The Streaming effect on music consumption

Music industry has passed through tremendous changes in the last decade, and still continues its transformation. Just 10 years ago could you imagine listening to the music online on your smartphone? The answer is probably no.

Nowadays, there is no wonder in streaming music wherever and whenever you want. What you need is internet connection, smartphone/laptop and to choose streaming platform. In some cases it’s not even necessary to pay for music content, you will be forced to watch some advertisements instead. By using streaming platforms you have opportunities to create and share playlists socially, discover new artists, follow them and be aware of any new music content they upload. There is no space for CDs and even downloads seem like a past. Sounds like a miracle for all music lovers, music is everywhere and can be easily accessed.

It’s not a surprise, Britons streamed 14.8bn tracks last year, almost double the 7.5bn of 2013, as internet connectivity improves and becomes pervasive according to the music business body the British Phonographic Industry (BPI).

In 2015 it’s expected that Apple will work hard on the scene using the Beats brand it bought for £2bn in May 2014, the same with Google’s YouTube, which last November launched a paid-for, ad-free music and video streaming service YouTube Music Key. Even Snapchat, best known for its self-destructing photos, is about to launch its own music service according to emails leaked as part of the hack of Sony Pictures.

Sometimes it seems as if everyone is planning a music streaming service. However, not everyone is happy with this reality. Going digital was the first phase of the digitization of the music industry, and moving from ownership to access is the next. It’s hard to deny we are on the cusp of a new era for the music industry, we are indeed on the cusp of a new industry. Consumer behaviours changed, perceptions of value of music changed, technology transformed our buying approach.

Streaming revenues are rising fast, according to the BPI’s they have dramatically increased from zero in 2007 to £76.7m in 2013. Data released by the Entertainment Retailers Association and BPI suggested that streaming revenues across the UK in 2014 were £125m.

Despite the fact that revenues are rising, there is a huge problem that streaming services are still far from being stable in profits. For instance, Spotify has lost a total of $200 million since it was founded in 2006, according to a report last year based on its financial disclosures written by PrivCo. However, Spotify declined to discuss its balance sheet. Only in 2013 Spotify’s UK business claimed for the first time it finally got profit. From £92.6m in 2012 to £131.4m in 2013 revenues, helping the company’s UK arm to move from an £11m net loss in 2012 to a £2.6m net profit in 2013.

The company earns money from subscriptions and advertising on the service’s free version. About 70 percent of Spotify’s costs are music royalties (although most artists are not making much from streaming music). The remaining 30 percent is used to cover overhead at the company.

The problem with streaming services is that they seem remarkably ineffective at persuading people to pay for content. Let’s have a look on Spotify, with 60mln users the company has maintained its conversion rate of 25%, which means only 15mln users are willing to pay for music. Another US-only service Pandora claims 250 million users, but only 3.3 million paying its $5 a month subscription.

Mark Mulligan (Midia Consulting), who has a long track record watching the music business claimed that there are only about 35 million paying subscribers worldwide for all streaming services, out of more than a billion potential users. Even before the digital revolution, the average person spent less than £5 a month on music. There is something to be changed in a price policy. It’s likely that cutting subscription prices would entice more consumers to pay, easily making up for lost revenues.

Like Google’s paid-for YouTube Music Key service launched in November did with its six-month free trial and a discounted £7.99-a-month cost (down from £9.99).

Therefore, it’s possible to guess other companies will make subscriptions less expensive than now. And it’s just a matter of time when artists and labels swallow their pride and accept the world of change.