The Digital Music Dating Game

No Comments 7 October 2012

The Digital Music Dating Game

Microsoft is probably in talks to buy Rdio, the music streaming service, according to The Next Web. The deal is just a rumor at this point, but one that raises an important point about the future of media: Tech’s biggest players are now deeply interested in streaming music.

Beyond the purported Microsoft talks, there are older reports about Apple planning an online radio service and Apple and Google talking about buying Spotify, a streaming internet jukebox. After years of ignoring digital music, and years more focused on digital downloads and lockers, it seems the big names in high technology have finally come around to caring about streaming services.

It wasn’t always so. Pandora, for example, went without venture capital from 2000 to 2004. Employees were asked to defer their pay for months on end, and the founder maxed out 11 credit cards. Pandora went public at a $2.8 billion valuation last year and these days, like its peers, is the subject of acquisition chatter.

A round of acquisitions would mean the streaming companies, universally unprofitable, finally get lucrative “exits,” and that investors are encouraged to put more cash into what can be a tricky sector. The digital media business involves big investments of time and money to license music on the one hand, and limited upside from piracy-spoiled consumers on the other.

Here are two pairings that we would love to see:

Spotify and Facebook: Of all the streaming services, Spotify is the one that most deeply integrates Facebook’s social graph. In fact, you can’t even sign up for a Spotify account without linking in your Facebook profile. Meanwhile, Spotify investor and director Sean Parker is Facebook’s former president.

Why it might not happen: Facebook might be able to create just as much value aggregating all the streaming services within its own network. Facebook’s “listen with your friends” is a step down that path.

Pandora and Apple: Pandora is the least social of the music streaming services, relying not on recommendations from friends, but on a sophisticated music classification system. It combines that human-powered system with a set of software algorithms and listening data to match songs to users on the fly. This makes Pandora a particularly attractive acquisition to a company without a social graph of its own, like Apple.

Apple would also make a good suitor for Pandora because of its good track record licensing music from the major record labels. Pandora has built a compelling experience strictly using compulsory licenses, in which it can broadcast songs freely as long as it pays a royalty set by a federal board of three judges and stays within the legally-defined bounds of an internet radio station. If Apple negotiated non-compulsory licenses for the service, however, it could break out of those bounds and offer users far more control of what they hear, potentially building some very cool hybrid services that combine on-demand listening with unrequested, radio-style streams.

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