How streaming music is changing the industry

Streaming isn't just a convenient way to get music for those with a high-speed Internet connection, it's poised to change the music industry as we know it — again.

Denys Prykhodov / Shutterstock.com

By Chandra Johnson, Deseret News National Edition

Summary

Streaming isn't just a convenient way to get music for those with a high-speed Internet connection, it's poised to change the music industry as we know it — again.

Every time he picks up a music magazine, Scott LeGere realizes how paramount music streaming is in his life

“I almost hate reading those magazines now because when I read a blurb about a record, I want to push the picture and hear it,” said LeGere, a professor of music at McNally Smith College. “It’s just a reminder that based on streaming’s convenience and immediacy, there’s really no putting the genie back in the bottle.”

As a music business professor and producer, LeGere says this month’s announcement that Apple plans to roll out its own streaming service marries the music industry’s future to streaming.

“It wasn’t that long ago that jumping in your car and going to a store was the most convenient way to find music. Now, it’s a Google search bar,” LeGere said. “That a company like Apple, that has the largest music store in the world, would cannibalize its own music sales tells you where the future is.”

Since Pandora was founded in 2000 and Spotify came to the U.S. in 2011, music streaming has quickly outpaced downloading as the primary way people listen to music.

In 2014, digital track and album download sales accounted for 113.2 million out of 227 million total sales, which included physical music like CDs and vinyl.

SEE MORE: How this superstar got Apple to change its streaming policy

To give streaming a comparable sales model (even though songs and albums aren't sold via streaming), the industry created stream equivalent albums — or the number of streams it takes to match the $7.50 wholesale revenue of a CD or a downloaded album. It currently takes 1,500 streams to equal the wholesale value of a downloaded or physical album, and in 2014, stream equivalent albums accounted for 46.9 million in album "sales."

The stream equivalent album figure nearly doubled year over year, a significant detail when overall album sales — including CDs and vinyl — slid by 8 million in one year, from 235 million to 227 million.

When artists have to hope their songs get streamed more than 1,000 times to make the same money they once did on a 10-track album, it's easier to see why high-profile musicians like Taylor Swift and Jay-Z have pushed back against the streaming model. In their efforts, both Swift and Jay-Z aren't fighting against streaming per se, but against a model that pays artists and others in the music industry fractions of pennies per stream.

In March, Jay-Z launched Tidal, an independent streaming service owned by musicians in what the service hoped would "forever change the course of music history." So far, that course has been difficult for Tidal; since its launch, Tidal has lost two CEOs and as a strictly paid, $10-a-month service, it competes with free versions of streaming services and free websites like YouTube.

Swift, on the other hand, has had more success in dealing with the issue of streaming. An outspoken opponent of file sharing and streaming as undervaluing music in general, Swift has held her music from streaming services like Spotify. This summer, she threatened to withhold her mega-hit record "1989" from Apple's proposed streaming service. Apple, to its credit,agreed to pay artists on the new service per stream in response.

While steaming’s future in the music industry seems secure, industry players are wondering what the future will look like, and whether or not the innovation it brings can change the label-driven music industry for the better.

“(Streaming) is not about demand or the Internet being good or bad, it’s more about the value we put into it and how to foster what we get out of it to make sure some of it gets back to the creators," Future of Music Coalition CEO Casey Rae said.

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In turmoil again, music industry once more looks to Apple to save it

By Cecilia Kang 

Taylor Swift will allow her album “1989” to be part of Apple’s service, the first streaming service to include her music. (L.E. Baskow/Reuters).

More than a decade ago, the music industry was in crisis. Songs were being passed around the Internet illegally free of charge. CD sales were in decline. So major labels and musicians embraced Apple, which convinced consumers to open their wallets again by buying digital songs through iTunes.

Now again in turmoil, the music industry is looking once more to Apple, which launches its new $10-a-month streaming service Tuesday. The challenge this time: Find a solution for the industry as it struggles with Web sites that are legally streaming songs for free online.

With its paid service, Apple will go against the grain of these proliferating sites — which partly fund themselves by requiring consumers to hear a few ads once in a while. Google, which has 1 billion music listeners through YouTube, introduced its own free streaming service last week. Pandora, the early streaming specialist, has 85 million listeners, and Spotify has doubled the number of its nonpaying users to 75 million in the past year.

3 times Taylor Swift was a savvy businesswoman

Taylor Swift's big win over Apple Music isn't the first time the pop star has proven her savvy business skills in the music industry. (Nicki DeMarco/The Washington Post)

The trends are a source of deep unease in the music industry, which would see a drastic change to its business model if it had to largely rely on advertising for revenue, rather than song sales.

“We are at an important inflection point of the evolution of music,” said Larry Miller, a professor of music business at New York University’s Steinhardt School. “After more than 15 years in digital music transition . . . only Apple has the potential to push streaming — paid streaming — into mainstream adoption.”

Apple is coming relatively late to the scene, but the tech giant arrives as labels and musicians have been searching for an alternative to Spotify. The privately-held firm was actually once championed by the music industry as an alternative to Pandora, but is now feared as it sees exponential growth.

After months of negotiations with music labels and artists big and small, Apple committed a vast marketing budget for glitzy TV ads and direct marketing to the hundreds of millions of e-mail accounts it holds. It also promised slightly better royalties to artists than Spotify and other streaming partners, according to people familiar with the company’s plans.

And in a departure from its rivals, Apple promised to strictly enforce its policy that users must pay after a free, three-month trial.

“Apple is generally positive for artists in getting better pay because subscriptions pay about seven times as much as free services do to artists,” said David Lowery, a member of the bands Cracker and Camper van Beethoven and a lecturer in music economics at the University of Georgia.

“But we don’t want to create another monopoly where we end up like authors did with Amazon. What we want is more options,” Lowery said.

The stakes are just as high for Apple, which for the first time saw music downloads decline on iTunes for the first time last year. Two-thirds of U.S. consumers, meanwhile, are listening to streaming music each week, according to Nielsen Entertainment research.

When Spotify first launched in the United States in 2011, the three major music labels — Universal, Sony and Warner — threw their support behind the company and took equity in the privately-held firm. Spotify chief executive Daniel Elk pitched the labels, saying most users would come first as free listeners but then become hooked and eager to pay $10 a month for the service’s premium tier, which is ad-free and gives users more control over what they hear.

In a May earnings call, Warner Music chief executive Stephen Cooper reiterated the importance of getting users to start paying. “We continue to believe that the long-term sustainability of the ‘freemium’ model is predicated on high levels of conversion from ad-supported ‘free’ to paid subscription,” Cooper said. “Of course, in order to achieve those levels, the benefits of paid subscriptions must be clearly differentiated from the ad-supported offerings.”

But in the last four years, Spotify has struggled to grow its paid service. Almost all new users started out with the fee plan, but only about 20 percent to 30 percent of them became paying customers, according to industry executives.

Privately, music labels began to express frustration. Spotify wasn’t putting enough money into marketing its premium service and didn’t collect credit card numbers of new users to ease the transition to the premium tier, executives said. They complained that Spotify, preparing for a public offering, appeared more interested in bulking up its overall user numbers to impress investors than generating revenues that could be passed down to labels, writers and musicians.

“The irony of it is that there is nothing more that we wanted than to make Spotify a significant player, but what happened was that Spotify revealed its true colors — that it is no different than any Silicon Valley company that wants to build a whole business on audience and not subscribers,” said a music industry executive who spoke on the condition of anonymity because of ongoing relationships with streaming providers.

Apple and Spotify’s recent dealings with Taylor Swift was also telling, two music industry executives said.

Earlier this month, Taylor Swift complained that Apple wasn’t paying artists for their music during the new service’s three-month free trial period. Apple quickly agreed to reverse its policy.

But in November, Swift said she would keep her “1989” album off Spotify because she believed the company’s free tier of ad-supported streaming would never make enough money to support artists. She insisted her album “1989” should only be available to subscribers of Spotify’s premium tier. Spotify, however, wouldn’t budge; the company said it was sorry to see Swift leave.

“Our feeling was that Spotify is too entrenched in very simple principles. They said they would never put anything just on premium and were unwilling to take a nuanced approach,” said one industry executive who spoke privately to protect an ongoing relationship with Spotify.

Spotify disagrees that it hasn’t grown the number of paid users quickly enough.

“Nobody is more interested in driving subscriber growth than we are. Nobody has more data about what works and what doesn’t, and nobody has had anything close to our success in actually getting people to subscribe,” said Jonathan Prince, a spokesman for Spotify. “The numbers speak for themselves — 100 percent growth from 10 to 20 million in just a year, the highest conversion rate of any ‘freemium’ business, whether it’s music, video, news or games, and orders of magnitude more subscribers than any of our competitors.”

Cecilia Kang is a staff writer covering the business of media and entertainment.

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