With Streaming's Explosion, Where Does the U.S. Music Business Go From Here?

Courtesy of Spotify
Daniel Ek, CEO of Spotify

Streaming is driving growth that the U.S. music business hasn't seen in two decades. Can it continue?

With sales revenue up 11.4 percent to $7.7 billion in 2016, the U.S. recorded music business finally seems to have turned a corner after more than a decade and a half of decline. The question now is whether this nascent recovery will continue -- and whether an industry dominated by streaming can eventually return to a level close to its 1999 revenue peak of $14.6 billion.

The biggest threat to a continuing recovery is the possibility that Spotify’s presumed IPO doesn’t go well. The Stockholm-based startup, which despite its status as the world's biggest streaming service does not currently have long-term deals with any of the major labels, needs to go public within the next year or so, or else face financial penalties from the investors that hold its debt. If it can’t do so -- or if its stock offering fizzles -- it could destabilize the streaming business and scare off the investors that the sector needs to realize its potential.

The second biggest threat is that Spotify experiences the kind of runaway success that would let it dominate the streaming market -- and develop the kind of leverage that Apple's iTunes Store has in the download business. Spotify added more subscribers than Apple Music in 2016 and competitors like Tidal and SoundCloud seem to be losing steam, while newcomers to the on-demand space like Pandora, iHeartRadio and Amazon's Music Unlimited are all still in their infancy. "There is real concern of the industry developing platform dependency, which would hand Spotify the whip hand in negotiations," says Mark Mulligan, an analyst at Midia Research.

RIAA Chairman and CEO Cary Sherman called the industry’s recovery “fragile and fraught with risk” in an article on Medium. And the recorded music business does face other challenges: Sales of downloads and physical products continue to decline, and free music on YouTube competes with the subscription services that generate far more revenue per stream. But last year’s growth in streaming revenue exceeded most expectations, and the rate of growth seems to be increasing as well.

"Last year, some of the reports from investment bank analysts about the future of the business were viewed as pretty aggressive, but I think they’re fundamentally right and the 2016 results are consistent with that," says Larry Miller, the director of the music business program at New York University’s Steinhardt School. One of the reports he’s referring to is an April 2016 Credit Suisse analyst note that predicted 2016 would be the year when the industry as a whole begins to recover, which seems likely, although global numbers are not yet available.

If subscription streaming growth continues -- which is hard to predict -- just how big could U.S. recorded music get? Even with recent growth, only about 10 percent of U.S. adults (an average of 22.6 million in 2016, according to the RIAA) subscribe to a streaming music service. "That’s great progress, but imagine what happens if we get to 40 percent or 50 percent," asks Russ Crupnick, managing partner at MusicWatch. "There’s a huge potential upside, especially if we can keep selling some CDs and downloads here and there."

As recently as last year, many label executives didn’t think streaming services would sell more than 50 million subscriptions in the U.S. -- a few million more than Netflix (47 million) has now. But they have already sold half that number, and with more than 130 million households in the U.S., some are becoming more optimistic.

Can the U.S. music business return to a level close to its 1999 peak? In order to generate $10 billion, streaming services would have to sell more than 83 million subscriptions -- which seems very optimistic, although not impossible. Even then, labels would have to sell an additional few billion dollars' worth of physical and digital product.

Most executives believe that digital product will continue to decline quickly, but that CDs will continue to sell, albeit in smaller amounts, for the foreseeable future. Even if the industry does continue to grow, whether that growth is steady depends on whether streaming revenue can grow faster than that from sales of downloads and physical products declines.

Most analysts, including Crupnick, think download sales will continue to decline, but that CDs will outlast them. "I think CDs are going to have a longer life than downloads, because the issue for downloads is that streaming is so substitutable,” Crupnick says. "It wouldn't shock me if in eight to 10 years we might look at [downloads] the same way we look at an 8-track today."