Narrative: Streaming is Saving Music
Each narrative page (like this) has a page describing and evaluating the narrative, followed by all the posts on the site tagged with that narrative. Scroll down beyond the introduction to see the posts.
Narrative: Streaming is Saving Music (Jan 28, 2017)
Written: January 28, 2017
The music industry has had its ups and downs in the last 20 years – from the CD-fueled boom to the era of Napster and file sharing to the entry of iTunes and other legitimate digital music services and now to the era of streaming. For most of the last 20 years, those trends have driven revenues downwards, but over the last couple of years there has been something of a turnaround, driven by streaming music. However, though it’s tempting to lump streaming into one big bucket, the true picture is one of two very different flavors of streaming.
Streaming is really a technological term – music is streamed rather than downloaded for playback – but actually tells us nothing about the business model behind it. In fact, there are two very different business models behind streaming, often both offered by the same companies, with radically different outcomes for labels and artists.
By far the most popular form of streaming by listener numbers is ad-based streaming. YouTube has over a billion people streaming music through the service, while Spotify likely has around a hundred million and Pandora has a similar number. These services make massive catalogs of music available for free to the user, garnering some revenue from advertising in the process, and paying out a portion of the total to labels. And it’s easy to get the impression that it’s this form of streaming that’s saving the music industry.
But in fact it’s the other flavor of streaming – paid subscription music services – that’s actually driving growth in the music industry, and the user numbers here are much smaller. In fact, the total number of paid streamers at the end of 2016 was around 100 million in total, between Spotify (the market leader), Apple Music, and a variety of smaller providers including Deezer, Rhapsody, Tidal, and others. But these services between them, even with their far smaller overall user numbers, contributed massively more to the industry than all the free, ad-based streamers combined.
Spotify’s annual financials are a good starting point for understanding the stark differences between paid and ad-based streaming. In 2015 (the last year for which we have the numbers), 31% of Spotify’s members were paid subscribers, but 90% of its revenue came from paid streaming. Put another way, it derived around $4 per year from each ad-based subscriber, but $80-90 per year from each paid subscriber. Another way to look at this is that YouTube, with its billion users, paid out around a billion dollars to music labels in 2016, while Apple Music, with its average of around 15 million subscribers in 2016, paid out roughly the same amount.
When the music industry complains about the economics of streaming, it’s increasingly a narrow argument about ad-based streaming, with YouTube the main target. The reality is, though, the the industry needs ad-based streaming, not least because it’s the only way many younger listeners engage with music, but also because it’s the best possible funnel for paid music services, especially where a single company provides both ad-based and paid options and therefore has a natural up-sell mechanism in place.
The big question is whether streaming music can be sustainable for the streaming providers. Apple doesn’t need to make money from streaming alone, because it helps add value to what’s already a highly profitable ecosystem which mostly derives revenue from hardware purchases, and the same can be said for YouTube with its broader ad model. But for standalone companies like Spotify, it’s critical that music streaming itself provide a profitable revenue stream, and that hasn’t been the case so far. Spotify loses money each year, with royalty, streaming distribution, and content expenses eating up 85% of its revenue in 2015, leaving very little room for staff, marketing, and other costs and putting it into the red overall.
There are various theories about what it would take for Spotify to become more profitable – a more favorable split between paid and ad-based streamers, greater scale overall, renegotiated rates with labels, and so on. But it’s possible that it’s just not possible for this model to be successful for a standalone company. Spotify is supposed to be working towards an IPO, and will need to prove that argument wrong if it’s to get investors on board, but it’s far from clear that it will be able to do that just yet.
Spotify’s deals with the music labels have long been a barrier to achieving profitability and therefore also a major barrier to an eventual IPO, especially because many of its relationships have been operating on a very short-term basis rather than being locked in longer term. It sounds like there might finally be light at the end of the tunnel, mostly because Spotify is finally caving on perhaps the single biggest sticking point in its relationship with the labels: the differences between the paid and free versions of its service. Spotify has, in fact, steadily eroded those differences, which used to be more significant but now amount mostly to a lack of ads, while the labels have long wanted Spotify to increase the differentiation between the two as a way to push users to the paid their and therefore compensate artists at a higher rate for their music. As I argue in the Streaming is Saving Music narrative, it’s not really streaming as a whole but more narrowly paid streaming which is helping the music industry thrive at present, and so those labels have every incentive to push that tier of service. On the other hand, Spotify has used that free tier very effectively as a funnel to create eventual paid subscribers, and the labels also want Spotify to IPO so they can get a return on their investments, which is why they’re finally showing some willingness to compromise too.
via Financial Times
Pandora Premium: the original music streaming giant is ready for prime time – The Verge (Mar 13, 2017)
I went to download the Pandora app so I could try out this new Premium service, but it’s not available yet, so the headline is inaccurate on that point at least. It also looks like there’s no desktop or even web app, which feels baffling given how many people probably listen to Pandora on a computer at the office. However, the app itself looks interesting – as befits Pandora’s heritage, it’s big on recommendations, though its characterization of everything else out there as “30 million songs behind a search box” feels entirely inaccurate, given how much effort Spotify and Apple Music put into recommendations. Pandora won’t succeed on the concept alone, but because (and if) it’s better at it. It’s always had a unique approach to that challenge, dissecting the music itself with its Music Genome Project rather than simply taking an Amazon-like “people who like this also like that” tack. But that means people actually have to experience it (or know someone who has) to know if it’s truly better, which means convincing them to give it a try will be the biggest challenge. For the 80 million regular users of the existing Pandora service that’ll be easy, but I’m not as sure about the rest of the world.
via The Verge
SoundCloud is beginning to look a lot like Twitter, another service which has lots of active users but which seems to be struggling to find a business model that can drive it toward profitability. In SoundCloud’s case, that has apparently meant it’s struggled to raise money over the past few months, and a possible acquisition by Spotify also seems to have fallen through. On paper, SoundCloud is in a hot area – music streaming – but of course even for the largest player in paid streaming (Spotify) it’s not yet profitable. Paid streaming has been great for the music labels, which have seen a turnaround in their fortunes over the last couple of years as a result of its growth, but not yet as good for the actual providers. SoundCloud is in an even worse position, being mostly a free provider, although it’s tried to turn up its paid services in the past year or so. I think the most likely outcome for SoundCloud at this point is an acquisition and absorption into something bigger, most likely Google.
Spotify now has 50 million paid subscribers – The Verge (Mar 2, 2017)
Spotify keeps extending its lead as the leader of the paid streaming market, although it’s worth noting that not all those subscribers are created equal – see, for example, its recent partnership with the New York Times and many more and larger partnerships with mobile carriers. Those subscribers are all paying a lot less than the standard $10 per month rate Spotify charges standalone subscribers, and they likely make up an increasing proportion of the total. Still, it’s quite the achievement by Spotify to get to this milestone, especially its rate of growth over the past year or so. Next achievement to focus on: turning all that growth into profits, something that remains elusive.
via The Verge
Another front in the challenging streaming music differentiation war: higher-fidelity music, something Tidal and some other niche services already offer but which the big players mostly haven’t. Spotify only appears to be testing this option with customers at the moment, including a range of different prices for the upgrade ($5-10), and there’s no guarantee it launches. Obviously, higher revenue per month could expand margins, but only if Spotify doesn’t have to pay commensurately more for the content itself. And of course the portion of users who would actually pay more per month is likely to be very small as a percentage of the total.
via The Verge
It’s becoming increasingly clear that original content is going to be an important part of differentiation in the streaming music space going forward, between Spotify’s earlier video content and now several new podcasts, and Apple’s focus on Beats 1 radio and its TV shows. The difference is, of course, that Spotify has a free tier, where this original content will also be available, while Apple will restrict its TV shows to paying subscribers. For Apple, the cost isn’t that big a deal – it has a much bigger company to fund such investment – but for Spotify such additional costs will push it yet further away from profitability without any big direct revenue benefit.
The Key to Pandora’s Subscription Hopes: Country Music – WSJ (Feb 21, 2017)
This is a fascinating angle on Pandora’s shift to becoming an all-you-can-eat subscription music provider next month: the idea that it’s uniquely appealing to country music fans and hopes to convert many of them to $10-a-month paying subscribers. The article presents lots of interesting evidence on every point but one: that country music fans aren’t already subscribing to other services – a point it finally concedes in the penultimate paragraph. It certainly is true that other streaming services have focused on other genres, principally pop and hip-hop, and that country music fans have been a neglected bunch. But if Pandora is staking its push here on winning over this group, I suspect it’ll have a tough time making a business out it – subscription music is a scale business, and Pandora’s appeal will have to be broad to be successful.
Apple Debuts Planet of the Apps Trailer – Recode (Feb 14, 2017)
Apple debuted the trailers for its Planet of the Apps and Carpool Karaoke shows at the Code Media conference last night. These are two of Apple’s first bits of original video content, both of which will debut as part of Apple Music. Carpool Karaoke still features James Corden on some episodes, but not all, which will detract at least somewhat from the original format, which is compelling in large part because of him. Planet of the Apps is a Shark Tank-style reality / competition show focused on apps. This clearly plays to Apple’s strengths, and gives potential competitors a big draw in the form of featured placement on the App Store. This isn’t my kind of thing – I’ve never been a big fan of reality shows – but Shark Tank is very popular, and Apple’s show mirrors its format pretty closely, so it should do well among the same people that like that show. In addition to music exclusives, these bits of video content are another unique feature of Apple Music, which should help set it apart versus the competition. But to my mind, it’s more interesting to see this as an ongoing push by Apple into original content, which for now may live in Apple Music but certainly has the potential to become the foundation of an Apple subscription video service in future, which could be a much bigger deal.
Billboard reported at the end of December that Facebook was working on a Content ID-like system for policing music rights infringement on the site, and this Bloomberg piece suggests more of the same. There are several challenges here. Firstly, most Facebook video is published privately, so it’s impossible for outsiders to truly gauge the scale of infringing content. Secondly, a lot of the music videos shared on Facebook are covers, not originals, making detection tough. And third, though Facebook wants to set itself up as a more attractive alternative to YouTube, with advertising as its business model it’s unlikely to pay out at a much higher rate, and in fact may detract from the progress being made by paid streaming services in compensating artists more adequately by creating yet another massive source of free music listening. As such, I’m not convinced that the labels should jump too quickly into bed with Facebook. And that’s tough for Facebook because it clearly wants to take share from YouTube, but music is a huge component of the latter’s popularity.