Spotify, MOG demonstrate digital music flux

If the on-demand music streamer Spotify is worth $3 to $4 billion, why is MOG, a similar if much smaller service, reportedly being sold for $14 million? The digital music industry is in flux, but it’s showing positive signs of growth. Are those two players really so different?
Our recent GigaOM Pro digital music forecast described Disruption Vectors, market forces and trends that smart companies can use to gain revenue and market share in the near term. Our analysis rated Spotify as the company best positioned along several of the most important vectors: anywhere access, discovery and the highly disruptive rent vs. buy business model. But MOG scored well on those factors, too.
Network effect?
Would-be investors must think that Spotify can pull off a network effect based on its size and momentum, and on its efforts to establish itself as a technology platform for developers. Indeed, Spotify claims to have 10 million active users in comparison with MOG’s 500,000. But Spotify’s business model isn’t solidly established. Its contracts with rights holders will come up for renewal at some point, and there’s no telling what the labels well demand this time around. Rumor has it that the labels got upfront guaranteed payments. What more could they ask if Spotify raises even more money? The big labels already have equity positions in the company.
Meanwhile, Spotify’s platform strategy is smart, but limited. It is using APIs to attract apps that run within its own application. Recently, it has used this strategy to tap into another Disruption Vector: the changing role of record labels. Several labels, including Universal’s Def Jam, Warner Music and indies like Matador and Domino have built apps for Spotify. But Spotify should extend its APIs beyond its own application and become a streaming music and discovery provider for other companies’ sites and apps. That way, it would gain distribution and potential partner lock-in, both of which would maximize network effects toward a winner-take all outcome.
Closed loop
Meanwhile, MOG appears to be an acquisition target for the hot headphones manufacturer Beats Electronics. Beats, in turn, is majority owned by the big mobile phone handset maker HTC. HTC could be trying to put together a device-based, closed-loop system that could create a subsidized music service, another GigaOM Pro Disruption Vector. Although Nokia tried something similar and its program flopped, Deezer and Muve have had some success screening the cost of on-demand streaming by bundling it with voice and data services via carriers. But those efforts are carrier-driven rather than tied to hardware, which already has razor-thin margins for anyone but Apple.
It’s clear that, like all digital media, digital music services need to cultivate multiple revenue sources to thrive. That includes consumer fees, advertising and, perhaps, licensing. Both Spotify and MOG sell ads, but mostly to help subsidize free trials they hope to convert to paying customers. And that’s even though MOG has an ad network to sell inventory on other music sites. Audio ads are still a tough market, but video and display ads on apps might gain new momentum from tablets. MOG has a iPad app; Spotify does not.
Digital transition underway
Fees from consumers look attractive, but they’re hard to come by. Spotify doesn’t break out its numbers, though it has said it has 3 million paying subscribers worldwide. That would represent a phenomenally high conversion rate for digital content. GigaOM Pro’s Q1 consumer survey shows that only single digit percentages of music streamers (6 percent) have paid for a music service, although four times as many (25 percent) had bought a music download in the last three months.
There are strong hints of music listening substitution. Music streamers (27 percent of the U.S. online adult population) listen to local radio stations and CDs at the same rate as the rest of the population. But the subset of streamers whose primary listening mode is streaming  (8 percent of online adults) are lighter radio and CD listeners. Both groups are above-average users of music on their mobile phones.
The digital transition appears to be underway, but it’s likely to be a long slog. Players need multiple revenue streams and some means of staying power, whether that’s a sugar daddy parent company or tons of cash in the bank. Spotify has momentum, but I’d be wary of  overestimating its odds to be the sole survivor in streaming music.

Question of the week

How do you think music streaming will make money?