LOS ANGELES — These may be golden years for streaming digital music, so enjoy it while it lasts.
Hundreds of millions of listeners have made the leap to streaming, abandoning CDs and downloads for free and monthly subscription services like Pandora, Spotify, SoundCloud, Apple Music and Amazon Prime Music.
Consumers love them, gladly swapping ownership for access to a massive, on-demand universe of songs. But the business has been treacherous, at least when it comes to turning a profit. The latest reminder: Spotify’s filing for U.S. shares, which detailed how big payouts to music labels have made it tough to turn its 71 million subscribers into a profitable concern. Late last week, Internet radio station iHeartRadio moved closer to bankruptcy, according to two reports.
In fact, analysts expect to see a big shakeout in the coming years among on-demand music services, which have subsisted on a mix of ads and monthly feeds.
“It’s an impossible business” due to the high royalties that have to be paid out to the record labels, music publishers and artists, notes Michael Pachter, an analyst with Wedbush Securities.
The good news for consumers: As long as Apple and Amazon make plenty of money selling you other things, they can probably afford to keep offering streaming, no matter how high the costs.
The bad news: The variety listeners have enjoyed for the past five years, as heavyweights counter offerings from independent services, may not last.
Music subscriptions are “great for consumers,” says Gene Munster, an investor and analyst with Loup Ventures, because for $9.99 you get to listen to unlimited music. “You get a lot for your dollars.” But it’s “just a bad business. It’s hard to see how they will make money.”
The strained dynamics of this business is nothing new for followers of early Internet streaming pioneers.
Pandora, the originator of the personalized music station for the Web and mobile devices, has been struggling to turn a profit since its founding in 2000. The ad-supported service, which has more than 75 million monthly listeners, lost $518 million in 2017, replaced its founder and CEO with new management and has been paring down to basics after shedding itself of a ticketing unit. It’s looked into selling itself, according to news reports, and is also the target of an activist investor. Pandora declined to comment for this article.
Spotify, the No. 1 music subscription service, which expects to sell shares on the New York Stock Exchange as SPOT, told would-be investors that it generated $4.5 billion in sales last year from customers paying $9.99 a month to subscribe to its unlimited Premium service. Those monthly subscriptions made up the lion’s share of its sales, or 90%. Its loss more than doubled from the year earlier as it paid money to music labels, squeezing its gross margin to 21%. Still, that’s up from 14% in 2016.
The Sweden-based company’s road map to profits includes scale — selling more subscriptions and bringing in additional revenue, primarily by reaching the large segments of society that have yet to subscribe to a service.
Another thing favoring Spotify and paid services such as Tidal: the record industry would like to see them survive as an alternative to the totally free services a company like Amazon and Google’s YouTube offers.
Spotify “could be profitable today if it wanted to,” says Par-Jorgen Parson, who had been an early investor in Spotify but no longer owns shares. “But it needs to invest to grow. That’s why it lost money in 2017.”
But it’s going up against some deep-pocketed competitors who might not flinch at losing money, as long as it keeps customers on their own phone, operating system, shopping site or social network — where the real money is made.
Apple Music is the No. 2 streaming service with 36 million paying subscribers. It doesn’t break out revenues for the unit, but tech analysts say the streaming music division, which offers unlimited music for $9.99 monthly, is just a part of the overall picture, which is to primarily sell iPhones, iPads and computers. Apple had no comment.
Amazon also doesn’t break out sales for the Amazon Music offering, which is bundled with Prime, the $99.99 yearly service for expedited shipping and entertainment. Amazon also has the Music Limited service, which offers a smaller library than competitors and a $7.99 monthly price. Amazon didn’t respond to requests for comment.
Many music fans are choosing to listen for free on YouTube, which has deals with all the music labels and offers on-demand selections of hits and library material. The cost is free, and many of its 1 billion monthly users choose to listen without watching the video. YouTube gets more than 1 billion visitors monthly.
YouTube also offers a subscription service, YouTube Red, which allows for listening to music in the background, without ads — like when reading e-mail or other functions on the phone. The cost is $9.99, and YouTube throws in a free subscription to Google Play Music, Google’s music service, as well.
Meanwhile, on the sidelines, several smaller companies are struggling to keep afloat with their digital music offerings.
—iHeartMedia, which owns 850 radio stations and the iHeartRadio music app and offers personalized music, like Pandora, could be headed into bankruptcy, according to the Wall Street Journal and Bloomberg News, as it deals with a crushing $15 billion debt. iHeart had no comment.
—Napster, the subscription service run by Rhapsody, which was one of the first digital music services, dating back to 2001, doesn’t make money. Parent company Real Networks has hired an investment firm to “review strategic options” for the future, according to the company.
—SoundCloud, a privately owned Germany app that had been popular just a few years ago, was just referenced to by Twitter in its 2017 annual report, saying its $70 million investment in the service had been mostly written off, as it was “not expected to be recoverable within a reasonable period of time.”
Firms can only struggle for so long. Analysts who follow the music business expect some acquisitions, say one of the big tech companies eventually buying Spotify or Pandora for other means.
Analyst Pachter notes Pandora has a minority investment from Liberty Media’s SiriusXM, which could pair Pandora with its satellite subscriptions.
Such deals mean listeners could keep choosing from several services. But cue the Bowie: These are still likely streaming music’s golden years.
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