Weekly Update

Why music won’t be Facebook’s next billion-dollar business

Last week Om broke a big story on Facebook’s plans for music. We’ll likely see more details at Facebook’s upcoming developer conference, but as Om describes it, Facebook’s scheme sounds cool, and music is a natural fit for the dominant social network.

Om described a Facebook music dashboard that will accommodate multiple third-party digital music services from companies like Spotify, enable music streaming while still in Facebook, and incorporate sharing, recommending and syndication technologies like Connect and Like buttons. Such a platform has great promise for increasing Facebook usage, especially since music, unlike video, encourages background listening. A platform like this one also offers potential user lock-in through habitual usage or a third-party music collection locker. And all without Facebook having to do complicated licensing deals with record labels and music publishers.

But it will be tough for the company to cash in big on music for the following reasons:

  • There is a limited subscription market. Facebook probably wants a cut of revenues from digital music partners. But on-demand music services like Rhapsody and Napster have never gotten more than a million subscribers each at $10 to $15 per month prices. Spotify, which needs to sign all the labels before entering the U.S., has a lot of momentum in Europe, but it faces the same tight market. I go into detail in this post, but it will be difficult to convince music fans to change from a model where they mix radio and personally owned music to a rental model. Total, there are probably five to seven million prospective customers.
  • Facebook doesn’t charge rent. Remember the portal tenancy deals AOL used to extort from startups back in the day? Some music startups – I’m talking about you, Spotify – have paid up-front fees (funded by VC firms) to music rights holders, and they might do the same for premium positioning on Facebook. But Facebook has never directly charged its partners for placement or for using its platform, choosing instead to cultivate an ecosystem of companies with Facebook advertising nearby. Apps companies, social games, retailers and brands all get this free ride. And a music “real estate” model wouldn’t be sustainable without big digital music revenues.
  • The margins in music sales are low. Years ago I did analysis that suggested royalties and credit card fees ate up about 85 or 90 cents of a 99-cent single. Like PayPal, prepaid Facebook Credits could cut the credit card costs by a third, but not if Facebook wants its usual 30 percent cut. Albums or bundles of singles can also reduce the impact of per-transaction credit card fees, but they’re not the dominant digital music package.
  • It hasn’t prepared for the best advertising opportunity. The most natural music ad opportunity is in audio ads that play between songs, like in radio. Radio networks (CBS, Clear Channel) and Pandora are working hard on online audio ads, but it’s a small market so far. Facebook could do ad insertion and create an audio ad network, but it would have to start from scratch. But it hasn’t even done anything similar for the much larger display ad opportunity in apps or on its Likes network.

Facebook’s best business opportunities around music build off its existing advertising business. The company is getting smarter about brand advertising; for example, it recently launched an advisory council to better schmooze with brands and agencies. But it hasn’t created any fancy ad formats or sponsorships. Youth marketers like Pepsi, Coke, and Nike would jump on a rich-media sponsorship app that deeply integrated music sharing or listening, like the old My Coke Music. Facebook’s audience would be much bigger.

If any of its music partners can make money, Facebook will no doubt wean them off viral communications that run in its News Feed. Then it could steer them toward complementary advertising, just like it did with social games companies like Zynga. But that’s “if” they make any money.

Question of the week

How can Facebook make money off music?