Spotify, Pandora land top spots in growing online music streaming sector

By Steve Brachmann
November 19, 2015

headphones-laptop-music-335Music is perhaps the most consumed form of entertainment media here in the United States. According to a 2014 Nielsen study, 75 percent of Americans actively chose to listen to music whereas only 73 percent said that they actively chose to watch television. Accessing music through online streaming services, many of which offer catalogs of 30 million songs or more, is also becoming a much more popular choice in recent years. The same Nielsen study found that 164 billion tracks were streamed through on-demand audio and video platforms during 2014, up from 106 billion in 2013. At the same time, purchases of cassettes and CDs have been declining, although vinyl sales are up slightly between 2013 and 2014.

Currently at the top of this mountain is Pandora Media Inc. (NYSE:P) of Oakland, CA. A report issued in March of this year found that a full 45 percent of the 119 million people listening to online radio services were tuning into Pandora’s service. Pandora also had the greatest brand awareness, registering with 75 percent of survey respondents. The study also found that 73 percent of people accessing online streaming music services did so through their smartphones.

However, in terms of paid subscribers, Pandora has to cede that crown to Spotify, headquartered in Stockholm, Sweden. In late October, the Spotify app became the top grossing app downloaded from the iPhone App Store. Of Spotify’s 60 million streaming music users, 25 percent of those users pay for the premium music subscription, gaining its 15 millionth paid subscriber just as the 2015 calendar year started. As of March 2014, Pandora only had 3.3 million paid subscribers in its total registered user base of 250 million people. About half of all the revenue generated by online streaming music services during 2013 came from paid subscribers to those services, whereas ad revenue only generated about $220 million of the $1.4 billion total revenue generated in that market.

We’ve been covering a remarkable shift in how Americans consume multimedia over the past few years and it has everything to do with the Internet and the advent of cloud computing. In a post on IPWatchdog this March, we noted some reports indicating that one-third of all American homes have access to Netflix and 10 percent of American households have two streaming video services. Nielsen reports have been showing a precipitous decline in the numbers of broadcast television subscribers as well as a significant drop in viewership for prime time television. Music streaming services have been causing a similar shift in the overall music industry by discouraging sales of physical copies of music recordings and changing the consumer mindset from one of seeking ownership of music to one of seeking access to music services. Streaming services have even been upending sales of music downloads, which have been declining right along with CD and cassette sales.

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Pandora and Spotify both inhabit very powerful positions in the on-demand music streaming world but they aren’t the only players. Apple Inc. (NASDAQ:AAPL) of Cupertino, CA, has been trying to leverage its position in the mobile electronic device world by offering the Apple Music service, which launched in June and was offered on a free three-month trial basis to every iPhone owner. As of late October, Apple Music only mustered a total user base of 15 million users, but its 6.5 million paying customers outstrips Pandora and is a pretty respectable number to judge by the rest of the online music streaming sector.

It’s interesting that Spotify has been able to attain a leading position in paid subscriber bases for music streaming services given that it’s one of the few services that offers a fully free ad-supported on-demand service and not just a limited-time free trial (Pandora’s free radio service does not offer on-demand play). The only other on-demand music streaming service which offers a free platform for users is Rdio, based in San Francisco. By May 2014, Rdio had only attained 500,000 active users, a very small subscriber base in comparison to other services. Remarks from Rdio CEO Anthony Bay last year, however, indicate that the small user base is very loyal and that the Rdio platform is respected for its simple web design.

Also among the online on-demand music streaming crowd is Rhapsody, based in Seattle, WA. An influx of about one million users in twelve months led to the July 2015 announcement that the streaming music service broke the 3 million user mark. The explosive recent growth for the Rhapsody service, which has been active for 13 years, is attributed to growing user bases in regions like Columbia and Brazil, countries where other services like Pandora aren’t available. A larger player in the global music streaming service field is Deezer, based in Paris. As of November 2013, Deezer claimed a user base of 12 million active users, including 5 million subscribers for its paid service. It has a small user base in the U.S., however, having only been available in that market since September 2014. Another small player in the U.S. market is Tidal, a streaming service with notable star endorsements from Jay-Z, Beyonce, Rihanna and others. Near the end of September 2015, Tidal-owner Jay-Z announced via Twitter that the streaming service had attained 1 million subscribers.

Subscription prices and software features for each of these streaming services have their similarities across the board. Except for Pandora, each of the online music services described above offer on-demand track listening, music downloads for offline access and radio station functionality, including some services which build personalized radio stations based on song preference. Typical subscription prices range from $10 per month to $15 per month, although Tidal offers a $20 per month tier for high quality audio playback. Apple Music and Tidal do offer an extra feature for music videos that most other streaming music services don’t provide.

The recent gains for the music streaming service market, and their subsequent effects on major business models in the music industry, have not been positive for everyone. Many musicians have lamented the meager royalty payments offered each time that an artist’s track is played and there are reports out that major services like Apple and Spotify may not be meeting the royalty payment amounts which they’ve publicized. Apple’s original plan to offer zero-percent compensation to rights holders during the first three months of Apple Music drew a swift rebuke from pop star Taylor Swift this June. As of last November, Spotify announced that it had paid more than $2 billion in music royalties.

The rise of music streaming services have also drawn the attention of certain government agencies, including the Copyright Royalty Board at the Library of Congress. That board is currently examining new rules regarding royalty rates for webcasting and has recently petitioned the U.S. Copyright Office to ask if it can charge different royalty rates for various music suppliers, which could impact the royalties which Spotify and others are forced to hand over to artists and record labels. Record label representative SoundExchange is pushing for a 40 percent royalty increase to be paid by online music streaming services. The rules, which will be in effect from 2016 until 2020, could increase royalty payments paid by services by Pandora from 14 cents per 1,000 streamed performances up to 30 cents per 1,000 streamed performances.

The Author

Steve Brachmann

Steve Brachmann is a freelance journalist located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He writes about technology and innovation. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients and is available for research projects and freelance work.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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