Music Streaming - Is it Killing or Saving the Music Industry (and where does my £9.99 go)?

 by Georgia McKirgan

I was born at the end of the CD age and in my lifetime, the music industry has been confronted by many challenges. First, it was piracy sites like the original Napster, then iTunes downloads and now, streaming services like Spotify and Google Play Music. To listen some some stars like Thom Yorke and Taylor Swift, you might think that streaming services are killing the music industry. Given the numbers, I can understand why the industry is worried. Music industry revenues have been almost halved in 15 years:

This overall decline has masked some different dynamics. Over this period, the sales of physical formats have declined but the value of downloads, while growing, has not made up for all of this decline. As the market for streaming services is growing, it seems to be at the expense of the download market. So are streaming services killing the music industry? To answer this question, you need to look closer at the development of streaming services. The first point to make is that streaming services were first established as a legal response to illegal piracy sites which paid artist nothing. Their business model is based upon migrating people from a limited free service supported by adverts, to more comprehensive paid-for packages. Let's look more closely at the market leader, Spotify.

Spotify has been very successful at growing both its free and paid-for subscriber base:

This growth has enabled Spotify to significantly increase the amount of money it pays out to music rights holders:

The complaints from musicians suggests that we, the customers, are getting too much and paying too little for their valuable music. The data, however, suggests that musicians should be aggressively supporting the growth of streaming services. It seems that Spotify users spend more money on music on average than non-subscribers.

Streaming services talk about a business model called 'music as water' to describe a model where once you have paid a fixed fee, you have unlimited use. They obviously come for a country that doesn't have water meters but I get the message! I suspect that the complaints from the music industry come from the fact that they are caught in the gap between the decline of physical format sales and the growth of these legal streaming services. How does this growth feed through to the musicians?

The news stories reduce the arrangement to a 'price-per-stream' but there is actually a complex algorithm:

The subscriber growth mentioned above has led the average price-per-stream to increase from $0.006 to $0.0085 but what does this mean for the typical artist? The figures below refer to real albums but the names have been generalised:

  

These are US$ numbers per month. I can't understand why artists, such as Taylor Swift, would be upset to only receive almost half a million dollars per month on top of their download and concert revenues. To the extent these numbers are not enough to satisfy the musicians, the solution seems to be growing the use of streaming services rather than going to war against them.

Another benefit of streaming services is their ability to expose users to new artists and music. A key part of the offering of the paid-for services is promotion of playlists and 'artist radio' stations. I know that using these services myself has introduced me to a huge number of artists that I would otherwise, not have discovered. As mainstream radio stations evolve into a smaller number of styles (Top 40, Classic Rock, Oldies) it is the streaming services that given music fans the best opportunity to experiment and discover new music.

It seems like the whole music industry was structured around the sale of physical units. I don't think that either the demand for music or the amount of money music fans are willing pay for it has declined as much as the industry revenues suggest but I believe that the 'water as music' model is the best business model for the music industry of the future. What we are hearing from the music industry is the crashing of gears as the industry changes to adapt to this new world. The good news for us music fans is that one way the musicians have reacted to the fall in revenue from this period of adjustment is to focus more on live concerts. The amount of money we spend on concerts and festivals has more than made up for the decline in music sales revenue. That's maybe a topic for a future article but in the mean time, don't feel too sorry for the musicians. From the newspapers and magazines, they still seem to be living a very affluent life.