Correction: thanks to Larry Kenswil for pointing out that I needed to multiply monthly charges by 12 to get annual revenues, which resets the numbers by an order of magnitude. My entire train of thought just doesn’t apply at that point, so I have marked everything below as deleted.
If you want to explore the numbers, I have created a collaborative worksheet that anybody can edit over on Google docs. Eventually it’s sure to be destroyed by vandalism, so save your work as a copy if you get anything you want to keep.
There is news today about two new music subscription services — MOG and Rdio.
Consensus wisdom around music subscription is that it can’t work. It can’t save the recording industry, and it can’t sustain an industry of any kind.
That’s not exactly right.
The reality is music subscription service can make some customers very happy, and can probably be sustainable businesses, but can’t be a large industry.
The kind of people who will love them can easily afford $10-20 a month and don’t have time for the DIY work that filesharing creates. Professionals and parents fit easily in this market. They prefer to pay somebody else to keep their metadata straight, do backups, eliminate duplicates, upgrade software, etc. The money is a non-issue. Their listening styles are relatively old-school, so the kind of user experience that the Rhapsody, Spotify, Yahoo Music Unlimited, etc, clients deliver is fine. Compatibility with Winamp and other third party software is a non-issue.
(Futurist music technology points: the compatibility issues may go away because of either music content resolvers like Playdar or pan-service wrappers like Yahoo Media Player that can seamlessly integrate multiple sources into a single browser-based experience).
There aren’t that many of these customers. Let’s pick a number out of the air and say there will eventually be ten million. That means an industry of max size 1.2 billion dollars at maturity. If the biggest company has 100% of the market and the P/E ratio is 20x, the biggest possible company would have a market capitalization of 48 billion dollars. For comparison, Google’s market cap is 168.84B today.
MOG’s pricing is different: for $5 a month, members can listen to as much music as they want from their computer; for $12 to $15, users can access music on their mobile devices as well.
That’s the best possible outcome for the entire universe of investors and worker bees in the field. More likely there is room for 2-3 companies grossing $100 million total, with a low P/E caused by the brutally high royalties and amount of risk. So market cap of the biggest company at 4X P/E * 100 million / 3 companies = $130 million. MOG just raised $5 million in VC money, suggesting an upside of 10-100x, or a company with market cap of $50 million-$500 million, which is correct. These are reasonable businesses.
But they aren’t going to sustain an industry. There are and will continue to be companies doing music subscription. There isn’t and won’t be a recording industry which exists primarily to supply product to the customers they serve.
Are you looking to sustain the industry of artists performing and recording their music and selling it to their audiences, or the industry of record labels making and selling copies of recordings at monopoly protected prices?
A more efficient industry may well have two less zeroes on its turnover (given no middlemen taking 99%), but that doesn’t mean it’s necessarily a smaller or less productive industry.