Music will be a tough payoff for Facebook

Last week Om broke a big story on Facebooks plans for music.A new dashboard will accommodate multiple third-party digital music services from companies like Spotify, enable music streaming while still in Facebook, and incorporate sharing, recommendation and syndication technologies like Connect and Like buttons.As Om describes it, Facebooks scheme sounds cool, and music is a natural fit for the dominant social network. But is it Facebooks next billion-dollar business? Not likely. Heres why.

Limited subscription market.Facebook probably wants a cut of revenues from digital music partners. But on-demand music services like Rhapsody and Napster have never gotten more than a million subscribers each at $10 to $15 per month. Spotify has a lot of momentum in Europe, but it faces the same tight market and it still needs to sign all the labels before it can enter the U.S. It has been and will continue to be difficult for any service to convince music fans to change from a model where they mix radio and personally o! wned mus ic to a rental model.Total, there are probably five to seven million prospective customers.
Minimal margin in music sales.Years ago I did analysis that suggested royalties and credit card fees ate up about 85 or 90 cents of a 99-cent single. Nothing has really changed. Like PayPal, prepaid Facebook Credits could cut the credit card costs by a third, but not if Facebook wants its usual 30 percent cut. Albums or bundles of singles help, but theyre not the dominant digital music package.
Facebook hasnt prepared for the best advertising opportunity. The most natural music ad opportunity is in audio ads that play between songs. Radio networks (CBS, Clear Channel) and Pandora are working hard on online audio ads, but its a small market so far. Facebook could do ad insertion and create an audio ad network, but it would have to start from scratch. And it hasnt even done anything similar for the much larger display ad opportunity in apps or on its Likes network.

In my weekly update at GigaOM Pro (subscription required), I go into more detail on the challenges Facebook faces in monetizing digital music and look at the best way Facebook can cash in.

Image courtesy Flickr user corazn girl

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