. As I said, when so many services offer many of the same elements, the ones that make it easiest and most fun to use are going to win. While neither approach is perfect, I certainly believe that the algorhythmic approach can be effective. I have seen it work for me. I frequently discover new music that way. On the flip-side, playlists from influencers do matter; if an indie artist whom I respect and like says he likes an obscure band called Radical Face, people who like that artist would be curious about that; they would like to know what else he listens to and recommends. It's much like the services that allow users to find out what their friends are listening to and what they like.
So where does radio fit into this equation?
I look at it from my own situation. Right now I'm driving from Los Angeles to San Diego; I have SiriusXM in the car, and I also have my Pandora, Rhapsody and of course, the local radio stations. I change between them depending on how lazy I am. If I want music discovery, I tune in to SiriusXM XMU. Many times, I just like to be very passive and listen to someone else's playlist. It depends on my mood, and it's the same thing for a lot of fans. It's not one or the other. It's all of them.
One thing radio can do is take new records and by presenting them to a larger pool of listeners at once, helps turn that unknown band into a known commodity and fueling its success far faster and more effectively than band that can only rely on streaming services, word-of-mouth and touring. Can music streaming services do anything to help artists advance their careers in a similarly significant manner?
This gets back to young bands and artists being entrepreneurial. The more active they are, the more opportunities will be available to break out. In this case, as a young artist who has some following and critical acclaim, I would reach out to each subscription service and offer a unique promotional package ... something they can market effectively to differentiate themselves from others. If a service likes the opportunity, it will promote it aggressively. And, that's a great thing for the band.
So where do we go from here, both in the short and long term?
There's going to be continuing pressure on the overall economics of the industry. The more popular music artists have been very vocal about the economics of royalties, yet the services must find a way to accommodate their interests and remain viable.