Business Matters: Streaming Drives 12% Revenue Gain in Sweden

Scandinavia continues to be the place where digital music's future is best taking shape. 
IFPI Sweden released figures Sunday that show gains in streaming led to a 12% gain in recorded music revenues in the first half of the year. A week and a half ago we learned that streaming had helped drive a 14% gain in recorded music revenues in Norway.
Streaming revenues gained 39% to $41 million and accounted for 75% of total revenue and 94% of digital revenue. Physical sales fell 24% to $13.8 million and represented 25% of total revenues.
Sweden and Norway show two things. First, digital gains can exceed physical losses when a market has outgrown physical product. A 24% drop in Sweden's physical revenues is manageable because CDs account for just 25% of revenues. (Norway's physical revenues dropped 29% to a 20% share.) There is a lesson here for the United States and other markets. As the years pass, every steep decline in physical revenues will amount to a smaller monetary loss. Consider the trend of CD sales in the United States. CD sales drop about 15% to 20% in a given year. But in dollar terms those annual declines get smaller and more manageable. Put another way, 20% of, say, $1 billion ($200 million) is a lot less than 20% of $2 billion ($400 million).
Second, subscription-led digital growth takes time to materialize. Sweden and Norway are having strong streaming growth five years after Spotify launched in each market. Consumers have obviously been very accepting of the streaming services, but we shouldn't forget that subscription services must create an entirely new consumer behavior. Internet radio is simply an online version of a familiar product. Digital downloads have familiar aspects of purchasing and ownership. But subscription services are an entirely new class of product.
The conversation about streaming revenue and new business models took a turn between the releases of first-half numbers from Norway and Sweden. Comments about Spotify's payouts to artists -- made over a week ago by producer/artist Nigel Godrich and musician Thom Yorke -- have created a conversation about digital services' role in supporting creators. The debate shows little sign of slowing down.
Creators' streaming revenue is a function of the royalty and the number of listens. Subscription services certainly pay a tiny royalty each time a song is streamed. The other variable -- perhaps more important than the royalty -- is the number of times an artist's songs are streamed, which itself is a function of popularity and the number of listeners. Artists will earn more royalties when they record songs people love. Artists will also earn more royalties when subscription services attract more customers.
The conversation about Spotify royalties tends to focus on the royalty while ignoring volume, or the number of times an artist's music is streamed. With low volume, revenue to an artist will be small relative to other products. But revenue to an artist will grow as volume grows. Norway and Sweden encourage us to think about streaming services on a much larger scale because they're already there. Other countries will follow.