Streaming revenue is up, music industry is still unhappy

I have always been intrigued by the music industry, though I’ve never worked a day in it, and I’m most fascinated by how the ways we listen to music have changed over the past two or so decades: from vinyl to CDs to digital downloads to streaming, with piracy thrown in the mix to make it all interesting.

US Record Sales between 2006 and 2015. Source: Recording Industry Association of America By The New York Times

US Record Sales between 2006 and 2015.
Source: Recording Industry Association of America By The New York Times

As technology has changed, so have the fortunes of the recording industry. RIAA released its 2015 sales data last week and, as the NY Times chart shows, while revenues are steady since 2010, hovering at around $7 billion annually, they are nowhere near the peak of $27 billion in 1999. This is due, of course, to changes in music consumption and the cost to consumers of each technology. CDs, the record industry’s most profitable product of all time, have been almost abandoned (down to $1.5 billion in 2015.) Digital downloads, the once-savior of the industry that prompted unbundling of albums, declined 10% in 2015 to $2.3 billion. Revenue from streaming is the only increase in 2015.

Before looking at current trends, I was surprised to learn just how profitable the CD actually was for the industry. I recently read “The Song Machine,” a book that chronicles the craft (read: business) of making hit songs. Most of the book is focused on the lyricists, melody writers, producers and artists that create those hits, but it also discusses the record labels and how they dealt with changes in music technology. One innovation from which the recording industry truly benefited was the CD, first presented to the industry in 1983. “The high-tech allure of the CD would allow the industry to raise the cost of an album from $8.98 to $15.98 (even though CDs were son cheaper to manufacture than vinyl records,) and the record companies got to keep a larger share of the money. The industry would even persuade artists not to raise royalty payouts, arguing that the extra money was needed to market the new format to customers.” [page 25] The CD’s higher price, and a string of mega selling albums from N’Sync, Backstreet Boys and Britney Spears,  propelled the recording industry revenue to a peak of $27 billion in 1999.

That was eons ago in the music industry. Today, despite the rising income from vinyl(!) sales, the most growth is from streaming. So what’s new?

  1. Pandora brought back their founder, Tim Westergren as the new CEO. Pandora has been losing users and is trying to shift from a “radio” model to an on-demand streaming model like Spotify. It’s a crowded market, to say the least. It will be interesting to see what price Pandora will set for the enhanced product. Right now Pandora has 81 million users with 4 million paying users who pay $5/month for ad-free radio. One other interesting tidbit about Pandora is that it bought Ticketfly last year, a “live events technology company.” Seeing as live events are currently a good source of revenue for artists, pairing shows with music discovery seems like a good idea. It will be interesting to see how Pandora succeeds in the already-crowded music-on-demand space.
  2. RIAA reported only a very slight rise in revenue in 2015, to around $7 billion, but an increase in revenue from streaming.  “Streaming — whether through paid subscriptions to Spotify or Rhapsody; Internet radio from Pandora; or even videos on YouTube — now makes up 34.3 percent of sales, edging out digital downloads as the industry’s biggest source of revenue… paid subscription services generated $1.2 billion in sales in the United States. After adding in free streaming platforms and Internet radio, the total for streaming is $2.4 billion.”
  3. Also in RIAA’s report: revenue from paid subscription streaming services (as opposed to radio or ad-supported) increased from $800 million in 2014 to $1,219 in 2015, an increase of 52%. At the same time, the number of paid subscriptions grew 40% to an average of 10.8 million for the full year, no doubt a result of the two new music streaming services launched in 2015: Apple’s new Music (claiming to have 11 million subscribers) and Tidal. Spotify also claims that it added 10 million subscribers in the last year. So more people are paying $10/month for music on-demand.
  4. Fragmentation yet again. Not all is great in the streaming world: the top-selling artists are providing some services exclusivity while ignoring others. Jay-Z pulled music from Apple and he and Kanye offer exclusive content only on Tidal. Gwen Stefani, who released her new album last week, followed Taylor Swift and Adele and did not release it on Spotify. The reason being that that Spotify’s ad-supported free listening tier erodes artist revenue. Her album reached #1 earlier this week. I wonder if the expectation is that users will switch to subscribe to the service that has access to the artists they love or if they’ll just end up subscribing to two services? Will there be a new, “uber” service that will offer all the music but for a higher monthly fee?
  5. Which leads us back to the recording industry: the labels. One of the high costs of any streaming service is licensing: Pandora faces struggles expanding abroad because its cheaper “radio” licenses are not available outside of the US and for on-demand streaming it will need to negotiate directly with the labels. Licensing music comes up again and again as one of the highest barriers to creating any digital music service. In the book “The Song Machine” I was blown away by this quote from Sean Parker, who met Daniel Ek in 2009: “Daniel said ‘I think it’s going to take six weeks to get our licenses complete.’ It ended up taking two years.” [page 292]
  6. Another player has entered the field. SoundCloud, a formerly free service, has tweaked its model and is now offering a paid tier: “SoundCloud Go… lets users listen to music offline and without ads, and includes access to the nearly 100 million mixes, mashups and other musical creations by emerging artists and DJs for which the site is known, in addition to the 30 million-song catalog owned by established record companies and offered on other subscription services such as Spotify.” Like the other services, SoundCloud Go costs $10 a month (more for Apple users.)

What does all this mean? That the current business models are still not getting it right. Listeners want more choice, instant playback, for less, but are willing to pay for a better product, artists want to be paid more than a few pennies, music services would like to be profitable, and the labels would like it to be 1999 but, as the Sony hack showed, are probably keeping more than their fair share of streaming revenue. Yet they probably should be happy that as streaming increases, piracy decreases as more people are willing to pay for music.

Will 2016 bring a consolidation in services? A rise in subscription fees? A rise in ticket prices for music concerts? New services trying a new model (why do all services continue to charge $10/month?) Maybe increasing fragmentation as artists gain more control of their music a la Tidal? Will Google use its incredible AI tech to become masters of music discovery? Will Apple parlay its dominance in mobile devices to the music space?

Stay tuned!

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One thought on “Streaming revenue is up, music industry is still unhappy

  1. We understand that music obsession works as a surrogate for lost human bonds. Songs can pierce the heart directly; it takes no mediation. Regular Bass House mixtapes uploaded every Wednesday. Hear us out on MixCloud!

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