Stuart Dredge 

Music streams are up and downloads are down. Why is that a surprise?

37m people will pay to stream by the end of 2014 but analyst Mark Mulligan sees more potential. By Stuart Dredge
  
  

Spotify is growing, but it's not the only streaming service affecting download sales.
Spotify is growing, but it’s not the only streaming service affecting download sales. Photograph: DADO RUVIC/REUTERS Photograph: DADO RUVIC/REUTERS

Streaming music is cannibalising download sales. It’s a phrase anyone connected with the music industry is hearing a lot about in 2014.

It’s a technological shift causing a lot of panicked flapping about, from an industry that counts “panicked flapping about at technological shifts” as one of its core skills.

It shouldn’t be this much of a shock: the idea of an eventual transition from downloads to streams – and from ownership of music to access to it – has been talked about since the early days of legal download stores.

What’s causing the flapping in 2014 is the current pace of the transition, as big music markets – the US especially – have been taken by surprise with how quickly download sales appear to have peaked, then tipped into decline.

Many musicians are worried that royalties from streams of their songs won’t make up for falling sales in their CDs and downloads. Meanwhile, some music executives who see the rise of streaming as inevitable are fretting at losing control of the transition.

They see that rising streaming income may make up for falling downloads income, but fear it’s not quite ready to balance out that plus the ongoing decline in CD sales. And they also worry about whether they can persuade enough people to pay for streaming music, rather than getting it for free.

This is why the “streaming music is cannibalising download sales” debate is much more complex than just “Spotify up, iTunes down”. And it’s also why a trend that’s been predicted for nearly a decade is causing shock now that it’s actually happening.

Someone who’s been tracking these questions through those years is Mark Mulligan, initially as an analyst at Jupiter Research, and more recently from his own Midia Research company, where he’s worked as a consultant to labels, telecommunications companies and music startups.

His latest report, co-authored with Alun Simpson, is The Streaming Effect: Assessing the Impact of Streaming Music Behaviour, which tries to get to the bottom of the transition from sales to streams.

Ownership to access

The report claims that by the end of 2014, 37m people around the world will be paying for streaming music, while 210m will be listening for free on advertising-supported services.

It also warns that 45% of people who buy downloads are now also streaming music, and that so far, only 15% of free music streamers have signed up for a trial of a paid service. And Mulligan has views on why the current transition is shocking people, despite having been talked about for a decade.

“Anything that requires consumers to adopt new technology always takes a while to happen. It’s very easy to over-estimate the near-term impact of a new technology, and under-estimate the long-term impact. We’re somewhere between those two points with music,” he says.

“Every new generation of music service steals from the last generation’s customers. Apple stole Amazon’s best CD buyers, and Spotify has now stolen those same customers from Apple – or at least the same sorts of people.”

Mulligan thinks that because only Apple really made a success of selling music downloads, that market is still weighted towards more tech-savvy early adopters: the kind of people who were also first to realise that paying £9.99 a month for unlimited access to something like Spotify was a good deal.

“You’re seeing the most valuable music customers, who were happily buying bucketloads of downloads from iTunes, now finding they can get even more value by spending £9.99 a month,” he says, adding that for these people “downloads were always a transition technology”.

Cheaper subscriptions

Mulligan thinks there are two levers that can be pulled to make digital music more successful: the first is how many people are prepared to pay for music, and the second is what price they’re prepared to pay for it, and how the music industry meets that demand.

On the first of those, he’s blunt about the challenges. “Five years ago, we were talking about peer-to-peer piracy, and now we’re talking about YouTube. Free music is ubiquitously available, and there will always be more of a preponderance of people not paying,” he says.

“It doesn’t matter how easy you make it for people to pay, however much more you pack into the paid offering, there will still be a majority of people who will not pay because they do not need to.”

He suggests that £9.99-a-month subscription services like Spotify, which has convinced 25% of its 40m active users to pay, are “pretty much as good as you can get” for this conversion rate.

Mulligan cites research from British industry body the BPI, which suggested that the top 10% of music buyers in the UK spend an average of £10 a month on music. “That 10% translates to around 5% of the total population, which is roundabout where subscription music services are now,” he says.

“Spotify and its rivals have done a great job reaching those people, but the price thing is absolutely crucial to go further: we need to be in a position where there are £4-£5 price points much more.”

MusicQubed – one of Mulligan’s clients – which is trying a £1-a-week service based on the UK’s top 40 singles chart. He wants to see more companies trying cheaper but more focused streaming services, to capture more mainstream music fans.

“It’s the only way you can do it: the only way labels are going to go near anything at that price. They are terrified of cannibalising the top table, and stealing a load of Spotify customers,” he says. “We need more in the way of mid-market pricing, but the US and UK digital guys at the major labels are the ones that are most cautious and have most to lose.”

Part two: What’s next for Apple, Spotify, YouTube and artists

 

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