The Beginning of Digital Piracy
Over recent years in the music industry, there has been a distinct transfer from physical to digital products as consumer attitudes and technology has driven a “free mentality concept.” Digital piracy has become commonplace, enabled by high-speed broadband, peer-to-peer networks and the availability of large storage media at an increasingly lower cost. The consequences of this have been serious for the music industry, as profits from record and album sales fell through the floor and the trend of illegally downloading music grew.
This trend dates back as far as 1999 when Sean Parker and John Fanning founded Napster. The initial success of Napster was down to the company having a finger on the pulse of what consumers wanted, allowing both their user base and music library to grow rapidly. Record companies reacted extremely aggressively to Napster which eventually led to it being shut down.
However, this was not the end of the battle for the record industry. Apple with their iTunes platform and the iPod were the first technology firm to enter the space, by ensuring they worked with record companies to bridge the gap between free, illegally downloaded music and having consumers pay for it. In a few short years, there had been a significant drop-off in end costs to those consumers of music.
The Growth of SBMS
Subscription-based music services quickly emerged as the fastest growing music option as labels have become more inclined to release their music to these companies. There has been a rapid growth in the number of subscribers to these streaming services in recent years, with the trend predicted to continue right through to 2020. This has led to the first profitable year for the music industry in a decade, with a sales having descended to a low-point of $14 billion in 2014.
The Popularity of Spotify
Spotify was founded in Sweden in 2006 by Daniel Eck and Martin Lorentzon. Over the years, Spotify has grown its library to over 30 million songs on 2 billion playlists in over 60 countries. By securing deals with music label giants Universal and Sony and more recently Warner Music, Spotify have cemented themselves as the dominant player in the market. These deals have allowed them to expand their music library, enabling a growth in their paying subscriber base from 20 million in 2015, to over 70 million in 2018.
“There are millions of people who consume music illegally every month. Just getting them into a legal service will make the music way bigger than it’s ever been before” – Daniel Elk
Based on this, it’s surprising to learn that Spotify continues to post heavy annual losses. The licensing agreements with labels come at a significant price, with the firm paying out 70% of their cash flow to labels and artists in the shape of royalties.
Despite the lack of profitability in the sector to-date, much has been made of the emergence of Spotify and their success. Recently, there has been a scrambling by larger tech firms to move into this space, with three of the top tech giants recently launching or planning to launch operations in the industry in the near future. Apple Music, at last count, has 38 million paying subscribers, just over half that of Spotify. Amazon with their Prime Music and Music Unlimited are well positioned, as is Google with their upcoming Youtube premium streaming service.
Moving forward, there appear to be only two options for these companies to generate some sort of profit within the current streaming business model, either payouts to record labels need to decrease or consumers need to pay more. Either way, the future of the industry is starting to look very interesting.
ianguerin 