Subscription streaming a growing source of revenue for music industry

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Consumers are downloading less music and streaming more, but all-you-can-listen-to subscription streaming services aren't yet the clear saviour of the music industry.

Services such as Spotify, Deezer and Rdio helped buoy the otherwise flailing global music industry to flat revenue growth in 2014. Subscription streaming is becoming a "key driver" of the $15-billion (U.S.) industry, according to the International Federation of the Phonographic Industry (IFPI), a chief global music lobby group, which released its annual Digital Music Report Tuesday.

This past year has been one of huge growth for streaming, as YouTube entered the subscription game, the high-fidelity Tidal service launched and was quickly purchased by rap mogul Jay Z, and global streaming leader Spotify gobbled up funding, most recently reaching an $8.4-billion valuation, according to a Wall Street Journal report. Now comes the hard part: getting enough people to pay for these services to make them sustainable platforms and profitable businesses.

It's unclear exactly how or when the adoption of paid streaming services will scale up enough to set the struggling music industry back on a growth trajectory. Most popular services, charging subscribers about $10 a month for access to millions of songs, still struggle to turn profits for themselves after paying out high-cost royalties to rights-holders such as labels and publishers.

And the recording industry is still concerned about free services – in particular, the nebulous licensing world of websites like YouTube – where they're still struggling to wring out what they consider a fair amount of cash for their songs.

"Consumers in the digital age are starting to understand that the Internet is free, but not all great services have to be free," said Edgar Berger, international chairman and chief executive of Sony Music Entertainment Inc., on a Tuesday conference call with reporters.

"But streaming is still in its infancy. We believe there's considerable growth potential."

Total global revenues fell a fraction of a per cent to $14.97-billion last year. That's less than half of the $37-billion industry high in 2000. While downloads helped cut the industry's losses for much of the 21st century, and represent half of the world's digital music revenues, their sales fell 8 per cent in 2014.

Digital music analyst Mark Mulligan says that streaming services' price points and enormous song libraries are partly responsible for cannibalizing download revenue.

"If next year was all about streaming services, new customers and making them spend money they didn't spend before, then yes, you can say, streaming should bring growth back to the market," Mr. Mulligan said.

But at about $10 a month, he's not sure that will happen. Making paying customers out of the roughly 20 per cent of Internet users who still pirate media is like pulling teeth. "We need to have sub-$5 products in the market if we're going to have a large number of users," Mr. Mulligan said.

While cheaper, more limited streaming packages are becoming available, they're not yet widespread.

Tyler Goldman, Deezer's North American chief executive, said in an interview that he doesn't believe the larger barrier to streaming services is price – it's convincing potential customers of their value. He points to Uber and Netflix as examples: "They grew [their respective markets] by creating a better value proposition," he said.

Representatives from other services including Spotify, Rdio and Google Play did not respond to requests for comment.

Anchored by streaming, digital revenues matched physical sales revenues for the first time last year, each accounting for $6.9-billion, or 46 per cent of global income.

Revenues from subscription streaming services rose 39 per cent worldwide to $1.6-billion in 2014, after a 51-per-cent jump the year before. Combining both paid and ad-supported free tiers of services like Spotify, streaming now represents 32 per cent of all digital music revenues worldwide.

An estimated 41 million people paid for streaming services in 2014, versus 28 million the previous year. But streaming is a long way from stable.

Mr. Berger told reporters that he has "no doubt" streaming services will be the "predominant" method to listen to music in the future and will lead the way back to growth for the industry. The artists behind that music, however, have long complained that the services don't pay them enough for their services.

Asked by The Globe and Mail if major labels would consider changing their agreements with artists to revise streaming income structures, Mr. Berger said it's an issue of scale. As streaming grows, he said, "you will discover that this will be diminishing, in terms of comments from the artist side."

According to an IFPI study conducted last year, while record companies' sales revenue fell 17 per cent between 2009 and 2014, artists' share of those revenues rose 13 per cent.

Warner Recorded Music international president Stu Bergen, who was also on the IFPI call Tuesday, echoed his colleague's words: "We're focused on growing the entire music ecosystem, which will provide greater value to our artists."

While many hardcore fans and audiophiles continually herald the return of the vinyl LP, it remains a niche product, accounting for only 2 per cent of recording-industry revenues. When it comes to owning music, young families and pop lovers are the biggest customers.

The soundtrack to Disney's animated film Frozen, anchored by Idina Menzel's earworm Let It Go, was the top-selling album of 2014, at 10 million copies. Taylor Swift's 1989 came in at a distant second, selling 6 million copies, followed by Ed Sheeran's x, at 4.4 million.

Ms. Swift was declared the IFPI's global recording artist of the year, earning the most combined downloads, streams and physical sales of 2014. She is proof that streaming alone will not save the music industry: One of Spotify's biggest critics, Ms. Swift and her fans remain old-school favouring purchases over subscriptions; she has yet to put her goliath 1989 on most streaming services, and her back catalogue is only on some.