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Digital downloads — once seen as the salvation of a music industry ravaged by online piracy and falling CD sales — are in decline, and record labels are worried.
Amid great promise, downloads became the main way to listen to music, but a decade of growth came to a shuddering halt in 2014 and sales are set to fall further in 2015.
Enter streaming, the latest white knight with potential to return the music industry to the good times. A range of companies led by Spotify and including Apple and Google, are betting music fans will migrate to new services that give listeners all the music they want to hear for a fixed monthly price.
Access, not ownership, is the order of the day and Spotify is the operator leading the charge. The Swedish company added 2.5m subscribers at the end of last year and now has 15m paying customers, with 60m people around the world using its services.
Its growth is attracting investor interest. It recently hired Goldman Sachs to raise about $500m, a new round of financing that is expected to value Spotify at as much as $8bn, according to people familiar with the matter.
Spotify’s investors include Sean Parker, the founder of Napster, and Technology Crossover Ventures, the Silicon Valley investment firm that led its most recent fundraising at the end of 2013, when it secured $250m. Record labels Universal Music Group and Sony Music also own shares in Spotify.
It is easy to understand why investors do not want to miss the boat. Consumer behaviour is shifting: global digital downloads of albums slipped 9 per cent in 2014 and sales of individual tracks fell 12 per cent, according to Nielsen Music data. Around the world, demand for streaming services is increasing, rising more than 50 per cent, with 164bn songs streamed in the US alone in 2014.
Despite the growth of streaming, no one in the music industry is yet popping the champagne. Even if it continues on its growth trajectory, streaming will not replace revenue lost by declines in downloading for two or three years. Still, it is a model the record labels love, because it replaces one that depends on hits with one that delivers steady, recurring revenue.
Downloads may be falling, but 2015 still ranks as a pretty good year to be a music label. Technology groups are launching competing music streaming services and are on the lookout for exclusive deals with labels and big acts — anything to give them an edge over their competitors.
One record executive commented: “Think about it: Google, Apple, Spotify and others are all converging on this space. And what do they need? Our music.”
Apple is — unusually, given its size and pedigree in digital music — an underdog in streaming: its iTunes store is the world’s largest music retailer.
The company took steps to change this last year when it paid $3bn for Beats Electronics, the audio group founded by entrepreneur Jimmy Iovine and hip-hop star Dr Dre. The deal gave Apple the Beats brand, which has cachet among young music fans, but will ditch the name when it launches its own subscription streaming product this year.
Due in the summer — the release date has slipped back from the spring — the Apple streaming service has the advantage of a vast installed base of devices. Apple will effectively pre-install the app on new devices, including it on an upgrade of its iOS operating system.
Mr Iovine, who Apple retained after buying Beats, is opposed to having a free tier, which will distinguish the service from Spotify: the Swedish group uses its free service to convert listeners to paying subscribers.
Apple will have to employ other means to attract customers. A lower price point has been mooted, with the company reportedly considering a $7.99 monthly fee in the US, compared with $9.99 for Spotify. It also has the advantage of having hundreds of millions of iTunes customers, existing music fans to whom it can promote and market the streaming service.
The absence of a free tier may also work in its favour. Spotify has in recent months found itself embroiled in a war of words with singer-songwriter Taylor Swift, who pulled her albums from the service to protest against the free level.
“With Beats Music and Rhapsody, you have to pay for a premium package in order to access my albums,” she said in a Time magazine interview, adding. “I think that people should feel that there is a value to what musicians have created, and that’s that.”
Spotify paid four-fifths of its revenues, equivalent to €605m, in royalty and distribution costs to artists in 2013. As more people turn to streaming, that figure should rise. But — as Spotify’s dispute with Taylor Swift shows — streaming remains a nascent business: there may be more bumps in the road for an industry still desperate to return to the halcyon days of high-margin CD sales.