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Searching for a viable business model in streaming music

The U.S. Justice Department is reviewing decades-old antitrust rules that grant internet radio stations such as Pandora the same licensing rights that AM/FM broadcasters have long enjoyed, as Gigaom’s Jeff John Roberts reported this week. The move appears to come in response to pressure from incumbents in the music industry looking to offset ever-increasing losses of CD sales. And it could ultimately lead to new rules that force online music providers to pay higher royalties than traditional broadcasters.

The problem, of course, is that streaming music providers still haven’t found a way to generate profits under the existing rules. Pandora lost $29 million in its most recent quarter, and Spotify (which is privately held and declines to discuss its balance sheet) has reportedly lost $200 million since its founding in 2006. Both companies have seen impressive audience growth over the last couple years, but that growth results in increased licensing costs. And paid subscriptions simply haven’t been sufficient to offset those costs.

So even if the current licensing system remains in place, streaming music is at something of a crossroads. Like mapping or messaging, online radio could emerge as a must-have component of operating systems like Android and iOS, creating user stickiness without necessarily producing profits. Some providers might eventually find ways to leverage data to develop lucrative ad platforms to fuel their businesses (which is a strategy Pandora has begun to pursue). Or one player might finally develop a curated service for which more users are willing to pay a premium. Apple clearly hopes to become that player following its $3 billion acquisition of Beats Electronics.