Posted by Mark Mulligan on April 13, 2010
Last.FM have announced that they will stop streaming full on demand songs to users, instead providing integrated streaming from 3rd parties. Though this certainly highlights some of the challenges in today’s on-demand streaming music business it says less about the fundamentals than it might first appear to do.
This is one more chapter in the Last.FM / CBS integration story. Last.FM was an early mover in the streaming music and had tens of millions of users when Spotify was just a twinkle inn Daniel Ek’s eye. Many – myself included – were surprised by the $280 million that CBS paid just under three years ago to acquire Last.FM. Since then Last.FM’s fortunes have been a mixed bag. Though user numbers are at an all time high, Last.FM has struggled to find its new identity within CBS and its paymasters recently took the decision to turn off free-streaming in outside of the major territories due to the inability to generate sufficient advertising revenue.
CBS are doing what you would expect a major media organization to do with an expensive start-up acquisition: they are trying to make it contribute to the bottom line. These objectives often do not align closely with the innovative vision that drive start-ups to scale and market profile, though usually not to profitability.
Profitable streaming requires the long view. Making streaming music profitable is a long term market-level play that requires patience and value chain partnership. Streaming services say rights holders need to drop their fees further than they have already done so. Rights holders say they need to see streaming services deliver revenue more and threaten sales less. CBS have decided that they are not willing to wait for the music industry to get its house in order and pay the expensive mortgage whilst doing so. Instead they’ve opted for rented accommodation in the form of supporting links from approximately 600 streaming partners, including Spotify, the Hype Machine and Vevo.
Some revenue will now slip through the cracks. It’s worth noting that not all of the content from all of those partners will be 100% legal. For example the Hype Machine collates links from numerous blogs, many of which post unlicensed content. So a portion of Last.FM’s streaming revenue will simply disappear rather than migrate to other services.
The bottom line is that CBS has made the call that Last.FM does not need to host streaming to deliver a differentiated music discovery experience. Is a hosted solution likely to deliver a better quality experience than relying on partners? Absolutely, but not better enough to justify the much higher expense for CBS.
When streaming rates and streaming revenues become better aligned (and they will, eventually) CBS may decide to buy back into the streaming music game. Until then it has the opportunity to focus on going back to its roots and strengthening its core value proposition: social music discovery. This isn’t a nail in the coffin for free but it is further evidence of the challenges of making free pay.