Wednesday, October 7, 2015

What Does This Music Industry Report Mean for Apple Inc., Pandora, and Spotify?

Written by Andrew Tonner — Parsing a music industry authority's recent report to see what the current industrywide sea change could hold for these companies.

The Internet fundamentally rewrote the rules of the music industry, and the winners and losers are still shaking out.

However, one of the bigger trends we've seen has been the rise of streaming platforms, such as Apple Music, Pandora Media, Spotify, Rhapsody, and Tidal, to name a few. And as streaming increasingly drives the music business, a recent report from one industry authority demonstrated this trend in its full effect.

Inside RIAA's halftime report
Recently, a midyear report from the Recording Industry Association of America, the music industry's lobbying arm, confirmed that streaming services such as Apple Music, Spotify, and Pandora are becoming an increasingly integral portion of the U.S. market. The American music industry generated $3.2 billion in revenues in the first half of 2015, exactly the same as in the first half of 2014. However, looking at distribution of sales among specific segments reveals an industry in flux.

As you might imagine, sales of physical music such as CDs continue to dwindle, with expanding streaming services picking up the slack:

The ongoing resurgence of vinyl was the lone bright spot in an otherwise dreary market for physical music. And although less negative than overall physical sales, digital-single downloads also contracted 9.4%, from $759 million last year to $678 million this year. But full-length album downloads expanded 4.2%, from $543 million to $571 million. However, this report was all about streaming, which constitutes the only meaningful growth trend supporting this long-suffering industry. Here's how the three revenue sub-classifications of the streaming music business each expanded over the past year.

"SoundExchange distribution" refers to any payment for digital radio licenses to artists and rights holders, so streaming radio operators fall entirely within this category. So how should investors and fans of streaming names such as Pandora, Spotify, and Apple Music reconcile these numbers with each individual company?

On the right side of history
For Pandora, the streaming service grew revenue faster (up 25%) than the overall industry (up 19.7%) during the period the report covered. Although not offering much more meaningful insight than this, for Pandora to outperform its industry helps further optimism for continued momentum, especially in combination with the likely positive impact from the favorable initial rights ruling from the U.S. Copyright Royalty Board.

Another key point in parsing the streaming growth figures is that the paid-subscriptions section probably doesn't include Apple's on-demand music product. Apple unveiled Apple Music at its Worldwide Developers Conference keynote address on June 8, offering a free three-month trial for consumers. However, Apple Music has been public since only June 30. If Apple recognized any revenue from first-day signups or had to pay license fees reflecting the first day of the service's usage, payments from Apple reflecting only June 30 would make their way into the paid-subscriptions figure. It makes sense that Apple would have to pay license fees as a song is played, whereas it probably only will recognize actual subscriber revenue when it begins collecting payment for Apple Music on Oct. 1. So in trying to divine the split between Apple Music, Spotify, and other smaller rivals, note that Apple is effectively a non-factor in the paid-subscriptions category. It will be illuminating to see how that changes in RIAA's next report.

Either way, as the RIAA report demonstrates, streaming is the preferred way for increasingly mobile consumers to listen to music. Whether names such as Apple Music, Spotify, and especially Pandora can form sustainably profitable business models isn't yet a given. However, as we've learned, they should have ample opportunity to do so, given their increasingly integral place within the music industry.

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