The digital music industry is grappling with a dilemma: how to make money without alienating consumers or record labels. Now, a smaller competitor to Spotify says it has a solution in a service that combines Internet radio with limited on-demand streaming for $3.99 a month.
The record labels are increasingly hostile to the idea of free, ad-supported subscription music services, while many music fans are unwilling to spend the $10 a month that has become the industry standard for unlimited subscription services. Rdio, a San Francisco startup that already offers a $10 subscription service and a free online radio option, is splitting the difference by launching a service today called Rdio Select. Listeners get access to an ad-free, Pandora-esque Internet radio service. They can also play music on demand but are limited to 25 new tracks a day and can store only 25 tracks at a time.
There’s a large population of listeners willing to pay something who don’t consume enough music to justify the $120 annual price of a premium subscription, said Anthony Bay, Rdio’s chief executive. “The music business has been as if the airline industry only had business class,” he said. “The broad base of people fly coach.”
Bay said he doesn’t have a target for how his subscribers will spread out over Rdio’s free, premium, and discounted services. But he said he believes that most of the users for Select will be those who aren’t paying anything at all and want a little extra service, rather than those who are paying $10 a month and are looking to save cash.
Streaming music companies are struggling to find a sustainable business model. The best chance they have seems to be to reach massive scale, which would be easier if prices were lower. But record labels don’t like that idea. There have been reports that Apple’s recent attempts to price its Spotify competitor at $8 a month fell on deaf ears.
The industry has also been at loggerheads with Spotify over its free service, which allows people to access a version of its subscription service, but with advertisements, without paying directly. The royalty rates on ad-supported music are much lower. Spotify has argued that its free tier serves as a way to funnel people toward paid subscriptions. Rdio has publicly sided with Taylor Swift and other artists who complain that such services devalue their work.
By offering something in between, Rdio is trying to appease both sides. The record labels are apparently satisfied enough with the idea to allow Rdio to include its entire library in the Select service. Bay is betting that casual-music fans may be all right with access to some music on demand. He said the ability to listen to music stored on a phone, rather than streamed over the Internet, will also appeal to people worried about the toll streaming music has on their monthly data allowances. “RDio Select pays for itself in data usage savings alone,” he said.
Andrew Sheehy, an analyst with Generator Research, is skeptical that many people will agree to accept a lesser music service even at a lower price. The main barrier, he said, is getting customers who are accustomed to free music to pay anything at all. “It’s an interesting thought, but as a category music is now a utility service, and it has a price, and it’s about $10 a month,” he said.
Rdio is in a difficult position, and a service like Select doesn’t solve its core problem. It’s a relatively small player in an industry where even the leaders are losing money. Apple’s entry in the market later this year will make those economics even harder, and the record labels and Jay-Z’s Tidal have been loudly pushing the idea that streaming services should pay more in royalties.
Rdio Select, or similar services from competitors, might convince more people to pay for music. But even if that happens, it’s not clear how the digital music industry gets people to pay enough to shore up its shaky finances.
The service is available in the Canada, United States, Australia, New Zealand, India and South Africa with more countries to be added later.