Narrative: Streaming is Saving Music
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Narrative: Streaming is Saving Music (Jan 28, 2017)
Updated: May 19, 2017
This narrative was the subject of the Weekly Narrative Video the week of May 15-19, 2017. You can see the video on YouTube here, and it’s also embedded at the bottom of this essay.
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.
Microsoft has today announced that it’s killing off its own streaming music service, Groove Music, and will be partnering with Spotify instead as the latter builds an app for Windows 10 and the Xbox One. This isn’t a huge surprise – Microsoft’s various incarnations of music streaming services have never done as well as its base of Windows users should have enabled them to – but it’s an admission of how completely Microsoft has failed when it comes to consumer content services, where it’s basically a non-player. That, in turn, is indicative of Microsoft’s continued challenges as a consumer ecosystem, especially relative to Amazon, Apple, Facebook, and Google, which dominate much of consumer time and content consumption. Microsoft’s consumer presence is largely limited to its de facto standard status as a maker of paid productivity software and increasingly free standalone productivity apps on mobile platforms, alongside its search and gaming platforms. None of that engenders much positive loyalty to Microsoft from consumers, and it generates very little revenue for the company on the consumer side. And yet it continues to try to straddle the consumer and enterprise worlds in a way few have ever managed to do successfully. Giving up in music is a logical and sensible step, but it’s certainly not going to get Microsoft any closer to cracking the consumer market. Meanwhile, it’s yet another channel – albeit likely not a big one – for Spotify to sign up more streaming music subscribers.
via The Verge
Amazon is adding voice control features to its mobile music apps for iOS and Android to give users more ways to control their music even when they’re not using an Echo or other Alexa-enabled device. That’s a logical place to extend Alexa functions given that music playback is a major use for voice speakers, and the symbiosis between the two has already made Amazon Music a much more widely used service over the last couple of years that it would have been otherwise. A recent survey I ran suggested that under 20% of US Prime subscribers use the music feature, but even at 20% that would be millions of users in the US alone, and I would guess many of those are likely Echo users. Adding a voice feature to a third party app still isn’t nearly as convenient as invoking it from an external button or a voice command from the lock screen, but for those committed to Amazon’s ecosystem, this is still a useful value-add. We’re going to see the connection between voice and music become considerably stronger over the next few years, with Apple’s entry into voice speakers through the HomePod as well as Sonos’s announcement next week. A big question is whether voice becomes an important way to drive playback on mobile as well as in the home – voice assistant use on mobile remains fairly low overall and high mostly in specific circumstances like while driving, but that could change as assistants get more sophisticated in understanding commands relating to music, something Apple’s clearly been working on lately.
It’s been increasingly clear in recent months that Spotify has big ambitions for its advertising operation, even going so far as to pitch itself as a threat to Google and Facebook in time. One thing essentially every big ad platform has in common, though, is self-serve tools to enable the long tail of small and medium-sized businesses to buy ads, and that’s an area Spotify hasn’t emphasized enormously just yet. One big challenge is that audio ads are rather tougher to create for small businesses than display ads, and that’s one of the things Spotify is now looking to solve with what it calls the Spotify Ad Studio. The tool will allow advertisers to upload a script and choose music and other options while text-to-speech technology creates the voiceover. That sounds like it could be terrible if it’s anything like other robotic sounding TTS software, but the key is that it dramatically expands the range of advertisers that could run audio ads on Spotify, which now has a large and rapidly growing audience in the US. Given how poorly ad-based streaming music is monetized today, anything which boosts the demand side of the ad market should help raise prices and therefore improve the overall economics, though it’s never likely to rival paid streaming in terms of revenue per user.
The Recording Industry Association of America (RIAA) today issued its report for the industry’s performance in the first half of this year, and it showed a by now familiar trend: stronger growth driven by rapid growth in streaming. That growth far more than offset the decline in both physical and download sales, with physical sales now just 16% of total revenues compared to 31% back in the first half of 2013. More importantly, downloads have dropped from 44% of industry revenue to just 18%, barely ahead of physical sales, while streaming is now 58% of total revenue. As always, though, it’s worth noting that it’s really subscription streaming that’s driving numbers up, with 61% year on year growth in that category and 74% of total streaming revenues, with just 12% coming from ad-based streaming despite the much larger user numbers. The RIAA says there were an average of 30 million paid subscribers in the US in the first six months of the year, up from 20 million in the same period last year. In its report (linked below) there’s the usual griping about that ad-based revenue stream, a stream the industry continues to go along with but moan about at the same time because it knows it can’t really live without it, even though paid streaming is far more lucrative. In the paid streaming department, the US continues to be quite some distance ahead of most of the rest of the world. A recent survey I ran showed that Spotify and Apple Music alone had captured 23% of online adults as customers between them.
via RIAA (PDF)
Pandora has been testing a new ad model for some time and is now launching it broadly. The model offers users an opportunity to trade watching a video ad for extra skips and playbacks, both of which are normally limited under its ad-based option. That’s a familiar model from the mobile gaming market, where games often offer users additional lives or other in-game features in return for watching video ads, although anecdotal evidence from my own family suggests that those ads aren’t really being “watched” in any meaningful way – they basically insert a 30-second delay in game play during which the player does something else. Pandora says a high percentage – 42% – of its active user base has signed up for this program, which is called Video Plus, so that’s a good start, but the key metrics here aren’t the number of signups or even the number of times people agree to trade an ad view for in-app functionality, but brand recall and other more traditional ad metrics which would demonstrate that users are actually watching and taking in the content of video ads. There’s no mention of any of that in the Adweek article linked below, and whether this new model ultimately succeeds or fails will depend entirely on whether brands actually see a decent return on the investment.