Why Those Free Music Streams Aren’t Forever

Oct 31, 2015

These days, music streams seem more like a utility than a privilege. Whether you use Spotify, Pandora, Rdio, or upstart 8tracks, streaming music is not a scarce commodity. It’s more like water. In fact, there’s so much digital music available—by stream, playlist, or even download—one can reasonably ask if there’s simply too much out there.

But it wasn’t always that way. And recent developments hint that things could really change.

Looking back, six years ago, when major labels agreed to launch Spotify in the U.S., they made a simple bet: Spotify, the biggest of a new generation of unlimited streaming services, would launch a premium subscription service alongside a free, advertising-supported product, with a goal of converting free consumers to paid subscribers.

At the time, the labels bet was actually forward-looking and strategic, especially as much of their core business had been ravaged by piracy. The labels could no longer fight the digital wave; so they agreed to accede to streaming, which looked like music’s future.

Never mind that many of the new streaming subscribers weren’t actually paying full freight, nor that many would come via carrier subsidies, nor that labels had experimented unsuccessfully with the new “freemium” model in other markets. The U.S. is the most critical digital music market, so the launch was a true gamble.

The bet was that Spotify and its competitors could convince enough paying subscribers to offset the amount of revenue the labels would lose from download stores like Apple’s iTunes. (“Why would anyone buy a download again, if they could stream it all for free?” went the doubters.)

The math was also simple: multiply the average number of tracks a consumer buys annually at $0.99 cents apiece, and compare that to the annualized revenue of a $10 monthly subscription. If Spotify and competitors were successful converting users to paying subscribers, the labels would have actually grown their business.

Streaming wasn’t the only bet: rather than fight the eventual decline of their download business, the labels also agreed to try a long list of new products with their partners, few of which they were credited for. The list resembles an album of obscure tracks: ring back tones in emerging markets like Latin America, subsidized “white label” carrier-backed music services that felt free to mobile consumers, video ring tones, pre-loaded artist handsets, even complete music handset packages from Nokia and Sony that offered the same access to music Spotify did. (While few mention it, the labels also invested in some of these new services, including Spotify.)

But as positive as the labels digital strategy seems, it may have actually been too liberal. When one adds up all the partnerships and includes Internet radio, which any webcaster can launch via a simple statutory license, there’s a tremendous amount of music available to consumers, free and premium.

Perhaps too much: music consumption is at an all time high, and while mid year results showed moderate revenue gains from U.S. streaming, actual US subscriber growth this year has been flat.

Digital music advertising sales haven’t helped the picture, and many U.S. consumers don’t see a big difference between interactive services and Pandora, either. (They’re just as happy to have music served up to them.) Perhaps most critical: recent Nielsen research indicates consumers don’t really want to pay for music subscriptions at all.

That could be changing, as Apple recently launched its own premium streaming service. Apple Music initially appeared to be a mess: however, recent reports on premium conversions from Apple’s free trials are encouraging. Even some label executives hint that those conversions are well ahead of internal forecasts, a positive sign. Even so, it is early on, and some suggest Apple’s trials may actually be helping drive the growth of Spotify’s subscriptions.

Apple is still the biggest, most critical digital partner for major labels, and it still occupies a central place in their thinking and strategy. While labels need to remain neutral, it is Apple who popularized and built the core of their digital music business, and they certainly need to support (if not favor) Apple Music’s premium service.

So what can one expect to see? It seems clear the labels will eventually move to degrade the free streaming experience, while trying to incentivize premium subscription growth.

“Destructive” options could include excluding certain content for free streaming, or creating tiers of content available to premium subscribers. Limiting the hours or numbers of streams for free users could be considered; some have suggested extreme measures like “forcing” free consumers to opt in to hearing extended sponsor’s messages to keep that free music stream going, too. The labels could take a hard new look at usage liberties they allow partners, such as the number of devices the music is available on.

More constructive ideas consider the labels offering niche content or packages of hits to partners, who might sell at different price points — a $1.00/week “streaming hits” package, or a specialized Jazz, metal, or ethnic music package at $3.50/month.

The concept of tiered pricing is not new: Apple tried tiered download pricing, too, to marginal effect. The bigger idea of “creating scarcity” for music content isn’t new either: Vevo was created around this notion, with a goal of driving up video advertising pricing.

Whatever the labels decide, they will also need to consider and balance any moves alongside the free and massive YouTube, who just announced its own new premium service.

It’s not clear how the labels will shake off the current subscription doldrums, but with Apple’s early streaming progress and subscription growth front and center, you can bet they will do whatever it takes to build subscription sales, their big bet. And that just might entail giving free streaming a real haircut.