Streaming platforms, which continue to grow as a primary revenue stream for record labels, have successfully disrupted the music industry. Streaming refers to music consumed legally over the internet and cloud with applications that track users listening habits and data. However, these streaming services must overcome a variety of challenges to be sustainable businesses. First, we shall discuss the shortcomings of the top digital streaming platforms; then, we will highlight the trends that position this disruptive industry as a sustainable presence in the music industry.
Challenges facing streaming services
Streaming platforms such as Apple Music, Spotify, Tidal, Tencent, Google, and Amazon are facing similar challenges in a music industry that has struggled transitioning into the digital age. For instance, Spotify is facing a $42 million dollar lawsuit over neglected royalty payments. To make matters worse, these royalties only pay artists a fraction of a penny per stream. These streaming platforms compete with three strategies over the hearts and ears of music fans globally. The first strategy is a free model in which streaming services allow users to listen to music at no cost with advertisements in between each song. The second strategy is a subscription model where users can pay $9.99 a month to access a nearly all-inclusive digital library of music without advertisements. The third strategy is a hybrid of the first two models.
While the free model allows music services to lure users, this is a very financially unsustainable approach the streaming. Most streaming services need to levy a monthly subscription fee in order to offset the costs of data collection, analysis, curation, and royalty payments. Tencent, a Chinese streaming service, found that 80% of their revenue comes from paying customers and 20% of their revenue comes from advertisements. However, right now the majority of their customer base are casual Chinese listeners who “don’t care” what they hear as much as they care about having background music. Their difficulty converting free users to paying users is one of the biggest challenges in the digital streaming economy. Another challenge is the balancing act streaming services must perform when negotiating deals with record labels. If a streaming service negotiates for too big of a cut of the royalties, then the labels may move their catalogs of music to competing services. However, if a streaming service does not negotiate for a big enough cut of the royalties then they may not be able to offset the cost of their service which threatens their financial sustainability and the industry as a whole. Moreover, many music streaming services lack the sense of community that many music fans find from 24/7 live genre-specific music streaming and the live chat boxes that fuel their appeal. Finally, many streaming service face challenges related to how they can help independent musicians, unsigned talent, and up and coming artists who may not be able to afford large marketing campaigns. Despite these challenges, streaming services have capitalized on a few lucrative opportunities through artificial intelligence, data analytics, and targeted advertising.
trends and opportunities
Spotify has recently leveraged “Spotify for Artists”, a hierarchy of playlists, discover weekly, and data analytics to overcome these challenges and compete with services such as Apple Music. Spotify offers star acts targeted email, Facebook, billboard, and Spotify app-placement campaigns that convert 17% of users through advertised links. However, this does not mean that Spotify has neglected the needs of smaller up and coming musicians. Spotify for Artists is an analytics dashboard for artist to view listeners by geography, demographics, and loyalty. Although smaller independent musicians may find it difficult to make a living off of Spotify royalty payments, this analytics dashboard allows them to better monetize their tours, merchandise, and brands. When musicians can see where their fan base is located that allows them to plan tour with more turnout, more revenue, and less risk. Although Apple Music may pay musicians more royalties for streams, they do not allow musicians to view and leverage their consumption data.
Furthermore, Spotify’s hierarchy of playlists allow smaller independent musicians to reach a much wider audience. Unlike pay to play services such as playola, Spotify moves songs along a path of discovery from niche regional playlists into mainstream playlists with massive audiences if the songs perform well. For instance, Frenship’s song “Capsize” moved through the Spotify playlist hierarchy until they reached 180 million streams and received offers from multiple major labels. Finally, Spotify’s Discovery Weekly features 30 auto-selected songs based on consumption data analysis and has helped artists double their fan-base with half of their total views coming from their time featured. With algorithms that crawl music blogs, listening behavior, and the rising tide of buzz Spotify’s data informs playlist curation which in turn provides them even more data.
the fate of streaming services
All in all, streaming services have the potential to overcome their challenges and become a sustainable income stream for the music industry. By utilizing tiered playlists and artificial intelligence, streaming services can help up and coming artists reach new audiences and catapult their careers to new heights. Live chats and social networking combined with listening data can help foster a much needed community around streaming services. Finally, despite notoriously low royalty rates, artists will find that streaming services really pay them in data on their audience which enables them to monetize tours, brand, and merchandising. The only question left is will users be willing to pay subscriptions that keep these services financially sustainable.