Online Music Services Compete For Small Pool Of Investment Capital

Companies offer services as varied as song streaming, concert ticket sales and music downloads using business models ranging from subscription to free-if-you-watch-an-ad.

Companies offer services as varied as song streaming, concert ticket sales and music downloads using business models ranging from subscription to free-if-you-watch-an-ad. Courtesy of Pandora, Songkick, Rdio, Rhapsody, eMusic and Spotify hide caption

itoggle caption Courtesy of Pandora, Songkick, Rdio, Rhapsody, eMusic and Spotify

Fans have flocked to the Internet to find music with — to put it mildly — great enthusiasm. But, investors — not so much. Very few have found a way to turn all that downloading and streaming into dollars. But there are some signs that could be changing.

The road to success in the online music industry isn't so much strewn with abandoned cars as it is with a bunch of idling vehicles. Services like Rhapsody for which you pay a monthly subscription fee to stream a library of songs, have 750,000 subscribers and holding. Spotify, another subscription service based in Europe, has 10 million people who use it for free by watching ads, but just 1 million paying subscribers.

Still, Drew Larner, CEO of Rdio, a newly opened subscription service, is ready to hit the road.

"If I were to say this was going to be easy and it was going to happen like that," says Larner, "I would sound naive." What is making Larner optimistic is that technology — especially mobile technology — is evolving in ways that he thinks will make subscription services more appealing.

Specifically, says Larner, "the adoption of smart phone. The increasing ability of those smart phones to deliver a great experience because of connectivity and the capacity on these phones."

Rdio has nearly 8 million songs available for streaming in any order you like for $10 a month. The company's Marisol Segal says she was watching American Idol the other night. "This guy sang this Luther Vandross song and I was like, 'Oh my gosh i want to listen to Luther Vandross right now,' and I grabbed my phone while i was watching Idol and synched Luther Vandross to my phone so that in the morning when I was going to work I could listen to Luther."

Segal can also stream those songs from the web on her computer, or through a connected TV. "I've kind of got it where ever I need it to be," she says.

Rdio, founded by the creators of Skype, just got more than $17 million in venture capital funding. Pandora, the streaming online music service, reached profitability and is about to go public. Songkick, which lets fans track artists they like and buy concert tickets, just got nearly $2 million in extra funding. And this week MOG announced a deal with BMW to put its on-demand streaming service in cars, using a smart phone plug-in.

But there have been a lot of failures, and that's scared many investors away. Mike McGuire, an analyst with Gartner who follows online music, notes that many of the companies are offering very different kinds of services — whether it be ticket sales, streaming music or downloads. He thinks real profitability will require those companies to offer all of those services together.

What will be key, he says, is "to find the kind of mix of — beyond simply providing the music, which is a great service — but also finding those other music-related transactions opportunities that can be kind of layered into the platform."

There are a lot of investors who remain wary of anything connected to music — online or otherwise. David Pakman, a venture capitalist and former CEO of eMusic, is keeping his checkbook in his pocket. "I don't think that there's a promised model that revitalizes everything and makes this a lucrative market segment," he says.

Pakman notes the following: Overall music sales were down more than 2% last year. And the industry's great hope, digital downloads, were flat. He points out that Apple's success with iTunes hasn't really been financial; the company's money comes from iPod, iPad and other hardware sales. The four major record labels, while more open to licensing to online companies, haven't exactly made it easy.

"You still have to pay advances," he says. "Essentially as a start-up you still have to take all the risk." Pakman is not exactly sold on the idea that mobile technology will make online music a profitable business, when so many people have become used to getting their music free.


Correction (3/10/11): A previous version of this post identified David Pakman as an early investor in eMusic. He was the company's CEO.
Correction (3/14/11): A previous version of this post identified Drew Larner as president of Rdio. He is the company's CEO.

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