Winnipeg Free Press - PRINT EDITION

A recording revolution — again

Record companies have a history of fighting technological change, but they're jumping on the streaming bandwagon

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At the Oakland, Calif., headquarters of Pandora, an online-radio firm, about a dozen headphone-clad analysts fill in a long questionnaire as they listen. They rank whether a song's mood is "joyful'' or "hostile,'' the vocalist "breathy'' or "gravelly.'' They note whether they can hear electric guitars, lutes or bagpipes. Their ratings help to shape algorithms that push music to the service's 76 million users.

Pandora is in the vanguard of a revolution in which ever more consumers are streaming music over the Internet to their smartphones or computers, instead of owning collections of songs. For the first time since Apple popularized the paid download in 2003, the record business is changing key again. From wax cylinders via vinyl, cassettes and CDs to MP3s, it is undergoing another format shift -- maybe, some in the business think, its last.

Streaming services give music-lovers access to millions of songs, but the services are not all alike. Online-radio versions, including Pandora and Apple's iTunes Radio, choose what consumers hear, and the firms make their revenues through advertising. Others, such as Spotify and Deezer, let customers select songs from a catalogue of as many as 30 million options, charging premium subscribers a monthly fee. Free services that stream music videos, such as YouTube, also get plenty of play. All the variants pay the record labels some fraction of a penny each time someone clicks on a song.

Streaming's rise makes music bosses as giddy as a bunch of teenage Beliebers lining up to see Justin Bieber. At first glance, though, a report issued on March 18 by the International Federation of the Phonographic Industry suggests things are still getting worse. Music labels' worldwide revenues fell by four per cent last year to $15 billion, a reversal of 2012's slight rise. Much of the fall was due to Japanese consumers finally giving up on CDs, as much of the rest of the world already had done.

A closer look, however, shows streaming services are starting to bring the business back into profit in countries that have suffered steady declines, such as Italy.

Streaming now has around 28 million paying subscribers, and several times as many who use free versions. Last year subscription-based versions such as Spotify had combined revenues of more than $1 billion, up more than 50 per cent from 2012. That figure does not include online-radio firms, which last year had revenues of $590 million in America alone, a rise of 28 per cent from the year before. In America, the largest music market, 21 per cent of the industry's 2013 revenues came from streaming, whose growth more than offset declines in CD sales.

Streaming services have taken off thanks to wider smartphone adoption, faster Internet connections, including 4G mobile, and the spread of cheap online cloud storage for music files. Even so, only four to five per cent of music consumers in America and Britain so far have signed up for subscription streaming, says Mark Mulligan of Midia Consulting. If only 10 per cent of the people in rich countries were to subscribe, however, the industry's fortunes would be transformed, says Claudio Aspesi of Sanford C. Bernstein, another research firm.

YouTube, Google's popular online-video service, is expected to launch a paid-for music-streaming service in the coming months, which should help boost the numbers. So might bundling music with a mobile-telephone subscription, as AT&T is doing with Beats, a seller of headphones that has branched into subscription music.

Having previously fought losing battles against technological change, record executives have been quicker to embrace streaming's surge. Until recently, Apple's iTunes was the sole king reigning over the digital-music realm. Now there are dozens of princelings, and that gives more negotiating power to the surviving three major record labels -- Universal, Warner and Sony, down from six 15 years ago.

"I see myself as an arms dealer, selling to everyone who will buy,'' a gleeful record executive says.

Streaming likewise is good news for independent labels, some of which are enjoying double the market share they had on CDs. It also is making it easier for music to travel beyond national boundaries.

''We are getting revenue from markets where we never had a presence in the physical world,'' such as Brazil, says Fredrik Ekander, CEO of the Swedish label Cosmos.

Charles Caldas of Merlin, a licensing agency for independent labels, says streaming also helps "monetize the nostalgia market'' -- that is, artists' past work. In the physical world, more than two-thirds of sales are for new releases, but on Deezer only a third of songs streamed are new.

To distinguish themselves from rivals and to help users navigate their vast catalogues, streaming firms are offering curated playlists, compiled by algorithms, by celebrities and by consumers themselves. Users also can see what their friends on social networks are playing, and can share tracks and playlists, which helps new acts take off. Avicii, a Swedish DJ, has become the most streamed artist on Spotify.

Streaming is forcing a creative but undisciplined industry to pay more attention to data. In early March, Spotify reportedly paid $200 million for Echo Nest, which analyzes data for music services and helps shape playlist algorithms. Beats soon followed by purchasing Topspin Media, which collects data to help artists connect with their fans. Warner Music Group recently launched a new label in partnership with Shazam, the music-recognition app. Together they will trawl Shazam's listener data to identify rising artists to sign up.

Providing that streaming services can be persuaded to share their data, record labels will be able to see the response to new songs immediately and can put marketing dollars behind those that strike a chord. Performers will get a better idea where their fans live and can optimize their tour schedules.

The economics of streaming look quite different from those of earlier music formats. On-demand streaming services pay a record label about three-tenths of a cent each time one of its songs is played, and online-radio services even less. Music fans may play a favourite tune dozens, maybe hundreds of times, however, so those fractions of pennies can add up. Streaming subscribers pay around $120 a year, which is more than double what the average American music consumer spends.

Some performers are unconvinced. Thom Yorke, the lead singer of Radiohead, has called Spotify "the last desperate fart of a dying corpse.'' Music services have responded by being more open about how artists are paid, and arguing that their cheques will grow larger as more people sign up, as has happened in Sweden.

It is more complicated in countries with a well-established download market, such as America and Britain, where industry executives worry streaming may cannibalize downloads. However, the bigger issue for artists is so few people overall pay for music, says Will Page, an economist at Spotify.

"Half the population in the West spends nothing on music,'' Page says. "You can't cannibalize zero.''

For years, music has been a toxic place to invest, but the Internet is at last "bringing sexy back,'' as Justin Timberlake, a pop star-turned actor and entrepreneur, might say. Since 2009, investors have poured more than $1 billion into digital-music services in private transactions. Speculation is mounting that Spotify, which last year was reportedly valued at more than $5 billion, soon will go public. Shares in Pandora, already listed, have nearly tripled in the past year. Its market capitalization is now almost $7 billion.

Such valuations assume the services' popularity will continue to grow, and subscription-based ones will persuade a sufficient proportion of those using their free versions, on which they lose money because of the royalties they pay the record labels, to upgrade to paid varieties. Worryingly, churn tends to be high: Mulligan reports around 46 per cent of users of subscription services either have switched or say they plan to.

Nevertheless, people in the record industry are talking about another "golden age.'' There is bound eventually to be a shakeout among the many new streaming services. For the music labels, though, it now seems clear that, once the physical CD eventually has gone the way of the wax cylinder, they will still have a profitable way to exploit their catalogues, based on music fans being offered instant access to a near-limitless online jukebox.

Republished from the Winnipeg Free Press print edition March 30, 2014 A1

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