In a chaotic first quarter of 2020, monthly subscription fees are providing rights owners and creators with a predictable flow of royalties that helps insulate them from financial shocks. Of course, royalties will fluctuate if subscribers temporarily or permanently cancel their accounts at Spotify, Apple Music or other ad-free digital services. But in the economy of the coronavirus era, rules for social distancing are primarily hurting purchases of digital downloads, CDs and LPs, not streaming services.
The latest data show stay-at-home Americans’ music streaming has subsided slightly as people spend more hours streaming video, primarily on Netflix. Last week, on-demand audio streams held up well: total streams fell 0.5% as audio sank 3.2% and video gained 3.7%, according to MRC Data/Nielsen Music. Music listening will “rebound rapidly” when the crisis subsides, says Russ Crupnick, principle at MusicWatch. And despite the week-to-week decline, American consumers’ streams of tracks and videos were still 14.2% higher than the same week in 2019.
1. Subscriptions insulate record labels from the financial shock of sudden unemployment.
2. Sales of digital downloads and CDs at brick-and-mortar stores declined by roughly 75% last week.
3. Some retailers are treading water by selling music online and offering curb-side purchase pickups and home deliveries.
4. Streams were down just 0.5% last week and will return to normalcy when stay-at-home orders are lifted.
But brick-and-mortar retailers were decimated by mandatory closures by mayors and governors around the country to limit the spread of the coronavirus. Last week, total physical album sales declined 23.7%, while plummeting 72.5% at chain stores and 76.9% at independent retail, according to MRC Data/Nielsen Music. Although some music fans would disagree, politicians have not deemed CDs and LPs to be essential products worth protecting alongside groceries, prescription drugs and prepared food. The downturn will continue as President Donald Trump extended the national stay-at-home order through April. But the loss for the overall business is mitigated somewhat, as brick-and-mortar retail accounted for just 12.3% of consumption in 2019 (measured as album equivalent units including tracks and streams).
Digital music services have the advantage of being open for business 24 hours a day. Of course, streaming royalties’ continuity isn’t ensured, since some consumers may cancel their subscriptions to help save money. Early data isn’t encouraging: 3.3 million Americans filed unemployment claims last week, easily beating the previous record of 695,000 in 1982, according to the U.S. Department of Labor; and the St. Louis Federal Reserves estimates 30 million people could receive the pandemic version of unemployment benefits.
According to MusicWatch, 30% of subscribers live in the four states with the most coronavirus infections and earliest social distancing mandates: New York, California, Illinois and Washington. And some at-risk demographics could pause or cancel subscriptions: 24% of subscribers have household incomes under $50,000 and 14% work in services jobs, which are being disproportionately hurt by retail and restaurant closures and lower demand for ride-share trips.
But subscriptions could hold up and continue to support rights owners and artists through this difficult period. Most current subscribers surveyed by MusicWatch in 2019 pay for convenience: 55% said it’s easy to connect in their cars, while more than a third related their subscriptions to smart speakers, ease of use and the simplicity of paying a single monthly or annual fee. About a third of subscribers said they’re paying for unlimited listening and the size of services’ catalog. If price isn’t one of consumers’ biggest concerns, subscriptions could remain flat, give or take a few percentage points.
Compared to previous eras, today’s music business does not depend on consumers’ purchases — either digital or physical — to generate revenue. “Had we been in a 2008 [recession] environment with disruption of the physical supply chains and stores closed, the result would have been catastrophic,” says Crupnick. Back then, manufacturing plants, warehouses and retailers responsible for CDs accounted for 62.3% of recorded-music revenues, while paid subscriptions were just 2.5%, according to the RIAA. If a one-stop distributor went bankrupt, it might not be able to pay labels — and when a retailer went out of business, its customers might not simply shift their purchases to another store. Subscription services avoid that messiness and help assure consumers continue to pay for music.
Yet digital services have not been immune to hiccups in the supply chain. Over the past few weeks, labels have pushed back release dates so new albums don’t roll out only online. And with employees working from home and meetings taking place via video conferencing, labels have lost the in-person meetings crucial to their relationship with services. There’s no online equivalent to taking a developing artist to a service’s offices for introductions and handshakes — yet.
Some streaming services are also exposed to the downturn in U.S. digital advertising. An IAB survey of 400 brand ad buyers found 74% believe the coronavirus’s impact on digital ad spending will be greater than the 2008-2009 financial crisis and 46% have paused their spending through the end of June. With subscription revenue growing 25-30% a year, a small downturn in advertising would mildly hurt Spotify, which gets only 10% of its global revenue from advertising, but would more meaningfully impact ad-dependent Pandora and YouTube. Even so, brands are expected to shirt some ad spending to digital advertising.
There is no historical precedent for citizens throughout a globalist, economic powerhouse being mandated to stay at home, limiting where they shop and spend their free time. During the Spanish Flu of 1918, Thomas Edison’s record label was selling recorded music on flat discs as well as cylinders. But if the Great Recession of 2008 is any indication, many consumers will rethink how they spend their discretionary income: more experiences, less home ownership and higher student debt payments.
Some consumers are still buying music thanks to creative solutions such as vinyl delivery and curbside pickup with whatever stock they had before distribution warehouses shut down. And while closed to the public, stores can sell their inventory online on eBay and Discogs.
But the stay-at-home orders may have created a new normal: more at-home streaming, more internet purchases and home delivery from brick-and-mortar retail, and less time spent in record stores. The main question is whether or not subscription services can convince their customers that $10 a month — $5 for students, $15 for families — is still a good value when income is squeezed.