2017 Streaming Wars: Will Spotify, Apple Music or Amazon Dominate?
With new competitors and momentum, the sector led by Spotify and Apple Music is poised to change dramatically. BUT can it survive its biggest challenges?
In a year full of milestones, 2016 became the first time streaming overtook sales as the music industry's dominant model, accounting for 51.3 percent of album consumption and besting physical and downloads combined, according to Nielsen Music. Now in 2017, a series of factors are converging that could leave some of its most significant players behind.
First, the good news: Streaming led the U.S. music industry to its first back-to-back yearly growth this millennium and in the first half of 2016 was the single highest source of revenue in the U.S. recorded-music industry, bringing in $1.61 billion. All three major labels -- Universal, Sony and Warner -- posted streaming-driven double-digit percent boosts in earnings throughout the year. And subscriber growth overall has consistently increased during the past few years; in 2016, Spotify and Apple Music together added more than 20 million subscribers, boosting their numbers to 40 million and 20 million, respectively.
But that growth has attracted new competitors to the space, as digital giants Pandora, iHeartRadio and Amazon all debut their own on-demand streaming services. Along with established offerings like Spotify, Apple Music and Google Play, not to mention YouTube, there will soon be nearly a dozen on-demand music streaming services in the United States alone. Which of them can survive in such a competitive market?
"I think 'consolidation' is a great word for what's coming next," says Chris Carey, CEO of Media Insight Consulting. "Smaller companies won't go away, but you might see acquisitions from them in order to catch up."
Currently, the big players, Spotify and Apple Music, have turned the quest for on-demand market share into a two-horse race, which means the clock could be ticking for smaller stand-alone companies like SoundCloud and Tidal, both of which have been linked to acquisition rumors (Google is reportedly eyeing the former for $500 million). In order to survive, streamers will need to offer more, or different, value than the market leaders already have.
One example will be different price points and new services, as incoming players look to undercut the currently standard $9.99/month all-access model. iHeart and Pandora have already negotiated direct deals with labels to offer enhanced radio at $4.99 that includes offline listening and replay functions, while Amazon, through discounts for its Prime members ($7.99/month) and owners of its hugely successful voice-activated home assistant Echo ($3.99/month), has made similar moves.
"It's difficult to have more than a couple of really big, all-things-to-all-people services," says MiDia Research founder Mark Mulligan. "Amazon is trying to open up a different customer base, but for big companies like Pandora wanting to create another global player, the dice is very much loaded against them."
Where does Apple Music fit in? The clear No. 2 has had impressive growth since its June 2015 launch, but its marketing magic bullet -- exclusive album releases -- faded significantly following Universal Music Group boss Lucian Grainge's label-wide ban in August. "I don't know if catching Spotify needs to be the goal, but I think making Apple Music stronger is," says Russ Crupnick, managing partner at MusicWatch. "You don't want to put yourself in a situation where you're losing ground."
Indeed, several analysts agree that the streaming landscape in 2017 will be dominated by Spotify and its long-rumored IPO, expected to arrive around September. "Spotify's IPO will have a bigger impact at the industry level than any other company in any other major industry," says Mulligan. "If successful, you'll see an influx of capital, new services and revenue for labels, publishers, artists and songwriters. If not, you'll see potential investments fall through and questions about the model. Successful or not, it will shape the market."
Spotify lost nearly $200 million in 2015 on $2.2 billion in revenue, and the company's $1 billion round of convertible debt, raised in March 2016, will require hefty interest payments the longer the company stays private. If CEO Daniel Ek does take the company public, it doesn't need to be profitable; Netflix never turned a profit before its IPO in 2002, for instance, and now boasts a valuation north of $50 billion. But analysts tell Billboard that Spotify needs to show a clear path to profitability in order to attract wary potential stockholders.
Yet there's plenty of room for optimism, even if smaller services eventually bow out of the race. A U.S. Department of Commerce report from October estimates that global streaming revenue will balloon to $5.4 billion by 2019, while a study by IHS Markit expects the number of U.S. on-demand subscribers to triple by 2020.
"It's going to be a three-horse race among Spotify, Apple and Amazon as the dominant players," offers Rich Greenfield, an analyst at BTIG Research. Counters Carey, "I think four services with different focuses, all looking after consumers and none driving price down, would be your ideal situation ... Whether or not I'm living in a dreamland is a different question."
This article originally appeared in the Jan. 14 issue of Billboard.