Cloud music services could be win-win for wireless carriers, consumers, rights holders

Carriers are starting to eye the cloud music space. Cloud music services—or those streamed live from the Internet—can be accessed anywhere via smart phones and other devices, and don’t require downloading. Some observers consider them a potential Holy Grail for music fans—not to mention service providers. In Europe, about 450,000 Vodafone customers signed up for unlimited access to two million songs last year when the music plan was added to a wireless data package for an additional three euros ($4) per month. It’s not clear whether Vodafone’s venture will succeed over the long-term. There remain significant challenges and risks with cloud music business models. One is negotiating licensing and royalties with record companies, copyright owners and artists, which has been a huge stumbling block for many startup new media companies. “Carriers may be able to make money in this space, but it all depends on what consumers have access to,” said David Oxenford, a media lawyer at Davis Wright Tremaine, a law firm in Washington, DC. Services such as Rhapsody, which allows users to stream or download songs, have to cut deals with the record companies. “But the record company’s entire catalogue of songs isn’t made available. There are many popular bands like The Beatles and Metallica that don’t make their works available to digital services. So there will be gaps in the content available," Oxenford said. Non-interactive live streaming services such as Pandora have a larger selection but don’t allow listeners to pick specific songs, although they can select music by genre or theme, he said. “So there’s a trade-off. With Rhapsody you can pick songs but you won’t get access to the entire library. With Pandora, you can hear The Beatles but you can’t pick Hey Jude.” How royalties are paid is another issue. Service providers want to try strike a balance with an affordable service that offers a comprehensive catalogue. Typically, royalties are paid as a percentage of the revenue generated by the service or on a per-song, per-listener basis, Oxenford said. “If a service attracts a lot of listeners, the per-song model means companies will have to pay huge royalties. If subscription fees are charged, then the question is, are they set at a high enough level to cover royalties while also attracting users? A casual music listener may not be willing to pay $10 a month.” There are also free, ad-supported models like Spotify, a popular service in Europe. Many American companies have tried this approach and failed. “What I hear is that royalty negotiations are the stumbling block for Spotify, which has been saying it will start up in the U.S. for over a year,” Oxenford said. “Record companies are growing increasingly wary of licensing their music for ad-supported, on-demand music services because dozens of these companies have gone out of business and not paid their royalty fees.” But carriers have advantages over small, standalone startups. They can develop viable models to cover off royalty costs, earning revenue from subscriptions, advertising, and data plans. Carriers also have the industry clout and expertise to negotiate better licensing deals with record companies and other players, said Carmi Levy, an independent technology analyst in London, Ont. “Unlike conventional radio and television, there’s no established royalty infrastructure for live streaming content of any kind. So every startup service provider is challenged to negotiate its own deals, and no one organization has sufficient critical mass.” But there are differences between the Canadian and American mobile landscapes that may pose difficulties for domestic carriers, Levy said. “Canadian don’t have access to the unlimited data plans offered in the U.S. The last thing they want to do is make prolific use of live streaming services that max out their data allocations and then pay huge sums for overages. So these kinds of data-rich services aren’t as much on the radar for Canadian consumers.” In Europe, carriers are working around the issue by targeting consumers who want mobile entertainment on their smart phones, offering special plans for specific types of use, he said. “They may not offer unlimited data plans, but they do offer unlimited radio streaming plans.” Some artists’ associations are skeptical about the viability of cloud music services. “The fundamental issue in all these models is: Why will consumers pay for a service when they can download any song they want for free on p2p sites like Limewire?” Eddie Schwartz, president of the Toronto-based Songwriters Association of Canada, said in an interview. The answer to that question is iTunes, Levy said. “If companies can add enough value to the media acquisition process, they can attract paying consumers. Although iTunes represents a small percentage of the total p2p downloading that’s happening, it’s pulling in billions in revenue that would otherwise not have existed if Apple hadn’t acted. And now there’s a huge unmet need for cloud music services.” Apple may well leap ahead of the pack in this space. The company may be looking to offer cloud music services in which subscribers can access their library at any time on their laptop, PC or wireless device. Oxenford noted that the company recently acquired Lala, a cloud music provider. “Industry observers are speculating that Apple bought Lala so it can get into cloud music services itself. We’ll have to wait and see how this plays out.” But Schwartz said he’s skeptical about cloud computing in general. He pointed out that, while computer storage costs have plummeted, making the storage of huge volumes of downloaded songs very cheap, bandwidth remains expensive and limited. “Imagine if all our music, movies, videos and so on were all streamed live from the cloud. I don’t believe the Internet could handle all that traffic,” he said. Levy said he’s sceptical, however, about the purported lack of bandwidth and Internet capacity. “Carriers would have us believe that so they can slow down investments to increase network capacity. But capacity has always grown to meet the needs of next-generation services,” he said. “Carriers should stop complaining and do something about it, or they’ll be watching their competitors make profits on cloud music and other services that consumers want.” Arvind Venkateswaran, a senior vice-president at Mumbai-based mobile solutions developer Geodesic, which provides its Mundu live-streaming radio service to many overseas carriers, said North America is falling behind. “Streaming radio, offered by carriers, is catching on rapidly outside the U.S. and Canada. We are currently in discussions with several carriers worldwide to launch music services under the Mundu brand or under the carrier’s own brand,” Venkateswaran wrote via e-mail. news@thewirereport.ca

Cloud music services could be win-win for wireless carriers, consumers, rights holders

Broadcast | May 3, 2010

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