Can streaming music services survive?
Consumers love them, but businesses have had a hard time turning a profit
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
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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 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 70 million daily 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.
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.
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 offer.
But it’s going up against some deeppocketed competitors who might not flinch at losing money, as long as they 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 is just a part of the overall picture, which is primarily to sell iPhones, iPads and computers. Apple had no comment.
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.
❚ SoundCloud, a privately owned Germany app that had been popular just a few years ago, was just referenced by Twitter in its 2017 annual report, which said 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.”
Analysts who follow the music business expect some acquisitions.
But cue the Bowie: These are still likely streaming music’s golden years.