AT THE headquarters of Pandora, an online-radio firm, in Oakland, about a dozen headphone-clad analysts fill in a long questionnaire as they listen. They rank whether a song’s mood is “joyful” or “hostile”, the vocalist “breathy” or “gravelly”. They note whether they can hear electric guitars, lutes or bagpipes. Their ratings help to shape algorithms that push music to the service’s 76m users.
Pandora is in the vanguard of a revolution in which ever more consumers are streaming music over the internet to their smartphones or computers, instead of owning collections of songs. For the first time since Apple popularised the paid download in 2003, the record business is changing key again. From wax cylinders via vinyl, cassettes and CDs to MP3s, it is undergoing another format shift—maybe, some in the business muse, its last.
Streaming services give music-lovers access to millions of songs, but the services are not all alike. Online-radio versions, including Pandora and Apple’s iTunes Radio, choose what consumers hear, and the firms make their revenues through advertising. Others, such as Spotify and Deezer, let customers select songs from a catalogue of 20m-30m, charging premium subscribers a monthly fee. Free services that stream music videos, such as YouTube, also get plenty of play. All the variants pay the record labels some fraction of a penny each time someone clicks on a song.
Streaming’s rise makes music bosses as giddy as a bunch of teenage “Beliebers” queuing to see Justin Bieber (pictured). Yet at first glance a report on March 18th by IFPI, a record-industry group, suggests that things are still getting worse. Music labels’ worldwide revenues fell by 4% last year to $15 billion, a reversal of 2012’s slight rise. But much of the fall was due to Japanese consumers finally giving up on CDs, as much as the rest of the world had already done. A closer look shows that streaming services are starting to bring the business back into profit in countries that have suffered steady declines, such as Italy.
Streaming now has around 28m paying subscribers, and several times as many who use free versions. Last year subscription-based versions like Spotify had combined revenues of more than $1 billion, up more than 50% from 2012. That figure does not include online-radio firms, which last year had revenues of $590m in America alone, a rise of 28% from the year before. In America, the largest music market, 21% of the industry’s 2013 revenues came from streaming, whose growth more than offset declines in CD sales.
Streaming services have taken off thanks to wider smartphone adoption, faster internet connections (including 4G mobile) and the spread of cheap online “cloud” storage for music files. Even so, only 4-5% of music consumers in America and Britain have so far signed up for subscription streaming, says Mark Mulligan of MIDiA Consulting. But if just 10% of the people in rich countries were to subscribe, the industry’s fortunes would be transformed, says Claudio Aspesi of Sanford C. Bernstein, another research outfit.
YouTube, Google’s popular online video service, is expected to launch a paid-for music-streaming service in the coming months, which should help boost the numbers. So might bundling music with a mobile-phone subscription, as AT&T is doing with Beats, a seller of headphones that has branched into subscription music.
Arms around the world
Having previously fought losing battles against technological change, record executives have been quicker to embrace streaming’s surge. Until recently Apple’s iTunes was the sole king reigning over the digital-music realm; now there are dozens of princelings. This gives more negotiating power to the surviving three major record labels (Universal, Warner and Sony), down from six 15 years ago. “I see myself as an arms dealer selling to everyone who will buy,” says a gleeful record executive.
Streaming is also good news for independent labels, some of which are enjoying double the market share they had on CDs. It is also making it easier for music to travel beyond national boundaries. “We are getting revenue from markets where we never had a presence in the physical world,” such as Brazil, says Fredrik Ekander, the boss of Cosmos, a Swedish label.
Charles Caldas of Merlin, a licensing agency for independent labels, says streaming also helps “monetise the nostalgia market” (ie, artists’ past work). In the physical world more than two-thirds of sales are for new releases; on Deezer only a third of songs streamed are new.
To distinguish themselves from rivals and help users navigate their vast catalogues, streaming firms are offering curated playlists, compiled by algorithms, celebrities and consumers themselves. Users can also see what their friends on social networks are playing, and share tracks and playlists, which helps new acts take off. Avicii, a Swedish DJ, has become the most streamed artist on Spotify.
Streaming is forcing a creative but undisciplined industry to pay more attention to data. In early March Spotify reportedly paid $200m for Echo Nest, which analyses data for music services and helps shape playlist algorithms. Beats soon followed by purchasing TopSpin Media, which collects data to help artists connect with their fans. Warner Music Group recently launched a new label in partnership with Shazam, a music-recognition app. Together they will trawl Shazam’s listener data to identify rising artists to sign up.
Providing the streaming services can be persuaded to share their data, record labels will be able to see the response to new songs immediately, and put marketing dollars behind those that strike a chord. Performers will get a better idea where their fans live, to optimise their tour schedules.
The economics of streaming look quite different from those of earlier music formats. On-demand streaming services pay a record label about three-tenths of a cent each time one of its songs is played, and online-radio services even less (see chart). But music fans may play a favourite tune dozens, maybe hundreds of times, so those fractions of pennies can add up. Streaming subscribers pay around $120 a year, which is more than double what the average American music consumer spends.
Yet some performers are unconvinced. Thom Yorke, the lead singer of Radiohead, has called Spotify “the last desperate fart of a dying corpse”. Music services have responded by being more open about how artists are paid, and arguing that their cheques will grow larger as more people sign up, as has happened in Sweden (see article).
It is more complicated in countries with a well-established download market, such as America and Britain, where industry executives worry that streaming may cannibalise downloads. However, the bigger issue for artists is that so few people overall pay for music, says Will Page, an economist at Spotify: “Half the population in the West spends nothing on music. You can’t cannibalise zero.”
For years music has been a toxic place to invest. But the internet is at last “bringing sexy back”, as Justin Timberlake, a pop star turned actor and entrepreneur, might say. Since 2009 investors have poured more than $1 billion into digital-music services in private transactions. Speculation is mounting that Spotify, which was reportedly valued last year at more than $5 billion, will soon go public. Shares in Pandora, already listed, have nearly tripled in the past year. Its market capitalisation is now almost $7 billion.
Such valuations assume that the services’ popularity will continue to grow, and that subscription-based ones will persuade a sufficient proportion of those using their free versions (on which they lose money because of the royalties they pay the record labels) to upgrade to paid varieties. Worryingly, churn tends to be high: around 46% of users of subscription services have either switched or say they plan to, according to Mr Mulligan of MIDiA.
Nevertheless, people in the record industry are talking about another “golden age”. There is bound eventually to be a shake-out among the many new streaming services. But for the music labels, it now seems clear that, once the physical CD has eventually gone the way of the wax cylinder, they will still have a profitable way to exploit their catalogues, based on music fans being offered instant access to a near-limitless online jukebox.