Massive losses in music streaming leave industry giants on low note

Taylor Swift

Streaming is the booming distribution channel for music, but the sound of profits is hard to hear.

By David Walker

The global music industry has had a tough 15 years. Recorded music revenue has fallen by more than half, adjusted for inflation, as CD sales have plummeted. The worst blows came from downloads – first illicitly, then legally via systems such as Apple’s iTunes. The industry now hopes that streaming – the on-demand delivery of music over the internet – can restore it to its former glory.

Positive signs are there. In late March came the announcement that annual US music-streaming revenues rose 29 per cent to US$2.4 billion in 2015, surpassing iTunes-style download sales. Digital music subscription services, such as streaming leader Spotify and Apple Music, brought in more than US$1 billion in US revenue for the first time last year.

Ad-supported music revenues rose to US$385 million; many streaming services, such as YouTube and Spotify’s free tier, are supported only by ads. Royalty payments from digital radio rose to US$803 million.

US industry trends are reflected in other countries, though data is scarcer. The International Federation of the Phonographic Industry (IFPI) – which represents music labels – estimates that streaming has now overtaken download revenue in at least 37 national markets.

The lesson is clear: the streaming marketplace is growing.

Valuable things?

The services have argued that their model will eventually make music a big payer again. As Spotify tells artists, the plan is that users of the free version will move to the US$10 version, which is twice the amount that Spotify estimates the average downloader spends.

Yet it is difficult to see how streaming services will produce more than a small rise in industry revenues.

Artists say it’s far harder to make money in the industry now because the services let so many people play music for free. One analyst, Music Business Worldwide’s Tim Ingham, calculates that the average stream across paid and free streaming services generated just US$0.0051 – yes, half a cent – for its rights holders. That amount was down 38 per cent on Ingham’s estimated 2014 payment average. 

When top-selling performer Taylor Swift pulled her music off Spotify in 2014 in protest at the level of artist payments, she made a succinct argument for higher payments: “Music is art, and art is important and rare. Important, rare things are valuable. Valuable things should be paid for.”

“Music is art, and art is important and rare.” Taylor Swift

How to get those valuable things paid for is a tougher problem. The recording labels are hardly profiteering: IFPI published a study last year saying the labels’ revenue dropped 17 per cent between 2009 and 2014, which is a far worse decline than the 6 per cent revenue drop the artists suffered. Industry groups such as the Recording Industry Association of America say revenues from streaming are “meagre” compared with what would happen if everyone paid for their music at download rates. 

Streaming services, however, have a different problem: as their revenue grows, their losses mount. Spotify says it will make money as its scale grows, but it announced in mid-2015 that its 2014 losses had nearly trebled to US$197 million. Rhapsody, branded as Napster outside the US, lost US$35.5 million on revenue of US$202 million in 2015. In Australia, two streaming services have already closed in 2016: Samsung’s Milk Music and JB Hi-Fi’s Now.

A new tempo

Those who see revenue growth for the industry don’t see that much of it. A 2014 Credit Suisse study found that by 2020, streaming might bring global recorded music revenues back to the level of 2008 – still barely half of the year 2000 levels.

Increasingly, artists are finding that the best answer is not recorded music at all. Instead, it’s concerts that make them money. 

That business, however, is no corporate money-spinner either: Live Nation, the world’s largest concert organiser and owner of Ticketmaster, has lost more than US$100 million on concerts worldwide in each of its past three years. 

The music industry, it seems, will have to get used to being less about money.

Down go downloads

iTunes-style download sales in the US fell 9.6 per cent to US$2.33 billion in 2015, meaning they now occupy second place. Indeed, paid downloads are falling almost as fast as sales of physical media, which dropped another 10.1 per cent to US$1.9 billion.

Physical media are mostly CDs, but also the resurgent medium of vinyl records. Vinyl’s revival underlines the music industry’s digital problems. In 2015 in the US, the US$416 million in vinyl sales was larger than the total of US payments for ad-supported music such as YouTube and the free Spotify service.

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Cost of streaming

Streaming prices seem to have settled for the moment, with ad-supported versions still free and unlimited ad-free streaming broadly available for US$9.99 a month. That’s what Spotify offers in the US, though it can be cheaper in other markets: it launched in Indonesia in March, offering ad-free streams for just US$3.80 a month. US$10 is also the base-level pricing that Jay Z’s Tidal service chose when it relaunched last year and that internet audio group SoundCloud chose when it entered the streaming market at the end of March.

Numbers in the stream

Streaming leader Spotify hit 30 million paying subscribers in March and is clearly the leading player in the field – but Apple Music topped 10 million subscribers in just six months after last year’s launch. Google’s YouTube and Play, global e-commerce giant Amazon and China’s Baidu, Alibaba and Tencent all offer streaming, as do indie firms such as Deezer, Tidal, Rhapsody and Taiwan-based KKBox.

Beyond them are internet radio services such as Pandora, which offers music based on your preferences without allowing you to select specific tracks.

Related: Spotify Asia CEO Sunita Kaur: why patience makes great strategy

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