Brian McAndrews is the CEO of Pandora.
A music industry executive was speaking to a class of undergraduate students at one of the top universities in the country.
He asked them how many listened to terrestrial radio and a number of hands went up. Then he asked how many listened to Internet radio, and nearly all were raised.
He then asked how many listened to music “on-demand” and virtually all the hands stayed up. His final question was “how many of you pay for the on-demand service?”
Not one hand stayed in the air. Was this the year 2000 at the height of Napster’s file sharing? No. This was about a month ago.
Growing up, like tens of millions of others, I listened to terrestrial radio all the time (we just called it “radio” back then). I didn’t pick the songs on WABC and WPIX; they were picked for me by a DJ. And every new song and new artist I discovered and loved, I first heard on radio. If I wanted to listen to a particular song or group of songs “on-demand,” I bought the album at a record store. The business equation was simple: music discovery leads to music ownership.
Historically speaking, this meant album sales or concert performances. Said another way, discovery and trial were free to me and supported by ads, but listening to a particular song or album over and over cost me my paper route money.
Today, advances in technology have resulted in a far better listening experience, but fundamentally the paradigm is the same: Internet radio services are largely ad-supported, free-to-the-consumer, and “programmed.” The listener does not pick which song they will hear next, but enjoys programmed favourites and discovers new songs and artists. On-demand services then allow a listener to hear any song or album she wants to hear whenever she wants to hear it. Internet radio is sampling and discovery; on-demand is the modern equivalent of ownership.
Only that’s where the analogy breaks down. Because today it is far too easy for on-demand consumers to continually “own” music for free. Not just a free trial, but free all the time.
Years ago, if anyone could have walked into a record store, legally taken every record home for free, and listened to the exact songs they wanted for as long as they chose, the music industry model would have completely broken down. But that is exactly the situation the music industry faces today.
Free-to-the-listener on-demand services are driving down music’s intrinsic value by creating a “grey market.” By that I mean a market where listeners can perpetually access licensed, free, on-demand music. An ever-growing number of listeners are happily lingering in music’s grey market, enjoying full access to all music without paying for the privilege and with little incentive or intention to convert to a full-paying subscription.
Defenders of free on-demand music will surely counter by reminding us every song they play is paid for with royalties. I also expect some will argue that free on-demand is an essential on-ramp to a sustainable subscription business. And both of these statements may well be true. But I would argue that an on-demand on-ramp is one thing; a permanent, free on-demand highway is another. The first is good for the long-term health of the music industry. The second is not.
This grey market is unsustainable. If consumers can legally listen to free on-demand music permanently without converting to paying models, the value of music will continue to spiral downward to the benefit of no one.
In order to reverse this trend, we need to fully understand how we got here. Consumers are doing nothing wrong; many are naturally seeking the lowest price available for on-demand music. But it is the agreements between content rights holders and some on-demand streaming services that enable the free on-demand construct that have created this hole, and they are the only ones who have the power to patch the leak. If they don’t, genuine attempts to get consumers to pay for music will increasingly fall on deaf ears.
This problem is imminently fixable: limit free on-demand music to truly trial. Countless other industries successfully convert their consumers from limited-time trials to payments. Ad-supported radio models will continue to lead to exposure and discovery, on-demand services will convert a sizable subset of those listeners to subscribers, and we can all work together to banish the grey market experiment of recorded music.