Analysis

The Secret Business Affairs Executive: Lessons from Omnifone’s fall


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Music Ally’s mystery columnist has seen the digital music market from both side of the rightsholders / startups divide. Now they’re spilling the beans.

“Yet another one bites the dust. And it’s happening faster than I can keep up at the moment. I’m not even talking about Crowdmix (which I will eventually get to separately).

I’m talking about Omnifone. It’s a sad moment when one of the earliest digital music businesses has finally made its way to the electronic scrapheap in the cloud(s). The infamous “inflection point” from ownership models to access models has long been talked about. It has now happened, and with it has come the brutal extinction of many digital music species.

The writing had been on the wall in pencil for some time, and has now been gone over in permanent marker. It is not unusual in the digital world for the early movers to fail and be surpassed by a follower. Nonetheless, here are my musings as to what went wrong and why.

First and foremost, the biggest issue in my mind was lack of differentiation from competitors. Why would someone use Rara or Sony Music Unlimited over Spotify, let alone YouTube? The short answer is simply that they wouldn’t.

Effectively the same user proposition in terms of catalogue and price, there just wasn’t a compelling enough reason to use an Omnifone service as a consumer as compared to the services that all your friends are using. This isn’t solely Omnifone’s responsibility, mainly because the music industry is only really open to licensing one model (unless you have about $100 million handy to ring-fence for guarantees).

Secondly, content owners have become increasingly unsympathetic to the costs of running a B2B service provider. Much has been written regarding the cost of running a digital music service, and how this compares to the revenue share. 75% for rights leaves 25% for the service provider, which flatly, is insufficient.

But it’s even worse for a B2B service. Assuming you have a 50/50 revenue share arrangement with your brand partner, you are left with 12.5% gross margin. That in itself is bad enough. However, the even bigger issue is that the marketing partner is only left with 12.5%.

The effect this has is that the marketing partner is not incentivised to make the proposition a core part of its business, as the upside is so insignificant. This also creates a real issue with CPMs because the cost of acquisition will almost always exceed the revenue share.

Sony Music Unlimited was a prime example: at Sony Group level the deal made a huge amount of sense. Sony Music as a repertoire holder had a vested interest in the service doing well, as did Sony Corporate. The OEM side of Sony’s business then also had a ready-made music proposition to bundle in to its many products.

But in practice it was a complete flop. Of course, intra-group politics played a factor, but ultimately, if Sony Mobile/PlayStation/Music can’t make it work then what chance does anyone else have? Spotify with 100 million active users is yet to make a cent of profit, and it does not benefit from the vertical and horizontal integration that Sony has. However, if there was a real financial upside for Sony’s hardware business then it could have been a different story.

Content owners used to offer a 10% discount on rates for B2B service providers on the understanding that these businesses needed more margin. However, this has been removed in the last few years because of “policy” (which some might see as “price-fixing”).

This means that back in, say, 2010 Omnifone’s revenue share would have been 37%.  It would now be 25%. At the moment this is an enormous barrier to entry – if content owners want to have a healthy B2B market (which I assume they do, because why wouldn’t you?) then adapting their rates to fit the model is a prerequisite.

Linked to the above points is the ability to secure further investment. Perhaps the least original statement that I will make, and continue to make, is that it is becoming increasingly difficult to secure investment in the music space. Lack of differentiation, lack of growth, unrealistic guarantees from content owners, and whopping 32% decrease in gross margin in a business that is still losing money is not the kind of environment that gives people the comfort to invest.

Sadly, this ultimately harms the artists.  In 2015 Omnifone was delivering roughly $50 million in revenue. This is now $50 million less that goes it to the digital music pot. Of course some of these users will move over to other service providers, but as always is the case this will be a fraction of the whole.

Lastly, and most importantly, I’d like to wish everyone at Omnifone all the best.  The hysteria and finger pointing surrounding another digital music collapse overshadows what should be the real concern – roughly 200 people have lost their jobs.

According to the administration documentation the assets were purchased for $10 million. I hope that this was a sufficient amount to mitigate this horrible blow for the sake of the preferential creditors, and the real heroes – the staff.”

The Secret Business Affairs Executive is on Twitter

Music Ally

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