Monday, October 10, 2016

Subscription Streaming, the Future of the Music Business

Written by the print edition: Business — Once enemies of record labels, Spotify and Apple are now spinning profits for them

IT WAS an eventful summer in the business of streaming music. Taylor Swift and other artists attacked YouTube over rampant free streaming. Frank Ocean and Katy Perry cut exclusive deals with Apple Music, to the dismay of executives at Spotify, a Swedish rival. Behind the scenes, Pandora, a radio-like service, and Amazon, an e-commerce giant, stepped up their efforts to take on Spotify and Apple. Then last month Spotify began talks to buy SoundCloud, another streaming firm.

All this drama obscures two emerging realities. The first is that subscription streaming is now the future of the music business. The industry suffered a catastrophic collapse in sales from 1999 onwards before beginning to recover last year. Selling music to own, whether via iTunes downloads or CDs, is still a declining business globally.

But American record labels and music publishers are now on track for a second consecutive year of growth. Recent reports on sales of music from Europe, where some countries are experiencing double-digit increases in revenues, suggest that the recovery will also continue in other parts of the world.

Most of that rebound is due to growth in subscription-streaming revenues. In the first half of 2016 subscription streaming in America reached a retail value of $1 billion, up by over $500m in just one year, putting it on a par with digital downloads. Retail revenues from radio-like services such as Pandora, and from ad-supported on-demand streaming such as YouTube and Spotify’s free service are faring much less well—they grew in America by less than a tenth, to $600m.

The second reality is that since Spotify and Apple have close to two-thirds of the world’s nearly 90m paying subscribers to streaming services, they are the ones shaping the future. If Spotify acquires SoundCloud, a mostly free service that claims to have 175m monthly listeners, its position would be stronger still. Last month Daniel Ek, the co-founder and chief executive of Spotify, tweeted that his company had surpassed 40m subscribers—adding 20m since June 2015, as many as it had acquired in its first seven years in operation. Spotify reached this milestone despite intense competition from Apple Music, which has won 17m subscribers since its start in 2015. The smaller firm hands over close to 70% of its revenues to the music business in royalties, says an industry executive.

Hogging the mic

Indeed, peel back the figures and the industry’s reliance on Spotify and Apple’s paid services becomes even clearer. The number of subscribers to all others combined shrank slightly—from 31m to 30.5m—in the year after Apple launched its service, notes MIDiA Research, a London-based consulting firm. Artist-backed services such as Tidal, which is co-owned by Jay Z and other performers, and which claims 4.2m subscribers, aren’t getting anywhere.

As a result, music companies are keenly watching what Apple Music and Spotify might do next. The industry remains nervous of Apple, since its size and multiple lines of activity may at some point allow it to force down royalty payments. In other words, the music industry knows that it needs Apple more than the other way around. Spotify, on the other hand, is a lossmaking firm with only one string to its bow. Record labels have their niggles about Spotifiy but are eager for it to succeed.

The change in attitude is striking. Once the bΓͺte noir of the industry for not paying recording labels enough in royalties, Spotify is fast becoming their most reliable moneymaker. The firm recently disclosed that it has paid $5 billion to the music industry to date. Apple, once vilified for decimating album sales with iTunes, is the second-biggest earner. If the music industry is singing a new and catchier tune, it has some erstwhile enemies to thank.

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