Streaming; The shift in tone of the music industry

June 20, 2017
Editor(s): Dominic Fischer
Writer(s): Tharaka Segar, Oskar Dobrowolski, Max Ruan

The previous decade has seen a decline in piracy and illegal music downloading due in part to the increase of legal music streaming services. During the 1990s, CDs and cassette tapes led the market which was then devastated by the free illegal downloading of music files. ITunes’ release in 2003 gave a boost to the music industry preenting a similar demise as CD’s and cassette tapes (Luckerson, 2014). Music streaming allows users to listen to whole albums or single tracks without having to download different audio files (Harris, 2016). Generally users pay monthly fees of around $12 to access unlimited playlists and albums, which is significantly minute compared to physical CD sales (Shaw, 2016).  Streaming remains the industry’s fastest-growing source of revenue, which had a 10.2% increase, reaching $6.71 billion in digital revenue in 2015, becoming the industry’s most significant growth in the past two decades (IFPI, 2015).

Subsequent to the turn of the century, illegal piracy services such as LimeWire and Napster came into prevalence, all facing copyright infringements and later ruled to be disabled by the courts (Gearlog, 2010). During this period, other platforms to recommend music started up such as Pandora and Last.fm (Gil, 2016). Such platforms used algorithms and song sorting technology to provide users with personalised playlists and recommend new artists to users based on genre and style preferences. Music listeners are now motivated to use streaming applications as they provide easily accessible, instant and affordable services. Rather than fearing the repercussions of illegal downloading, or splashing big bucks on CDs, users are spoilt for choice with an array of millions of tracks.

Across the globe, music streaming has soared to a record 68 million subscribers for paid music streaming in 2015, accentuating the boom from 2010’s figure of only 8 million (IFPI, 2015). Growth started to surface in 2014, particularly China which has surpassed $100 million revenue for the first time in a decade, South Korea too for reaching one of the top 10 largest music markets in the world (Shaw, 2016). In spite of this several artists including Beyonce, Coldplay and Ed Sheeran use other methods of promoting their music, such as releasing CDs for sale before putting them on streaming services (Arthur, 2015). The technology has come into scrutiny however by artists over royalty payments creating boycotts. The question being will they have enough influence to shift the market’s trajectory or will streaming continue on its current positive trend?

How has streaming surpassed the alternatives?

Historically, musicians and record label earnings came from the number of CD sales. In the first decade of the 2000s this changed with the advent of digital music downloads opening a new way to earn revenue. Inversely this new opportunity has led to the music industry suffering over the past few years as a result of these new markets. This leads to new threats and competitors, primarily copyright infringement via piracy. We have seen popular websites like Napster be a part of such widespread illegal music sharing creating a downward trend in both physical CD and digital download music sales.

After 2010, the concept of subscription-based ‘streaming’ was offered by providers such as Spotify, Pandora and Apple. The way it works is that consumers are able to have a completely legal access to a wide range of music for a low monthly fee or for free given infrequent advertisements – ‘freemium’. Now in 2016-17, the music industry is finally seeing signs of recovery and growth because of the success of streaming services. What in particular has occurred?
Data from the ARIA shows that within the Australian music industry, there are positive signs with total music sales increasing to $352.2 million, representing a 5.5% increase from 2016 (Mason, 2017). The cause of this is due to the significant growth in streaming which now represents the largest revenue stream, accounting for almost 40% of all music revenue. This statistic becomes even more impressive given that the fact that all other forms of revenue (e.g. CD sales, digital downloads) have continued to decline (except Vinyl albums). The recovery trend not only is in Australia, but extends worldwide. For example, in the US, streaming revenue grew 57% to $US1.6 billion in the first half of 2016, accounting for almost 50% of industry sales (Shaw, 2016).

Source: (Shaw, 2016).

A significant factor of the success of streaming is the impact streaming has had on piracy. Piracy remains to have a significant influence on music industry revenues, but we see that there is a change in attitudes for music pirates. Historically, the widespread use of piracy by consumers was made on the main decision that it had low relative costs. Consumers believed that pay-per-download music was too expensive and piracy was appealing especially due to being free financially, making other costs like search costs being a lot less of a deterrent.

Now, streaming presents pirates an attractive alternative. A study was done by Dörr et al. (2013) regarding pirates and their attitude towards music as a service (MAAS) as an alternative to music piracy. It concluded that pirates have a positive attitude towards MAAS. The study showed that users was pleased by the attractive pricing model, both as a freemium model and as a low flat monthly fee. In addition, other distinctive features and factors such as the submission of music recommendations, searching for music recommendation (lower search costs, strong design features and ease of use were taken into account and overall developed a positive attitude towards the service.  These reasons are evident in decreasing level of piracy. We see that the availability of ‘free’ music through streaming services has led to sharp falls in illegal downloads, both in terms of volume and population.

In 2014, Spotify claimed there was over a 20% decline is music piracy volume since December 2012 (Grubb, 2014). This agrees with the Annual Music Study 2012 by NPD Group, that found 40% of people in their survey illegally downloaded the year before but didn’t in 2012 (Knapp, 2013). The other major factor to the decline was litigation, where 20% of users stopped because their favourite website was shut down or filled with viruses and spyware.

Music Streaming Business Model

The most common business model found in the music streaming platforms is based on revenue per stream. Putting it simply, artists earn for every time a fan plays one of their songs. However, streaming platforms do not want to deal with thousands of individual musicians and require them to join music labels and publishers for representation. This practise is also in place to ensure that all work is properly licensed (“Spotify Artists – FAQ – popular”, 2017). Spotify makes deals with big music labels that aggregate and represent many artists. Usually money is divided between labels on the basis of the percentage of total songs listened in a given period. As it is a premium business, musician representatives receive around 70% of proceeds, the other part going to the streaming company (Keating, 2015). Later, labels distribute royalties to musicians based on their personal agreements. It may seem complicated but this wholesale model is easier to operate for music streaming platforms.

To shed light on the controversies around the magnitude of artists’ compensation from music streaming, ‘Information is Beautiful’ (2015) compiled data into an iconographic to show that Apple Music and Spotify pay artists $0.0012 and $0.0011 per stream, respectively. It means that an artist must have their songs listened at least 1,117,021 times on Spotify to earn the US minimum living wage ($1,260 per month). Although it seems like a huge number, such artists as Drake achieved 4.7 billion streams in 2016 (“Spotify’s most streamed artists of 2016 revealed”, 2016). It is approximately 36 million per month, what comprises a decent salary of $39,600 per month. What is more, it is necessary to point out that music streaming is not a major revenue stream for the majority of artists. Even for the top 1% best-selling performers, music streaming comprises as less than a quarter of their income. The greatest portion of income comes from live performances (DiCola, 2013). In a way to combat the disadvantage for individual artists with a small fan base, the Discover option helps less known musicians gain popularity by introducing their songs to fans who listen to particular style of music. This, in turn, can positively impact gig ticket sales (Keating, 2015). Another advantage for musicians from using music streaming platforms are analytics tools, such as Fan Insights at Spotify. These tools make use of data to deliver information on the most popular songs and the ways fans discover one’s music.

Future Outlook

According to Recording Industry Association of America (RIAA) (2016) the share of revenue in music sales from music streaming exceeded 50% in 2016. We have seen a steady growth from 9% in 2011 to 51% in 2016 this trend should persist given no major unexpected events happen. Another factor that will play an important role in shaping the music streaming industry’s future is overcrowding of a market. In 2016 major brands on the market were Spotify (50m paying users) and Apple Music (20m paying users). In 2018 such brands as Amazon Prime Music, Pandora and iHeart Radio plan to be major players in the market (Keating, 2015). It will be interesting to watch how the market transform with new entrants in place.

The music industry is reaping the rewards of ‘freemium’ music streaming, following a tenacious decade of illicit piracy and declining record sales. With the hike in streaming services across the globe, musicians can endorse their work to a diverse array of eager fans. Furthermore, the music industry is finally able to breath from the abatement of incessant illegal downloading. With the wave of music lovers switching the easily accessible and affordable streaming platforms, major competitors in the market can ascertain that the industry is in a healthy position.

The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.