On the Up: Music Based Ad Revenue

Ad revenue has been an important funding source for many music based services, and is becoming a foundation in the era of digital music. With terrestrial radio ad revenues remaining unparalleled in the music world, mobile and internet based music services are finding sustainability in the once overlooked digital ad-generated business model.

When internet music service Pandora announced that it was going public on June 15, 2011, skeptics doubted the company’s ability to break even, let alone profit.  Since digital radio stations pay statutory license fees – unlike traditional radio stations who are not required to pay for playing music over terrestrial radio waves – skeptics questioned ad-based music services’ ability to rake in enough money to cover license fees and to reach the point of profitability.

Pandora, however, proved skeptics wrong, receiving a majority of its total revenues from advertisements. The company’s ad revenue jumped 102% to $66 million in the its third quarter after going public.

Pandora is not the only digital music service to thrive off of ad-based models.  During the D: Dive Into Media conference, Vevo’s CEO Rio Caraeff announced that, “In the last year alone we’ve generated over $150 million…We paid the labels about $100 million [over the last 2 years]. So we’re making money.”

Digital marketing and media research company eMarketer estimates that revenues from ad-supported mobile music services will increase 52.7% in 2012, bringing in an estimated $433.8 million. Further, eMarketer puts ad-based mobile content in the $1 billion range by 2015, projecting 30% of mobile music services’ profits to come directly from ad-based revenues.

The much-anticipated music streaming service Spotify, however, is struggling to stay afloat. Although the company saw 458% increase in revenue in 2010, the company had a net loss of $41 million.

With the projected increase in ad-based music services, advertisements play an important  part in creating a sustainable business model. Whether used alone or in conjunction with a subscription model, ad-based music services will continue to drive the music world.

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