Monday, June 13, 2016

Is the Era of Free Streaming Music Coming to an End?

Written by Marc Hogan — With streaming services asserting their market dominance, the music industry must now try to convince an entire generation raised on free to start paying up—without scaring them off.

Those who share a birthday with Napster—which launched June 1, 1999—are turning 17 today. It’s an age when music often means the world. How differently, though, are these digital natives hearing their favorite artists compared to listeners from decades past? There’s always a risk of exaggerating the changes facing younger generations, but the shift undergone in this millennium feels less ephemeral and more profound than, say, transitioning from cassettes to CDs. This is because music is now free.

Before Napster, to hear whatever you wanted, whenever you wanted, you had to pay for it. Pirated music still exists, of course, but the real breakthrough for the music industry over the last decade has been free, ad-supported streaming. Vast libraries of songs ready at a click’s notice? Personally customized online radio stations? It’s all there, all the time—on car trips, in the shower, while sleeping or partying or working out or studying—and it doesn’t have an obvious cost.

Stone Mills, a 21-year-old musician at The Evergreen State College in Olympia, Washington, tells me that although he prefers playing vinyl or tapes, almost of all his current listening happens via YouTube. “Nowadays, my expectation of finding music on the internet for free is so high that I feel slightly offended when I can’t do it,” he says. “It’s kind of a warped mindset, actually.” It’s also, no doubt, a common one.

For all the debates about the paucity of payouts to music makers, with ad-supported streaming—unlike with piracy—at least those payouts exist. But now, the industry may be rewriting its compact with free streamers. Streaming services appear to be approaching a point of rebalancing as they try to maximize advertising revenues from the many who don't pony up for monthly subscriptions while at the same time finding new reasons for potential customers to pull out their credit cards.

Glimmers of what this realignment could mean for artists and listeners are already becoming evident. People who make music may eventually start to see their payouts from free streaming rise as services spread and advertisers follow—though it’s hard to see how those amounts will ever compare with the sales of old. People who listen to music, meanwhile, may want to get used to not being able to hear every major new release (legally) without paying for the privilege.

The problem, as Tim Westergren, founder and CEO of web-radio giant Pandora, tells me, is locating the right middle ground, where there’s enough free music to encourage paid subscriptions but not enough to condition audiences to stop paying altogether. “We’re heading into a period of reckoning, where the industry is going to make some decisions about what really makes sense,” he says. “It can’t go on as it is.”

The ability to stream music online without paying for it has been under threat for a while. In late 2014, after Taylor Swift’s high-profile decision to withhold her album 1989 from Spotify in the wake of proclaiming that “music should not be free,” a Sony Music exec reportedly said the label was re-evaluating its support for free, ad-supported streaming. By March 2015, major label sources were saying that “we need to rethink free.”

More than a year later, the practice hasn’t gone anywhere, but the business around it has evolved. Streaming companies that previously used to offer only free, ad-supported services, like YouTube and SoundCloud, have started providing paid-subscription options. Pandora, which provides online radio rather than songs that can be streamed on-demand, has undertaken an acquisition and a change in management. Apple Music and Tidal entered the on-demand streaming fray, both without a bona fide free tier. Moreover, the record industry has—for now, at least—shifted its crosshairs from Spotify to the biggest music streaming service of all, YouTube, in a battle over copyright law.

It’s an open secret that YouTube, the Google-owned streaming video giant, also happens to be the world’s most popular site for streaming music. A recent nationwide survey found that 53 percent of respondents had watched music videos or listened to music on YouTube in the last month. That compares with 32 percent who listened to Pandora, and 13 percent who listened to Spotify, the leading music-only services. What’s more, among younger music fans in particular, a vast majority—86 percent—said they used YouTube to satisfy their musical needs.

YouTube, like Google’s search engine itself, has long been free to users, supported by targeted advertising. Last October, the company unveiled YouTube Red, a new paid subscription service that offers ad-free viewing and listening. At the same time, YouTube also announced a new app that filters out YouTube’s non-music content and includes the usual 30 million or so tracks found on other streaming services, plus the vast array of live clips, remixes, and other musical ephemera found on YouTube. The free app is ostensibly separate from YouTube Red, but if you want to use it in most real-life circumstances—like when your screen is off or while using other apps—you’ll have to pay.

But as YouTube moves into the paid subscription business, it’s hardly abandoning its bread and butter. When asked about the near future of free music streaming, Robert Kyncl, YouTube’s chief business officer, tells me, “What’s next is more ad revenue coming into it.” For instance, the advertising conglomerate Interpublic Group recently revealed it was shifting $250 million in TV ad spending to YouTube. Kyncl suggests advertisers could increasingly take money off traditional radio, too, and put it on the service’s clips. The record industry’s business model always differed from TV and radio in that fans bought specific songs or albums, but now it’s being tied into that same advertising-based model through free streaming.

“The music industry as a whole hasn’t earned that much from advertising, and now that’s changing,” Kyncl says. The reason industry coffers haven’t previously spilled over with ad revenues is partly a quirk of U.S. copyright law. Unlike in some other nations, radio broadcasters here pay royalties only to the songwriters, not the labels that own the recordings. But on-demand streaming service providers like YouTube and Spotify must pay both types of royalties. So, according to Kyncl, as listening goes from analog to digital, the music industry can look forward to a bigger share of the revenue from a larger market. In other words, labels—and artists who own their own master recordings—have gone from “monetizing only the super fans, by selling them CDs and LPs and tapes, to making money through ads from everybody that enjoys music,” he explains. “And that’s a big deal.”

Exactly how big of a deal—and who will benefit from it—is up for debate. Kyncl’s comments come as trade organizations for the record industry have been waging a public relations battle with YouTube. In April, the U.S.-focused RIAA and the global IFPI both issued reports complaining of a massive “value gap” between the amount of free music streamed on sites like YouTube and the money returned to copyright owners. Meanwhile, a host of acts, from Katy Perry to Arcade Fire, signed letters calling for changes to a 1998 law that protects sites like YouTube and SoundCloud from copyright infringement lawsuits when, say, someone uploads a leaked Taylor Swift song. YouTube responded that many of the arguments against it were unfair and said it has paid out more than $3 billion and counting to the music industry so far: not chump change, but still, a relatively paltry sum compared to the more than $20 billion in inflation-adjusted revenue the U.S. record industry generated at its peak in 1999. What result, if any, will come of the clash with YouTube is unclear. Neither side is challenging the basic concept of free, ad-supported streaming as a moneymaker; they’re fighting over their share of the pie.

Despite the gains from streaming, that pie has shrunk by more than half over the last 16 years. The U.S. recorded music industry brought in overall revenues of $7 billion last year, up almost 1 percent from 2014, according to the RIAA. (Globally, revenues had their first significant uptick since the ’90s.) But industry sales have been hovering around this level since 2010. And that overall stasis masks an underlying swing in listening habits. This year, for the first time, streaming generated the largest share of revenues, at slightly more than 34 percent, inching ahead of digital downloads. In early May, Warner Music Group became the first major label to boast that streaming is now the largest source of revenue in its recorded music business, though that was partly offset by ongoing declines in physical sales.

In 2015, with Tidal and Apple Music making splashy debuts, the biggest and fastest-growing source of streaming revenues was from paid subscription services, which accounted for $1.2 billion. The nonprofit SoundExchange, which distributes royalties to artists and copyright holders who are played on Pandora, SiriusXM, and other digital radio services, paid out $803 million. By comparison, on-demand, ad-supported services like the free tiers of Spotify and YouTube represented just $385 million. As the RIAA didn’t hesitate to point out, that was less than the estimated retail value of vinyl album sales. (U.S. radio revenue last year, meanwhile, was more than $17 billion.) So yes: If free streaming keeps drawing advertisers, there will be more money. But the industry will need to bring in a lot more to return anywhere close to its heyday.

In March, SoundCloud, another free, user-upload streaming site, introduced its own paid subscription service, SoundCloud Go, and the company’s CEO Alex Ljung also sees free and subscription components as necessary complements to each other. “Music is something that you have the chance of reaching billions of people with,” he tells me. “Subscription will be really big, but you’re still not going to get all those billions of people into subscription. You don’t want to leave that on the table.”

As SoundCloud was reaching its deals with labels for the new service, some users complained of having their uploads unexpectedly taken down. More recently, NPR noted concern that dance DJs and producers may no longer be able to use SoundCloud for their mixes and remixes. Ljung acknowledges a need to respect rights holders while at the same time allowing remixes and other “derivative works” to keep proliferating, but he casts SoundCloud’s industry agreements as a boon. “It’s really a step forward both in terms of compensation for artists, but also for enabling more creativity,” he says. For instance, SoundCloud recently announced a free music mastering service. As Ljung describes it, going legit will result in fewer takedowns, not more, and the music that stays up will now generate actual money. The community drawn to SoundCloud by its DJ mixes surely hopes he’s right.

But perhaps the most dramatic transformation in the free streaming world is taking place at Pandora. Unlike Spotify, YouTube, or SoundCloud, Pandora is an internet-radio company, not an on-demand streaming service, so different copyright rules apply. That’s why certain artists and albums are sometimes available on Pandora but not on most streaming services, including single-platform exclusives like Drake’s VIEWS or Beyoncé’s Lemonade. “Monetizing free audio listening is a fantastically difficult problem to solve," Pandora’s then-CEO Brian McAndrews said last June, "and we are alone in solving it." While the company fell $170 million short of a profit in 2015—partly blaming the loss on licensing costs it has to pay that terrestrial radio doesn’t—it still managed to generate $1.16 billion in revenue.

And while Pandora offers an ad-free, paid tier, 80 percent of its revenue last year came from the advertising on its free streaming option. Still, the company is in the midst of a substantial makeover. Last November, it bought the scraps of bankrupt Spotify rival Rdio, giving it an entree into the on-demand space. Pandora has also diversified beyond streaming, acquiring concert ticket service Ticketfly back in October and music analytics company Next Big Sound earlier in 2015. Then, in a surprise move, Westergren replaced McAndrews abruptly this past March as CEO.

Westergren confirms that Pandora’s on-demand offering is in the works, but he says that “isn’t a pivot away” from the online radio business “at all.” And he’s careful to differentiate free radio, which has existed for nearly a century offline, from the free on-demand streaming on offer from Spotify and YouTube, an area where he sees more potential pitfalls. “You’re training people not to pay for music, really,” he observes.

For that reason and more, ad-supported streaming remains under pressure. “Free on-demand music services are not working really for anybody, except the consumer, of course,” says Jon Maples, an industry analyst and veteran product executive. “It doesn't work for the content creators, because the drips of pennies that come out of the payment machine are laughably small. It doesn't work for the content owners and distributors because it has totally gutted the retail products. And it doesn't work for the services because of the enormous cost of the content.”

But even with all of its imperfections, virtually no one expects free streaming to go away. “Free has a purpose,” Vickie Nauman, founder of the digital music consultancy Cross Border Works, tells me, noting that it has helped direct listeners toward paid services. Michael Sloane, co-founder of Streaming Promotions, a Nashville-based startup that pitches independent labels’ songs to user-generated playlists, contends that labels aren’t doing enough to point audiences toward streaming. “We as an industry continue to push toward this download model, where everything goes into the iTunes store,” he says. “You gotta go where the fish are biting, and right now the fish are biting at Spotify.”

Allen Bargfrede, an associate professor at Berklee College of Music, predicts “continued subtle shifts” for free streaming. He says putting some music behind a paywall may be a smart move for the industry and streaming companies alike, noting the more than 250 million streams Tidal claimed for Kanye West’s The Life of Pablo in the first 10 days of its (essentially Tidal-only) release. “The exclusive angle seems to be working,” Bargfrede says.

The concept of exclusivity goes far beyond releases limited to a single platform when they first drop. In addition to the user-uploaded content on YouTube or SoundCloud that exists nowhere else, YouTube, for one, has been nurturing new music talent with its YouTube Music Foundry program. As for “derivative works,” Apple Music and Spotify have each struck deals with digital music distributor Dubset to make remixes and DJ mixes available to stream legally, though how that will work out in practice remains unclear. And Spotify is working on original video series with such stars as actor Tim Robbins and Def Jam Records mogul Russell Simmons. “Music will always be most important, but our audience wants more from us,” Spotify’s content partnerships chief, Tom Calderone, has said.

Spotify, for its part, declined to comment on the record about what changes it might make, if any, to its free tier, such as potentially allowing artists like Swift to make their music available only to paid subscribers. Last December, during negotiations over Coldplay’s album A Head Full of Dreams, Spotify reportedly showed a new willingness to let the band limit access to the record to the paid tier for a time, an approach known as windowing, but the record ended up being released on the free tier as usual. And, in a statement to Pitchfork, Jonathan Prince, global head of communications and public policy at Spotify, echoed other services’ arguments that free, ad-supported streaming will eventually generate more money for music.

But some industry watchers tell me it’s almost inevitable that free streaming will be increasingly curtailed as the overall streaming market matures. “At some point, it’s got to become rationalized,” Pandora’s Westergren says. “A perpetual free option doesn’t make for a viable music industry—what are you telling people about the value of music? You need to give them an alternative that’s attractive, reasonably priced, and fits the way they want to consume music. That is the holy grail.” For fans, artists, streaming services, and the music industry as a whole, the search continues.

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