This blog post takes a closer look at the music streaming services that have been forced to shut down and disappeared from the market. It is the story of a market consolidation that is not yet over and that will end up with a few platforms forming an oligopoly, similar to the record and music publishing industries. The reason for this is the high market entry barriers erected by the major rights holders and their business model of multimillion-dollar upfront payments that are offset against streaming revenues. We will look at this business model in more detail in the next blog posts on the ‘spotification’ of the music business. But for now, it is worth noting that this business model has contributed to the failure of many music streaming companies.
The Music Streaming Economy – Part 7: Failed Music Streaming Services
Simfy (2007-2015)
An early victim of this business model was the German streaming service Simfy. But it all started so promisingly. Steffen Wicker and Christoph Lange were business students at the University of Mannheim in 2006 and were annoyed that the same music album had different prices in the numerous music download stores that were popping up at the time. In some cases, the price difference was so big that it was worth searching for the best deal. Since many music fans didn’t want to waste their time of comparing prices, Wicker and Lange identified a market gap and founded the online price comparison platform ‘Simplify Your Music Search’ – Simfy for short – in the spring of 2006.[1]
But comparing prices was just the beginning. In 2007, while still studying business administration, the two young entrepreneurs had another idea. While the major rights holders had shut down numerous music sharing sites in their crusade against P2P file sharing and were not afraid to sue music users, Wicker and Lange wanted to offer music fans a platform where they could upload their music files, listen to the shared songs and buy them legally. However, they wanted to prevent people from downloading the music. In this way, the start-up entrepreneurs hoped to enable file sharing without infringing copyright.[2] They were able to raise EUR 100,000 in venture capital to make this business idea a reality and built a team of 13 people to develop a mobile app and a premium service.[3] However, the two Simfy founders quickly realised that their business model was too complicated and could not compete with Spotify, which had taken the market by storm since October 2008. In the spring of 2009, a complete relaunch took place, transforming Simfy from a music network for friends into an on-demand streaming service.[4] The rapid growth in user numbers – 3,000 per day – proved the two young entrepreneurs right and attracted the attention of investors. At the end of September 2009, Music Networx, the operator of the online live music platform Concert Online, joined Simfy as a strategic investor. The company was backed by Klaus Wecken, who had invested EUR 2 million in Music Networx and would now play a leading role in Simfy. The CEO of Music Networx, Gerrit Schumann, also joined the Simfy board.[5] Following this quasi-merger, in which Music Networx became the majority owner of Simfy, Concert Online was transformed into Simfy Live and expanded into a comprehensive information and search portal for music.[6]
However, Simfy still had one problem to solve. Although Simfy users were able to stream around 1.5 million tracks win 2009, the full repertoire of major and indie labels was not yet available. To realise this multi-million-euro investment, a further EUR 7 million funding round was required, which was raised by a consortium of DuMont Venture, Earlybird and NRW-Bank, led by Klaus Wecken.[7] This satisfied the licence demands of the four music majors at the time, Universal, Sony, Warner and EMI, as well as indie licensing agency MERLIN. By mid-2010, the available music catalogue had grown to 6.2 million tracks, streamed by 1.5 million users. Simfy was now a fully licensed freemium streaming service, with the basic version still free but supplemented by a premium subscription for EUR 9.99 per month.[8]
Simfy now could compete with Spotify. What Spotify was to Scandinavia, Simfy seemed to be to Germany. As if to confirm this, in October 2010 Simfy merged with Steereo, the music streaming service launched by German media group Holtzbrinck earlier that year. In a newspaper interview, Claas van Delden, a member of Holtzbrinck’s board of directors, explained the move by saying that negotiations with record companies, rights holders and exploiters, in particular GEMA, had been costly and time-consuming, and that the company had decided to withdraw from the music streaming business.[9]
This was problem for Simfy too. When negotiations for new licensing deals with the majors and MERLIN came up in 2013, it was clear that Simfy did not have the financial resources to expand internationally, despite having raised EUR 30 million in several rounds of financing. The management therefore decided to focus exclusively on the German streaming market and also moved its headquarters from Cologne to Berlin to save costs.[10] Simfy had fallen behind its main competitors Spotify and Deezer, which had each attracted EUR 100 million in investment. On the other hand, Simfy was kept alive with interim financing and emergency loans. By this time, Simfy’s two founders, Steffen Wicke and Christoph Lange, had already left the company,[11] and Lange teamed up with artist agent Till Janczukowicz to found the high-fidelity classical music streaming portal IDAGIO in Berlin in 2015.[12]
However, things got worse. In October 2013, MERLIN prematurely terminated its licensing agreement with Simfy because the streaming service had failed to provide royalty reports for months, making it impossible to recoup the contractually agreed advance payments. In addition, Simfy’s new management refused to accept MERLIN’s demand for an equity stake in the company, which led to the early termination of the contract and the withdrawal of MERLIN’s repertoire from the streaming platform.[13]
The final blow to the German streaming service, however, came from Warner Music Group, which pulled all its music catalogues from Simfy in February 2015 without further explanation.[14] However, it is likely that Simfy was no longer able to meet the financial demands of the music major. Universal and Sony followed Warner, and by April 2015 Simfy was a shadow of its former self, forced to admit on its homepage that from 1 May 2015 Simfy would only offer a very limited number of songs for licensing reasons. Shortly afterwards, Simfy had to advise its users to switch to competitor Deezer and was liquidated as a company at the end of April 2015.[15] Simfy failed to raise the necessary funds to cover the high costs of advance payments to the major rights holders and, unlike Spotify and Deezer, was unable to find financially strong investors to provide the capital. The result was the loss of the music catalogues, which meant the end of music streaming.
Rdio (2010-2015)
When Niklas Zennström and Janus Friis launched the music streaming service rdio on 3 August 2010, they were no strangers to the music industry. On the contrary, Swedish software developer Zennström and Danish school dropout Friis had developed the P2P file-sharing software KaZaA in 2000 after meeting at Danish telecoms company Tele 2 in 1996. KaZaA succeeded Napster as a decentralised music sharing platform and even survived a copyright infringement lawsuit in the Netherlands.[16] By this time, Zennström and Friis had withdrawn from the KaZaA project and were working with software developers from Estonia on their next coup. In 2003, they founded the online telecommunications company Skype, which was to cause a sensation with its voice over IP application and was bought by the online auction platform eBay for US $2.6 billion in September 2005.[17]
The brand new billionaires did not retire with this deal, but launched their next project with rdio, this time in agreement with the major rights holders in the music industry. When rdio launched in the US on 3 August 2010 after a two-month beta phase, the music streaming service had already been licensed by the four music majors and several digital music distributors. At US $4.99 per month for the desktop application and an additional US $9.99 for the mobile application, rdio was more expensive than the competitors. However, unlike Spotify & Co, rdio tried to position itself as a social media music application, allowing users to share their music and playlists in a similar way to Facebook.[18]
In early 2011, rdio expanded its repertoire of music majors through a licensing deal with indie label licensing agency MERLIN.[19] To pay the advances to the majors and MERLIN, rdio required funding, which was provided in 2011 by a consortium led by Mangrove Capital Partners in the amount of US $17.5 million.[20] Rdio early recognised the potential of artificial intelligence for recommending music and creating playlists, and has been working with The Echo Nest, which was eventually acquired by rival Spotify in 2014.[21] To compete with Spotify, rdio became a freemium service in October 2011, with a free version with no ads to differentiate it from its main competitor, Spotify.[22]
Thus, rdio attempted to conquer the international streaming market in 2012 and was launched in Australia, Brazil, Germany, New Zealand, Portugal and Spain.[23] At the same time, the company also developed the video streaming platform vdio, which should compete with Netflix and Amazon, but this was strongly questioned in the media.[24] The critics were proved right, as Vdio was cancelled just a few months after its launch in January 2014. By this time, rdio was already in financial troubles. In November 2013, 35 employees were laid off in order to streamline the cost structure.[25] It seems that not only did rdio overspend on video streaming, but rapid international expansion also took its toll. Despite this, rdio expanded into a further four Asian and five European markets in 2014,[26] which in turn resulted in immense start-up costs. In September 2013, rdio also entered a partnership with US radio network Cumulus Media, which invested US $75 million in rdio to launch an ad-funded free online radio station in the US to challenge then US market leader Pandora.[27]
In spring 2015, it didn’t look like rdio’s end was near. In July 2014, rdio bought the music recommendation service TastemakerX[28] to fill the gap left by the loss of The Echo Nest. Although the purchase price was not disclosed, it is believed to be in the millions. At the start of 2015, rdio expanded into the highly competitive Indian streaming market, and shortly afterwards into 24 countries across the Caribbean, Central America and the Pacific. Finally, rdio attempted to take on the price war with Spotify and Apple Music with Rdio Select, which could be subscribed to for US $3.99 per month.[29]
However, the launch of Rdio Select was only the last stand. Then came the bombshell in November 2015. Rdio filed for bankruptcy and sold its remaining assets and user base to US competitor Pandora for $75 million.[30] This revealed the full extent of the economic disaster. Rdio’s aggressive market expansion had paid its toll, as it could no longer afford the upfront payments. The owners were also unwilling to inject any more capital, and finally it was revealed that the streaming service had only 98,000 paying users at the end of 2014,[31] a ridiculously low number compared to its competitors. Rdio had failed due to its own overly high standards, the financial demands of the major rights holders and the lack of an additional financial pillar.
Microsoft: Zune, Xbox Music und Groove
But it wasn’t just independent streaming services like Simfy and rdio that fell victim to the market consolidation; tech companies that entered the fiercely competitive market also failed. Perhaps the most prominent example is Microsoft, which failed miserably with Zune/Xbox Music/Groove Music Pass.
The background: In 2006, Apple was the undisputed global leader in the digital music market with the iPod and its iTunes store and Microsoft wanted to counter its main competitor. On 14 September 2006, the Zune Player and Zune Marketplace were presented to the public in the news feed of the Microsoft homepage under the title “Microsoft’s Zune Delivers Connected Music and Entertainment Experience”.[32] Up to 30GB of digital content – music, photos and videos – could be stored, played and shared on the Zune player via Wi-Fi. However, the Zune Marketplace was still a classic music download store, following the same pricing policy as Apple/iTunes and initially offering 11 million tracks. Music could be downloaded to the desktop or to the portable Zune player. With its ubiquitous Windows operating system and Xbox games console, Microsoft was ideally placed to break into the digital music market. But the Zune project was perceived by users as a cheap imitation of Apple with no added value. The Zune Marketplace led a shadowy existence in the digital music market and was quietly shut down in November 2015.[33]
Microsoft had previously made a new attempt to succeed in the digital music market. Now it was no longer Apple, but Spotify that was to be challenged with an on-demand streaming service. At the Electronic Entertainment Expo 2012 (E3 2012), which was held at the Los Angeles Convention Center between 5 June and 7 July, Microsoft not only presented its latest operating system Windows 8 to the public, but also the streaming service Xbox Music, which was conveniently pre-installed as an app on the brand-new Windows Phone and could be used via the Xbox 360 games console.[34] The new music streaming service launched alongside Xbox Video on 15 October 2012, using Xbox as the umbrella brand for Microsoft’s entertainment products. At launch, Xbox Music offered 35 million tracks, more than any other competitor. The music could be streamed for free on the PC thanks to advertising, but could also be downloaded with the Xbox Music Pass for US $9.99 per month, with each download paid for separately. Xbox Music also offered a scan-and-match feature for music stored in the cloud, as well as numerous artist branded radio stations.[35]
But like the Zune Marketplace before it, Xbox Music has failed to take off. Why would Spotify users give up their carefully curated playlists to switch to Microsoft? Spotify was also for free, and whether there were 34 million or 25 million tracks in the catalogue made no difference to the average music fan. Another reason for Xbox Music’s lack of popularity was that, despite promises to the contrary, it was initially only available through Windows 8 on the desktop and on Windows Phone 8. It was not until September 2013, after a one-month free trial, that music could be streamed to all Android and iOS devices, as well as online with the Xbox Music Pass for US $9.99 per month.[36] Free streaming was still available, but the freemium model was discontinued by Microsoft in December 2014 without any explanation.[37]
This was already a sign that Xbox Music was also coming to an end, and indeed Microsoft announced its intention to replace Xbox Music with Groove when Windows 10 was released in July 2015. This was a rebranding of the existing music streaming service, which didn’t undergo any major changes. Users now had access to 40 million tracks, and MP3 music tracks that had previously been downloaded or purchased from other stores such as iTunes could now be transferred to Groove via OneDrive.[38] The Xbox Music Pass became the Groove Music Pass, allowing you to stream music for US $9.99 a month.[39] But those were all the new features.
With Groove, Microsoft thought it could take on Spotify, Apple and Amazon. However, two years after transforming Xbox Music into Groove, Microsoft pulled the plug after burning a lot of money launching an MP3 player and the download store behind it, and later launching a music streaming service. On 2 October 2017, Microsoft told its music streaming subscribers that the Groove Music Pass and the option to buy music on the Windows Store would be discontinued at the end of the year, and that they could switch to Spotify.[40] Microsoft’s ambitions to succeed in the digital music market had failed dramatically and, more humiliatingly, it had to sell its user base to its competitors. Despite all its financial muscle, Microsoft had failed to build a satisfactory music streaming service because the technology giant had always entered the market too late and failed to offer users any added value to persuade them to switch.
Simfy, rdio and Microsoft’s Xbox Music/Groove are just three examples of failed music streaming services that have seen the number of services disappearing from the market over the years. Other platforms such as MOG, WiMP, Napster and Aupeo have been acquired by competitors. With Spotify, Deezer, Tidal, SoundCloud and the music streaming offerings of Google, Amazon and Apple, there are now only a few players in the global streaming market. Although there are regional players such as Anghami (Middle East and North Africa), JioSaavn and Gaana (India), NetEase Cloud Music and QQ Music (China), Line Music (Japan, Thailand, Taiwan), Melon and VIBE (South Korea), the international music streaming market has become an oligopoly protected by high market entry barriers. This means that another major music market, alongside the recorded music, music publishing and live music markets, is dominated by a few large players, although the market consolidation is far from over.
Endnotes
[1] Der Spiegel, “Simfy sucht die Download-Schnäppchen”, May 26, 2006, accessed: 2024-07-28.
[2] Stern, “Musikportal ‘simfy’. Musik von allen Freunden”, February 9, 2008, accessed: 2024-07-28.
[3] Ibid.
[4] Deutsche Startups, “Simfy dreht auf”, April 28, 2009, accessed: 2024-07-28.
[5] Deutsche Startups, “Finanzspritze für simfy”, September 29, 2009, accessed: 2024-07-28.
[6] Deutsche Startups, “Aus Concert Online wird simfy live”, April 21, 2010, accessed: 2024-07-28.
[7] Deutsche Startups, “Sieben Millionen Euro für simfy”, May 12, 2010, accessed: 2024-07-28.
[8] Billboard, “Warner Licenses To Germany’s Simfy”, April 28, 2010, accessed: 2024-07-28.
[9] An interview by Claas van Delden with Handelsblatt, cited in Spiegel Online, “Musikplattformen Steereo und Simfy fusionieren”, October 11, 2010, accessed: 2024-07-28.
[10] Berliner Morgenpost, “Simfy konzentriert sich aufs Deutschland-Geschäft”, May 7, 2013, accessed: 2024-07-28.
[11] Deutsche Startups, “Hat simfy den Kampf gegen Spotify längst verloren?”, November 5, 2012, accessed: 2024-07-28.
[12] Frankfurter Allgemeine Zeitung, “Das Spotify für Klassik-Fans”, December 25, 2017, accessed: 2024-07-28.
[13] Hypebot, “Merlin Pulls Content Off German Music Streamer Simfy, Threatens Legal Action”, October 2, 2010, accessed: 2024-07-28.
[14] Music Business Worldwide, “Warner pulls catalogue from Simfy in Germany”, February 23, 2015, accessed: 2024-07-28.
[15] Deutsche Startups, “Simfy will, dass seine Nutzer zu Deezer wechseln”, May 2, 2015, accessed: 2024-07-28.
[16] See an earlier chapter in this book.
[17] BBC News, “eBay to buy Skype in $2.6bn deal”, September 12, 2005, accessed: 2024-07-28.
[18] Billboard, “Rdio Launches To Public, Adds More Content”, August 3, 2010, accessed: 2024-07-28.
[19] Billboard, “What Merlin’s Deal With Rdio Means for Indies”, January 12, 2011, accessed: 2024-07-28.
[20] Billboard, “Rdio Lands Funding From Mangrove, Plans Aggressive Expansion”, January 28, 2011, accessed: 2024-07-28.
[21] Billboard, “Rdio ‘Transitioning Away’ from Spotify-Owned Echo Nest (Source)”, March 12, 2014, accessed: 2024-07-28.
[22] Billboard, “Business Matters: Rdio Unveils Free Listening Option”, October 6, 2011, accessed: 2024-07-28.
[23] GigaOM, “Interview: Rdio Prepares To Take On Spotify, Deezer Et Al In Europe”, March 29, 2012, accessed: 2024-07-28.
[24] See a critical analysis by The Verge, “Rdio launches Vdio, an on-demand streaming video site”, April 3, 2013, accessed: 2024-07-28.
[25] TechCrunch, “Music Streaming Startup Rdio Lays Off Staff To Improve Cost Structure And Ensure A Scalable Business”, November 19, 2013, accessed: 2024-07-28.
[26] Billboard, “Exclusive: Rdio Now Playing In Nine More European & Asian Countries”, May 19, 2014, accessed: 2024-07-28.
[27] Billboard, “Rdio, Cumulus Announce Free Ad-Supported Music Streaming Service”, May 1, 2014, accessed: 2024-07-28.
[28] The Guardian, “Rdio buys TastemakerX app to boost streaming music discovery”, July 1, 2014, accessed: 2024-07-28.
[29] BuzzFeedNews, “Rdio To Launch A $3.99 Monthly Streaming Service”, May 14, 2015, accessed: 2024-07-28.
[30] Music Business Worldwide, “Pandora buys Rdio assets for $75m as Spotify rival files for bankruptcy”, November 16, 2015, accessed: 2024-07-28.
[31] Heise.de, “Internet-Radio Pandora schnappt sich Musik-Flatrate Rdio”, November 17, 2015, accessed: 2024-07-28.
[32] Microsoft News, “Microsoft’s Zune Delivers Connected Music and Entertainment Experience”, September 14, 2006, accessed: 2024-07-28.
[33] BBC News, “Microsoft pulls plug on Zune music service”, November 16, 2015, accessed: 2024-07-28.
[34] The Verge, “Xbox Music service announced, coming to Xbox, Windows Phone, and Windows 8”, June 4, 2012, accessed: 2024-07-28.
[35] Rolling Stone, “Microsoft Returns to Digital Music With Xbox Service”, October 15, 2012, accessed: 2024-07-28.
[36] The Verge, “Microsoft launches web-based Xbox Music, available for subscribers now”, July 1, 2013, accessed: 2024-07-28.
[37] The Verge, “Microsoft is ending free Xbox Music streaming”, October 23, 2014, accessed: 2024-07-28.
[38] The Verge, “Microsoft launches web-based Xbox Music, available for subscribers now”, July 1, 2013, accessed: 2024-07-28.
[39] The Verge, “Microsoft rebrands Xbox Music to Groove”, July 6, 2015, accessed: 2024-07-28.
[40] The Verge, “Microsoft retires Groove Music service, partners with Spotify”, October 2, 2017, accessed: 2024-07-28.
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