Streaming and the Music Business

Streaming has become the big thing in the music industry over the last few years. On the one hand, it’s the fastest growing form of consumption for music but, on the other, it’s a medium the music labels seem to feel pretty ambivalent about, given their frequent spats with YouTube in particular. The real picture, of course, is always a little more complex than it seems. Here are some data points on what’s happening with the three big music labels and how streaming ties in.

Streaming Achieves what Downloads Never Did

Digital music has, of course, been around since the late 1990s in one form or another. At first, its rise precipitated a massive decline in the music industry, as the upgrade cycle driven by CDs faded and online MP3s suddenly gave people a cheap and easy alternative to buying music on physical media. Eventually, Apple and others created legitimate digital music storefronts and paid downloads became a thing. However, it took until 2006 for digital music to generate even one tenth of the sales of physical media globally and until 2014 for total digital revenues to finally catch physical revenues.

However, one thing downloads never did during that time was become the prevalent form of music consumption, eclipsing physical media because, even though total digital music revenues matched physical revenues in 2014, they did so with the help of the first streaming revenue. Now that streaming is taking off, downloads are in rapid decline and, in fact, have fallen to the third largest contributor to recorded music revenue for the three major labels, behind both physical media and streaming:

Streaming has, therefore, achieved what downloads never did and become the dominant form of music consumption by revenue for the three major labels. Its growth has been far faster than the growth of downloads ever was, enabled by the near universal availability of broadband in mature markets, in particular, mobile broadband. In fact, Q1 2017 was the first quarter in which total revenue from streaming for the big three labels outweighed physical and download revenues combined.

Streaming has been Good for Margins Too

The growth of streaming has, in turn, helped the record industry get back to revenue growth after a period of stagnation but it’s also helped to grow profits:

As you can see, since the time streaming music took off, the major labels have seen both a return to overall revenue growth and increasing margins. In large part, the revenue growth has driven the margin growth as costs have remained roughly constant, even as streaming consumption and total spending on recorded music has risen. At the same time, however, streaming is now eating into not only physical consumption but download revenue, which is dropping far faster than it grew and even faster than physical revenues.

If Streaming is so Good, Why Fight It?

If streaming is so good for the industry, why would the labels constantly appear to be fighting it? Well, the answer lies in the oversimplification implied by the single word “streaming”. Streaming, like downloads and physical consumption, is merely a description of the medium but, unlike those other two media, it doesn’t directly describe the business model. Whereas the download and physical models both relied on the same basic model – payment per unit consumed, whether albums or singles – streaming actually has two fundamentally different business models: subscriptions and ad-supported free streaming.

That’s where the mismatch between the industry’s benefit from streaming and its objection to streaming comes in: the industry loves paid subscription streaming because it delivers consistent revenue per customer which is above the long-term average spend on either physical or digital music per customer. But the industry is far more skeptical of ad-supported free streaming, because it delivers far less revenue per user or per song, and because much of it happens through platforms like YouTube where the labels feel they have relatively little control.

By way of illustration, in 2016 I estimate paid subscribers generated an average of $75 per year in revenue on the services they used, such as Spotify and Apple Music. By contrast, ad-supported streamers generated an average of $3.50 per year. So, even though there are ten times as many users of these free services, the 100 million or so paid subscribers actually generated more than twice as much revenue. Of course, the labels get a proportionate cut of each of these revenue streams, so the same economics apply to them. Subscription streaming is the savior of the music industry but ad-free music streaming looks a lot more like Napster and other free file sharing services than any of the business models the industry has officially endorsed over the years in terms of the amount of revenue it generates.

Yet the free tier of these various services is arguably the best possible funnel for creating future paid subscribers because it introduces users to the basic model but with limitations, whether those are ads between songs, limits on how many songs can be skipped or the order in which they play, the ability to play offline or on mobile devices, and so on. That’s why, despite all their bickering and complaining, the labels stick with YouTube year after year and even sign new deals which they then describe as unfair. They may not like the revenue streams coming from free streaming but they know they’re a necessary evil to keep paid subscriptions growing over time.

Going forward, we’ll continue to see this somewhat schizophrenic behavior on the part of the music labels. On one side, rubbing their hands together over the new revenue coming from streaming and, on the other, bemoaning the ongoing dominance of the free services and exerting pressure on their owners to pull back certain content and reserve it for their paid tiers. In the meantime, users get to benefit as well, from both better and cheaper services and from the ongoing competition between the providers.

Published by

Jan Dawson

Jan Dawson is Founder and Chief Analyst at Jackdaw Research, a technology research and consulting firm focused on consumer technology. During his sixteen years as a technology analyst, Jan has covered everything from DSL to LTE, and from policy and regulation to smartphones and tablets. As such, he brings a unique perspective to the consumer technology space, pulling together insights on communications and content services, device hardware and software, and online services to provide big-picture market analysis and strategic advice to his clients. Jan has worked with many of the world’s largest operators, device and infrastructure vendors, online service providers and others to shape their strategies and help them understand the market. Prior to founding Jackdaw, Jan worked at Ovum for a number of years, most recently as Chief Telecoms Analyst, responsible for Ovum’s telecoms research agenda globally.

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