Who will win the streaming wars?

They have made piracy unfashionable and are adding customers fast — but for music-streaming giants the real battle starts now

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Last Monday, Eddy Cue, Apple’s senior vice president of internet services, stood before a crowd of software developers in San Francisco to reveal Apple Music, the company’s new music-streaming service. Wearing an untucked, unflattering salmon-coloured shirt that brought to mind a divorced dad at a nightclub, Cue walked through the platform’s features — $9.99 a month subscriptions, 30m songs, voice-activated commands — while occasionally pausing for interludes of dance. Several musical celebrities made appearances, including Beats co-founder Jimmy Iovine, Nine Inch Nails’ Trent Reznor, and the Canadian rapper Drake. The event closed with the premiere of an original song by the R&B artist The Weeknd.

The reaction from the crowd was muted. It had not been a great presentation. Cue’s stiff moves were cringeworthy; Drake stumbled through his lines, and seemed a little confused; The Weeknd looked bored, although he always does. The worst part was the product. Apple Music offers no compelling advantage over existing services in the space.

The copycat economics of the industry dictate the terms. Like all music-streaming services, Apple Music charges $9.99 a month. Like all music-streaming services, Apple Music offers around 30m songs — the overwhelming majority of humanity’s creative output from the last 50 years. And, like all music-streaming services, Apple Music pays out around 70 per cent of its revenue as royalties to rightsholders.

This business model was pioneered by Spotify, which, with 20m paying subscribers, remains the market leader. Over the past five years, the company’s applications have largely supplanted iTunes on the desktop and the smartphone. You weren’t mistaken if you sensed a hint of desperation at the product launch; Apple needs a win. Still, the company currently has over 800m registered iTunes accounts. If Apple can get just 3 per cent of its iTunes customers to purchase follow-on subscriptions to Apple Music, it will surpass Spotify as the largest streaming platform. And many people find Spotify’s interface confusing, which may encourage switching.

Why so much interest? The music-streaming market is growing rapidly. More than 40m people currently pay to subscribe to a music-streaming service, and this number is increasing by 50 per cent each year. Outstanding questions about low royalty payments to artists persist, but for the customer, at least, the value proposition is obvious—for $120 a year, you get everything. Streaming services are pricey, but once you’ve subscribed to one, you know there’s no going back. Of the original subscribers to Spotify’s first premium offering in 2010, 70 per cent were still enrolled after four years.

Spotify

During the first decade of this century it was possible to believe that the recording industry might disappear completely. Advances in peer-to-peer technology, coupled with sophisticated audio compression technology, permitted average users to reproduce files easily, and share them with millions. The Napster generation seemed unconcerned with ethical issues of infringement, or the prerogatives of copyright holders.

Enter Spotify. Launched in Sweden, in 2008, during the peak of the Pirate Bay frenzy, the company’s mission statement was to get consumers to pay for music again. Its initial product was free, supported by advertising, and targeted at the exact demographic most likely to steal. The service proved popular, and when the company introduced its paid subscription tier two years later, more than 2m users signed up.

Sweden, where Spotify has been active the longest, presents a model of what a mature streaming music economy can look like. Streaming services account for 79 per cent of the country’s music sales last year, and payouts to labels have been substantial. Practically alone in the developing world, Sweden’s recording industry saw significant growth in 2014.

That growth comes from a low base; Sweden’s music business is still half the size it was in 2000. And only about a quarter of Spotify users actually subscribe; they account for three-quarters of the company’s revenue. The rest are basically freeloaders, and the advertising sold against their attention provides laughably small compensation to the musicians.

Spotify insists it needs this “freemium” tier of users. Most of the platform’s subscribers started out there, then switched to subscription when they got tired of the ads. Once this switch is made, subscribers almost never switch back, but to accomodate its ad-supported tier, Spotify pays some of the lowest per-stream royalty rates in the industry.

The company’s biggest accomplishment, however, cannot be denied: it has made piracy unfashionable. BitTorrent traffic, which once comprised a third of all data transferred on the internet, now counts for less than 5 per cent. Polling services find that only 20 per cent of respondents will admit to pirating media in 2015, down from around 50 per cent at the start of the decade. Compared to the elegance of streaming, downloading an illegal mp3 and syncing it across numerous devices is cumbersome.

Other problems remain. In 2014, 50 per cent of global music industry revenues still came from the compact disc — not a sustainable source of money. The vinyl revival is fun, but accounts for less than 2 per cent of sales. Digital downloads are starting to decline, with many blaming Spotify for cannibalising sales. Spotify’s representatives counter that digital sales are decreasing even in markets where the service is not available. They pin the shrinkage on another culprit: YouTube.

YouTube

YouTube was originally conceived as a democratic experiment in crowdsourced content. Today, it acts more like the world’s jukebox. Twenty-nine of the 30 most-viewed clips on the site are professionally produced music videos, led by “Gangnam Style.” (The sole holdout from the amateur days is “Charlie Bit My Finger.”) YouTube counts more than a billion users, and is thought to be the single-most popular method for accessing music.

The site has taken care to ensure that this access is legal. YouTube’s automated Content ID system screens every uploaded video for copyright-infringing material. If infringement is found, the rightsholder has the option to monetise the video by selling ads against it. This isn’t limited to professional recordings — remixes, amateur covers, and even home videos scored with unlicensed music are all monetisable. Artists can earn passive, automatic income without even negotiating.

But within the recording industry there is much grumbling about YouTube. Its videos are currently supported exclusively by advertisers — meaning its payout rates are by far the worst. A video with a thousand views on YouTube will generate, on average, about one dollar in royalties. After the labels, distributors, and managers take their cuts, musicians get paid in pennies.

Google, YouTube’s parent company, is aware of this problem. Since November, the company has been beta-testing its Music Key service, which will move YouTube to a two-tiered model that resembles Spotify’s. For $9.99 a month, users will get unlimited access to the standard library of 30m songs, plus the ability to remove advertising from all YouTube videos. Of all the services, Music Key has done the most to differentiate itself; a bundled subscription to YouTube music videos has significant value on its own. But synchronising all this content is difficult, and Google recently postponed the service’s public launch to September.

The longer it takes to get Music Key ready, the more complaints Google can expect to hear. Musicians, understandably, are growing tired of these economics — a nine-dollar cheque from one of the world’s most profitable tech companies feels less like compensation and more like an insult. If they can’t figure out a solution quickly, they may face a revolt.

Bad Revenues

“34,000,000 streams Income After tax = £1700,” Portishead’s Geoff Barrow tweeted in April of this year. “Thank U @apple @Youtube @Spotify especially @UMG_News for selling our music so cheaply.” Take Barrow at his word, and he’s netting about five one-thousandths of a penny per stream. Of course, this is after his label, his manager, his agent, his lawyer, his producers, his two bandmates and the taxman all take their cuts, but it’s still no way to earn a living.

Many artists have similar gripes. “I think there should be an inherent value placed on art,” said Taylor Swift, after pulling her entire catalog from Spotify last year in advance of the release of her album 1989. Radiohead’s Thom Yorke also pulled his music, calling streaming “the last desperate fart of a dying corpse.” On his website, the Talking Heads’ David Byrne wondered if streaming services weren’t treating musicians like an overharvested resource. “Many industries have depleted the resources they depend on,” he wrote. “It’s not like it hasn’t happened before.”

Others are taking a proactive approach. In March of this year, Jay-Z introduced his new music-streaming service Tidal, which promised to pay artists and composers the highest royalties in the business. At the elaborate and supremely odd product launch, the rapper made a show of gifting equity stakes in the service to some of the world’s most famous musicians, including his best friend Kanye West, his wife Beyoncé, and his android companions Daft Punk.

Tidal was an immediate target for ridicule. The platform’s high-fidelity streaming tier was double the price of competing services, and no one wanted it. Indeed, given the option, many users prefer low fidelity — they don’t want to exceed the mobile data caps on their phones. Jay-Z pivoted, and began emphasising exclusive content. In theory, this approach could work; a new album from Daft Punk, solely available on Tidal, would certainly attract business. But most musicians’ contracts forbid the release of such exclusives, and even when they don’t, the pressure to block them can be immense.

In December of 2013, Beyoncé released her surprise, self-titled album exclusively through iTunes, with every song accompanied by a music video. The move was fêted by the press, but, behind the scenes, she’d had to overcome the objections of Doug Morris, Sony Music’s chief executive. Morris feared—correctly—that an exclusive release of this type would anger powerful distributors like Amazon, Wal-Mart and Target. This wouldn’t just affect Beyoncé, but all the music on his labels. And the music majors, operating from a weakened position, can’t afford to rankle the retailers.

Worse, exclusives weaken the services themselves. The appeal of Spotify is that it offers 95 per cent of all the music you’d ever want to hear. If the music-streaming platforms start bidding wars for exclusive streaming rights, this number will drop, say to 90, or even 85 per cent. Market fragmentation like this is dangerous. Convincing people to subscribe to one service is hard enough — no one wants to subscribe to two.

And exclusives may carry less power than executives assume. Back in 2013, Spotify chief executive Daniel Ek announced, with evident satisfaction, that he had signed arena-rock legends Led Zeppelin to an exclusive streaming contract. After eighteen months on the service, “Stairway to Heaven” had just 24m streams; by comparison, Wiz Khalifa’s hit song “See You Again”, released in March of this year, has over 200m. In February, Ek quietly let the Zeppelin deal expire.

These kids today

The real problem might be that Spotify users don’t even know who Led Zeppelin is. In a blog post a few months back, Daniel Ek revealed that more than half of his subscribers are under the age of 27. This is the Napster generation, who grew up paying nothing to get everything. Now, they’re opting in to a corporate music library for $120 a year. The average iTunes account generates about a tenth of that.

Musicians should pay attention. With the exception of Taylor Swift, most of the streaming refuseniks are past their creative peaks. Geoff Barrow is 43. Thom Yorke is 46. David Byrne is 63. Their continued commercial viability as musicians will rely more on monetising older songs than releasing new ones.

Perhaps Barrow should even be grateful. Portishead are a good band, but not a prolific one: the group has released just three full-length albums in 21 years, the last one seven years ago. Their biggest hit on Spotify, with 11m streams, is “Roads,” an album cut from 1994 that was never released as a single. A 1998 live performance of the same song on YouTube has 21m views, making it by far the band’s most-watched video.

Yet Portishead continues to tour, to enthusiastic crowds — in 2013, they headlined a stage at Glastonbury. Would this cult popularity be possible without the internet? Could Portishead still sell concert tickets for $35 two decades after their debut if you couldn’t preview the band’s best material online for free? Every stream is a victory in the war against obscurity, and, although YouTube’s pay is terrible, Portishead can’t afford not to be on it.

The Prize

Drake (right) and Eddy Cue

A few hours before the launch of Eddy Cue’s Party Machine, the AP reported that the long-term goal for Apple Music was 100m paying subscribers. Spotify’s long-term goal is a more modest 40m. If both companies can hit these numbers, they’ll clear more than $16bn in annual revenue, with $11bn of that going to royalty payments to rightsholders. That compares favourably to $15bn, the total size of the recording industry today.

Someday, maybe. For now though, winning means losing, and Spotify, the market leader, is losing the most—nearly $200m last year, according to public filings. Even YouTube, with its billion users, struggles to break even. And the market is crowded. Wade into its second tier, and you’ll find a raft of unfamiliar names — Xbox Music, Rdio, Deezer, Slacker, Rhapsody — all offering the exact same access to the exact same songs at the exact same price.

Spotify must look vulnerable. Certainly there are risks. Its unintuitive interface is a disgrace to contemporary principles of design. Artists may continue to defect from the platform, perhaps lured by big-money deals from other services. Apple and Google control 96 per cent of the smartphone OS market and have a combined $100bn in cash to spend. But the tech press focuses more on new products than old ones, and this has caused them to miss a big story: Spotify just won the first round.

Apple, Google and Tidal aren’t actually launching their music-streaming platforms — they’re re-launching them. All three companies have already tried, and failed, to meaningfully compete. Beats Electronics launched its music service in January 2014; Apple purchased the company in August, valuing Beats Music at $500m. By December, Beats secured just 300,000 subscribers. It will now be shut down, and its users will be grandfathered into Apple Music. Google launched its music-streaming service — clunkily termed Google Play Music All Access — in November of 2011. It too, has struggled, and will likely be combined with YouTube’s Music Key. Tidal originally launched its high-fidelity streaming service in October of 2014, to almost complete consumer indifference. Jay-Z bought the company in January of this year, then re-introduced it to the world with his press conference in March.

In their scramble for market share, well-funded corporations are running large losses to provide users with exactly what they desire, while paying artists a pittance. From the consumers’ perspective, this is terrific, better even than the heyday of online piracy. But the situation is unsustainable, and eventually the technologists, the record labels, and perhaps even the musicians will have to get paid. What that future state looks like is anyone’s guess, but for now the streaming services have managed to get young people, including many serial pirates, to pay for music once again. That, on its own, is an extraordinary accomplishment.

Stephen Witt is the author of ‘How Music Got Free’, published by Bodley Head on June 18

Photographs: Charlie Bibby; New York Times/Eyevine

This article has been updated since publication to amend the date when Apple acquired Beats Electronics


Letter in response to this article:

As with vinyl records, so now with the CD / From Brian Pizzala

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