Mobile Marketer has re-launched! Click here to learn more!

Is mobile killing premium digital music?

The music industry?s revenue model ? which has already been upended by the move from analog to digital ? is once again under attack from mobile streaming. 

Spotify recently announced its new free streaming service on mobile, and there are plenty of others in the space, including Rdio, iRadio, Pandora and smaller players, such as Ourtunez and 8tracks. While a small percentage of consumers pay for a premium streaming service, the free streaming is still raking in money via audio and display ads.

?Mobile is helping drive legal, legitimate business models like Spotify and Pandora,? said Ryan Heuser, senior director of music integration at The Marketing Arm, Dallas, TX. ?This year (2014) will be a year of competitive deals with the telco industry and music services.

?There?s a decline in MP3 downloads, however there is an enormous growth with subscription services,? he said. ?There's also digital revenue via streams, advertising, merchandise and online ticket sales.

?Spotify is now officially the No. 2 form of digital revenue for the music industry. Probably doesn't mean much to Apple, which just launched iRadio, but long-term they?ll eventually roll out a subscription model, probably in the next 24 months.?

Premium music
While consumers can stream music for free on Spotify or Pandora, many opt to pay for unlimited ad-free streaming. Either way, the provider and musician make money.

Musicians earn a set amount of money per play, and it just depends on whether that money stems from ads or from a consumer?s monthly fee.

Pandora, for instance earns most of its money from ads. In the third quarter of 2013, Pandora earned $104.9 million in ad revenue from an overall revenue of $180.4 million.

Consumers may be becoming more accustomed to being able to listen for free, but they still understand that there is added value in the premium service.

?Consumers are now trained to understand that if they are listening to a Pandora or Spotify station for free, they will just have to put up with ads interrupting their experiences,? said Harley Block, senior vice president of brand development and marketing at Rokkan, New York.

?For serious listeners, or those who want a more premium experience, the opportunity to upgrade and do things like extend to mobile and remove those interruptions exists as an option,? he said. ?I think we're trained to understand that if we're getting music for free, we'll have to also digest messaging from brands in the process.?

In the post-Napster era, there are now laws in place to regulate music streaming and ensure that consumers are not ?stealing? music.

For instance, providers can only play two songs from the same album in a three-hour span or three songs from one artist in a three-hour span.

SoundExchange, an independent digital performance rights organization, promotes these rules for streaming radio services that are not on-demand. There are additional rules for on-demand streaming.

Pricing models
Spotify recently added free streaming to its mobile app, but if consumers want to upgrade to premium, they will have to pay $9.99 a month. This translates across all devices and allows users to play any song, anywhere, download music and listen offline as well as get rid of ads (see story).

Pandora offers an even cheaper pricing plan, with a fee of $3.99 a month or $36 a year for Pandora One. Pandora One removes ads, increases the quality of the audio and provides fewer interruptions.

Ourtunez, which launched this past September, offers three different models: free, silver and gold. Silver is $0.99 a month or $9.99 a year for unlimited listening hours and 15 skips an hour, while Gold is $3.99 a month or $39.99 a year for unlimited listening, unlimited skips and no ads.

Three percent of Ourtunez users are paid subscribers. Pandora has more than 2.5 million paid subscribers, and Spotify has more than six million paid subscribers, counting for 20 percent of its total user base.

Higher expectations
One interesting challenge that mobile streaming presents for musicians is that the stakes are higher. Consumers can now listen to music for free before deciding if they want to go ahead and purchase the album.

While there will still be die-hard fans, name alone may not deliver huge album sales for a famous musician. They need to prove their worth and earn the sales.

?There?s always going to be money to be made,? said Sam Munaco, co-founder of Ourtunez, Macomb, MI. ?The good music is going to go to the top. It?s going to make musicians have to make good music. An artist is not going to sell millions off of their name alone because the majority of people will hear the music before they purchase it.?

Mr. Munaco?s co-founder Chris Ciaramitaro believes that there will be a rise of the independent artist.

?We?re seeing some of the largest most successful artist belong to independent companies, and they?re doing marketing on their own,? Mr. Ciaramitaro said. ?It?s crazy when you really look at the artists nowadays. You hear their names and music all over the Internet and you would never think that they?re independent artists. Now we?re starting to see a shift from major record labels to independent artists.?

Whether or not the artist is independent, musicians are facing a new reality now that mobile is a part of the picture.

?Mobile has become a vital component of the digital industry. It provides more convenient platforms for people to discover and enjoy music on the go,? said Bill Aurnhammer, CEO of Aurnhammer LLC, New York.

?It is always important for the music industry to do well and provide the artists, so that we won't lose new talents to listen to,? he said. ?A lot of artists are complaining about not making money from digital streaming.

?The big stars are still mostly profiting from concerts, not selling albums. So the digital music industry should bring new services that offer artists better financial results for a sustaining business.?

Final Take
Rebecca Borison is editorial assistant on Mobile Marketer, New York