Chapter Fourteen Music Streaming Recording Star Taylor Swift Shook the Industry by Demanding Better Royalty Treatment from Streaming Service Apple Music
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Chapter Fourteen Music Streaming Recording star Taylor Swift shook the industry by demanding better royalty treatment from streaming service Apple Music. Photo by Kevin Mazur/Getty Images. “I love YouTube, but I think it is underpaying and getting away with it.” —Singer-songwriter Nelly Furtado Reshaping the Landscape Few developments in recent decades rival the rise of audio streaming for impact on the music industry. Although surprising for its speed of adoption, streaming’s displacement of analog and digital antecedents can be explained as addressing user desires. The reason is simple: convenience has always been a key driver for the mass market. Even in the heyday of the record business of the 20th century, most hours of music consumption were spent listening to a broadcast signal— not by juggling a relatively small number of tapes or discs in a treasured collection of purchased objects. One way of looking at the somewhat passive medium of streaming, then, is that it is the natural successor to radio in an interactive, digital age. Early in the 21st century booming revenue from Pandora, Spotify, Tidal, and other streamers emerged as the best hope for returning prosperity to the financially battered music business. According to the trade group Recording Industry Association of America (RIAA), streaming swelled from just 7% of U.S. label recorded music revenue in 2010 to 65% by 2017. (See Figure 14.1.) The monthly subscription revenue model is the big revenue-driver, offering an all-you-can-eat proposition to consumers for one price. Music streaming also comes in a “free” mode, supported by advertising that is less profitable for both streamers and the content creators. Streaming is a medium that doesn’t get a lot of love from key players in music’s ecosystem. That’s because on a revenue-per-play basis, streaming is far less lucrative than downloads and sales of physical recordings (discussed in the economics section later in this chapter). The music industry executives and talent particularly dislike advertising-supported streaming—the free option—believing it generates inadequate compensation and devalues music in the eyes of the consumers when they pay nothing. Of course, in the 20th century industry executives also grumbled about radio’s economics, but at least in those days rights holders enjoyed the symbiosis of radio acting as a big promotional boost for the profitable sales of physical product. In short, streaming rearranged the recorded music landscape. Record companies and terrestrial broadcast radio arguably were the platform players of earlier generations, while today digital streaming services are key pillars. Based on their economic heft and brand strength, arguably the streaming companies are more important to the business now than any other category of corporate players. Figure 14.1 Digital Streaming Percentage of U.S. Recorded Music Revenue Source: Recording Industry Association of America (RIAA) Note: Recorded music industry revenue from online on-demand streaming, online noninteractive streams, and satellite radio. Streaming Technology Streaming parses and compresses content that is then transmitted independently in digital pieces—called packets—to receiver devices. On the receiving end, the packets are rearranged to deliver an uninterrupted flow of content. When packets don’t arrive in time or aren’t processed quickly, streams freeze until the data flow catches up, at which time playback resumes. Quality is not the highest, either, given that streaming files are typically compressed for better transmission flow and not permanently stored on the consumer’s device (with a few exceptions explained in a moment). Digital compression degrades audio fidelity, but that’s a trade-off for smoother delivery (so download-to-own alternatives deliver fatter files that generally offer higher audio quality). Another characteristic of digital streams is that they are difficult for consumers to share or duplicate. Satellite digital radio uses an audio streaming methodology as well but is not the focus here. In rare cases a limited amount of streamed music is actually stored on consumer devices for playback with premium subscriptions when subscribers don’t have Internet connections available. These are sometimes referred to as conditional or tethered downloads offered with pay streaming (not the free ad-supported types), but they disappear once a subscription ceases. To achieve smooth and high-quality streams, media players and apps are used, particularly on mobile phones and other devices with limited computing power. Besides boosting audio playback characteristics, the media players and apps improve navigation so users can more easily access and optimize playback of content. Streamers engineer their services to work on hundreds of different devices such as computers, cell phones, tablets, automobile media systems, smart TV sets, and wireless speaker systems. Most playback is on mobile devices. For example, Pandora reports that 88% of listening by its users in 2017 was on mobile devices. A Crowded Marketplace: Audio and Video Streaming emerged as the Third Age of the nonphysical digital music revolution. The first was a vast outbreak of piracy misappropriating copyrighted music, particularly the launch of notorious file-sharing service Napster in 1999 (a respectable streamer today uses that same name because of its cachet with consumers). The second act was legitimate commerce for digital music downloads with Apple’s successful iTunes store in 2003 as the landmark. We’re now well into the age of streaming, which kicked off in earnest a few years after iTunes emerged. Streaming today is dynamic in that it has quickly evolved in new directions and comes in several flavors that offer real choice to consumers, as illustrated in Table 14.1. Let’s look at those various flavors. One level of choice is on-demand music streaming, which is interactive and permits listeners to individually select titles. The on-demand streams are offered on a pay subscription basis, or free but with advertising. The free-with-advertising alternatives usually have a reduced pool of available music, caps on the ability to skip songs, and other limits on users’ functionality. The music streamers try to entice their free customers to upgrade to pay. Subscription on-demand streamers like Spotify offer a larger selection of music, superior navigation, and better functionality with their premium offers compared to their free on-demand product. Another type of streaming is noninteractive, where music is served up blindly (users can’t select specific tunes), but the flow of music fits a user-directed genre. It’s somewhat like conventional radio in that users create their own individual radio-like stations to deliver formats such as rock, rap, or country music. Such noninteractive services can be free or pay to consumers (if pay, then at a lower price than on-demand interactive services). Such noninteractive streaming emphasizes music discovery, a polite way of saying reduced consumer choice. In some instances, listeners actively set up personalized audio channels, and in other instances the streaming service uses proprietary algorithms to present music that it calculates will fit each individual subscriber’s tastes. Algorithms are mathematical shortcuts that either predict or influence behavior. Consumers seem to favor interactive on-demand, prompting the leading radio-like streamer Pandora to introduce an interactive on-demand Pandora Plus in 2017, despite higher rights costs and higher costs for consumer subscriptions. Streamers push the notion that they are expert at tailoring music delivery to individual tastes. Some services highlight that human music curators fashion playlists, and the services promote these tastemakers to cultivate personal followings among users. “From the moment users open the Spotify application, we serve them a personalized homepage with content that reflects our understanding of their music tastes, listening habits, musical moods, and daily activities,” says a 2018 Spotify disclosure filing. Table 14.1 Selected Music Streaming Services Table 14.1 Selected Music Streaming Services Users Audio Year Name Description Globally Tracks* Background Launched (millions) (millions) Integrates with Apple ecosystem including On-demand iTunes, Siri, interactive etc. Apple only, after Offers both 50 45 2014 Music free on-demand introductory and radio-like streaming. period Dates to 2014 purchase of Beats for $3 billion. Prime Music free with sales club membership. Amazon Paid upgrade Music Unlimited Unlimited On-demand provides more 20 n/a 2008 and Prime interactive music. Music Integrates with Amazon’s consumer electronics ecosystem such as Echo. Partners with audio speaker makers to launch U.S. service in 2014. On-demand Warner interactive Deezer and also 16 53 2007 Music’s limited free controlling option shareholder owns big stake. Focuses heavily on international. Terrestrial broadcaster launches with On-demand radio-like interactive iHeart streaming. and also n/a n/a 2011 Adds its All Radio radio-like Access on- streaming demand interactive in 2016. Renames in 2016 after On-demand predecessor interactive Rhapsody Napster and pay 4 30 2001 acquires radio-like Napster. streaming RealNetworks owns 42% stake. Acquires streamer Rdio in 2015. Adds on- demand Pioneering Pandora Plus pay radio- service in like 2017. Pandora streamer 72 30 2005 Satellite adds on- radio’s demand SiriusXM interactive buys Pandora in two transactions beginning