Sunday, February 19, 2017

The Internet: Where hundreds of millions of users does not equal a business model

The subject of how the world of the Internet differs from the ‘real’ world is one of much erudite discussion. There is, of course, a lot to know, and a lot to consider that challenges conventional thinking about markets, economics, and customers/consumer/users.

Anil Dash recently penned a stinging critique of the 'fake markets' of the tech world, which is well worth your while, but I’ll go with a simpler thesis for now. On the Internet we use things without knowing how they work. Or maybe even wanting to know how they work. Where the money comes from, where it goes, and the machinery that lies in the middle could be described as a black box meets a hornet’s nest that mystifies many who have worked at the more traditional end of industries such as publishing, advertising, and marketing. Content has become unbundled, so that the site of production and the site of consumption are now separate (i.e. you don't have to buy the New York Times to read a New York Times article), we leave digital trails everywhere we go, with demographic and psychographic information contained within, and in the process what were once aggregate clumps known as 'audiences' have become micro-markets, but made up of millions. If that sounds challenging from the market and customer angles, it's because it is.

When news broke earlier in the week about SoundCloud’s serious financial difficulties, I was confronted, once again, with the reality of digital markets. SoundCloud with its 200 million users being fiscally-challenged, Twitter with its well over 300 million users being in similar dire straits.  And there’s Spotify, the undisputed leader in music streaming with 100 million users of which about 40% are paying subscribers – a huge proportion for a freemium service – and the company, say some, is on the brink of bankruptcy, or acquisition, which in Internet economics can actually co-exist. 

The big difference between SoundCloud's financial challenges and Spotify's is that in the case of the latter, on average, between 55% and 70% of revenues are paid to the music labels. These payments come to about $1.5 million per day and over 1 billion dollars in 2016.

Trying to figure out the SoundCloud riddle I used Facebook to turn to a friend who is a former major label VP for additional perspective.

He said he would put some pensiveness on the question and get back to me. He did.

This is definitely a reasonable theory. However, on SoundCloud hit and non-hit material exist side by side, with known acts such as Gucci Mane, Migos, and Drake using the site to upload, alongside the completely unknown. It’s still a ‘go to’ destination, with its own version of a star system. In fact, it’s one of the ones that catapulted Chance the Rapper, the now Grammy-winning artist who, to date, has made none of music available for sale, to stardom.

The SoundCloud Top Ten 2/19/17
Click to enlarge

And in the adjacent world of publishing there’s Wattpad, the social reading site that has 40 million monthly users and over 100 million uploads. Anyone can post to the platform and it has produced bona fide stars, such as Anna Todd, whose fan fiction based on boy band One Direction netted her a publishing deal and a movie deal with Paramount.

Which of these becomes a real market vs. a fake market in Dashian terms is TBA. But are any of these easy markets? Absolutely not. Are they new markets with new logics still being figured out? Yes. I'm reminded of the sharp comment uttered across the table in the lawyer's office by the Mark Zuckerberg character to the Winklevi characters in The Social Network: “If you guys are the inventors of Facebook, you would have invented Facebook.”