Why music Music Streaming Services still have a long path

Illegal music download has been a threat for the music industry in the last 10 years, but recently new business models started to make the industry surplus and generate benefits again. Besides the surge of music online platforms as Itunes and streaming made piracy experience a decline since 2001, still other issues have permeated, which leads to question the real effectiveness of these platforms in the long term.

The IFPI reports that 89% of Swedish Spotify subscribers illegally downloaded less often because they began to use the legal streaming platform. In addition, the retail value for audio streams reflects also a growth of 50% by being the only platform which increased in 2015, while retail value from singles and albums suffered a decline.

Data collected by Mintel shows Spotify as the most used music streaming service, attracting 48% of music streamers in 2015. The wide reach of its free and paid-for services has been achieved by its range of tracks as well as the number of exclusive deals with relevant artists it has formed. Mintel claims that the value of both the music and video markets is expected to grow over the coming years, with music subscriptions market expected to increase a 163% between 2014 and 2019. By being the retail value of streams £251 million in 2015, it is expected to reach £786 million in 2020 under a stable context.

Forecast value of subscriptions within the UK music streaming market (2010-20)

mintel-forecast-music-streaming

Source: Mintel,2015

But regarding the consumers, Mintel also shows that the 24% of internet UK users used a paid service like Spotify premium, while the 73% surveyed admits that they did not, although using it in a free-mode. One of the main reasons for this the existence of a relatively high percentage of consumers (48%) saying they are happy to use free media services (music and video) that feature advertising, as not being a disadvantage to turn towards premium for eliminating them. However, Paid-for music and video streaming services are very well received by users, with around 9 in 10 saying they are either fairly satisfied or very satisfied with the provider they use the most. So, which are really the reasons that demotivate free users to start paying a premium subscription?

Since its launch, the business model of Spotify made the service to maintain a free option that will not create the aggregated value of “premium subscription”. Also, the company claims the need of its free streaming option, claiming that until now, 80% of paid users upgraded from the free version. In the last years, it has been a recurring number of complaints from musicians saying that the company doesn’t pay enough in royalties for the music it streams, despite the fact that Spotify notes it has paid more than $3 billion in royalties since the company began in 2008.

On the other hand, there are academics as Richard Windsor, an analyst at Edison Investment Research, who pointed that “Spotify has to pay away 70% of the revenues that it makes to the record labels and this is the single biggest reason why the company is still losing money“. Windsor confirmed that at the rhythm that Spotify grows it will give it the scale it requires to work on establishing its profitability in the short term.

100 million worldwide users (free and paid) are the key threshold when an ecosystem will gain critical mass” (R.Windsor, Edison Investment Research)

This mass will lead the service having more power over the market, possessing a big piece of share based on direct users, and negotiate with music labels more money for itself as well as for paying it out to music companies and artists.

Mintel recommends that if services want to keep a free option then it is likely they will need to improve their artist deals in order to temper the backlash and keep the industry satisfied. Marketing campaigns directed to support artists for transforming “freemium” (free users of the platforms) clients can be used as a strategy.

There is a big gap needed to be solved between the growth popularity and usage of this sector, and the low royalties paid to artists and copyrighters for guarantee a sustainable growth. This would be a problem only concerning the platforms and musicians, but Mintel reports that 11% of people were more likely to pay for a music streaming service if they knew they paid artists fairly, rising to 22% between millennials (16-24-year-olds).

As the market becomes increasingly competitive, each service is looking to distinguish its offering. According to BPI it can be seen that musical videos and music tracks themselves are linked to the music industry, and it constitutes a clear opportunity for music streaming services to offer music videos at their platforms in order to diversify offer and improve platform´s value for users. Experts also advise that gaining exclusive rights to albums and musicians could be a powerful tool for doing so, while services are also toying with the introduction of expanding the content range to include more exclusive video content.


Sources:

Weiss, T. (2016). “Spotify Grows to 100M Users in a Competitive Music Streaming Market”. Eweek.com. Retrieved from <http://bit.ly/2lNRZ1E>

Engel, P. (2014) “Spotify To Taylor Swift: Would You Rather Have $6 Million Or Zilch?”.Business Insider. Retrieved from <http://read.bi/2mCHfCz>

Mintel (2016) “Music and Video Streaming – UK”. Retrieved from <http://bit.ly/2lgh4k8>

Mintel (2015) “Streaming Media – UK”. Retrieved from <http://bit.ly/2lr1keK>

International Federation of the Phonographic Industry- IFPI (2015) “IFPI Digital music report 2015, charting the path trough sustainable growth”. Retrieved from <http://bit.ly/1GJLWBW>

British Phonographic Industry, BPI (2016) “BPI 2015 Music Market Report”. Retrieved from <http://bit.ly/1O8bTKS>

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