ad-sponsored music and the major labels

By: Lucas Gonze

What are the economics of ad-sponsored streaming music services like iMeem? Labels want some amount, most commonly quoted as a penny a play, and the question is whether this price makes sense, or if not what the price will have to be.

A song lasts 3.5 minutes. The majors have been asking $.01 for it. The site pays for the play by selling advertising. Let’s say the site shows a new ad every time the song changes. To break even the site needs to sell one ad per song at the rate of 1 penny a song, which gives you an effective CPM (”eCPM”) of $10.

A $10 eCPM isn’t feasible. Sites don’t earn that kind of rate with 100% sell-through. Even if were feasible it leaves no room for the rest of the business. They have other costs. They need to earn a profit, and it has to yield a return on investment comparable to web businesses that don’t pay music royalties; otherwise investors will move their money out of music-related products into royalty-free products like search engines.

A $1 effective CPM is closer to the mark, meaning that Myspace, Google, Facebook, etc need a 10X price reduction from the labels to make this business work. The labels see this as unreasonable. They’re already lowering prices from what they earn at the iTunes store — why should they keep going to accomodate third party businesses at their own expense?

The alternative business for the labels to be in is selling music by the piece. The majors gross about $.70 on a download at the iTunes store, 70X what they are proposing for an ad-sponsored play; $.01 is only 1/700th of that! So naturally the price change

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