Taylor Swift right to shake off Spotify: Why music streaming services are bad economics

Joe Hall
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Taylor Swift
Taylor Swift argued the growth streaming "has been shrinking the numbers of paid album sales". (Source: Getty)

Did Taylor Swift make the right call when she withdrew her music from Spotify? A new report on the profitability of the music streaming industry suggests she was.

Strategy Analytics, a technology advisory and consultancy firm, argues that despite the music streaming industry’s rapid growth, it will continue to struggle to provide adequate royalty payments to artists.

The debate over how much artists benefit from streaming services such as Spotify or Pandora was ignited last year when American singer Taylor Swift withdrew her entire back catalogue from Spotify.

Swift argued that the service negatively affected actual album sales. She told Time magazine that “everybody's complaining about how music sales are shrinking, but nobody's changing the way they're doing things.

“They keep running towards streaming, which is, for the most part, what has been shrinking the numbers of paid album sales.”

According to Leika Kawasaki, digital media analyst and author of Strategy Analytics report, she has a point. Kawasaki accuses the growth of the streaming industry as the driving factor in the decline of overall music industry revenues.

Kawasaki said:

Technology is evolving and changing the way consumers discover, listen to, share, and interact with music, but it is also a significant factor in the decline of music industry revenues.

Many artists feel they are under compensated by streaming services, but as currently structured the underlying economics won’t support higher royalty payments by these services, particularly for free ad-supported services.

As a result, we may never see the same levels of spending on music as we did a decade ago.

The report adds that while Spotify achieved significant growth in revenue in 2014, monthly revenue per user has actually declined for both subscription and advertising. It states: “Pandora and Spotify’s content acquisition costs increase in parallel with subscriber growth, preventing them from getting ahead of the cost curve.”

Recent figures revealed that Spotify has 50m active users, 12.5m of whom are paying subscribers.

The digital music industry continues to grow, and shows no sign of slowing down as more technology companies develop streaming services.

YouTube is set to launch its own streaming service this year, while Apple is expected to introduce the Beats streaming programme onto all iOS devices.

Music industry revenue 2014 |Create infographics

Yet although digital music revenue rose 14 per cent in 2014, overall global recorded music revenue declined one per cent from $22.8bn to $22.5bn as “digital growth failed to offset losses in packaged music revenues”.

Digital music accounted for almost half of all recorded music revenue last year, and Kawasaki argues that the balance of power could be shifting.

She said:

The industry must increase music streaming services' ad revenue while simultaneously transitioning users to paid services.

With too many competitors already in the space, music-centric companies are facing growing competition from tech giants that have a distinct advantage in terms of leveraging their vast product ecosystems to drive growth in the music space.

Current music-centric services may not be able to overcome inefficiencies in music streaming economics and increased competition. As a result, we very well may soon be seeing changes in the balance of power.

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