In other words, if this is a turnaround, then it’s a fragile one. “We’re in recovery,” says Michael Nash, Universal Music Group executive vp digital strategy. “It’s one day at a time.”
THE GOOD NEWS
So far, the rebound in the recorded-music business has been driven by paid subscription services, which together in the first half of 2016 brought in $1.01 billion, more than double the $478.6 million for the same period in 2015. (That’s 63 percent of the overall U.S. streaming market.) Much of that growth came from Apple Music, which didn’t generate any revenue until the second half of 2015.
“This seems a solid and continuing [trend],” says Martin Mills, founder/chairman of Beggars Group. “I see no reason it would turn back.”
No one knows how big the potential U.S. market for music subscriptions is, but if approximately 100 million households have some kind of cable TV subscription and 47 million subscribe to Netflix, there’s plenty of room for growth. “The question isn’t whether we’ll get to 50 million streaming subscriptions,” says Russ Crupnick, managing partner of the consultancy MusicWatch. “The question is how long it will take.” To understand the opportunity this represents, consider that about 42 million people in the United States bought a downloaded track in the last year, according to MusicWatch, spending an average of between $50 and $60 on music. Broadly speaking, that means each additional subscriber paying $10 per month is worth two average downloaders.
One factor that should continue to drive streaming’s success is something the download business never really had: competition. The major labels have a vested interest in Spotify’s success -- literally, since together they own an estimated 18 percent equity in the company -- but they also want to be sure one company doesn’t end up controlling the streaming market in the way Apple dominated downloads. So far, Spotify has a lead in streaming, with more than 40 million paid subscribers worldwide, while Apple Music has 17 million. Amazon just introduced its own subscription streaming service, which the company is marketing and discounting to its 60 million Amazon Prime members. Pandora and iHeartMedia will enter the market in 2017 with the ability to promote their services to the millions of listeners they already have, and Google could make Google Play or YouTube Red serious competitors as well.
“We’re looking at a world with four or five players competing on the core proposition,” says Nash, “and we’re going to see innovation at the high end and the low end.” The former could involve high-quality audio options from Tidal or Deezer, while the latter could involve lower-priced limited subscriptions, like the $4-per-month Amazon deal that offers unlimited access to music for one of the company’s Echo speakers.
Promisingly, as the music business starts growing again, investment seems to be following. “I’m getting calls from people in private equity asking me about music assets,” says Doug Davis, a leading entertainment lawyer. “That hasn’t happened for six or eight years.”
“Eventually these companies have to make a profit for the overall industry to be healthy,” says attorney Joel Katz, who leads the media and entertainment business practice at Greenberg Traurig. “If they don’t become profitable, that could disturb the revitalization of the record label business, which is coming back in a really good way.”
The streaming business also will require labels to fundamentally change how they operate. First, they’ll need to shift promotion and marketing efforts to drive consumption rather than transactions. Second, as smartphones increasingly are used to consume video content, labels need to produce more of it. Finally, labels have to ensure they don’t help make streaming services so powerful that they will start releasing music themselves, as Apple essentially did with Frank Ocean’s Blonde.
Few in the music industry harbor any illusions that things will return to the way they were in 1999, when U.S. revenue peaked at $14.6 billion. Today, music generates money when it’s played rather than when it’s purchased -- which adds up more slowly but also more steadily. “The new market is not like the old market,” says Mills. “New releases generate less immediate revenue than they used to, but their earning span is extended.”
The revenue that labels and other rights-holders collect also will be more predictable. The music business always has depended disproportionately on hits, but in a streaming world, the amount of money consumers spend on music won’t vary nearly as much. "There are very few industries that have come back from a 50 percent revenue decline,” says Nash. “And we can do it if we have the big picture in mind.”
This article originally appeared in the Nov. 12 issue of Billboard.