Why the Music Industry’s Streaming Co-Dependency Could Become More Contentious

Co-authored by Sarah Ghostine

Once considered taboo merely two decades ago, music streaming has replaced album sales as the pre-eminent measuring stick of success for the industry. So much so that artists as disparate as Taylor Swift to Def Leppard and AC/DC that have long eschewed streaming sites have relented to market pressures and made their music available online.

Record labels still own music content and specifically the ability to market and distribute an artist’s music on a larger scale. However, services such as Spotify are leveraging data collected over time to help labels promote artists with better targeting capabilities than traditional terrestrial radio broadcasters — making each ad dollar spent to promote more efficient. This will be an interesting dynamic to watch over time, specifically whether this co-dependent relationship between labels and streaming services will remain mutually harmonious or if issues arise that make the alliance more fractious.

Spotify is the streaming leader in the music industry. Spotify has 75 million paid global subscribers and 170 million global monthly active users (including those on its ad-supported platform). In terms of subscriber scale, the company seems comparable to Netflix — if not in paid users, then in reach. Spotify’s paid user base is roughly double that of its next biggest competitor, Apple Music. Netflix similarly stands out as a giant relative to peers in the Internet TV landscape.

However, music content can’t really be differentiated since most streaming players have access to the same catalog of music controlled largely by the big three music distributors (Sony, Warner, and Universal). Spotify has smartly built a competitive advantage by investing heavily in its technological capabilities and enhancing the personalized experience. So when a subscriber builds a profile, Spotify is matching its library of 35 million tracks with consumer preferences to create an endless stream of music perfectly tailored to each of its users’ individual preferences.

Exclusive content is very different for music. Apple Music continues to use exclusive windowing with popular artists as a way to generate subscriber growth and scale. However, industry participants are realizing such a strategy is less effective. It could be to artists’ economic detriment to exclude potential users and fans from access to new tracks, as streaming becomes the majority.

One example is the aforementioned Taylor Swift, who in 2014 pulled her catalog off of Spotify stating that artists weren’t properly being compensated for their work. However, this was also a time when digital album and track sales still represented a bulk of industry revenues. It wasn’t until 2017 when streaming was the dominating medium of consumption that Swift added her albums back to Spotify’s library.

Notably, subscription streaming services accounted for roughly 65% of industry revenues in 2017, up from just 27% in 2014. During the same time period physical and digital music sales have compressed by 46%.

Conclusion

Optically, streaming players are saving the music industry at least for now. But there is also a potential for further disruption. As streaming services become an even larger share of music industry revenues, will the current “mutually beneficial” relationship between labels (content creation) and streaming services (content circulation) erode and become more contentious? The two are dependent on each other — streaming services on the labels for the music catalogs and the labels on the streaming services for revenue growth through their growing scale and subscriber reach. However, there is a potential for Spotify to gain more of the “power” over time as it amasses more subscribers.

In the same way that Netflix has moved away from third party licensing towards heavy investment in original content, Spotify could sign and develop their own artists, circumventing record labels and significantly reducing the overwhelming royalty payments. In the near-term, this does not seem viable given the scale required to run and the intricate nature of a record label. Additionally, considering the big three’s content represents a significant share of the service’s streams, Spotify could see a counterattack from the labels who could respond by demanding royalty payment increases, terminating the licensing agreements or even creating a shared streaming platform among the three of them.