The Music Streaming Ecosystem

Music streaming has become a ubiquitous part of our lives- I barely know anyone who doesn’t use Spotify or Pandora, and most of them even have the premium version.

Understanding the dominance of the streaming industry, and surprisingly, the acceptance of this shift by record labels, requires an understanding of how the music industry and its revenue streams have shifted over time.

The Death of the Record Label Era

The record label industry had an incredible amount of leverage over the music industry before the internet era- marketing, production, and distribution were incredibly difficult without the help of a record label with capital behind them (compare that to now, where anyone with a relatively affordable set of equipment can record competitive music and distribute it online organically).

Unfortunately, however, the growing popularity of digital music in the 2000s resulted in year by year sales decreases of around 8%. Napster and other file sharing technologies like LimeWire made piracy of music a growing epidemic. Even when Napster, and later, LimeWire, was shut down, websites like PirateBay remained as an increasingly common source of music. For the average consumer, downloading and sharing portable files was the easy choice over purchasing CDs. This, combined with economic recession in this decade made it necessary for record labels to find a way to turn these trends around, in a thrifty, digital based, consumer environment.

Record label music sales dropped substantially in the 2000s (source: CNN)

The Power of Streaming

This market scenario essentially placed the internet and digital music at the forefront of distribution and monetization for the record label industry. Either they had to work with it, or they were going to continue to hemorrhage their profits. Ultimately, they decided to play the game and embrace this new market evolution.

The licensing of music to streaming services like Spotify that make music readily available and affordable to consumers has allowed record labels and the music industry as a whole to take some control back in how people consume music. Revenue finally started growing again in 2016, with streaming revenue specifically increasing by over 60%.

The Record Label Dynamic

The dynamics have started to shift in more ways than one, however. Because music streaming has become the catalyst for much of the music industry’s revenue, providers like Spotify have the leverage in more ways than one to dictate the terms of their agreements.

  • Streaming platforms now have enough users that they have the strategic leverage to dictate more beneficial revenue shares or record labels risk losing out on all the users on that platform.
  • Playlists on streaming playlists are increasingly influencing what music users listen to. Internally curated playlists can push artist popularity and are can be a necessary force to make a song go mainstream. (These playlists are almost starting to replace radio- stay tuned for a blog post investigating this relationship further).
  • Streaming services are beginning to explore record label style deals directly with artists, and are diversifying their revenue streams in general to avoid being reliant on external actors.
  • Billboard now uses streaming data along with album sales through Nielsen to put together their Top 100 and platinum certifications.

Recently, even Taylor Swift has come back to Spotify for her latest album despite a widely publicized dislike of streaming services and their alleged ripping off of artists.

Swift returned to Spotify as she released singles for her latest album
“ Spotify is simply too large and far too important these days to ignore, no matter what an artist looking to be №1 feels about their financial ethos.”

What’s Next?

This evolving dynamic between record labels and streaming service providers as a whole will dictate the progress of the music industry- will we see another dramatic shift? Will record labels start to offer internally developed streaming/distribution platforms? Or will major streaming providers become the dominant players in an industry that has been dictated by the same entities for the last century?

For a more specific analysis of record label A&R teams have adapted to this new reality, check out our last blog post.

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