Business Matters: Norwegian Music's Revenue Spike May Mean the Streaming Model Is Working

Led by growth in streaming revenue, both digital and total recorded music revenue in Norway grew in 2013, according to figures released by IFPI Norway. Total revenue grew 10.6% to 603 million NOK ($97.8 million), the country's best total since 2008. Digital revenue rose 39.7% to 468 million NOK ($75.9 million), or 77.6% of total revenue.
Streaming was the largest revenue source for Norway's recorded music industry, accounting for 65.3% of total revenue and 84.1% of digital revenue. Downloads represented 15.9% of digital revenue and 12.3% of total revenue. Physical product accounted for 22.3% for total revenue.
A number of factors have helped drive adoption of streaming services in Norway. First, services have partnered with telecoms to bundle subscriptions with broadband or mobile service. (For example, Spotify has partnerships with NetCom and Chess in the country.) Second, the paid download did not gain much popularity in Norway. In 2008, the year Spotify launched in Norway, digital sales accounted for just 8.5% of total revenue in Norway. In contrast, digital accounted for 38.7% of recorded music sales in the United States that year.
Third, adoption of the Internet and high-speed data services are high. Internet penetration is over 90% in Norway -- it's about 85% in the United States. In addition, the country has an advanced mobile broadband infrastructure. Sweden, another country with strong streaming growth, and Norway were the first countries in Europe to offer 4G LTE in 2009.

 The explosive growth of streaming revenues raises an important question: How much attention should be given to per-stream royalties paid by digital services when these services are leading to overall growth? Digital executives have brought up this argument when deflecting criticism that their services pay artists too little. Their comments may have been public relations pivots designed to deflect criticism, but Norway is an example that greater royalties could stand in the way of much-needed growth.     How much more revenue could be shared with artists and rights holders? Subscription services already pay out 70% of revenue to rights holders. (An Internet radio station could pay out less. Royalties accounted for less than 50% of Pandora's revenues last quarter.) Critics seem sure subscription services could pay more without harming their businesses. I'm not sure that's the case.

Is a larger royalty with less listening activity better than a smaller royalty with greater listening activity? In other words, should an artist want a larger share of a smaller pie or the current share of a larger, growing revenue pool?
In the case of Norway, it appears the current royalty structure, along with a slate of other factors -- telecom partnerships, adoption of high-speed broadband, the download's lack of popularity -- have allowed streaming to drive growth of both digital revenues and total revenues. Some artists may want higher royalties, and that's understandable. But it's entirely plausible that higher royalties would hurt the business model, lower adoption by consumers and harm the amount of royalties paid.
The United States market has a chance to look like Norway. Investment will bring greater competition and consumer awareness to streaming services (see Beats Music and Deezer). Telecom partnerships will lead to increased adoption of subscription services (see Beats Music's partnership with AT&T). Greater use of high-speed mobile broadband will help drive consumers to streaming services. This growth will lead to growth in streaming royalties and growth in digital music revenues, and changes in royalty structures won't be required.