If we have to believe Forbes, the music industry is still not doing so well: ‘According to a report published recently by the RIAA (the Recording Industry Association of America) evaluating the state of the music industry at 2017’s halfway point, paid digital downloads are suffering the most, declining at a faster rate than even physical products, which many declared dead years ago.’. (McIntyre, 2017) Strange, because other sources are claiming that the music industry is on her way back. Bloomberg for instance states: ‘The music business is booming again after nearly two decades of decline, thanks to paid streaming services Spotify and Apple Music, according to a report from the Recording Industry Association of America.’. (Bloomberg, 2017)
So how well are things going? Are streaming services, like Spotify, really saving the music industry or is this just a fairy tale?
If we only look at paid subscriptions, the industry is doing pretty well. Spotify and Apple Music have been able to convert millions of people who before did not spend any money on music into paying subscribers. As a result, the sales of paid subscriptions have increased with (at least) $650 million. Moreover, in the first half of 2017 streaming was responsible for 62 percent of the sales. (Shaw, 2017), (Helmore, 2017)
But this is still just a little fraction of what it used to be when the industry was at its best. This gap, called the ‘value-gap’ by RIAA, should be filled by advertising-supported streaming. However, this type of streaming is lagging behind. Not only at Spotify but also at for instance YouTube. (Shaw, 2017)
More importantly, neither Spotify or its rivals have been able to report a profit. In 2015 Spotify reported an operating loss of $195.5 million, which was even higher than the year before when they reported a loss of $165.1 million. (Shanley, 2016)
Parson, a general partner at venture capital firm Northzone, explains these losses by the fact that the focus of Spotify has been on growing instead of being profitable. Since the initial costs for music royalties have to paid every time Spotify enters a new market and it is not able to get revenues from advertising and subscriptions from each additional subscriber right away, it is not strange that they have reported such big losses. Moreover, as Parson also states, if Spotify decides to change its focus on profit instead of growth, it can take full advantage of these unit economics. (Shanley, 2016)
But not everyone agrees with the point made by Parson. For instance Gerber, he states that Spotify (and its rivals) could only become profitable by rising (maybe even doubling) their prices. (Gerber, 2017)
To conclude, the music industry is definitely doing better at some points. Spotify is certainly playing a significant role. But the industry has still a long way to go, to get where it was at its peak. When it comes to paid subscriptions, things are going well and substantial revenues are generated. The problems are in ad-supported streaming, which is lagging behind. The gap that ad-supported streaming has to fill is still enormous, and the question is if companies as Spotify are able to fix this. And moreover, if they able to become profitable businesses without losing customers by rising their prices.
Gerber, R. (2017) How The Music Industry Is Putting Itself Out Of Business [online] Forbes, Available at: https://www.forbes.com/sites/greatspeculations/2017/05/03/how-the-music-industry-is-putting-itself-out-of-business/#61864a48e57a [Accessed 09 October 2017]
Helmore, E. (2017) Spotify hopes going public will cement streaming as music’s future [online] The Guardian, https://www.theguardian.com/technology/2017/may/27/spotify-ipo-stock-market-daniel-ek [Accessed 09 October 2017]
Shaw, L. (2017) Music Industry Soars Into Year 3 of Recovery Thanks to Spotify [online] Bloomberg, Available at: https://www.bloomberg.com/news/articles/2017-09-20/music-industry-soars-into-year-3-of-recovery-thanks-to-spotify [Accessed 09 October 2017]
McIntyre, H. (2017) Report: Digital Download Revenue In The Music Industry Has Dropped By 50% In Just 4 Years [online] Forbes, Available at: https://www.forbes.com/sites/hughmcintyre/2017/09/21/report-digital-download-revenues-in-the-music-industry-have-dropped-by-50-in-just-four-years/ – 58f2d6c72823 [Accessed 09 October 2017]
Shanley, M. (2016) Spotify could become profitable in 2017 [online] Business Insider, Available at: http://www.businessinsider.com/r-exclusive-europes-biggest-tech-hope-spotify-starts-talking-about-profit-2016-12?international=true&r=US&IR=T [Accessed 09 October 2017]
