Explore music streaming business

Matic Magister

Feb 22, 2024

In today's digital age, understanding how to stream music is essential for anyone who appreciates the art of listening. This guide, brought to you by Viberate, delves into the intricacies of music streaming, its history, its financial model, and its impact on the music industry. Let’s unravel the melody of streaming music!

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Understanding the Basics of Music Streaming

Music streaming operates on a simple yet ingenious principle: a streaming service sends data in small chunks to the user. This results in pre-buffered music being available just seconds or minutes before a song plays. This technology, developed as a countermeasure to the music piracy of the late 90s and early 00s, ensures an uninterrupted listening experience without saving files on the user's device, as long as there is a stable internet connection. 

The Evolution of Music Streaming

Initially, the music industry grappled with piracy, which led to plummeting revenues. The emergence of legal download-to-own platforms like iTunes in the early 2000s provided an alternative, but they couldn’t entirely curb the allure of free pirate services. By 2008, an astonishing 95% of all digital music was downloaded illegally. The breakthrough came around 2007 with the concept of Music as a Service or music streaming, revolutionizing the recording business.

Spotify, founded in 2006 and launched in Europe by 2008, became the first legal streaming service with a comprehensive catalog, redefining how we understand music streaming today. 

The Streaming Market and its Diversification

Initially, streaming services like Spotify offered unlimited access to music. However, as the market evolved, new entrants sought to differentiate themselves. The streaming landscape became more complex, with each brand offering unique features atop the core concept of unlimited music access.

Spotify, akin to Google in the web search domain, emerged as a reference brand in Europe and the U.S. However, platforms like NetEase Cloud and Tencent Music have surpassed it in monthly active users, despite Spotify’s lead in paying subscribers. 

The Unique Role of Semi-Streaming Services

Platforms such as YouTube, SoundCloud, and Pandora, while not fitting the traditional streaming model, play a significant role in the music industry. For example, YouTube, primarily a video-sharing website, accounts for 47% of global music consumption. These services have a vast user base, which they leverage to transition into full-fledged streaming services with premium subscriptions. 

Market Growth and Sustainability Challenges

The shift from physical sales and digital downloads to streaming has driven the market's growth. Markets like Scandinavia, where streaming accounts for a significant portion of music sales, indicate the future of the global recording market.

However, finding a sustainable financial model remains a challenge. Even leading services like Spotify have struggled with profitability, focusing instead on business valuation and market share.

The Financial Mechanics of Streaming Services

Streaming services’ revenue primarily goes towards rights holder payouts, including mechanical royalties (for reproduction rights), performance royalties (for public performance rights), and payouts to sound recording owners. These costs, along with other expenses, constitute a significant portion of a service’s revenue.

The cost structure and negotiations with rights holders are crucial in understanding the financial dynamics of streaming services. Spotify, for example, allocates between 60% to 70% of its total revenue to rights holder payouts. This is a significant portion and is indicative of the industry standard.

Looking Toward the Future

As the streaming market matures, the focus shifts from immediate profitability to long-term market valuation. Streaming services are playing a long game, investing in market share and potential future profits.

Conclusion

Understanding how to stream music is more than just knowing which app to open. It’s about comprehending the intricacies of a system that has reshaped the music industry. From its humble beginnings as a solution to piracy to its current state as a juggernaut of the entertainment sector, music streaming continues to evolve and adapt. As we look to the future, one thing is certain: streaming will remain at the forefront of how we experience music.