8.1 Percent of What? Why the Record Business Is Celebrating

Billboard

Cary Sherman, the chairman and CEO of the Recording Industry Association of America (RIAA), called the immediate state of his industry "a remarkable transformation and reinvention" in a blog post yesterday.

The occasion for Sherman's celebration was his organization's half-year report, which aggregates and estimates the economic output of the U.S. recording industry, which says that industry generated $3.43 billion in the first six months of this year.

The reason everyone is so excited, though, is because much of that $3.43 billion (about 47 percent of it) was generated by streaming services like Spotify, Apple Music, Tidal, et al. -- and that these services, the "new business model" Sherman is referring to, drove an 8.1 percent growth in the wake of years (and years, and years) of diminishing revenues. After making a mint on the high-margin business of CDs through the '90s, and the painful correction that followed the slow (and still ongoing) death of media ownership in general -- whether MP3 or CD -- the recording industry seems to have turned the corner.

"Hopefully people start to realize how great the numbers are," David Bakula, senior vice president for insights at Nielsen Music, tells Billboard. "We haven't seen growth like this since the '90s."

The largest chunk of this newly larger pie, $1.03 billion of that $3.43 billion, came from the 18.3 million Americans who pay $9.99 ($19.99, in the case of Tidal's "hi-res" tier) for their monthly subscriptions to the service of their choice. Second to that, at $403.4 million, were distributions from SoundExchange, which tracks payouts from "webcasters" who take advantage of statutory licenses (which don't require them to sign contracts with labels and rights holders). The third-largest slice $195.4 million came from advertising revenues from the free tiers of these platforms.

After the success of the iTunes Store, labels' profits became inseparable from Apple, which was taking 30 percent off the top. Now the major labels, and their independent counterparts like Merlin, are spreading their bets, fostering competition between a host of services, and taking the lion's share from each. In the case of Apple Music, the labels' revenue share is 57.5 percent.

This doesn't make it easy for the streaming services, even the incumbents. One major label source tells Billboard that Spotify, the largest streaming company with 40 million subscribers worldwide, which came to the table thinking it had some negotiating leverage, asked for its revenue share percentage to be lowered dramatically; the offer was rejected. Rights holders need streaming services, and vice versa.

Spotify has still not generated a profit, and lost about &euro184 million last year. Apple Music probably hasn't either (Apple's financial reports include it in a catch-all category, "Internet Services," which doesn't allow for parsing), considering the $3 billion that Tim Cook's tech giant paid for it in 2014. Tidal definitely hasn't, losing an estimated $28 million in its first year under Jay Z's care.

(It's worth noting that Bandcamp, which offers a sort of streaming as well as digital and physical sales, has been profitable since 2012 on the strength of wholly independent bands and labels, despite the continuing drop in download sales.)

But there seems to be plenty of room for everyone. Given the growth of both Apple Music and Spotify over the last year, it's not unreasonable to conclude that, while competing, they don't seem to be cannibalizing each other's customers. Add to all this the slow acceptance in countries like China, Japan and India of streaming, and the sky is the limit. Or at least, the number of people on Earth who have relatively fast connections to the web is the limit.

And, importantly, the race towards the middle is just beginning.

Pandora recently relaunched its $4.99-per-month radio subscription service, and iHeartRadio is rumored to be working on one of its own. Both are targeting casual listeners, which make up the majority of the human race. There's no doubt that Spotify will offer its own at some point.

The initial wave of streaming services, which has now crested, could be seen as a giant petri dish. Now that the cultures are collected, its time to really start the experiments.