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To Stream or Not To Stream

03-05-2012  |  By: Ben Edmonds |  (0) Post comment »  |  Read comments »

As the popularity of legal music streaming services such as Pandora and Spotify continues to rise, the effect that these services will have on the industry’s bottom-line has become a topic of hot debate.  Given that 2011 was the first year since 2004 that the industry reported positive album sales growth, opponents of the services fear the services will cannibalize future sales, leading to a repeat of the revenue declines which followed the explosion of peer-to-peer file sharing in the early years of the new millennium.   Supporters, on the other hand, point to these services as a unique and separate revenue stream for the industry - one that will complement record sales.  The arguments both for and against are too many to be covered here, however, this post will serve to provide a general overview of the issues at hand.

Opponents of the services point to the micro-penny per-stream royalty payments that the services offer as clear evidence that they do not bode well for the financial health of the industry.  It has been reported that Spotify pays record labels approximately $0.0033 (⅓ of a penny) per stream, while a single track download on iTunes will net the record company approximately $0.70 (seventy cents). 

The services (of which Spotify is the most vocal) and their supporters argue that this is like comparing apples to oranges, and to a degree, they are correct.  The iTunes model is based on ownership, while the Spotify model - and those of similar companies - is based on access.  The Spotify user does not own the song: they cannot download the song to their computer or transfer it to their Mp3 player, although users who subscribe to the mobile service do have the ability to cache songs on their mobile device (though the cached songs will be deleted as soon as the user stops subscribing to the service).  Still, the difference in revenue generated is difficult to ignore.

 That said, the streaming services tout the fact that when a person purchases a track download from iTunes, they pay once, and can listen to the song as many times as they like without any further payment.  If the same person listens to the same song on Spotify 1,000 times, Spotify pays the rights holder for 1,000 streams.   

Industry analysts have estimated that 95% of all music downloaded online is obtained through illegal channels.  Streaming services offer users a safe and cheap (often free) way to listen to music legally, which, the services claim, gives the industry an opportunity to monetize a potentially huge market of consumers who previously obtained some, or all, of their online music through illegal channels.    

Currently, some groups such as Coldplay and The Black Keys are withholding their new release albums from Spotify either for a period of time following the release (a strategy referred to as “windowing”) or keeping them off completely.  Rights holders are trying to dictate the terms under which their music will be consumed and how they will be compensated, which is entirely their right; however, the streaming services are gradually becoming a force to reckon with (Spotify reportedly amassed 4 million subscribers in the US within four months of its launch in 2011).  It is too early to tell what the overall effect these streaming services will have on the music industry; however, if the new digital era has taught us anything, it is that artists, labels and publishers alike are well served in finding ways to embrace and exploit new technologies to their advantage, rather than standing still as the technology overtakes them.