Report: Streaming Music is Failing to Meet Industry Needs

Taylor Swift's recent move to leave Spotify has intensified the debate around the impact of streaming on the music industry. A new report Will Royalty Crisis Defeat the Music Streaming Industry found that despite continuous growth in adoption of music streaming services, current players are having difficulty turning music streaming into profit.

"Technology is evolving and changing the way consumers discover, listen to, share, and interact with music, but it is also a significant factor in the decline of music industry revenues. Many artists feel they are under compensated by streaming services, but as currently structured the underlying economics won't support higher royalty payments by these service, particularly for free ad-supported services” noted Leika Kawasaki, Digital Media Strategies (DMS) Analyst and author of this report. “As a result, we may never see the same levels of spending on music as we did a decade ago".

Key findings from the report include:

• Despite significant growth in revenue and a lower net loss, Spotify average monthly revenue per user (ARPU) has actually declined for both subscription and advertising. Monthly subscription ARPU in 2013 was down 2%, while monthly advertising ARPU was down 37% from 2012.
• Most companies benefit from economies of scale; however, Pandora and Spotify's content acquisition costs increase in parallel with subscriber growth, preventing them from getting ahead of the cost curve.
• Pandora earns the vast majority of its revenue from advertising (82%), whereas Spotify earns the majority of its revenue from subscriptions (91%).

Strategy Analytics predicts that overall global recorded music revenue declined 1%, from $22.8 billion in 2013 to $22.5 billion in 2014, as digital music growth failed to offset losses in packaged music revenues. Streaming music (subscription and ad-supported) accounted for about half of digital music revenue in 2014, up 14% year-over-year.

"The industry must increase music streaming services ad revenue while simultaneously transitioning users to paid services” comments Kawasaki. “With too many competitors already in the space, music-centric companies are facing growing competition from tech giants that have a distinct advantage in terms of leveraging their vast product ecosystems to drive growth in the music space. Current music-centric services may not be able to overcome inefficiencies in music streaming economics and increased competition. As a result, we very well may soon be seeing changes in the balance of power."