The Yahoo Music Business Model

20 Comments

A few days have passed since I used and published my initial impressions of Yahoo Unlimited, and during that time, I have come a conclusion, though that word has such finality to it. Yahoo Unlimited is an ad-supported personal radio network.

There, I said it. Now let me explain. Radio networks normally have preset play lists, and deejays that manage those play lists. The songs, which are broadcast in a one-size fit all model, are interspersed with advertisements. Ads bring in the dollars, and keep large terrestrial radio network owners in gravy.

In case of Yahoo Unlimited, the online company offers up a million songs, turns you into a deejay and charges you $5 a month. (As long as you don’t download the tunes to devices!) If people transfer music subscriptions to a device, they cost Yahoo about $6 a month, and as a result the whole model is unprofitable to begin with. (Business Week reported that Yahoo could be paying around $8 a month to the music industry, but my sources are saying its $6 per subscriber per month.)

Given the state of the MP3 player device market, and the minimal support for devices as of now, in reality Yahoo’s music service is all about making customers sign-up and listed to music on their PCs. It makes most economic sense of the company.

Of that $5-a-month subscription fees, Yahoo is going to send about $3.50 goes to the music industry, a number of industry sources have told me. (Business week put this figure at $6 a month.) As long as folks don’t start moving songs over to their devices! Lets assume it costs Yahoo spends about $1 per user on infrastructure, hosting and bandwidth costs. Its total costs are about $4.50 or so.

In other words, the money to be made for Yahoo here is about $0.50 per user per month or about $6 a year. Even with a million subscribers, that works out to about $6 million a year. That’s not enough to even cause a blip on Yahoo’s bottom-line.

Enter advertising. If Yahoo can sell ads worth $2 a month on its PC-only service, the monthly profits can swiftly climb. More ad-dollars will mean even more cash in the bank for Yahoo! In other words, you play the deejay; create your play lists and ad dollars make it all happen. Just like a radio network, except one with extreme personalization.

Hypothetical scenario: what if Yahoo turned this into a free service, and decided to eat all the costs, that is $4.50 a month – within days it would have more than 20 million users who will sign-up. $6.50 a month of advertising every month, on every user means $130 million a month or $1.56 billion a year. Even with costs hovering around $1.08 billion, Yahoo could make some serious cash here. Has the record industry hoisted by its own petard?

The problem is that this model won’t work for Napster or Real Networks – they just don’t have the scale of Yahoo, or the audiences to cherry pick from 176 million registered users. Yahoo will become their single biggest nightmare. And while that is happening, Apple will continue to sell its iTunes! Think of it this way – if Yahoo Unlimited is Infinity Broadcasting, then Apple is Virgin.

There are a couple of issues, I admit.

1. It’s going be tough to sell advertising in an area that right now at least is subscription only and actually convincing consumers would be most difficult aspect of my theory.
2. Given the level of greed at the record labels, they are most likely to demand a cut of any money Yahoo makes on advertising.

But despite that Yahoo has got to be thinking that advertising is their endgame, for sure, or Steve wins his bet. Though I would say, Jerry has better odds. On Yahoo Music every time you look at a bio or something else you end up on a page with a (surprise!) banner ad.

Business Week’s Heather Green has her take on this. Yahoo has insisted that it is not an ad model. “We thought that too, but according to Dave Goldberg, vice-president and general manager of Yahoo! Music: “We’re not doing this to sell ads,” he says. Yahoo, he says, already has an ad-supported model in its Internet radio and music video offerings. “For users who want more control and greater access, subscription is the right model for them.”

20 Comments

Pete Jackson

I think Malik misses one key point, though: the interesting thing about the internet music model, as opposed to the broadcast model, is that the customer is the listener.

In over-the-air broadcasting, the advertiser is the customer, the audience is the product, and the individual listener is a supplier. Broadcast radio is all about giving away content “free” to listeners in order to supply them to advertisers.

Satellite radio, podcasts, and streaming music subscriptions seem to be more about pleasing the listener at an individual level. That is, treating them like a customer.

I haven’t seen any examples yet of a successful business model that merges the two concepts: “listener as customer” vs. “advertiser as customer.” I think that most subscription service listeners join because they want to be a customer instead of an audience to advertisers.

Though I haven’t thought all the way through the subtle differences in the mind of the customer, I think that’s exactly where the answer lies for a successful blend of the two revenue streams. That is, until we understand the psychology of the radio listener a little better, we can’t mix advertising and pay services.

After all, if HBO, Showtime, Cinemax, and other pay TV channels started running commercial advertisements, wouldn’t you rethink your $10 monthly payment for the service? It’s a tough problem to crack.

For what it’s worth, though, in order to have a profitable advertising business in streaming media, you need a lot of listeners, according to David Frerichs, founder of iM Networks. “The reason that many of these stations aren’t profitable is simply because they’re not big enough. To create a profitable streaming radio business, you need about 10 million listener hours per month.â€? I am betting that the introductory offers Yahoo is putting out there are aimed at building that critical mass.

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Yahoo can’t offer it free because advertisers don’t value free so Yahoo has to sell it at something – cheap enough to attract a high number of viewers. Yahoo makes money on each page view bnecause they can dice and slice each page & view depending on what you click & the path you take.

The problem is subscripton is a limited market once you learn the details. The average music fan is not going to sit down on their PC for hours on end to sort through 50-thousands of songs each month – to move onto a playlist for songs they like enough to listen to NOT to own. Average music fans do not want to play radio station for songs they do NOT own.

But for stream recorders/hackers/crackers/hoarders, this is perfect. For $8 a month, they can grab 10-20 CD’s a DAY.

Subscriptions sound great – like Netflix but the reality of subscription music is not the same as renting a DVD – the equivilient is that for $8 you can rent all the movies you want but you havef to edit them together … some appeal yes

mass appeal – no.

Lindon

The most interesting thing here is in a Yahoo vs Apple world Yahoo wont be “closed” and will offer their service across other devices (read: mobile phones). Apple wont/cant go this path (they still own and target the end-user device: iPod), Yahoo meanwhile could care less what you are listening on…they may just back-end a carrier-based service and add to their potential base.

Oh yeah the Motarola iTunes phone? Ever see the light of day? Nope, thought not – last thing the carriers want is iTunes in their walled gardens.

Om Malik

Dror

you are right. i did the incorrect math. sorry … it was late night. i have updated the numbers. the data is even more stark. i thank you for being “public editor.” $6.50 a month in advertising – well that’s a big challenge, though not as difficult. … i think they can. anyway this is just a hypothesis.

dror shimshowitz

You really need to do some better math, here.

1) You postulate that if Yahoo eats the costs ($4.5 per month) and just gets advertising revenue ($2 per month) it would MAKE money?!? Sounds like the change bank (lose money on every customer but make it up in volume!)

2) Do you really think it’s possible to get $2 per month in advertising for each user?!? Really?

Tony Gentile

What’s the value in knowing all of a user’s music preferences, in light of the launch of their movie recommendation engine (where they’ll now potentially also know your video/movie preferences):

http://www.buzzhit.com/2005/05/yahoo-movies-adds-recommendation.html

Yahoo is marketing itself to the entertainment industry as a complimentary platform. That argument is much more compelling when it has millions of profiles (from paid subscribers); how much are the HotJobs/Apprentice tie-ins (etc) worth to Yahoo and its brand?

IMHO, there’s more going on here than just the dollars & sense of the subscription revenues.

O. Hardison

One other tidbit worth noting here is that Yahoo forces you to use it’s wallet to purchase the service – not an issue if you don’t mind yet another party storing your credit card information.

darth

hmm…looking at subscription based music as on demand radio (as opposed to the iTunes model) makes a lot of sense-it moves a users expectations off from “you buy it, but don’t really own it” to “you are just paying for radio that you control”…

maybe Apple will spin it similarly if/when they offer a subscription type service.

watching real/napster trying to spin their offerings as “just like apple, but better! more flexible!..and cheaper!!..and you are stupid!! ” was just pathetic.

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