Why the Music Industry is Making a Comeback
The music industry is expected to double its revenues by 2030. Wait wait wait. You’ve been hearing for last decade that the music industry was a dying giant though, right? How are they supposed to double their revenues with internet piracy, musicians that make next to nothing, and fewer CDs sold than a twenty years ago? I mean supply and demand should dictate that when more people start producing music, consumers will pay less for it. Interestingly, a new analysis by Goldman Sachs says that that is not the case. Here’s how and why.
Streaming services are the answer to the revenue question. If you’re in college, there’s a good chance that you already subscribe to the likes of Spotify or YouTube Red. These services take a catalog of music and give you access to every artist they have access to. These companies charge you a monthly fee, but in exchange for that fee, you don’t have to listen to ads and you pretty much get your pick of whatever songs you’d like to listen to (Except for maybe Taylor Swift and Chance the Rapper). This music consumption strategy is pretty popular with millennials. There are a few reasons for this; for one thing, the entire generation is digitally native.
Generation Z is really the target market for these services. Millennials and those that came after are more comfortable using technology to satisfy needs and wants. They are much more comfortable paying $10 a month for a service like Spotify than committing to only a single CD for the same price. This generation tends to consume many more songs, and whether that is because they use streaming services that allow for the consumption of those songs is up for debate. This is one reason that many streaming companies have launched student discounts. Another important thing about students and the younger generations is that they are a very sticky consumer, meaning that once they are paying for your streaming service, they are likely to continue to do so. That is great for subscriber companies because they are able to maintain a reliable revenue stream.
The culmination of connectivity and the drive for convenience has helped to fan the flames of the music industry too. Cellular communication and wireless technologies are achieving an efficiency and cost never before seen. This means that we now have the ability to stream music whereas before, we did not. Companies are jumping into this space left and right because of how attractive it’s becoming. Amazon, Apple, SoundCloud, Tidal, and Google have all recognized the potential of the industry, and are now focused on leveraging profits from it through streaming services of their own. An interesting competitor stands out among many of these companies though. Spotify is one of the few streaming services that is not attached to any parent company. This could be a problem for Spotify because the companies that they are up against maintaining profit streams where music is only a drop in the bucket compared to the rest of the business. Compounding the problem is the fact that Spotify still hasn’t turned a profit, even with revenue streams of just under $2 billion dollars. The big reason for the losses are the increasing royalties that Spotify pays artists. The company is still growing though, and any venture capitalist will tell you that you have to lose money to make money sometimes.
All of this is more encouraging for the industry, as many have thought it was on the way down. This is because piracy and illegitimate streaming services ate away at the value of music for about 15 years. During that period, revenues fell, and for good reason. Apple was doing great work with their iTunes platform, but the platform was really made valuable by the iPod, not necessarily the music. This meant that music became very cheap, and since there were a great number of artists and only one consumer (Apple), the buyer power decimated the profits that some argue artists are entitled to.
For a little perspective, streaming services tend to keep a little over a quarter of the revenue they bring in. That sounds a lot better than what most people think. Apple pays out even more to artists though.
The problem is that consumers have so many options to choose from, it’s hard to get any large number of listens for a song you produce. For instance, it’s very easy to get at least one listen, but very hard to get over 100. This has made streaming a very high margin business. Regular listeners prefer YouTube to other services as well. This is probably due to the free, albeit ad-laden experience, that Google provides to their consumers. The problem with this is that ad revenues are not always the most reliable source of income, so maybe it’s time for a little diversification.
Either way, the outlook for the music industry is looking better than it had in previous years. Some tailwinds include increasing technology across developing markets, more options for users to choose from, better sorting algorithms that allow users to find new and interesting artists, and a business model that is making it even cheaper for consumers to listen to music. It is still easy to make the case that this is still hurting artists though. Many view Spotify and YouTube more as discovery engines where they can lure paying customers to their own personal websites in hopes of CD or single sales. There is a slim chance that with increasing revenues, all boats will rise with the tide, and artists will again make more money from their hard work, but you’re not going to find me grabbing a guitar and a mic anytime soon. You wouldn’t want to hear me sing anyway.
McDonald, Heather. 2016. Get Paid in Your Music Career. August 16. https://www.thebalance.com/get-paid-in-your-music-career-2460878.
Nicolaou, Anna. 2017. How Streaming Saved the Music Industry . January 16. https://www.ft.com/content/cd99b95e-d8ba-11e6-944b-e7eb37a6aa8e.
Yang, Lisa. 2016. Technology Driving Innovation. December. http://www.goldmansachs.com/our-thinking/pages/music-in-the-air.html?mediaIndex=1&autoPlay=true&cid=PS_01_75_07_00_01_16_01&mkwid=Lh4ZhFG8.