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How Spotify might save the music industry Add to ...

Today's music industry can be a gloomy place, full of cranky concert promoters facing more competition than ever, sleek music label executives who've seen their huge bonuses cut as revenue plummets, and musicians bemoaning the illegal distribution of their art. But according to some of the most respected and esteemed minds in this troubled business, the future of music is hopeful, and it's resting on a cloud.

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Imagine: the entire history of recorded music, stored on networks and hard drives across the world that can be streamed directly to portable music players, computers, home stereo systems and even vehicle sound systems. This virtual collection has been dubbed "the cloud." Every song by every artist ever recorded would be available in seconds, and consumers wouldn't worry about downloading digital files, storing music on their own devices or even whether or not they're breaking copyright laws. While this omnipresent cloud is still in its infancy, there's a good possibility this will be how we get most of our music in the near future.

"The bottom line is that no one is going to own anything, everything is going to be streamed, and it will be available anywhere," says Bob Lefsetz, a former entertainment business attorney and author of the infamous music industry-themed Lefsetz Letter. He says it's only a matter of time until most people get their music from the cloud.

"Will [consumers]pay a raw fee? Will they pay in advertising? Whatever they pay, the fee will be low and most people will pay in, and they won't think twice about it."



One new service that has music types buzzing is Spotify (Lefsetz calls it "magic"), a legal music-sharing program developed in Sweden that already has six million registered European users. It uses proprietary peer-to-peer streaming software that allows listeners to hear specific albums or songs with little to no buffering delay, and is paid for either by advertising or an ad-free 9.99 euros ($14 CAD) per month subscription. It also recently launched an iPhone application that allows users to access the service's virtual library of about six million songs and listen offline to a maximum of 3,333 songs. While not presently available in North America, Spotify is negotiating with major American labels in an effort to access the U.S. market.

This burgeoning demand for cloud-based music has a lot to do with the increasingly high expectations of listeners, says Steve Pratt, director of CBC Radio 3 . The station, which pioneered one of the earliest podcasts in 2006, launched its reworked website three weeks ago. On Radio 3's streaming-based audio player, listeners can hear music based on artist, genre, program or playlists that have been created by the site's members.

"I think there is definitely demand from consumers to get what they want, both where and when they want it, and if we have connectivity, this is an awesome way to provide that," says Mr. Pratt. "Having everything streaming and on-demand coming from the cloud, rather than having to download files up and down, is the easiest way to do it."

Plus, streaming of music from the cloud could be one of the missing puzzle pieces for which the music industry has been so desperately searching. If consumers don't need to download files to listen to music, there's the prospect that the appeal of getting pirated files from peer-to-peer networks will decrease. By changing the business model and format of how we listen to music, media companies are hoping they can stop their bleeding revenues.

Last year, users obtained an estimated 95 per cent of music files, or about 40 billion tracks, through file-sharing, reports the International Federation of the Phonographic Industry. But there have been recent reports that piracy is declining, and it's been widely speculated that this is at least partially due to the popularity of streaming services such as Spotify. According to a survey of 1,000 self-described "music fans" by British media and technology research agency The Leading Question , the percentage of people who obtained their music through file-sharing at least once a month dropped by nearly a quarter, from 22 per cent to 17 per cent between two national surveys conducted December 2007 and January 2009. The number of file-sharing teens between the ages of 14 and 18 plummeted from 42 per cent to 26 per cent over that same period.

The prospect that streaming audio could take a bite out of online piracy is very alluring to big music companies, says Raj John, a principal at the Boston branch of Cambridge Strategic Management Group, a communications and media consultancy whose clients include major music labels and wireless providers. In their spring 2009 report "Digital Music Moves to the Cloud," he concluded that as music libraries are increasingly stored online, "consumers will have fewer incentives to illegally download digital music files to their own hard drives." But that doesn't mean the music industry has the capability to transform away from its old business model overnight.

"The problem is that these bigger players have certain values established, in distribution, in marketing, in customer control that's very different than what exists today. The transition that we're going to see is not seamless; it's going to have a lot of pain," says Mr. John. "It's also going to make them test and play in a field they're not used to, but we think this is a transition that will be necessary to compete in the future."

That's not to say that streaming is the silver bullet that's going to save the industry, he adds, but that it will probably be one part of a very diverse and complicated business model that is adapted to consumer demand. Plus, while the music industry vigorously pursues the cloud model, Mr. John says he's sure it's only a matter of time until books, video games, television and movies are also distributed the same way. In that sense, change is the only constant everyone agrees on when it comes to the future of music distribution.

"Tech is a story of evolution," concludes one of Mr. Lefstz's letters. "If you think CDs are perfect, that physical will still rule, then you're reading this on an…original IBM PC. But you're not. You've seen the advantages of the future. And it's so bright, we've got to wear shades!"

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