The Business of Music Streaming

April 26, 2020
Editor(s): Justin Lai
Writer(s): Marian Gobeaux, Matthew William, Annie Zhu

The music industry has changed drastically in recent years with the rise and growth of music streaming platforms. These services have recorded a combined $8.8 billion in revenue, a rise of 19.9% in revenue from last year (RIAA). The market is dominated by firms such as Spotify with 124 million paid subscribers (Statista) followed by Apple music with 50 million paid subscribers during 2019 (Midia). Additionally, Amazon music also has a substantial number of subscribers with 55 million in total.

However, the current market of music streaming platforms offers little differentiation in both content and pricing. Amazon music has tried to take advantage of this and differentiated itself from its rivals by aiming at different types of audiences. Just recently, the firm has worked on proposing a more varied menu of streaming services with a cheaper package of prices for less committed consumers (Ingham). But newer companies have noticed the “oligopolistic type” dominance from well established companies and are looking elsewhere to hunt new subscribers instead of just conforming to the usual music subscription model. For example, Tidal, currently owned by Jay-Z has marketed itself as a “high-def, exclusive content and lossless audio” music streaming service dedicated to give customers a more “refined music experience”. Additionally, TikTok, developed by Bytedance is a video-sharing app that is primarily used to create short comedy skits and music videos has taken the world by storm with over 1 billion downloads globally.

As such, there is no doubt that music streaming is a “hot, lucrative” business model, one where many start-ups, developers, companies, labels and artists are trying to enter and get a hold of. But it isn’t always going to be successful as evidenced by the current COVID-19 pandemic, extreme competition and “razor-thin profit margins”. So, we are going to analyse the history, business and financials behind the music industry to better understand the “power and influence” it really has.  

Back in 2018, one of the major market players in the music streaming industry, Spotify, floated its shares in April. The IPO was a major success, with a closing price of $149.6. This price was 12% higher than the initial offering price at $132 (Statt, 2018). Spotify took a risky approach, namely direct listing. This method is less expensive as it allows Spotify to sell shares directly to the public without intermediaries, that is, they did not have the usual support from financial institutions like investment banks (Deahl, 2018). However, the risk paid off and Spotify to raise a staggering US$26.5B backed by huge consumer and investor confidence. In 2019, Spotify reported a total revenue of $7.44 Billion, an increase of 29% compared to 2018. Moreover, Spotify addressed that the service now has 124 million paid subscribers, compared to only 96 million at the end of 2018. With the extreme popularity of podcasts, the music streaming giant also reported a 200% of year-on-year podcast hours streamed (Fielding, 2020).

However, Spotify Technology (SPOT) posted a much larger loss than forecast. It lost the equivalent of $1.26 a share on sales of $2.05 billion. For the first quarter, Spotify guided to an operating loss of $99 million on revenue of $2 billion. Wall Street was looking for revenue of $2.1 billion (Seitz, 2020). During the COVID-19 pandemic, one might assume that the streaming numbers increases. Contrary to popular belief according to an analytics provider, streams in the US dropped by 7.6% during the first week of self-quarantine (Martin, 2020). The reason is simply that more people would listen to the news than music and the lack of social gatherings would have decreased the need for music streaming too. Therefore, Spotify has taken a considerable measure for artists that are affected directly from the COVID-19. Spotify has released a Music Relief initiative for artists affected by the coronavirus pandemic, which ‘recommends verified organizations that offer financial relief to those in the music community most in need around the world’ (Guttridge-Hewitt, 2020). Spotify has also forged partnerships with some organizations such as MusiCares, PRS Foundation and Help Musicians to further assist in the cause.

Music streaming services generate a hefty amount of profit for the music industry, but it does not necessarily reflect the same correlation for music artists on these platforms. Generally, artists are paid music royalties that vary across platforms and are dependent on influential factors such as the listeners’ country and type of subscription and specific artist’s royalty (“How much do music streaming services pay musicians in 2020,” 2020). Popular streaming services have varying royalty rates due to their payment systems and this can be approximately calculated. For example, Apple Music which does not have a free tier is substantially higher at $0.00783 compared to Spotify paying $0.00437. Other platforms like YouTube offer $0.000069 per view, Amazon Music pays $0.00402 per stream and the highest per stream payout is $0.019 from Napster. 

The rise of streaming services is exemplified if we look at the streaming revenue of top artists such as Drake, who received his recognition prior to the rise of music streaming through signing to Young Money Entertainment in 2009 and initially releasing music the “old way”.  To put into perspective, Drake has made over 115 million dollars in payout just from Spotify and Apple music, where his music was streamed a total of 23 billion times, equating to an average of $0.005 per stream (Ingham, 2018).  Other artists like Billie Eilish (who grew up in a family of musicians) gained her way to top charts through the debut of “Ocean Eyes” on Soundcloud, a music streaming platform. Eilish’s music in 2019 was streamed nearly 5 billion times just in the United States (Watson, 2020). 

As well-established and new famous artists contribute to the rise of music streaming and make a substantial amount of money, what does this market really look like for upcoming artists entering? As exponential growth continues for music subscriptions, naturally these platforms become a pitching ground where 150, 000 artists are featured, and 22,000 songs are uploaded every day (Mellish,2020). With these statistics, each song is like a tree in a forest, which makes it harder for people to discover. In an attempt to overcome this issue, streaming platforms offer direct routes to listeners that enhances the degree of exposure to each song. Currently, upcoming artists themselves can utilise other social media platforms to market their release and coverage. To showcase the association between two social media platforms, a trending video sharing app called TikTok has demonstrated a significant link. TikTok is mainly populated with viral dances, comedic acts and “memes” that feature background music; showing that popular background music in TikTok sequentially follows with an appearance in the top 50 charts of Spotify.

With the recent pandemic, COVID-19 has been a major reason for the cancellation and banning of concerts and music award ceremonies, hence many artists are seeking virtual alternatives of streaming their performances.  In essence, 2020 is currently the peak of music streaming however this cannot be rectified for the following years as a paradigm of activities have shifted to a technological form.

Cover Image from https://pitchfork.com/features/article/9896-is-the-era-of-free-streaming-music-coming-to-an-end/


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The CAINZ Digest is published by CAINZ, a student society affiliated with the Faculty of Business at the University of Melbourne. Opinions published are not necessarily those of the publishers, printers or editors. CAINZ and the University of Melbourne do not accept any responsibility for the accuracy of information contained in the publication.

Meet our authors:

Justin Lai
Marian Gobeaux

As an exchange student from Sciences Po, I want to interact with the vibrant business community during my time in Melbourne. I am passionate of Political Economy and Economic diplomacy issues and have a strong interest in developing my Financial Markets analysis skills. On my personal time I enjoy  playing some good Sevens Rugby, discussing belgian beers as well as enjoying classical music and live art performances.

Matthew William
Annie Zhu