Mar 31, 2016 ยท 6 minutes

Investing in streaming music has always been like investing in subsistence farming.

With enough raw grit, quick thinking and years of sleepless nights, you just might be able to extract a return on your work that, meager though it is, is enough to declare a profit.

Ever since Napster emerged 17 years ago, online music has promised to become one of the Internet's more disruptive spirits. And disrupt it has. Labels and artists alike have had to rethink their notions of making a living. Digital downloads relegated CD collections to some dusty set of shelves. Digital streaming is making downloads seem just as ancillary, becoming the music industry's biggest source of revenue last year.

The usual platitudes about disruption tell us it's the tools of such a gold rush that lead to the most profits. But this doesn't apply to the rise of digital music, which has only strengthened the archaic imbalances. If anything, online music has exacerbated the income inequality between the labels and the artists. The streaming pioneers like Rhapsody, Spotify, Rdio, and Pandora, etc,, meanwhile, aren't seeing anything close to the profit margins of Microsoft, say, in the heyday of Windows, or of Facebook today.

Today, they are lucky to wake up and realize they are still in business.

Among those streaming-music providers – the ones that fatally supplanted the grandisonant vinyl record; the bulky, if discerning 8-track tape; the tinnier, pocketable, 90-minute cassette; the not-bad-compromise-until-the-era–of-broadband solution of the CD – a familiar power law is playing out, which is: Fortune favors the big.

We are seeing this law play out throughout the digital space. It has always been the case that, if you are a promising company forging a new business model online, you'll need to spend heavily to grow fast. But over the past year -- as the money to finance that growth has, first, all but vanished in the IPO market, then become choosier in the private market – the big companies like Alphabet, Amazon, and Apple are muscling ahead, while smaller players are increasingly playing defense.

To recap, many years ago, Rhapsody was a legal but less user-friendly alternative to Napster, Limewire, and Soulseek. Then came Pandora with its music-genome gambit, then Spotify with an interface that invited audiophiles into a future of streaming. Now that that future is here, it looks like Apple – the supposedly disruptable incumbent because of its dominance in digital downloads – is instead the one shaking things up for the pioneers of digital music.

Spotify has built up 30 million users in the past eight years, although, importantly, another 45 million listen while enduring its ads. Pandora has 81 million users but is shy about how many pay to avoid ads. Pandora simply says that about a fifth of its revenue comes from subscriptions versus advertising (only 1 percent comes from the ticketing businesses it later purchased).

Apple began offering its streaming music, for free, nine months ago. Six months ago, it weaned off users who didn't want to pay. As of a month ago it still had more than 11 million users. That is to say, Apple has signed up more than a third of Spotify's paid users in nine months, and Spotify had a seven year head start. Apple, remember, already has close to a billion credit card account numbers, a subtle but sizable psychological barrier to people signing up for monthly media subscriptions.

There is also Tidal, which is an interesting aberration, a hybrid between the toolmakers of streaming services, the taskmasters of recording labels, and the creative power of individual artists. Tidal is like a fantasy world made real in our own tawdry one, where artists are so favored by their taskmasters they are allowed to have the tools to pay themselves what they deserve. Indentured servitude as self-actualization. Tidal said this week it has 3 million subscribers, which is impressive given the terrible year Doug at Tidal has had at the company.

So Tidal is having a good week. But how many of those 3 million subscribers will hang on once The Life of Pablo becomes a list of songs that can be standardized into some kind of stable archive (I know, it may be Kanye's plan to avoid this, which would actually be pretty great)? I think it's Apple – and maybe Google and Amazon, once they kick their music businesses into a higher gear – that is having the better week. Because Pandora and Spotify are having a really bad week.

Pandora, as Sarah Lacy argued, was the unfundable digital-music company that, like TiVo, pioneered an industry. And, like Tivo, couldn't build a lasting business on the disruptive idea that inspired it. Pandora's stock has risen from $10 four years ago to $40 in March 2014 to $9 today.

This week, the cult of the founder CEO took a hit on the chin when Pandora said Tim Westergren, in a news release beginning with the words “company remains 100 percent committed to growth strategy,” returned as CEO. The stock fell 12 percent on that 100-percent commitment. Because the expectation was the company would soon be bought by Apple, or Alphabet. Or one of those big guys.

A day later, Pandora said it would sell a South Dakota pop-music station KXMZ. Pandora bought the station less than a year ago not because Rapid City was a key market, but to get a broadcast license and pay lower fees to studios and songwriters. "These shareholder encumbrances will be unnecessary if Pandora decides to change its business strategy to that it is no longer an FCC licensee," the company said in a letter to the FCC. 

If Pandora doesn't want the discount that radio stations pay for silly things like fees to songwriters, maybe it's being courted by someone who already has it?

Then there is the news from Spotify, which raised $1 billion in convertible debt from Dragoneer, private equity firm TPG and some clients from Goldman Sachs. 

Why is this worrisome? Imagine if you're a Spotify engineer who has created something wonderful like Discover Weekly.

Now imagine that a bunch of clods who invested in Burger King and Petco, as well as unnamed clients of Goldman Sachs, are butting in line ahead of you, thanks to this round. And that they'll get better terms from you from a Spotify IPO. And until said IPO takes place, they'll essentially punish Spotify with interest rates that ratchet up every six months that the company doesn't go public.

Would you want to stay at a company that is increasingly designed to pay out these Johnny-come-lately investors? Or would you take your pioneering expertise to an established company that has the coffers of cash? It's a tough call. Life in these big companies can be asphyxiating. But at least they can offer upside on stock awards. Because, more and more, they seem like the only game in town.

In the greatest ever TV show about startups, George Hearst says, “Gold confers the power. The power comes to any man who has the color.” Today, in music streaming, the color doesn't begin with the letter P, as in Pandora, or the letter S, as in Spotify. Or even the letter G, as in gold.

No, it begins, like the Sesame Street of post-infancy, with the letter A. Brought to you by Amazon. And Alphabet. 

And most of all, Apple.