It's easy to dismiss ad-supported models today while digital streaming is still small and relatively new. Radio, which has been around for nearly 100 years, commands a 26 percent market share; streaming video only accounts for eight percent of music consumption today.
But ads are already generating billions of dollars for the music industry (over $3B from YouTube alone). While the recent concerns artists have made about the copyright safe harbor reflect a fear of losing money from ad-supported streaming, the truth is, it is a new source of revenue that is poised to dramatically increase. As digital consumption grows and more print, radio and TV advertising dollars shift online, the music industry has a chance to reap a massive windfall.
Why am I so optimistic? Mainly because the music industry has largely solved the problems that online content creators have grappled with for years.
Fundamentally, people love music. At a time when there's never been more competition for attention, and millions of web publishers and mobile app developers compete aggressively for traffic, finding, sharing and listening to music remains a core part of people's lives. It accounts for the fourth-largest share of the time we spend each day after sleeping, working and watching video.
We're witnessing that engagement with the rapid growth of streaming subscriptions from Spotify, Apple Music, TidalYouTube Red, which we released late last year to provide content creators with a new source of revenue in addition to ads. While online publications still struggle with converting their most valuable readers into regularly paying subscribers, music subscriptions are now mainstream, accounting for billions in revenue in 2015.
But for all the people who purchase subscriptions, there is an even larger audience all over the world that won't pay, or simply can't afford the price of a subscription. The majority of music listeners (around 80 percent) are casual fans who, rather than buy CDs or digital downloads, are happy just listening to the radio. And despite earning $35 billion a year in ad revenue, radio pays no royalties to labels and artists in countries like the U.S., and only a very small share of revenue in Europe.
The industry now has a fantastic opportunity to earn revenue from these casual fans thanks to digital advertising. Unlike radio, ad-supported digital services like the free tiers of Pandora, Spotify, SoundCloud and YouTube pay out the majority of their ad revenue to labels, publishers and artists, which means they only earn revenue when their partners do.
As casual fans consume more of their music online and less on radio, the industry will begin to earn revenue from 100 percent of the people who enjoy music, not just the 20 percent who buy CD's, vinyl or streaming subscriptions.
This could result in a multi-billion dollar “value shift” from radio to artists and songwriters. While a healthy subscription business may eventually sign-up 200-300 million people worldwide, the ad-supported market has the potential to earn money from 3 billion people who are currently online.
Advertisers follow eyeballs (or eardrums), and the growing consumption of music on services like YouTube demonstrates the kind of user engagement both publishers and brands would die for.
On YouTube, that engagement is especially strong, with fans uploading millions of covers, remixes and tributes. These expressions of fan love used to be considered piracy but today, thousands of labels, publishers and artists have licensing agreements with YouTube to leave fan videos up and earn significant advertising revenue from them. In fact, this “found” money represents more than half the revenue we pay out to the industry every year.
And because music videos of all kinds have become popular on YouTube, that means the music industry can generate money from video ads too. I mentioned that radio ads generate $35 billion a year. Well, TV commercials generate $200 billion a year. If just 20 percent of that TV and radio ad revenue shifted online it would double the current size of the music industry.
Yes, that shift will take time, but it's already begun. And YouTube is one of the only firms in the world poised to bring those dollars online. With advertising as a powerful additional source of revenue along with subscriptions, the future of the music industry will be brighter than it's ever been before.
