How streaming will change the music industry
Streaming is organically increasing. When I first wrote The Music Industry, an infinite journey way back in early 2014 I concluded the study with the chapter titled The Future, which determined how the industry would be by 2020. One section in that article covered Streaming vs Downloads, the War is open. In fact, for most people it was still unclear that streaming was going to take over from downloads – let alone physical sales. Half-way between 2014 and 2020, there is no doubt anymore about streaming dominating the industry. Plenty of questions remain though.
We are used to stating raw facts, but it is rare that we understand their meaning. Streaming took over from downloads and tons of publications mentioned it, ok. So what? If a $15 billion industry moves from one format to another should we assume that this change of format is the only real novelty? The truth is obviously much different. There are many impacts, direct or indirect. Your favorite artist may start to flop while they were successful before, and that would have nothing to do with him being urban or not. Albums won’t be released at the same date anymore. Albums won’t be in the same format anymore. We aren’t even sure if there will be albums anymore. Your country may not matter soon or, quite possibly become relevant. Marketers won’t promote artists in the same way and they won’t promote the same artists either. You won’t give the same Christmas present to your mother. Your mother will likely start to know of the artists you listen to. Yes, the impact with the arrival of streaming is that deep.
First, it is changing the industry itself, completely redistributing the cards of the game between various markets. Second, it will require from its actors, both the labels and the artists, to fully revamp their way of working. Third, it will change your way of acting.
It is time to precisely detail all the ongoing and upcoming changes. Here is the beginning of 3 articles that will tell you exactly how the market, its actors and yourself, will evolve in the near future due to the enthronement of streaming consumption.
This first article covers the industry point of view. A lot of things have been said about streaming. People quickly started to rant against it saying platforms weren’t paying artists enough, or that it was an another much hyped fad. At some point, it was truly demonized by some – hi, Miss Swift – although now you won’t hear someone complain about it anymore. So at the end of the day, now that we have more indicators to fully understand its impact, is streaming a good or bad thing for the music industry? How is the business reacting? How will it go during the next few years? What will it change for each country? When streaming reaches its full potential will the industry be effectively dead, or will there be Thriller-esque albums released at a fast pace?
Market figures analysis
Pictures taken from the IFPI GMR of 2017, page 11
In order to be accurate please keep in mind that the IFPI hasn’t adjusted its figures to account for inflation. Also, early figures were the direct gross of physical units sold, without factoring in performance rights. In the late 90s / early 00s, the figure to keep in mind is a market of roughly $38 billion in today’s dollar value.
I have often praised streaming and said the market has a chance of returning to its all-time peak worth of $38 billion by 2025. The figure above suggests the market remained around $15 billion, give or take a billion, every year from 2009 to 2016. Should we expect it to remain this way? Absolutely not. While the figures seem flat, the market is fundamentally different now from the one in 2014.
How so? Back in 2014, the evolutions were the same as today. The physical market was tumbling, downloads had started their free fall and streams were booming. The difference is that streams accounted for less than 15% of the total business by 2014, so even 50% increases from that sector weren’t enough to afford for 20% losses on avenues that represented 70% of the market. By 2016, streams were already up to 29,5% of the global market and growing faster than ever posting a tremendous 60,4% increase. Since its share is much bigger now its growth impacts far more on the overall total, which resulted in a 5,9% increase in 2016.
But this trend is far from being over. The more it continues, the more streaming’s share of the pie will be large, and the more its increase will fuel the overall total. The below table lists all five fragments of the music industry revenues in billions of dollars as well as their percentage of change in 2016.
What happens when we apply the same percentage of evolution for each avenue in the upcoming years?
You can now understand why artists no longer whine anymore about streaming and why no insider is worried about Spotify running at a loss for now. While the creation of iTunes was like opening a Pandora’s box, streaming is the Ali Baba’s cave of the music industry.
Obviously, one may wonder if streaming will really continue booming like this. I always insist that every figure has a meaning. You can’t just expect a market to keep growing incredibly well over your previous performances for no reason. Downloads too were increasing like crazy at first and we know what happened there. Will it be a déjà vu moment or a real success story?
Fundamentals of growth
The Anti-Piracy weapon
As much as we glorified our good old LPs and CDs or even MP3s, the media has always been the nemesis of the music industry. It was absolutely essential – no media, no party. Indeed, for more than a century, the industry faced ups and downs depending on the availability of record players and the switches from one to another. At the same time, the sole existence of this media opened the door to piracy. Recording a song from the radio onto a cassette, burning a CD or copying a digital file was easy.
The consequence is that the music industry always relied on the honesty of its consumers as well as on the presence of needed infrastructures from the copyright protection laws to the retailers, in all countries. If one piece was missing, there was no official medias sold. That’s why more than half of the world’s countries have always been absent from the IFPI’s listings.
This limitation has been capping the market for decades. The easier it was to copy media, the lower the industry has been. Burning a CD was arguably less casual than recording a cassette, so the market exploded during the 90s. Copying a file is as easy as it gets so the digital years were harsh.
Legal downloads by themselves were the best ally of piracy. One person buys and infinite number of people can copy. On its side, streaming is the best anti-piracy weapon. You can register for free, legally, and gain access to millions of songs. As there is no media but instead software, there is indeed no possible piracy, plus the piracy itself is fairly useless given the software provides a far superior service to copying material, and all with no limitations whatsoever. If the market is less capped than before, then there is no reason to limit our expectations for the upcoming years.
Room for improvement
Speaking about the software, one question remains, what about the required equipment? How will people from poor areas log onto internet to access their music? While there is still a way to go before getting legal streaming services everywhere, the late propagation of smartphones in various areas is precisely what’s securing room for increase to streaming. When iTunes’ popularity was increasing massively from 2004 to 2009, the internet was being propagated into everyone’s house in developed countries. Once most inhabitants had a connection iTunes hit a ceiling. Paying for individual songs in countries not use to buying music was out of reach too. Thus they were left with no room for improvement.
As streaming can bring in money even from free users the opportunities are much bigger. Even before getting there, the increase of internet data limits from mobile subscriptions and the development of the 4G networks will continue to push streaming strongly for several more years in the richest countries. There are still billions of people expected to be new smartphone users within the next 5 years. Also, current IFPI numbers include millions of users of streaming services that have been using a free trial, including at Apple Music and TIDAL. We know that as per user behaviors a large chunk of them will turn into paid users.
2017 mid-year figures for the US market prove the increases are far from reaching their limit. The market is up an insane 17% fueled by a growth of 48,1% by the streaming segment. The situation is similar in the UK with an increase of 11,8% thanks to the streaming’s rise of 53,2%.
If markets that were arguably the healthiest in the world are increasing so well one may wonder how markets heavily damaged by piracy in the past are evolving…
Breaking new boundaries
As soon as the question “can someone beat Michael Jackson‘s Thriller?” comes out somewhere, you will get at least one person saying that if it happens that will be thanks to sales in China. In reality, China, just like India, has sold low amounts for decades due to a heavy amount of piracy. International blockbusters sold under half a million units there and even the very top selling local albums remained under the 5 million threshold. (BTW, do not believe the fanciful claims of albums having sold 20 million units in Mexico, in China, 8 million in Nigeria or 55 million in India, as shown currently on Wikipedia).
This chaotic situation from heavily populated countries has always been pretty frustrating for the industry. Guess what? Streaming is once again the answer. The immense number of smartphone users, including 700 million from China alone, is incredibly promising for the future of streaming as the country is currently adopting the format. This figure was expected to be reached by 2020 only a mere 3 years ago. By then, I had already claimed China would likely jump into the Top 5 music markets by 2020. It has climbed from 21 to 19 to 14 to 12 already, with a massive 20,3% increase in 2016. Expect the country to continue to skyrocket in upcoming years with 96% of its revenues coming from digital avenues only.
Is China the only case of this kind? No. India too is booming. The market increased 26,2% last year after 3 years of drops in excess of 10%. Mexico is also coming strong with a 23,6% jump. Brazil will soon follow. Both countries lead all the relevant markets in terms of smartphone usage for music purposes at 91% and 85% respectively. While for now their potential is still limited by their extensive usage of YouTube, it is only a matter of time before this situation is sorted as audio streaming is rapidly increasing in those nations as well.
With all these elements put together, it seems clear that streaming still has plenty of room to improve in both already developed markets and newly embracing countries. Obviously, the sector can’t post +60% increase every year, but let’s be frank, even if we suggest it will slow down year after year, increasing +50%, +40%, +30%, etc. and then stabilize at +10%, it is only a matter of time before it becomes more than twice as big as today as shown in the figures below. All the numbers are in billions of dollars.
A step in the future – Ed Sheeran’s success in 5 years
Ok, streaming is here to stay and the industry as a whole will become much bigger. While that’s clear, this remains kind of conceptual as if the industry is worth $15 billion or $35 billion it doesn’t change much for you and me. It does change a lot of things for artists we support though. With this new information about streaming, we get back to our classic question, can someone realistically top the results of the album Thriller, or at least come close?
Let’s use as an example the most successful album of the year, Ed Sheeran‘s Divide. I’ll completely ignore its 4 million-ish pure album sales as we saw on the previous page that the $7,5 billion revenues coming from physical sales and downloads will reduce to $3 billion by 2025, with drops in units even sharper than in gross. In any case, pure album sales will soon be a niche market and as such not relevant to gauge the success of an album.
As of today, Divide has amassed the total of 4,494,371,294 streams on Spotify. Extrapolating it to all platforms with our CSPC formula, this represents 7,218,232,684 audio streams. With the now standard 1 album = 1,500 streams equivalence, that’s worth 4,812,155 albums. The LP is everything except done though. It keeps registering over 10 million streams per day with Perfect and Shape of You currently topping 5 million combined on Spotify alone. With Perfect still growing, all the year end lists that will put Shape of You on top and with all awards ceremonies during the first quarter of 2018, the album will continue to be very strong for 6 more months, realistically hitting 6 billion Spotify streams by then. In other words, by the end of its promotional campaign, Divide will be on roughly 6,5 million equivalent album sales from audio streams alone.
We saw that the streaming avenue was going to be worth over $7 billion this year, in 2017. By 2022, even if streaming increases more slowly than now, we calculated they could be worth as much as $26 billion. If an album performs exactly the same as Divide did this year but in 5 years time, it should be able to record some 26 million equivalent album sales from streams in a 13 month time frame. This sounds like a lot? Of course it does, but Ed Sheeran‘s success is massive, and if the industry goes back to market figures similar to those from the 90s, there is no reason why the top seller will sell less than what 90s’ blockbusters used to sell. Obviously, as sustaining the growth of streaming for many years will require markets from countries like China and India to be far more developed, an artist who aims to score those figures will need to be really global. That’s fine enough, one needs to achieve extraordinary feats to join the all-time top sellers.
If you have been following the music industry in recent years, during this truly dark era, be ready to be happy as the future is more promising than ever before.
As usual, feel free to comment and / or ask a question.
Sources: IFPI, BPI, RIAA, newzoo