Stats don't support hype: Digital music is ailing

While founders of Imeem and MOG debate over the state of digital music, we take a look at what the numbers say. Here's a hint: they aren't good.

There are lessons for digital music in the tale of "The Music Man." Warner Bros.

commentary If you want to get a sense of both the wishful thinking and the likeliness of dashed dreams for people investing in the digital-music business, click over to your Netflix queue and rent a copy of the 1962 musical "The Music Man."

Humor me here: "The Music Man," first a Broadway play, tells the story of a traveling huckster who convinces people in small towns that he can teach their tin-eared kids to play a musical instrument--all he needs is money to buy their trumpets and whatnot. And what happens once they give him his money? He's off to the next town to take advantage of some more wishful thinkers.

That brings me to wishful thinker du jour, David Hyman, founder of digital-music service MOG. Hyman wrote a very cheerful column in TechCrunch last week in response to a gloomier assessment of the segment's health from Imeem's founder and former CEO Dalton Caldwell. Hyman declared that those music services with "models that work, can reap massive rewards through [digital music's] tumultuous evolution."

Hyman seemed to suggest that MOG is one of those services that has the "know-how, hard work, diligence and passion" and that is "making it." Good for him. It's important to believe in yourself. But should we believe in his company?

No, I'm not saying Hyman is a con man. He's more like one of the good townspeople who think their kids can learn to play trombone. Digital music has not been kind to entrepreneurs. Other than Apple's iTunes, no digital-music company or service has provided proof that it is consistently generating significant revenue or profits. Pandora said in January that it saw its first quarterly profit last year but has been quiet about profits since. Even if there is a group of quietly successful start-ups somewhere out there, it is doubtful that MOG would be a member. MOG, a Berkeley, Calif., service that has been around in one form or another since 2005, launched a subscription music offering in December.

According to traffic statistics from media measurement company Quantcast, MOG's site topped 3 million worldwide monthly visitors a year ago, has trended downward ever since, and is now below 2 million.

The company hasn't fared well in consumer surveys either. Research firm The NPD Group takes a survey every quarter that it calls the "music acquisition monitor," Russ Crupnick, senior entertainment industry analyst said today. NPD analyzes four groups.

First, are music services that have awareness among consumers and high usage, such as iTunes and Pandora. Second, is a group with reasonably high consumer awareness, but less usage than the iTunes and Pandoras. That includes AOL Music and Yahoo Music. The next category has low usage, such as Slacker and Vevo, but are showing signs that the public is learning about them. The last category are services with low usage and low awareness, and that's where MOG is, according to Crupnick.

MOG's traffic spiked a year ago, but since a subscription service was launched in December, traffic has trailed off. Quantcast

"The company's awareness was at 2 percent," Crupnick said. He added that another service with comparable numbers was SpiralFrog, one of the so-called iTunes killers that sprang out of the ad-supported music craze in 2006 but never connected with the public and resorted to boosting visits through iffy marketing schemes. The company collapsed spectacularly in 2009 .

What's killing music services and has depressed the sector is that most consumers just don't want to pay for music. Why should they? For a decade, a generation of music fans have grown up listening to music they obtained free from illegal file-sharing services. On the heels of those services came start-ups that offered more free music if users were willing to put up with a few ads. What nobody has proven yet is whether these free music sites can convince consumers to reach into their pockets to pay for songs or anything else.

While Hyman, the former CEO of Gracenote and MTV exec, didn't offer any hard data about his company's financial performance, he did suggest that his company is doing well financially. First, he disputed Caldwell's assertion that the labels force digital-music start-ups into bad deals.

"The labels don't require you to do deals that make no economic sense," Hyman said. "For example, MOG is very happy with the realistic minimum guarantees that were set, all of which we've hit. You have to come to the labels with a great idea, a great product, and a model that works."

Later Hyman said, "It's a low-margin business, yes, partially offset with improved margins from our ad business, but a great business on its own."

I interpret that to mean that MOG is squeezing out a profit. If true, good for him. But the stats say he has yet to attract an audience of any important size. By comparison, Quantcast says Pandora had fewer than 14 million users to its site a year ago, but is now at more than 20 million.

On a side note, Hyman in his commentary took a shot at younger techie entrepreneurs like Caldwell, who have tried and failed to make a go of digital music.

"Digital music seems to be a game that every twentysomething wants to try and play, and it's almost as if creating a digital music product is a rite of passage for millions of young buck programmers," Hyman said. "It's unfortunate that because it's a sexy space, and because there are tons of entrants into the field, all of the noise creates an impression that winning can't be done."

That's unfair. There have been plenty of experienced executives in their 40s and 50s who have tried their hand at online music and failed to make it work, including Mike Bebel, CEO of Ruckus, and Joe Mohen, founder of SpiralFrog. Entrepreneur Bill Nguyen has a great record of start-up success and he couldn't make a go of Lala, though he sold it to Apple late last year.

Digital music simply isn't anywhere near as rosy as Hyman makes it seem. There are too many failures and too few successes. Heck, even download sales have stopped growing. If what Hyman said was true, investors would be moving into the space instead of out. But the opposite is happening.

Hyman, Caldwell , Bebel, Nguyen, Daniel Ek of Spotify , and many of the other founders are smart guys who have what it takes to, as Hyman said, "make it."

But a good business isn't built on promises or hype. It's built on strong revenue and profit. Sounds easy, but it's not, as many failures have shown. Perhaps Hyman will prove us all wrong and MOG will become a wild success. We'll see. In the meantime, I'm going to keep an open mind about Hollywood musicals and relearn an old lesson about kidding yourself from "The Music Man."

Pandora, the online radio service, sees 10 times MOG's traffic and we're not totally sure that company is profitable. Quantcast

 

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