What if subscription services started eating into download and CD purchases? It’s not an unlikely scenario. Consumers allot only so much of their income for entertainment spending. If spending on streaming services increases, spending on other forms of music is likely to decrease.
Americans spent 4.1% of their after-tax income on entertainment in 2011, down slightly from 4.4% in 2002 and 4.6% in 2008, according to the U.S. Bureau of Labor Statistics. Some forms of entertainment may grab a greater share–recorded music competes with games, movies, live music and other categories–but consumers will spend roughly the same share of their income on entertainment from one year to the next.
Through 2012, subscription services grew rapidly while digital purchase revenue grew as well. While there’s always been concern that streaming services might cannibalize sales–and some acts, like Vampire Weekend, hold back new albums from streaming on initial release–the widely held belief in the industry is that streaming does no harm. Streaming may actually help music purchases in some individual cases: Recent albums by Daft Punk and Mumford & Sons have sold well while setting streaming records.
But future subscribers may be less likely to continue purchasing music than early adopters have been. When streaming services succeed in acquiring casual consumers, it could change the mix of entertainment spending of a large segment of the global marketplace. The result: More money for streaming and less for other segments.
This may already be happening to a small degree. Billboard analysis of Nielsen SoundScan data finds that digital sales–both tracks and albums–have consistently weakened after a strong start in the early weeks of 2013. CD sales had a similar decline much of the year but have improved slightly since mid-March. In other words, whatever is driving down digital sales hasn’t had the same effect on CD sales.
A shift from purchases to streaming will have ramifications. One change will be the timing of revenue. Purchases–especially downloads–result in a lump-sum payment. But streaming royalties are like an annuity that’s paid out over time. This will require some getting used to. After all, most lottery winners choose to receive a lump-sum payment rather than an annuity because an amount of money now is better than the same amount of money later.
What if streaming takes away more than it replaces? What if the amount of money that arrives later is less than that received now? Players in the industry will adjust. They’ll extract value from streaming services–e.g., the kind of information and direct communication with listeners not available through download stores. They’ll pursue new revenue opportunities like paid online concerts, merch and monetized artist-fan experiences. (Direct communication with listeners would be an obvious aid in all this.) Songwriters, unable to monetize artists’ relationships with fans, will obtain a greater share of streaming royalties.
Consider the change brought by consumers’ shift from physical purchases to digital: lower revenue, the rise of the 360 deal, discontent and, finally, acceptance. The shift to streaming could be just as powerful.