A host of new, subscription-based music streaming services are entering the Canadian market, but a central question remains unanswered: Does the industry actually make money?
"It's a great question," says Greg Nisbet, CEO of Canadian music-streaming technology provider MediaZoic. "And I don't think the market has answered it yet."
By one estimate, from the International Federation of the Phonographic Industry, streaming music revenue jumped about 50 per cent last year, while digital music downloads dropped 2 per cent. That shift in consumer preference has attracted the attention of the biggest names in technology, including Google Inc. and Apple Inc.
Now, after largely ignoring the country for years, many of those services are starting to come to Canada. Most recently, Spotify, one of the Internet's biggest streaming music services, launched an invitation-only preview of its Canadian site, with plans to open it up to all users soon. Spotify joins a growing list of companies that have also launched Canadian streaming music sites, such as Songza and Google (which purchased Songza in June).
Spotify allows users to build playlists populated from its database of some 20 million songs. Users can also listen to specialty playlists based on certain themes or genres. A free version of the service features banner ads. A premium service has no ads but costs $10 a month.
Unlike some other streaming music sites, Spotify allows all users, including those who don't pay for the premium product, to play songs as often as they'd like – most Internet radio stations, as part of licensing deals with music providers, give users only limited control of what individual songs they can listen to by, for example, allowing users to skip past only a pre-set number of songs .
The Canadian marketplace likely became a little more alluring for streaming music services earlier this year, after the Copyright Board of Canada issued a decision providing some clarity on the royalty rate that such services should pay for the use of recordings. Under the ruling, issued in May, streaming services would have to pay about 10.2 cents in royalties for every 1,000 plays. The rate is substantially lower than the rate of between $1 and $2.30 that some members of the Canadian music industry had called for. At the time, the streaming service Pandora, not currently available in Canada, called the decision encouraging.
A Spotify spokesperson would not comment on the extent to which the new royalty scheme influenced the company's decision to come to Canada, or when the service will open its doors to all users in the country.
"[Spotify's] goal is to make sure all Canadian music fans receive the best possible experience with comprehensive local content and great local music curation."
For the past few years, users have been flocking to sites such as Spotify by the millions. The user growth in the streaming music industry has been so great that the biggest names in tech have taken notice. In addition to Google's recent purchase of Songza, Apple paid $3-billion for Beats Electronics – getting the Beats digital music service in the process.
But as with social media and other technology sectors, user growth doesn't always immediately translate into profit. For streaming music sites, the central profit equation revolves around the difference between how much the services generate in ad clicks and subscription fees, versus how much they have to pay in royalties.
"The reason I spent 2 1/2 years negotiating a licensing deal was because I didn't think the off-the-shelf deal was viable for our business," Mr. Nisbet said. "I think the subscription model is really challenging."
That's in part why many streaming music companies are opting for alternative business models. MediaZoic, for example, focuses instead on offering turnkey streaming radio solutions for individuals and retail outlets, among other customers – taking care of the technology and licensing issues, and charging customers a monthly fee determined in part by how many listeners those customers have.
Spotify has also explored more business-focused approaches, in part, by launching a division aimed at providing commercial music licences for businesses looking to play music in their stores.
Even if the traditional subscription model ultimately fails to yield sizable profit, the technology industry has seen no shortage of startups whose valuation – and acquisition by bigger players – was dictated largely on the size of their audience, rather than their profitability.
"The big guys are saying yes, something about this is viable," Mr. Nisbet said.