Tech

Shira Ovide is a Bloomberg Gadfly columnist covering technology. She previously was a reporter for the Wall Street Journal.

Leila Abboud is a Bloomberg Gadfly columnist covering technology. She previously worked for Reuters and the Wall Street Journal.

Long a symbol of internet-era value destruction, the music industry has scratched and clawed its way to an impressive milestone: an estimated 100 million people now have streaming music subscriptions that they pay for each month. That’s more than the number of people who subscribe to Netflix.  

But it’s still too soon to declare the job done. Although revenue is finally growing again for the big record labels, the music streaming industry is on the verge of a shakeout that could eliminate smaller players like SoundCloud.

Paid Up
The ranks of those paying for streaming music services has surpassed 100 million worldwide
Source: Midia Research, company reports
Figures repreent millions of paying users

The economics of streaming remain tough for such independents, given that they have to pay out 75 percent or more of revenue in royalty fees to labels. It's easier for tech giants like Apple Inc. and Amazon.com Inc., which are happy to subsidize music as long as it serves their broader business of selling more phones or merchandise. 

First, the good news. Revenue for the U.S. music industry is just one-third of what it was in 2000, but last year brought the first significant gain in 17 years, according to inflation-adjusted figures from the Recording Industry Association of America. U.S. music retail sales rose 8 percent in the first six months of 2016 from the same period a year earlier. Nearly half of industry sales were generated by streaming music services -- mostly from paid subscriptions to offerings like Spotify, but also from ads aired on free hangouts including YouTube and Pandora. 

Tuning Up
Thanks to growth in streaming music, revenue for the U.S. music industry increased 8% in the first half of 2016 from a year earlier. It was the first significant gain since the CD was king.
Source: The Recording Industry Association of America
Note: Figures for prior years are inflation adjusted.

The record labels that control most popular music are betting their future on paid music services. As a result, they are trying to limit companies including Alphabet Inc.'s YouTube and Pandora Media Inc. that offer free music with advertisements. It’s a business model shift being watched closely by every media and entertainment company, many of which are suffering from sluggish growth in internet ads.

Happy Tunes
Internet music services such as Spotify and Pandora now generate nearly half of U.S. music industry revenue
Source: The Recording Industry Association of America

It’s not clear, though, how many more people are willing to pay roughly $120 a year for access to almost any song they can imagine. The growth rate of streaming subscribers globally has been flat for about 18 months, with 16.5 million or so signing up every six months, points out Mark Mulligan, an industry analyst at Midia Research.

To change this, more creativity is needed on types of streaming offers to attract everyone from metalheads to jazz buffs, as well as lower-priced plans starting at a few dollars a month to attract a broader audience. The record labels have to be more flexible on their licensing deals to allow such experimentation, and the streaming services have to improve their offerings, especially in emerging markets.

If the music labels aren't careful, they're likely to have fewer allies as they try to shift the world to music listening for a fee. Look at the ill health of many of the companies that sell streaming music. 

Germany's SoundCloud Ltd., which started out as a home for remixes, DJs, and amateur musicians before adding a traditional streaming service last year, recently warned that it might need an influx of cash. The music labels dragged their feet for a couple of years before agreeing to sell SoundCloud the right to stream popular music, and the delay was compounded by confusion over the strategy. The next step could be a sale. 

Pandora is also not on sound financial footing. Revenue rose 20 percent in the first nine months of 2016, but the terms of its deal with music companies makes it tough for Pandora to turn a profit. The company has posted an operating loss in 14 out of the 17 quarters since it went public.

The company also waited too long to jump into the same type of subscription music as Spotify and Apple Music, which let people pick any song at will. (Pandora largely operates like a radio station, with listeners unable to select each song.) Now the subscription service Pandora fought so hard to launch is facing long odds. Investors have held out hope that Pandora could be rescued in a sale, although that looks less likely. An executive at a commonly rumored buyer, Sirius XM Holdings Inc., last week cast doubt on its potential interest. 

Even Spotify Ltd., the current leader of the streaming business with nearly half of global subscribers, remains unprofitable. With its initial public offering expected this year, the Swedish company has two ways to fix that: wrangle a better deal from the music labels or cut other costs on items like marketing or research and development.

Opposite Directions
Spotify is growing fast but remains unprofitable largely because of the fees paid to labels
Source: Company reports

If the independent music streaming players wither and only the tech superpowers remain in the business, the music industry will have less leverage to shape business models as they see fit. So yes, the music industry should celebrate the 100 million streaming subscribers mark. But in a few years the industry may wish it had made more friends on the streaming music tide.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Shira Ovide in New York at sovide@bloomberg.net
Leila Abboud in Paris at labboud@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net