From sales to streaming

By Tom Watling

In 2001, the Global Music Report estimated that the music industry generated revenue of $23.6 billion. The following year, Napster launched its stable release and the industry lost 40% of its revenue in the succeeding 15 years: it’s worst decline of all time. Fast forward to 2016 and the digital streaming revenues account for over 50% of the $15.7 billion total generated revenue. This is also the first time, since Napster, that there have been two years of revenue growth.

So, this begs the question: Are online streaming services killing the music industry, or are they about to save it?

Sean Parker founded Napster in 1999 with the idea of creating a platform upon which users could share digital audio files encoded in MP3 format. Whilst it was revolutionary, it violated every rule of licensing and ownership yet to be put into legislative form. It set in motion the slow decline of physical format sales and demanded the emergence of online streaming services capable of compensating the rightful record owners for the sharing of their property. This came in the form of Spotify in October 2008.

Whilst iTunes had been in full effect prior to the launch of Spotify, it did not have the potential to correct the problem caused by Napster. Thus, in 2008, Spotify created the idea of having a multi-tier streaming service capable of catering to the needs of those that would pay for their music, in the form of a monthly payment, and those that would not, in the form of an ad-supported platform. This idea grew with rapid speed and the current market boasts a plethora of streaming services, all of which have over 1 million subscribers, and video-hosting services, such as YouTube and VEVO, which generate billions of views annually.

However, many artists saw Spotify as an experiment with potentially catastrophic consequences and sought to withhold or withdraw their music from Spotify and other platforms. Taylor Swift is the most obvious example of this, who, in November 2014, following the release of her album entitled 1989, removed all her material from Spotify. Her reasoning behind it was explained by her discoverer and CEO of Big Machine Records, Scott Borchetta: “If [a] fan purchased the record…and then their friends go, ‘Why did you pay for it? It’s free on Spotify,’ we’re being completely disrespectful to that superfan,”

Borchetta and Swift did not want to conform to an experiment that seemed to them to be nothing but a glorified version of Napster capable only of compounding the problem of disproportionate compensation. However, in the years succeeding Swift’s decision in 2014, the success of the streaming services proved revolutionary for the industry, showing itself as far more valuable than previously realised.

The saving grace, unforeseen by many, came in the form of the paid subscription platform, commonly known as Spotify Premium. This idea consisted of subscribers paying a monthly fee of £10.00 in return for over 30 million songs. Spotify’s rights to the distribution and secondary ownership of this music was actualised through the payment of royalty fees to the record labels, which currently exists at 58% of revenue generated by the relevant musician, although this fee will be cut to 52% by the end of next year.

This goes some way to explaining why Goldman Sachs Research predicts, in a research note called ‘Music in the air,’ that streaming services could be the cause of a second digital revolution and help music revenues reach a staggering $104 billion by 2030.

So, are online streaming services killing the music industry, or are they about to save it? In short, the streaming services are hurting the music industry, it’s just not the services one might suspect. The disparity in royalty fees, compounded by the contrasting disparity in users/views, serves to show that whilst music streaming services, such as Spotify, are struggling to turn over a profit, sites such as YouTube disproportionately take from the music industry. Until sufficient copyright laws are passed by the European Commission, sites such as YouTube will act as an anticatalyst to the growth of the music industry. Only in addressing this the industry can finally offset the 40% revenue decline of the 15 successive years after Napster.

Photograph: Wiennat Mongkulmann via Flickr and Creative Commons

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