Don't Worry, the Growth of U.S. Streaming Isn't As Bad As It Looks

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The U.S. had 8.1 million subscribers at the end of June. If not for Muve Music, it could have had far more.

With the launch of Apple Music on June 30, the number of U.S. subscribers to music services might start to resemble the sort of revenue the music industry needs. But not yet. While streaming is definitely the future of music, few people actually pay for these services.

The best measure of the U.S. music subscription market are the reports issued by the RIAA twice a year. The mid-year report released last week shows U.S. subscriber count at the end of June was 8.1 million, a gain of just 200,000 subscribers over the previous 12 months. It should go without saying a year-over-year gain of 2.9 percent is less than optimal for what labels and publishers need to be a major source of revenues. 

But the lack of subscriber growth wasn't as bad as it might seem. Subscription revenue grew 24.9 percent, a rate in line with the growth of ad-supported, on-demand revenue (27.1 percent) and SoundExchange distributions (19.7 percent, representing royalties from Internet, satellite and cable radio). 

So how were so few subscribers added while revenue grew so much? The most likely cause is a loss of Muve Music subscribers. While Spotify and other services undoubtedly experienced growth, these gains were almost completely erased by Muve Music losses.

Muve Music was created by prepaid mobile carrier Cricket Wireless and bundled, for a single price, with its mobile plans. AT&T acquired Cricket's parent company, Leap Wireless, in March 2014. Muve Music was known with certainty to have about 2.3 million subscribers at the end of 2013, as stated in a Leap Wireless SEC filing. The number of Muve subscribers when it was acquired by Deezer in January is not known. What is known is almost 2.3 million subscriptions disappeared from the U.S. market over two and a half years. 

Acquiring Muve Music required Deezer to convince Cricket customers to switch from a bundled service to a standalone Deezer service. It should have helped that carrier billing allowed former Muve Music users to have Deezer added to their Cricket Wireless bills for just $6 per month.

But it appears few Muve Music customers made the switch. Again, the number of Muve Music subscribers when the service was acquired by Deezer is unknown. What is known is Deezer had just 67,984 subscribers in the United States at the end of June 2015, according to its IPO prospectus. (That number included an unknown number of subscribers gained in the 9.5 months after Deezer's quiet launch of a high-quality audio service.)

So, in spite of multiple $1 promotions by Spotify (promotional subscriptions are included in the RIAA's subscriber count) and a public tiff with Taylor Swift that helped its name recognition, not to mention growth that would have happened anyway, the number of total subscribers barely inched forward in the recent 12-month period. Muve Music's dwindling subscriber count could also have impacted 2014's numbers. The subscriber count actually dropped to 7.7 million at the end of 2014 (when Deezer acquired Muve Music) from 7.9 million on June 30, 2014. (It's important to note that the RIAA's subscriber count is an average annual number -- think of a stock price's moving average -- and not a count at the end of the reporting period. So, the subscriber count at June 30 represents an average of the previous 12 months.)

For the sake of argument, one could take an optimistic view of these subscriber counts. What if the lost Muve Music subscribers are more a reflection on AT&T and Deezer than consumer demand? After all, Muve Music subscribers could have greatly enjoyed the service. They could have signed up and stayed with Cricket mainly because of the service. But these subscribers were lost because Muve Music was no longer bundled with their wireless plan. It's entirely possible these consumers do want a subscription service, but companies and labels aren't properly meeting their needs. (This argument only goes so far, however. Services prefer standalone subscribers to bundled subscribers, meaning they would prefer not to hitch their wagons to third parties like mobile carriers if they didn't have to. Deezer has come to this conclusion and is trying to shift subscribers away from bundles with mobile carrier Orange to standalone subscriptions that pay more, and pay directly.)  

Nevertheless, those missing 2.3 million subscribers are simply gone, and will probably be difficult to get back. The lower income consumers of prepaid mobile plans were off the grid before Muve Music. They were so untouched by legitimate music services that labels were willing to receive less money for them: Deezer subscribers at Cricket Wireless pay just $6 per month, an amount equal to the royalties received by record labels on a typical $10-per-month subscription. Labels had been concerned that subscription services were cannibalizing their customers' download purchases. Muve Music subscribers were considered to be found money.

There is good news here. The U.S. gained 400,000 subscribers in the first half of 2015 after losing 200,000 in the second half of 2014. That signals recent growth in subscription services. What's more, Apple Music wasn't even counted in the RIAA's mid-year number. The market is expanding. Until a subscription service closes shop or merges with a competitor -- and goes through the same migration challenge Deezer faced -- the U.S. subscription market should grow at a strong rate. 

More good news is the revenue gain. The reason subscription revenue far outpaced subscriber growth -- 24.9 percent to 2.9 percent -- is Muve Music subscribers are worth less money than normal subscribers. The $6 paid by Cricket subscribers is $4 less than the normal price (Muve Music subscribers could have been worth less). Thus, the departure of low-value Muve Music subscribers combined with the addition of higher-value subscribers to increase the average annual revenue per subscriber to $59.00 at the end of June from $48.44 a year earlier. That's progress. 


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