With download sales cooling after a decade of growth, streaming services like Spotify, Pandora and Apple’s new iTunes Radio have become the latest hope for the troubled music business.
If you were a small business owner, would you stream music from Pandora for free into your store and hear a few advertisements or pay a monthly fee?
When Spotify, the digital music company of the moment, announced this week an exclusive deal with Led Zeppelin and free access on mobile devices, it also reported impressive numbers. Its listeners have streamed 4.5 billion hours of music this year, and it has paid more than $1 billion in music royalties since its founding.
But Spotify, a private company, omitted the results that music executives, competitors and investors care about most: how many people use the service and how many pay for it.
Services like Spotify, Pandora and Apple’s new iTunes Radio have become the latest hope for the beleaguered music business. They let customers listen to vast catalogs of songs online, either free or through subscriptions for as little as $3 a month.
With download sales cooling after a decade of growth, streaming has the potential to transform the industry’s financial model by charging for the very act of listening. Instead of selling a CD or a download, companies could earn royalties every time someone clicks to hear a track.
“The buying habits of music lovers are changing,” Doug Morris, chairman of Sony Music Entertainment, told investors last month at a conference in Los Angeles. “Rather than buying physical records, or even digital downloads, consumers are starting to prefer buying music on demand from streaming services.”
Streaming has even begun to affect the way hit songs are made, with young acts like Lorde, Imagine Dragons and Baauer gaining much of their popularity and momentum from streaming platforms.
Yet even as they have grown, streaming companies have encountered a stubborn problem: Music lovers will consume large amounts of music as long as it is free, but getting them to pay a monthly subscription has proved much more difficult.
Pandora, the only publicly traded streaming company, delivers about 1.5 billion hours of music each month to more than 70 million users, but only about three million of them pay. The rest listen free but must endure advertising. Even though it has a market value of $5 billion, Pandora has yet to turn an annual profit.
“There is this irrational resistance for people to actually plunk down their credit card for streaming services,” said Ted Cohen, a digital music consultant with the firm TAG Strategic. “We’re 13 years into the Napster phenomenon of ‘music is free,’ and it’s hard to get people back into the idea that music is at least worth the value of a cup of Starbucks coffee a week.”
YouTube’s free music videos have made it the most popular listening platform of all among young listeners, according to Nielsen.
When Spotify’s chief executive, Daniel Ek, was asked about the company’s subscriber numbers, he said, “We’re not a company that will update the numbers with every million subs we get. We will update them when we feel there are important milestones that we reach.”
Reaching those milestones may prove increasingly challenging. With several major players about to enter the market in the next few months, the competition in streaming music is about to intensify.
Beats Music, a subscription service from the makers of Beats by Dr. Dre headphones, will arrive in January, accompanied by an aggressive marketing campaign. YouTube and Deezer, a French company, are also expected to enter the American market with subscription plans. They join an already crowded streaming market that includes Rdio, Rhapsody, Google’s All Access, Xbox Music from Microsoft and Sony’s Music Unlimited.
And while all of these companies are fighting one another for subscribers, they face the additional challenge of getting music fans to pay for streaming music.
Spotify’s strategy has been to lure customers in with an advertising-supported free version, and hope they can be “converted” to pay $5 to $10 a month for perks like better-quality sound and no ads. But the service, which started in Sweden in 2008 and is now available in 55 markets around the world, has not updated its customer numbers since March, when it reported 24 million users. Six million of those pay.
The limited free access on mobile devices that Spotify announced this week was partly a way to continue to attract consumers who now spend more of their time on phones and tablets than on desktop computers. Mr. Ek said half of Spotify’s new users were signing up through mobile devices. One way Spotify hopes to attract new customers is through exclusive deals with popular musical acts, like the one it struck this week with Led Zeppelin.
Beats Music is not expected to offer a free listening option, gambling that customers will find the service attractive enough to pay for. That plan may appeal to musicians, who have complained that the royalties they collect from the free services are too low to make a living. Royalty rates from pay services tend to be much higher.
Within the streaming world, the prevailing opinion is that the market is still young and has enormous potential. In 2012, streaming services and satellite radio in the United States contributed just over $1 billion in revenue to the recording industry, a 59 percent increase from the year before. Still, those numbers are small compared with the $5.6 billion from downloads and physical sales, according to figures from the Recording Industry Association of America. Streaming’s growth is expected to continue at an even faster pace in 2014, while CD sales and downloads will most likely decline.
“It took many years for digital downloads to become mainstream along with CDs, and in time, subscriptions will be a widely adopted third option,” Anthony Bay, chief executive of Rdio, said. Rdio, which started in 2010, has not announced its subscriber numbers, but on Thursday it began a marketing campaign through a deal with the radio giant Cumulus Media to promote its service on the air.
It is still unclear exactly how many subscribers a service needs to be a mainstream success, although Spotify appears to have chosen 40 million as its target. It uses that number to demonstrate how much money it can contribute to the music industry once it reaches a dominant scale.
Most other services do not publicly report their results, but music executives and analysts estimate the total number of subscribers to paid streaming services in the United States at somewhat more than five million. Those numbers pale in comparison to the numbers posted by other media companies like Netflix, with about 31 million subscribers, and Sirius XM Radio, with more than 25 million.
Several analysts doubt that streaming companies can attract enough paying customers with only recorded music, citing a sharp drop in music sales over the last decade and abundant free music online. And they say it will be difficult for them to survive on advertising alone.
Instead, some see these companies’ success as lying in a so-called subsidy model, in which music sales support another business with higher margins. Apple, most notably, used low-margin music sales to spur demand for iPods, phones and computers.
“Music is an accompaniment, to add to your jog, your workday, your prep in the kitchen,” said James L. McQuivey, an analyst for Forrester Research. “ But it’s not something you’re eager to pay for if you don’t have to.”
And then there is the fierce competition as new entrants continue to flood the market. When asked about competition, Mr. Ek of Spotify noted that there was plenty when his company started. And many of those services — like Myspace Music, Napster and Zune — are diminished or have disappeared entirely. But he said he was pleased to be a leader instead of a challenger.
“I’d much rather be hunted,” Mr. Ek said, “than the one that has to chase people.”