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Business News Digital
New report reckons plenty of challenges ahead as streamers aim for scale and profit
By Chris Cooke | Published on Thursday 8 January 2015
While the headline figures that are now emerging for the record industry in 2014 all seem to confirm what we anecdotally already knew – that downloads have peaked, CD sales continue to slide but streaming is booming – that doesn’t mean the streaming sector has as yet come of age, far from it.
There are still plenty of challenges to tackle, not least how royalties are split between different music industry stakeholders, how the streaming services can go properly into profit, how more mainstream consumers can be wooed, and whether – at the end of all this – the value of the recorded music market will go up, down or stay around about where it is now (which is about a third less than back in the heyday of CDs).
Things aren’t entirely pessimistic, even if there’s a bumpy road ahead, though a new report from Boston-based research and consulting firm Strategy Analytics has plenty of gloomy stats and predictions to counter any positive thinking.
The report, called ‘Will Royalty Crisis Defeat The Music Streaming Industry?’, reckons that while Spotify did, of course, see phenomenal growth last year, it’s ‘average monthly revenue per user’ is down, 2% in the case of paid subscribers and 37% in the case of ad-funded users. The former possibly because of the rise in bundled subscribers (who get Spotify via a mobile or other package), the latter because ad sales aren’t growing as fast as the freemium user base.
Of course, Spotify, the market leading on-demand streaming service, is still very much in growth mode at the moment and even Pandora, the market leading interactive radio service that has already floated, is still seeking more scale in a bid to go profitable.
Though, says Strategy Analytics, both services still face significant challenges to get into the black. “Most companies benefit from economies of scale”, says the report. “[But] Pandora and Spotify’s content acquisition costs increase in parallel with subscriber growth, preventing them from getting ahead of the cost curve”.
Of course, all players in the streaming sector are already aware of these challenges and presumably reckon they – and possibly only they – are equipped to meet them. Though success for the wider sector seems certain to depend on cracking the mid-level market, as we discussed in this CMU trends piece.
Meanwhile the Strategy Analytics report’s author Leika Kawasaki said this morning: “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 [record] 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 … particularly for free ad-supported services. As a result, we may never see the same levels of spending on [recorded] music as we did a decade ago”.
“The industry must increase music streaming services’ ad revenue while simultaneously transitioning users to paid services. 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”.
Concluding, Kawasaki reckons: “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”.
