Steunpunt voor artiest
en muzieksector

Music streaming services and their path to financial viability

Is het huidige businessmodel van Spotify, Apple Music en co. commercieel houdbaar op lange termijn?

The music industry is a volatile industry and has known many technological innovations over the past decades. Through the introduction of radio, vinyl and CD, the industry has been forced to continually reinvent itself. All of these innovations eventually turned out to be sustaining innovations. As the industry entered the digital era, it has known an evolution that was very destructive to the existing business models. The industry is now slowly recovering through new business models generating revenue on the internet. First through a business model based on a pay per track or pay per album basis, and since recent years through the business model of interactive streaming.

Whereas the streaming business model was initially perceived with a skeptical approach, thanks to the exploding growth of streaming services such as Spotify and Apple Music, the recorded music industry is now celebrating its second consecutive year on year growth after a crumbling market for almost two decades. Meanwhile however, Spotify has yet to become profitable and in fact its loss is growing every year. The company is held down by license deals agreeing the bulk of revenue to be paid out as a royalty to the copyrights holders of the music. It is proving difficult for Spotify to secure a long term commercial viability with low margins left to cover their operating cost.

The question whether artists are earning enough money from the streaming business model has been widely discussed in the media. Several studies took the perspective of the record labels and focused on whether streaming can generate enough value for the copyrights holders. Few however took the perspective of the streaming services themselves. A lack of research form the perspective of the streaming services lead us to the folowing research question:
Is the current business model of streaming services commercially viable in the long term? And if not, how would the business model have to change in order for it to become commercially viable?

Our qualitative research combines financial figures of music streaming companies with the expert insight of key persons involved in the recorded music industry. Interviewees include Charles Caldas (Merlin Network CEO), Zach Fuller (Midia Research), Romy Harber (Hospital Records label manager) and Charlie Phillips (Win For Music). We verified different scenarios in how the streaming business model will find its path to profitability. This research can be relevant to streaming services and all copyright holders in the music industry. Streaming had an enormous impact on how artists and record labels had to market themselves. A good anticipation on how the streaming business model will evolve can prepare them on how this will affect them on a marketing and financial perspective.

The paper first summarizes the copyrights upholding the recorded music industry and how these secure the industry to be financially compensated for their copyrights ownership. Alternatively it looks into how they establish the financial relationship between streaming services and copyrights holders. Second we focus on the impact of digitization on the music industry. It goes into detail on how the industry coped with the disruptive innovation of the internet and what business models got in place to adapt the industry to the digital era. It goes deeper into the streaming business model, describing all different variants of the business model and showing what services are on the market right now. Next we look at the internal financial structure of streaming services, defining their main sources of revenue and where the money eventually goes to. Based on in-depth interviews with key persons of the music industry we conclude with possible scenarios on how the streaming market can evolve and how consumers, copyrights holders and streaming services can be affected.

Download scriptie
Toegepaste Economische Wetenschappen
Prof. Dr. Dirk Van Den Poel
Matthias De Rouck