The Future Of The Music Industry
The music industry has faced significant changes since the 1960s when The Beatles burst onto the music scene. Vinyl, CDs and downloads have almost become obsolete on the mass market as streaming becomes the new consumption tool for the new generation. The British Phonographic Industry (BPI) calculated that Britons streamed 14.8 billion tracks in 2014 alone, which is why 2014 was branded as the ‘transformative year’ for the music industry. So why is the current streaming model so bad for the music industry in its current form?
The majority of the problem amongst artists, producers and record labels centres on money. Spotify pay on average between $0.006 and $0.0084 per stream on their service. Other factors such as the geographical location the track was streamed in and the particular track that was streamed can impact the amount of money earned by rights holders. Thus artists do not get a set rate as Spotify uses a ‘pro rata model’. So if an artist was payed $0.0084 per stream, the track would need to be streamed 118 times to make $0.99. In defence of Spotify, they do distribute about 70% of their profits to rights holders and have been attributed to helping reduce pirated music downloads. According to Spotify, 55% of 18-29 year olds pirate music less when they are offered a free, legal alternative. The problem is that a ‘free alternative’ does not generate revenue for artists or record companies.
The difficulty of getting consumers who are accustomed to not paying for music to purchase again is very challenging particularly when pirating and listening to tracks on YouTube for free is so accessible. Other forms of monetisation apart from membership fees often do not make significant amounts of revenue. The financial results from Spotify in 2014 reveal that 91% of its income comes from the 25% of its users who pay for the service.
It is key to remember that Spotify’s business model supports profitability at scale and therefore they argue Spotify needs to expand its reach in order to improve its margins. However, with over 75 million users (55 million of those on free accounts), Spotify is still yet to make a profit, making a loss of $132.3 million in 2014 despite a 45% growth on revenue from 2013.
If streaming music is here to stay then a much more effective business model needs to be created. If someone can establish a streaming model that encourages more paid members, monetises advertising much more effectively and provides a ground breaking user experience, that person will be a power played in the music industry.
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