The music industry is changing, not on the surface but structurally. Age old tradition of music companies buying music and dominating is gradually and subsequently withering away.
I was recently listening to The Wave by Colouring on my Spotify premium when I started thinking of how the technology and music along has changed in these years. Spotify, a music streaming service company along with Apple music had a 45.5% growth in their global revenue in 2017. This will surprise (somewhat) you all but streaming music online has now become the music industry’s single biggest revenue source.
In this blog, I will be specifically talking about Spotify, which is one of the biggest companies in this industry and will thus represent the whole business. Streaming is not a fancy word but just means paid subscriptions to services (in this context music). Streaming also includes video streaming, radio broadcast and so on and so forth but regarding this content, I will be talking about music streaming only.
According to our research, the new user adoption rate for streaming is currently 1 million new subscribers services per month and data suggests it will grow multifold in the coming years. The digital download revenues and physical purchases are down by digit percentages suggesting consumer’s move towards online streaming. What I am thinking is why to bore you by throwing these facts on you? Instead, let me just tell you how these music streaming service companies make money.
Generally, what we have seen is that these companies have two sources from which they make money.
Business Model
- First, a free version of the app wherein you, the listener can actually listen to music but get interrupted with ads.
- Second, the premium version which will give you lot of advantages like downloading music, uninterrupted ad free experience ust by paying a fee. Now this flat fee is paid by subscribers on monthly basis.
The second version is where the things get a little complicated. Now according to our research, Spotify doesn’t pay royalty on a per song stream basis, but it estimates that approximately it pays out $0.0072 per song to the artists ($0.006 to $0.0084, taken average) and a user is US pays $10 for the monthly subscription.
Now a user to fully take the complete value off her subscription she has to listen to $10/$0.0072= 1388 streams per month. Now assuming each track is around 4 minutes long, that is 4*1388= 5555 minutes or approximately 92 hours of listening music per month!!
This doesn’t seem believable, but the people who actually listen to more than 92 hours of music, will be the customers wherein the company will actually lose money. This situation can be compensated by people who will listen to less music overall.
These music streaming service companies will only make money if the number of premium subscribers just listen to that many songs (in this case 1388). This analysis also brings to the fact that latest songs’ length being lesser as artists will take more royalties home if the users will listen their songs a greater number of times.
Money Generated
As you all must have guessed, music lovers actually go to Spotify for their passion, so they might be listening to good amount of music. According to 2017 financial filings, the company suffered a net operating loss of $460 million. This is mainly attributed largely to royalty payments (although revenue is rising). Accordingly, on 2nd May 2018, Spotify had a market cap of $30 Billion in the market.
Disclaimer: This is just an exclusive brief of Music Streaming series.