Is the music industry revenue really growing? Streaming’s mixed impact on profit
The Changing Landscape of Music Industry Revenue
For the last several years, Barclays’ annual reports on the music industry have highlighted the struggles of a business in transition. The studies often showed that while the industry had managed to slow its steep decline, it still had not fully returned to music industry growth. In 2014, as digital track sales continued to shrink, Barclays titled its report “Streaming Killed the Download Star.” A year later, the 2015 edition carried the name “Swimming Upstream.” Fast forward to October 2016, the bank’s newest report was far more optimistic. Called “Dancing Days Are Here Again,” it opened with the hopeful statement that 2016 was the year recorded music finally seemed to be turning a corner.
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Music Industry Growth Backed by Numbers
Many U.S. analysts and executives echoed this optimism, especially after September when the RIAA reported that recorded music brought in 8.1 percent more revenue in the first half of 2016 compared to the same period in 2015. This rise in music industry revenue was powered by the expanding base of streaming subscribers. At the end of 2015, there were 10.8 million subscribers, but that figure jumped to an average of 18.3 million in just the first six months of 2016. The positive news extended beyond the United States, with the U.K. market growing by 10.9 percent, France by 6 percent, and some experts predicting global growth ahead. “We’ve reached a place where our largest source of revenue is increasing,” said Stu Bergen, Warner Music Group’s CEO of international and global commercial services. “That is a good feeling after the long decline of physical.”
The Fragile Side of Music Industry Revenue
Still, this turnaround is not guaranteed. Even as streaming rises, downloads and CD sales are collapsing. Nielsen Music reported that in the first nine months of 2016, downloads fell by 22.1 percent and CDs dropped by 12.7 percent. The lingering question is whether casual listeners will eventually pay for subscriptions when free access exists through YouTube and Spotify Promotion efforts. For major labels, streaming has been a lifeline, but the financial rewards are not as generous for songwriters, publishers, smaller labels, and many artists. Adding to the uncertainty, none of the streaming platforms themselves are profitable.
In short, if this is a rebound, it is a fragile one. “We’re in recovery,” said Michael Nash, Universal Music Group’s executive vice president of digital strategy. “It’s one day at a time.”
The Good News
The current rebound in the recorded music business has been largely driven by paid subscriptions. In the first half of 2016, these services brought in $1.01 billion, more than double the $478.6 million collected during the same period in 2015. That made up 63 percent of the entire U.S. streaming market. Much of that jump came from Apple Music, which only began generating revenue in the second half of 2015.
“This seems a solid and continuing trend,” said Martin Mills, founder and chairman of Beggars Group. “I see no reason it would turn back.”
The Potential for Music Industry Growth
No one is sure how big the U.S. streaming market can become, but the comparisons are promising. Roughly 100 million households subscribe to cable television and 47 million pay for Netflix. With those figures in mind, the potential for music industry growth is significant. “The question isn’t whether we’ll get to 50 million streaming subscriptions,” said Russ Crupnick, managing partner at MusicWatch. “The question is how long it will take.”
To put the opportunity into perspective, MusicWatch found that around 42 million people in the United States bought a downloaded track in the last year, spending between $50 and $60 on average. That means each new streaming subscriber who pays $10 per month is worth roughly the same as two download customers.
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Competition as a Catalyst
Another factor helping streaming succeed is competition, something the download market never truly had. Major labels have a direct interest in Spotify’s future, as they collectively own about 18 percent of the company, but they also want to avoid a single company dominating the way Apple once controlled downloads.
At present, Spotify leads with more than 40 million global subscribers, while Apple Music follows with 17 million. Amazon has just launched its own subscription service, promoted heavily to its 60 million Prime members. Pandora and iHeartMedia plan to roll out subscription services in 2017, while Google may grow Google Play or YouTube Red into serious players.
“We’re looking at a world with four or five players competing on the core proposition,” Nash said. “And we’re going to see innovation at the high end and the low end.” High-quality audio from Tidal or Deezer may attract some listeners, while budget-friendly options like Amazon’s $4 plan for Echo devices could appeal to others.
Encouragingly, as music industry growth continues, new investments are appearing. “I’m getting calls from people in private equity asking me about music assets,” said entertainment lawyer Doug Davis. “That hasn’t happened for six or eight years.”
The Bad News
Despite the optimism, challenges remain. “We aren’t out of the woods yet,” Bergen cautioned. For streaming to become a lasting business model, it must turn profitable for the tech companies running these platforms. So far, that has not happened. Deezer postponed its IPO, Rdio went bankrupt, and Spotify reported losing 173.1 million euros (about $191.4 million) in 2015 on revenue of 1.95 billion euros ($2.2 billion). A broad economic downturn could weaken Pandora’s stock or affect Spotify’s future IPO, forcing shifts in strategy or even driving some players out of the market.
“Eventually these companies have to make a profit for the overall industry to be healthy,” said attorney Joel Katz, who leads the media and entertainment practice at Greenberg Traurig. “If they don’t become profitable, that could disturb the revitalization of the record label business, which is coming back in a really good way.”
New Rules for Labels
Streaming also demands that record labels rethink how they operate. First, they must adjust their marketing to encourage ongoing listening rather than one-time purchases. Second, as more people watch videos on smartphones, labels will need to create more video content. Finally, they must be careful not to allow streaming services to become so powerful that they start releasing music themselves, as Apple effectively did with Frank Ocean’s Blonde.
The Upshot
Few believe the music industry will ever return to its 1999 peak, when U.S. revenue hit $14.6 billion. Today, money comes in when songs are played rather than bought, which means revenue grows more slowly but also more consistently. “The new market is not like the old market,” Mills explained. “New releases generate less immediate revenue than they used to, but their earning span is extended.”
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A Predictable Future for Music Industry Revenue
The music industry has always relied heavily on blockbuster hits, but streaming is creating a steadier flow of revenue. That makes music industry revenue more predictable, even if the big chart-topping moments remain critical. “There are very few industries that have come back from a 50 percent revenue decline,” said Nash. “And we can do it if we have the big picture in mind.”
