2014: Year of the Streaming Service?


January 31 marked the Lunar New Year, ushering in the Year of the Horse. It will also be the "Year of the Streaming Service."

As I call it, the "normalization" of streaming will accelerate this year, as the continued proliferation of services drives more and more people to adopt streaming as their preferred method of consuming music. I think in many ways we're talking about a significant change in consumption patterns, and so it has taken time for people to come around to the idea. The marketplace is reaching critical mass and smartphone penetration is driving things. Consumers are increasingly aware of how they can use their phone as an entertainment device and are much more willing to change their behavior. (Spotify's recent change in allowing streaming to mobile devices as part of their free offering is a sign. To make money from their free service, Spotify must serve ads to their users, and all those eyeballs are now looking at mobile devices.)

With January's launch of the Beats Music service and the coming launch of Deezer in the US, as well as the continued evolution of Spotify, Rdio, Pandora, Slacker, iTunes Radio and Google Play, consumers will have more and more choices. Those choices will increase competition amongst all the services, forcing them to continue to innovate, tweaking their offerings to attract and retain customers. Given that customers are now more inclined to adopt a streaming service, they are likely to try several on for size and settle on one they feel satisfies their needs. In turn, those customers will get a big say in which features will become standard (as they vote with their ears and their dollars). This process, coupled with how the services manage their costs, will determine which can become dominate in the space.

All of this means that 2014 will be a pivotal year in the evolution of streaming services.

What Streaming Services Pay Artists Doesn’t Matter. . .Yet.

What do streaming services pay out, anyway?

Everybody is trying to answer this question for every streaming service. I’ve seen articles about the amount that Spotify and Pandora pay out in royalties and how that number breaks down on a per-play basis. Yet for every article that talks about how these services represent growth in a new marketplace, there are articles showing the opposite. I’ve even seen a graph showing data indicating that Spotify’s model is unsustainable.

The conversation about streaming services is everywhere. It reached a fever pitch last Thursday night, with reports that Apple is working to launch a streaming radio service. There must be money in it, right?

I've been reluctant to weigh in on the question of how much streaming services pay artists because of the complexity of the discussion. Each service is experimenting with its model, its pricing, and its offering, and each has different statutory rates to use. All of these variables result in different royalty calculations. Also, because they are licensing content from record companies and music publishers, the payments they make are often not disclosed. Additionally—and to make things even more complicated—regardless of what the label or publisher gets paid, the payment to the artist is still dependent on their individual label or publishing deal. Together, these factors make it nearly impossible to compare services.

I tend to think of streaming services as radio replacements. When you think of them in this way, two truths emerge:

First—regardless of the payout—streaming income represents a step forward for artists. This revenue stream was not previously part of the mix of products and services they could capture. In fact, terrestrial radio stations (like "non-interactive" services) don't pay record companies or recording artists for the recordings they play. Only the songwriters are paid royalties in connection with what is on terrestrial radio. (The reason for this stems from the long-established premise that radio airplay represents “free” advertising that drives record sales, and therefore no statutory rate exists.) Any payment derived from streaming represents a new revenue stream. That’s good news at a time when other revenue streams are shrinking.

Second, when you consider the reach of a radio station in a major market, you get some perspective on the difference between one radio play with an audience of millions versus one person streaming a single song. The reason that radio remains a powerful promotion vehicle is because of that reach, and currently the audience on streaming services just doesn't compare. Therefore, the “low” payments we hear about are simply due to the fact that there aren’t enough plays to generate more income. Despite the inability to compare these numbers, however, as the audience for streaming services increases, so will the revenue, and likewise, the per-stream rate.

My radio analogy might not be entirely accurate, given that some streaming services (Spotify, Deezer, Rdio) are “interactive”, allowing their consumers to choose the songs they want to hear, while others (like and Pandora) are “non-interactive”, playing songs without direct intervention on the part of the customer. (For a good discussion of all of these terms, check out this post.) But this will likely change as well.

As I've discussed before (here and here), I think that Spotify is immensely important. It is transitioning consumers to an access-type subscription model by normalizing the process of streaming for music fans used to buying physical products, while at the same time legitimizing streaming for those who previously pirated music.

How this all plays out remains to be seen, but the proliferation of services demonstrates that startups are experimenting in this space. These companies—and the VCs who fund them—see promise in the model, even if the current situation is not particularly stable. That promise means that the situation will improve, and payments to artists will too.