Ad-Supported Music as a Sustainable Business Model

One of the most fascinating recent developments in the music technology world is the proliferation of music streaming sites such as Pandora, Imeem, and last.fm. These services provide unlimited free music provided by the major labels, plus a host of independents and individual artists. These services are now also all available on cellphones.

Does this mean recorded music is going towards free? Far from it! These services actually already generate millions of dollars in revenue from display advertising. Now, as the credit crisis forces companies to monetize faster, these companies are moving more and more towards embedded audio ads in their playlists. Pandora and Imeem have started running infrequent audio ads (much in the style of radio airplay) in their music streams.

Because they hold a captive audience, these short (10-second) audio ads command far greater revenues than traditional banner ads. In fact, 1000 impressions of a 30-second ad can generate more than $7.50 in revenue.

This doesn't sound like a lot, but given the size of the market, it could end up being a revenue machine.

Lets do some basic math. Three billion people around the world use cellphones. Within five years, everyone will be using a smartphone that can enable one of these music streaming sites. Pretty much everyone listens to music at least a little bit (lets say an average of 3 hours per week, which I think is conservative).

So now you have 3 hours per week x 3 billion people = 9 billion hours per week x 52 weeks per year = 468 billion hours per year!

Lets say that the service runs 6 30-second ads per hour. That's 3 minutes of advertising per hour, for free music streaming. People trying to find songs illegally probably spend much more time than this looking for quality files. Plus, its far less advertising than the traditional radio.

So that would generate: 6 (ads per hour) x $7.50 CPM / 1000 impressions = $0.045 per hour in advertising revenue x 468 billion hours = $21.06 billion in revenue.

This is some significant annual revenue potential. Granted, it would be split between artists, labels, and the tech companies, but it doesn't even include merchandising, touring, licensing, and the other elements of the music industry!

Sathvik Tantry
www.musimuse.com