Technology | Media | Telecommunications

Thursday, January 08, 2015

Recorded Music Industry Business Model Weakness

Once again, the recorded music industry is at a pivotal juncture in their evolution. The recent recording artist royalty disputes with Spotify has intensified concern about the economic viability of streaming music subscription services.

The latest market study by Strategy Analytics found that despite continuous growth in adoption of music streaming services, current providers are having difficulty turning music streaming into a profit. Given the ongoing financial challenges with this business model, the resolution is still unclear.

"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" said Leika Kawasaki, analyst at Strategy Analytics.

According to the SA assessment, as a result of these recent events, it's possible that the recorded music sector may never see the same levels of spending on music as we did just a decade ago.


Key findings from the market study 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 percent, while monthly advertising ARPU was down 37 percent 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 percent), whereas Spotify earns the majority of its revenue from subscriptions (91 percent).

Strategy Analytics predicts that overall global recorded music revenue declined 1 percent, from $22.8 billion in 2013 to $22.5 billion in 2014, as digital music growth failed to offset losses in packaged music revenues.

Furthermore, streaming music (subscription and ad-supported) accounted for about half of digital music revenue in 2014, that's up 14 percent year-over-year.

SA believes that the recorded music industry must increase streaming services ad revenue while simultaneously transitioning more users to paid services.

With too many competitors already in the space, smaller music-centric companies are facing growing competition from tech leaders -- such as Google and Apple -- 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 may soon see some changes in the balance of power, once again.