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Is Streaming the Savior of the Music Industry?
Spotify, Apple Music, and hundreds of smaller music streaming services are fueling growth in music industry revenue, despite high licensing costs demanded by major labels Universal, Sony, and Warner.

Over the last 20 years, the overall revenue of the music industry in the United States has significantly declined. According to the RIAA, from a high of almost $15 billion in total revenues in 1999, the music industry’s revenues decreased to roughly $7 billion in 2010 before leveling off for 5 years. This is largely attributed to the digital revolution and the increased accessibility of cheap/free music over the course of the decline. 

However, over the last two to three years, there has been a sharp change in the music industry, and revenues have been growing rapidly. For the first time since the 2008 recession, U.S. recorded-music revenues reached ~$9 billion in 2017, a 16.5% increase from 2016.

Increased Consumption Growth

The music industry made major strides in its recovery over the last two years: 

  • Total consumption has grown from 544 million to 637 million from 2015 to 2017
  • The average amount of time spent listening to music weekly has grown from 23.5 to 32.1 hours over the same timeframe
  • The industry experienced consumption growth of 12.5% from 2016 to 2017, fueled by an increase in digital/streaming offerings

Streaming revenues grew 40+% from 2016 to 2017, offsetting declines in digital downloads and traditional unit-based sales. As the music industry continues to regenerate, music streaming will continue to be the vital catalyst.

Streaming means that, as the listener, you are listening in real-time instead of downloading a file to your device to listen later. The industry has an attractive business model, because there is no physical product or distribution network required and there are recurring subscription revenues instead of one-time purchases. This has attracted a large number of new companies in the space.

Fortunately, the industry “shakeout” is already underway and early winners have achieved user scale and brand recognition. These winners include companies such as Spotify, Apple Music, SiriusXM, TuneIn, Pandora, and Tencent Music, although there are other smaller players.

Spotify Continues to Lead the Way

With almost twice as many paid subscribers as the next largest provider, Spotify has emerged as the clear leader in the industry, with 170 million users, of which 75 million are paid subscribers, the largest paid subscriber base across the industry.

On April 3, after sustained aggressive growth, Spotify filed for an IPO that valued the company at nearly $30 billion. About four months later, Spotify released its second earnings report and performed in line with revenue expectations with €1.27 billion. Their paid subscriber base grew to 83 million, beating Wall Street projections. The company expects between 85 and 88 million paid users by the end of September 2018. Spotify is attracting free users as well, with a revamped experience for free users that will give them on-demand access to 15 curated playlists.

Although they missed EPS estimates, Spotify’s stock still traded up roughly 1.4% after the earnings release, largely due the increased user growth. The fact that investors see the company as a favorable stock shows the confidence investors have in the future of music streaming. Like Spotify, other large players in the streaming and music space continue to flourish. 

Major public players in the music industry such as Live Nation and Pandora recently reported their quarterly earnings. Both companies reported above market expectations in revenue and their stocks have risen 15% and 60% year-to-date respectively.

Other companies, such as Tencent Music, China’s largest streaming service, have indicated that they plan to join the public market in the near future. Tencent Music announced that it plans to IPO on a U.S. stock exchange, with some reports valuing the company at $30 billion, only slightly less than Spotify.

YouTube’s Entrance

All of these players are clear indications that music streaming has the potential to grow and thrive at an above-market pace. Potentially the greatest proof of concept is the newest player in the music streaming game, YouTube.

On May 16, Alphabet’s YouTube announced that it was launching a brand new standalone music streaming service on May 22. YouTube hopes to compete with industry leaders Spotify and Apple Music, despite failing to do so with Google Play Music. The new YouTube Music Premium starts at a price point of $9.99/month and will attempt to steal share in the competitive industry.

At a new price point of $11.99, YouTube Premium offers all of the features of YouTube Music Premium as well as ad-free video, play in the background, downloads, and all YouTube Original content on the video platform.

Indicative of Alphabet’s renewed faith in the industry, music streaming looks to continue to grow rapidly and has already supplanted other sources as the largest and most influential piece of the modern music industry.

In 2017, music streaming generated nearly two-thirds of US music industry revenues growing by 14% of the total U.S. market in one year. This growth was primarily driven off paid subscriptions, which grew 63% from 2016 to more than $4 billion in revenue.

Paid music subscriptions in the U.S. grew from approximately 7.7 million subscribers in 2014 to 35.3 million subscribers in 2017 representing a compound annual growth rate of 66%. 

Recurring monthly revenues (~$10/month/user) and the absence of physical distribution channels/physical goods drive attractive per customer margins in subscription streaming. 

According to Billboard, paid subscription models generate gross margins of up to 20%. On the other hand, other sources of revenue in music streaming, such as on-demand ad-supported revenue, have become an increasingly marginal share of revenue despite steady growth. This is likely due to the fact that ad-supported business models in streaming generate unfavorable margins as low as negative 20%. 

Music Labels Stifle Profitability

While streaming revenues are growing rapidly, distribution is fragmented among 400+ operators across both paid and ad-supported models. Although streaming services are fragmented, the three major record labels control the majority of recording artist content and therefore hinder the profitability of the industry.

Universal, Sony, and Warner are the three largest record labels and made up about 72% of all music streaming royalties of 2016. Because of this, in spite of rapid consumer adoption, the profitability of streaming services remains challenged.

High content costs from licensing and royalties given to record labels present a major impediment to profitability for industry operators, particularly when combined with user acquisition costs such as marketing and promotional campaigns. These costs scale directly with user growth, limiting the ability of providers to realize economies of scale. Sources estimate streaming services keep only a quarter of streaming revenues.

Streaming Remains the Cornerstone of Music

Despite some obstacles in the industry dynamics, such as the power of the record labels and the fragmentation, there is clear proof that the industry shows massive potential and is currently the cornerstone of music. Music streaming has sparked the resurgence of the music industry and has quickly become the primary source of revenue for the industry.

Continued growth and strides towards profitability by the leaders in the space have been recognized in the form of paid subscriber growth and conversion from traditional music sources. 

Although the clear winners and losers of the music streaming industry are still to be determined, it is evident that the industry will be the driving force for music for the foreseeable future.