The end of the record collection?
- 11 July 2014
- From the section Business
The household record collection has changed shape a number of times over the decades. During the 1960s and 70s it was a cupboard full of vinyl discs. In the 80s and 90s, it was racks of cassettes and compact discs. And in the new millennium our collections went digital as the MP3 and download came to the fore and the playlist began to supplant the album.
But common to all these formats was the principle that once you bought the music you owned it forever. Is this about to change as the music industry undergoes yet another transformation?
Music streaming services allow you to listen to music from a collection of millions of songs for either a monthly subscription fee or for free if you don't mind listening to in-play adverts.
According to the International Federation of the Phonographic Industry (IFPI), $15bn was spent on music in 2013. Streaming services accounted for $1.1bn, but this was more than 50% higher than the year before.
The numbers who are paying for music streaming are increasing fast, from eight million in 2010 to 28 million in 2013.
Futuresource, a consultancy specialising in the digital entertainment industry, expects the music streaming business to grow to $5bn by 2017.
Streaming services have benefitted from growing smartphone use and faster internet access. The infrastructure supporting music streaming will solidify as 4G networks are rolled out and cloud storage becomes widespread.
Is streaming the future?
The two companies at the vanguard of the streaming services are Spotify and Pandora.
Spotify has been popular in Europe for several years but only hit the big American market in 2011. For a subscription fee of $10 per month, users can choose what they listen to. To date, it has 10 million subscribers and 30 million users of the free but ad-supported service.
Pandora is more like internet-radio. It doesn't allow users to pick tracks but uses an algorithm to put together a personalised playlist. Although it is only available in the US, Australia and New Zealand, it has more than 70 million users, and three million who pay $5 per month to get the same service without the ads.
With more than 800 million registered users, iTunes has made Apple the largest player in the download era. However, in the streaming business it finds itself in the unusual position of playing catch-up.
Last year, Apple launched iTunes Radio and has so far amassed 40 million registered users. In May, it completed its $3bn acquisition of Beats Electronics. Although best known for its premium headphone business, many believe the deal was really about the music. It is speculated that Beats Music will form part of a new premium streaming service aimed at taking on not just Spotify and Pandora, but also the video-streamers Netflix and Amazon Prime.
Is anybody making money?
Despite their millions of users, neither Spotify or Pandora have made a profit. Nearly three-quarters of revenues are paid to rights holders. Both companies still consider themselves in start-up mode, and infrastructure and expansion costs more than account for what's left over.
However, analysts estimate that Spotify is worth about $5bn, while Pandora had an IPO in 2011 and currently has a market capitalisation of around $5.4bn.
The recorded music industry has been in serial decline for decades as it battles to collect royalties on its offerings. This has accelerated in the digital era. When Steve Jobs persuaded record bosses to license downloads from iTunes at 99 cents, music buyers no longer had to purchase a $10 album to get the songs they wanted.
The industry hopes that streaming can reverse the trend. A paid-for subscription typically costs in excess of $100 per year, comfortably more than the $30 per year that defines a good music consumer.
Streaming has also helped to tackle the perennial issue of piracy. But, on the other hand, the ad-supported services have reinforced the notion that people don't have to pay for music.
On a subscription service, a music track needs to be streamed between 25 and 50 times for the rights holder to make the same revenue as a single download. However, on a free ad-supported service, several hundred streams are typically required.
New artists, who do not achieve millions of streams, are likely to receive meagre payments for their work. This led to Thom Yorke, the lead singer of the British band Radiohead, to describe Spotify as "the last desperate fart of a dying corpse".
Apple now appears to be embracing a streaming future, but before his death three years ago Steve Jobs hated the idea of music subscriptions. He believed people wanted to own their music rather than simply rent it.
We are about to find out whether he was right.
For more on the music industry, watch Talking Business with Linda Yueh: bbc.co.uk/talkingbusiness.