Like almost everything else – from driving a car, to speaking on the phone, to watching television – the manner in which people listen to music has undergone dramatic shifts over the last 25 years. It started with the evolution from vinyl to CDs, then from CDs to digital downloads and, most recently, downloads to streaming services.
Not only have such advances made the listening experience easier, cheaper and more enjoyable, they have also slowly revolutionized consumer behavior, with tastes having become more wide-ranging and variable. It’s not unusual today for the average consumer of music to have formed very eclectic tastes that jump across multiple musical genres, and we have the access and affordability of streaming music to thank in large part for this.
The economics of these shifts have been a boon for consumers, but mostly disastrous for artists who have seen the value of their musical content decline with each technological evolution. The harsh reality for musical artists is that albums no longer matter, individual songs do.
In 2004, ten albums sold 2.7 million copies or more, including the no. 1 album of the year, Usher’s ‘Confession,’ which sold nearly eight million, according to Nielsen. This year, no album will sell close to that.
As consumers show an increasing preference for individual songs over albums, download activity, another important driver of revenue for artists, has slowed considerably. Apple recently reported that sales on its iTunes platform are down more than 13% this year. This decline, of course, can be traced the rise of streaming services like Pandora and Spotify, which can be accessed for free and pay next to nothing for content. According to one estimate, record labels and publishers receive between $0.006 and $0.0084 per stream, a small slice of which goes to artists.
The upshot of all this is pretty clear: With few exceptions, it has become next to impossible for artists to profit solely off making albums and producing content. This has led many to focus instead on touring and building their brand, which can then be leveraged into selling a wide variety of consumer products, including clothing, alcohol or electronics. Look no further than P Diddy and Ciroc vodka or Dr. Dre and Beats headphones.
Another shift could be on the horizon but this time it could favor artists. In a move that could shake up the industry, Taylor Swift’s entire music catalog was recently pulled from Spotify’s platform after Swift’s label requested that songs from her new 1989 album be made available only to the service’s paying customers, which make up a mere fraction of its user base. Swift’s decision could have a cascading effect, leading to more spats down the line with other prominent artists and record labels, who increasingly believe streaming companies are not paying enough for content and are cannibalizing music sales.
The notion of Taylor Swift leading a movement that makes it easier for small-to-mid size acts to make more money from streaming is ironic given that she is one the few artists today capable of generating out sized revenues producing albums. Make no mistake, however, pressure on streaming services is about to become more intense, as the cost of doing business could increase significantly in coming years and more competition from Apple, the leader in download sales, gets bigger in the streaming business with Beats Music.
And if royalties go up, it’s only a matter of time before the ad-supported model goes away entirely. That means that Pandora and Spotify, having already fallen out of favor with many investors, could have bleak futures as stand-alone companies as costs and competition rise.
But as acquisition targets, that might be a different story. At the right valuation, Google would likely find either service attractive. While Android is the most widely used operating system in the world, in terms of having an ecosystem of products and services that can compete with Apple and drive additional revenue, Google still has a long way to go.
Yahoo would be another likely suitor. The company has a pile of cash after the Alibaba IPO but has barely grown in recent years, lagging far behind rivals Google and Facebook for online ad share. CEO Melissa Mayer is coming under intense pressure from investors, and will be looking to show she can find innovative ways to lift flat-lining growth.
Even Amazon might consider making a play. While the company seems focused on other areas, like content production, smart phones and even drone technology, it is constantly making large investments to drive future growth. At the right price, reinforcing its current online streaming capabilities could make sense.
Echoing the Rolling Stones, artists and record labels are essentially telling free, ad-supported streaming services, ‘You can’t always get what you want’ – Meaning, in this case, the days of cheap access to content could be coming to an end. By ponying up, such companies ‘might find out, you get what you need.’
Ultimately, the real trick will be changing consumer behavior. It’s going to be very difficult to convince consumers to pay more – or, in most cases, anything – for streaming services.
Changing that dynamic will drive valuations of companies like Spotify and Pandora, and likely the future of the industry. Investors should listen closely to these changing tunes.
By Ross Gerber
Ross Gerber is CEO and president of Santa Monica, Calif-based Gerber Kawasaki, an investment advisory and wealth management firm with $310 million in assets under advisement. Gerber Kawasaki clients and employees may own positions in various companies mentioned here. Please consult your advisor before making any investments.