Beats Music's launch in the United States provides a good opportunity to reflect on the state of streaming music.
On-demand music streaming services have come far in the last five years. The first generation of services, such as Rhapsody and Napster, found limited success during the heyday of the paid download. Under the next wave of services, best represented by Spotify and Beats Music, the business model and user experience have greatly evolved. Advertising-supported services like Pandora and YouTube have become significant revenue sources as well.
At the beginning of 2014, as a major brand has entered the on-demand subscription business, there are five main themes that characterize the streaming business.
1. Streaming is Having a Noticeable Impact on Download Purchases. Until the second half of 2013, people weren't sure if streaming services were having an impact on purchases of music downloads. There's now more certainty after the bottom fell out of the U.S. download market in the latter half of the year. Here's how track sales in each quarter of 2013 compared to the prior-year period, according to Nielsen SoundScan: Q1 -1.3%, Q2 -3.3%, Q3 -6.0% and Q4 -12.9%. And here are the year-to-year comparisons for album sales: Q1 +10.4%, Q2 +1.9%, Q3 -4.9% and Q4 -7.1%. In all, U.S. consumers bought 76.6 million fewer tracks and 99,000 fewer digital albums last year. Those purchases had a retail value of about $90 million to $95 million. The silver lining: losses in digital sales were undoubtedly smaller than the gains in advertising-supported and subscription streaming revenues.
2. Streaming Needs to Provide More Value. There are a couple obvious ways to make subscription services more attractive to consumers. The first is price. Services could lower price to better match what the vast majority of likely customers are willing to pay. But for the most part, subscription prices have been and will be static (outside of family pricing plans and subsidized prices from telecom bundles and low-cost bundles with prepaid mobile plans). The standard price is $10 per month in the United States. Family plans are available for $15 per month. Unless labels allow for greater pricing flexibility, the other way to add value is by improving usability and access. Beats Music -- which doesn't have a free, advertising-supported tier -- has taken this route. The service adds value through a well-designed user interface and human curation. (Even small things add value, such as the availability of a seven-day trial without a credit card.) Beats Music has also created value by partnering with AT&T to facilitate consumer acquisition. These types of added value increase the perceived value of a service. It's important for perceived value to be flexible when prices are inflexible.
3. The Subscription Business Model is Proving Itself -- In Some Countries. The subscription model won't succeed in a vacuum. Instead, a variety of factors work in concert to drive adoption. Services need to partner with telecom companies to speed up consumer acquisition. Success is also aided by external factors such as smartphone ownership and access to high-speed mobile and broadband Internet. Services also need time. The countries with the most success with subscription services were among the earliest to get the second wave of services. This mix of factors helped the Norwegian recorded music industry grow 10.6% last year to $98 million thanks to 60% growth in streaming revenue. (It may seem like a small number, but $98 million works out to an impressive $19.30 for each of the country's 5.1 million citizens.) Expect to see streaming-led growth in Sweden and Holland when those countries' 2013 numbers are released.
4. Is Streaming Really the Future? People still wonder if streaming services can do the financial heavy lifting. There's uncertainly about the ability of next-generation streaming models to drive overall revenue growth. People worry that streaming royalties won't replace the revenue from purchases -- both downloads and CDs -- that will inevitably be lost in the coming years. There's also doubt about the very business models of streaming companies. Why all these question marks? The shift from CDs to downloads was easier than the shift from downloads to streaming will be. Streaming, which generates revenue from advertising and subscription fees, represents a new consumer behavior. It's undoubtedly the future of music. The question is when the business will catch up to the business model.
5. Connected Devices Will Help Streaming Grow. Streaming services are most closely linked to desktops and portable devices such as smartphones and tablets. You can listen to music while you work and while you're on the go. The next steps are better integration with consumer electronics products for listening at home and in the automobile. Wireless speakers and speaker systems are growing in popularity. Thanks to improved smartphone-automobile integration, more people are listening to streaming services in their cars. These are favorable trends that will help increase adoption of streaming services and the amount of revenue paid to rights holders, songwriters and performing artists. Streaming services' per-stream royalties may seem small given current listening activity, but payouts will vastly improve when far more consumers are streaming for more often.