Market Thoughts: March 2018 | Digital Audio

By David Turner (Head of Investment – Media)

Digital Audio v2

What’s happening to the world of digital audio?

With the recent news that iHeartMedia has filed for bankruptcy, last year’s closure of Pandora (everywhere except the USA) and the massive losses reported by Spotify (nearly $1 billion over the past two years), I’ve been thinking – what is the future for digital streaming services, and is there room for anyone other than Spotify?

It’s clear that when it comes to online content subscriptions, consumers expect highly competitive costs. This expectation is largely driven by the belief that online companies enjoy lower outlays and have the ability to reach significantly larger audiences. However, this model isn’t sustainable for all providers.

On Spotify, for just $14.99NZD per month (or $22.50NZD for a family), you can get access to unlimited music, with offline listening and no advertising. This is the deal of the century for anyone who listens to music and has a smartphone or tablet. And better still, if you’re a Spark mobile customer, you don’t pay a cent!

So how do Spotify make money? In truth, they don’t. And it’s only by having the backing of major record labels that it is possible for Spotify to sustain such loses. Sony BMG, Universal Music, Warner Music and EMI are each shareholders in the company, and clearly benefit from ensuring the work of their artists is accessible via the largest music platform in the world. Though artists might not make the same money they used to from audiences listening to their music, having their tracks on Spotify allows them to build hype and interest when they eventually go on tour (which we all know is the real cash cow).

Digital streaming services cannot survive on advertiser funding alone, and unfortunately for them, ad spend across the NZ market is very low: only 1% ($300K) of total digital expenditure (according to the IAB – Q3 2017). Why is this so small? The linear radio market is incredibly strong in New Zealand. This medium continues to grow, and New Zealand audiences love on-air talent, so the incremental reach that digital radio can achieve is extremely limited (especially since we can only target the small proportion of Spotify users on free subscriptions).

But where does this leave us in the local audio world? Linear radio will continue to perform extremely well, and we forecast this to continue for at least four years. As a result, it’s up to local networks MediaWorks and NZME to ensure they continue to develop their digital footprints. The key to their success will be continuing current formats (which audiences feel a connection to) and offering listeners something more than what Spotify do, by providing a human connection with quality talent. Both MediaWorks’s ROVA and NZME’s iHeartRadio are making the right moves so far (although we are unsure what may happen to iHeart post-bankruptcy). I’ll be watching this space closely over the coming year with great anticipation, in the hope that our local partners succeed.