Streaming music services saved the radio star

At first glance, the recent annual report from the IFPI, the music trade body, made for grim reading. Global music sales were down 4 per cent in 2013, a depressing slip for an industry that had hoped to put a decade of decline behind it.

But hidden in the report was a possible key to music’s future. Income from streaming services rose 50 per cent to more than $1bn last year, a sign that music fans are moving from digitally downloading music to own in favour of an all-access subscription model.

European music services such as Spotify are leading the innovation charge and record labels are, for the first time in more than a decade, looking to the future with optimism. Subscription music provides a steady and growing revenue stream, instead of a business model built around a cycle of releases by individual artists.

“What the subscription model does is take volatility out of the record business,” says Rob Wells, president of global digital business at Universal Music Group, the world’s largest music company and home to artists ranging from Kanye West to the Rolling Stones. Subscription, he adds, “makes the industry more attractive to investors”.

The picture was a lot less rosy in 2006 when Daniel Ek, Spotify’s founder, was kicking around ideas for a streaming music service. The music market in Ek’s native Sweden had been damaged by piracy and some of the biggest operators of pirated content, such as The Pirate Bay, were based in the country.

Record labels and music services around the world had struggled to absorb the impact of piracy. Sales of CDs had fallen into inexorable decline while digital downloading, from sites such as iTunes, was popular but not growing fast enough to offset the slump.

Ek envisaged a creative solution to beating the pirates at their own game – making music available for free on an ad-supporting streaming service that served to turn its users into longer-term, paying customers.

“From the outset the notion was that to compete with piracy you have to be free [of charge] and when people fall in love with the service you can get them to pay,” says Jonathan Forster, Spotify’s managing director of the Nordics.

The launch of the service in 2008 almost coincided with the launch of Apple’s 3G iPhone model. The two services were tailor-made for each other: in tech-savvy Sweden, Spotify took off like a rocket and now represents more than 70 per cent of the country’s total music revenues; in the UK, it will represent about a third of all music revenues by the end of this year.

Other Nordic countries where Spotify launched have followed a similar trajectory and, as it has rolled out across the world, the expectation is that other markets – including the US – will follow suit in terms of subscription becoming the main way people listen to music. “It’s only a matter of time; it’s an absolute inevitability,” says Wells.

Spotify’s most recent public figures reveal 24m users, of whom more than 6m are paying subscribers. Other streaming services have joined the fray, each catering for a different slice of the market. Wimp, which also hails from Sweden, is a paid-for service that offers streaming music in high-definition quality, for example, while other services have targeted more cost-conscious customers. Beats Music, which recently launched in the US, is targeting listeners who want a more curated, personalised service. The company was started by fabled record producer Jimmy Iovine, and hip-hop legend Dr Dre and has backing from billionaires such as Len Blavatnik and James Packer. “There’s plenty of room for competition,” says Wells. “All of these services are parked in different lanes.”

Powered by the iPhone and a generation of listeners that were using mobile devices, Spotify quickly became the fastest-growing music service. When it launched in the US in 2010 it attracted 1m subscribers in its first 16 months, a milestone that took its rival, Rhapsody, 11 years to reach.

The biggest obstacles it faced were ensuring its technology platform worked smoothly as well as convincing the record labels to do licensing deals. “The licensing was hard,” says Forster. “I don’t think anyone had done it on that scale before.”

Spotify and its rivals are now centre stage in an industry that has undergone a dramatic transformation. As sales of CDs and full albums have declined and the industry has grappled with the transition to a digital downloading model, live music and performances have exploded. For top artists, global tours now represent a larger slice of their earnings than sales of recorded music.

Cities and countries once deemed too remote for touring have now become mainstays on the global circuit for the biggest acts. Thanks to social media, the cost of promoting tours has fallen: concert promoters now rely on the biggest acts telling their fans where and when they will be appearing. Promoters can also plan tours using social media data to identify parts of the world where a particular artist may be popular.

But for recorded music, subscription streaming and the proliferation of mobile devices show the way forward. Mobile networks eager to boost their credibility and reduce customer churn have signed deals with streaming services such as Deezer and Spotify, while Beats Music launched its service in the US on the back of a partnership with AT&T. Spotify, which has several mobile deals in Europe, recently struck its first deal in the US with Sprint, the mobile network controlled by SoftBank.

With new distributors and creative thinking coming into an industry that has had a miserable decade, music has regained some of its swagger. “I firmly believe we can expand even beyond the glory days of the industry,” says Wells. “We can make the music business bigger than it has ever been.”