Making Money from Music in the Digital Era

Transcription

1 Making Money from Music in the Digital Era Elise Overbeek University of Twente P.O. Box 217, 75AE Enschede The Netherlands ABSTRACT This paper aims to discover how digital music business models can be profitable in the future. Currently several business models are in use but most of them experience that willingness to pay for these services is low. A literature study will be conducted and results from several previously conducted surveys on the topic will be used to investigate the topic along with data from the International Federation of the Phonographic Industry. The paper gives an overview of the current digital music industry and developments in the past 1 years. It identifies issues the digital music industry is facing and gives recommendations for the future and describes where the digital music industry could be headed. Keywords Music, digital, business models, downloading, streaming 1. INTRODUCTION Currently several digital music business models are being used. The most common are legal downloading, paid streaming services and free streaming services with advertisements. Wellknown providers of these services are YouTube, Spotify, itunes and Pandora. Although the digital music market is growing, global digital revenue increased by 6.9 per cent in 214[n], there is a value gap between the actual price of a song or album and what it is perceived to be worth. What people are actually willing to pay for a digital music file is less than the actual price of the file[21]. This low willingness to pay for digital music services is problematic for the music industry[3][14][21]. Not only in file downloading is the willingness to pay low, subscription services have the same problem. Spotify, a popular streaming service, claims to have 6 million active users while only 15 million of those users have a subscription to the service. So 75 per cent of Spotify s users do not pay for the service [29]. In 211 a survey showed only 12 per cent of users of digital music had ever paid for streaming services[4]. This value gap forms a serious problem for the providers of digital music. For example, in 212 Spotify had an operational loss of 8 million euros, in 213 the loss was 93.1 million euros. [7]. Illegal downloading, also known as piracy, via p2p networks is in decline. In per cent of young internet users, ages 14-24, said to download illegally, in per cent of these internet users downloaded music illegally [4]. Looking at the trends of the last five to ten years and other research results, current problems will be identified and recommendations for the future of the digital music industry will Permission to make digital or hard copies of all or part of this work for personal or classroom use is granted without fee provided that copies are not made or distributed for profit or commercial advantage and that copies bear this notice and the full citation on the first page. To copy otherwise, or republish, to post on servers or to redistribute to lists, requires prior specific permission and/or a fee. 23th Twente Student Conference on IT, June 22, 215, Enschede, The Netherlands. Copyright 215, University of Twente, Faculty of Electrical Engineering, Mathematics and Computer Science. 1 be made. Any business model must be looked at from the perspective of not only the business itself, but also from the perspective of the consumer, the record labels and the artists to determine acceptance. If the business model does not meet the demands of the users they will seek alternatives, like illegal music downloading. Artists also have to be willing to allow their music to be distributed via digital services. 1.1 Problem Statement What are the problems the digital music industry is facing and how can these problems be solved? This is the main question of this paper and an answer to this question will be sought through answering the following questions. 1. Which digital music business models currently exist? 2. How many people use digital music services and which services do they use? 3. Are people willing to pay for digital music services? 4. How has use of digital music changed in the past five to ten years and how has this affected the music industry? 5. How profitable have digital music services been in the past and what can be expected in the future? This paper has the following structure. First some background information on the subject is given. Next the research methods that have been used are explained. After that the results of the research are presented. Based on these results several battles have been identified which are then described. These battles are followed by recommendations to music services for the future and finally a conclusion is given. 2. BACKGROUND In the last ten years there has been a steady growth in the global revenues from digital music [3]. This can also be seen in figure 7 of this paper. Globally 39 per cent of revenues in the music industry in 213 came from digital music, in 214 this was up to 46 per cent[18]. Fee based streaming services like Spotify have grown 51.3 per cent in 213, and in 213 such services had 28 million users. Revenue from advertisement-based business models has also grown substantially while revenue from downloads had a decrease of 8 per cent in 214 [18]. Physical sales had a decline of 8.1 per cent in 214[18]. All these numbers show that the music industry changing to a much more digital business as opposed to the old business model in which only physical sales were possible. Consumer preferences for the different digital music models have been shifting slightly from downloads to streaming and the industry needs to adapt. While a few years back the music industry was desperately holding on to old business models based on physical sales and busy fighting piracy, now it seems to have realized that digital music is here to stay. Record labels and artists are starting to see the potential of the internet and digital music distribution. Another big change in the past years has come from smartphones. As more and more

2 people own smartphones this has become an increasingly important market for distributing music and offering streaming services, for instance, 56 per cent of U.S. adult smartphone users use their smartphone to listen to music[25]. The cd player has become the least popular device of young internet users for listening to music[4]. In light of these developments old business models based on physical record sales are no longer viable and research into digital distribution business models is necessary for the future. 3. RESEARCH METHODS The research was done with a literature study and analysis of data from the International Federation of the Phonographic Industry (IFPI). For the literature search Scopus and Google Scholar were used. Keywords that have been used to search for literature include music, digital, business models, streaming, downloading, piracy, Spotify and itunes. Around 4 papers have been found, about 2 of these were useful. Most of the papers that were found had a focus on piracy instead of legal distribution. Not all data in this paper comes from scientific papers as the research field is highly commercial and fast developing. The data analysis is based on IFPI data from their yearly digital music report. Information about several aspects related to the digital music industry in the years 24, 29 and 214 was compared to see how the digital music business has developed over the years. 3.1 Research Scope In this paper the main focus lies on the distribution side of the music industry: how and by whom and at which prices music is being distributed via the internet. The internet offers many options for bands to publish their music and to get more fans. The internet can also provide new business opportunities, like albums made with money raised by crowdfunding[1]. Another example is the pay what you want model[23], where a consumer can pay anything he wants for an album and then download it from the artist s website. Although both interesting and influential for today s digital music world, this paper will primarily focus on large scale legal distribution of music. Music that has been made available by a record company, to a certain digital service, which then in turn makes it available to the user. Although this paper focusses on legal music distribution, it is not possible to ignore piracy completely because it is influential to the industry as a whole. Many papers have been written on piracy, not quite so many paper have been written with a focus on legal distribution. 4. RESEARCH RESULTS 4.1 Digital Music Business Models Streaming and downloading are the most common digital music business models. With streaming the user has the right to listen to music or watch videos, with downloading the user gets actual ownership of a digital file. Both types of digital music business models are a collaboration between artists, labels and services with the goal to provide music to consumers in exchange for a payment. Figure 1 shows a simplified version of the relationships between these players. In reality variations on this model are possible as not all artists are signed to a record label and license agreements tend to differ where payment is concerned. An artist signs with a record label and makes music. The record label has a licensing agreement with digital music services which gives them the right to distribute the music. Figure 1: The simplified digital music business model Figure 2 gives an overview model of the available business models along with examples of the biggest players in these submarkets. Digital music businesses The digital music service makes the music available to consumers at a cost. Figure 2: The digital music business models Another way to model the digital music market is presented in table 1. Table 1: digital business models Downloading Streaming The digital music service pays the label based on the number of downloads or plays. The label takes a cut of the profit and pays the artist. Downloads Streaming Single tracks Paid Albums Ad based Subscription based,99 per song 9,99 a month Audio Video Audio Video Free Alternative business models/ illegal Advertisements/ illegal itunes, Amazon, mp3 mp3panda panda Spotify Freemiun, YouTube, Vevo, Hulu Spotify, Tidal, Deezer, Napster Music Key 4.2 Downloading One of the available digital music business models is legal downloads, also known as a la carte downloads[9]. In this model the consumer can choose to buy full albums or single tracks. Full albums are usually sold for 9,99 euros and single tracks for 99 cents[1][8]. Consumer research showed that 26 per cent of internet users had accessed download services like itunes and Amazon mp3 in the last six months [18]. The largest download store is itunes[18]. In 24 itunes was available in 2 countries[2], in 212 itunes was available in a 119 countries[22], showing a tremendous growth during these 2

3 years. However, a controversial decision from Apple is that itunes, the largest download store, is not available on Android, whose share in the mobile market is growing[18]. With more people using android there will be less people using itunes. As a diversification of operations itunes has bought Beats, a legal streaming service which is available on android[18]. 4.3 Streaming Services Audio Services This category can again be subdivided into services which offer only music, services which offer music and video streaming and services which offer only music videos for streaming[34][32][18]. These services are now available in 2 countries and are being used by 41 million paying subscribers[18]. The revenue of music subscription services is 1.57 billion dollars [18]. Napster and Rapsody, together claim to have 2.5 million fans in 32 countries and their catalogue has 34 million tracks[18]. Tidal, another subscription service claims to have 77. subscribers[18]. To compete with other services Tidal offers exclusive content like new tracks from world famous artists like Beyoncé and Rihanna that are only available on Tidal[15]. Unfortunately this exclusivity approach does not seem to work for the service. The exclusive content was soon after publication on Tidal also illegally made available on other platforms like YouTube[15]. The service also offer High Fidelity, CD quality streaming and High Definition videos[32][18] to differentiate itself from other services. Pandora, Napster, Deezer and Spotify currently do not offer music video streaming. The biggest struggle for all of these services is getting users to switch from the free version to the paid subscription service. This subject will be further discussed in paragraph 4.8. Figure 4 shows the numbers of users of the bigger services according to data from the IFPI 215 report[18]. Pandora is at the top of the market with the most users, but this service is only available in the US. And then there is one service that is literally of the charts, YouTube with 1 billion users is by far the biggest provider of online music[18]. So if YouTube makes any change to their model like limiting the amount of video s a user can watch a day, more advertising before every video, or any other big change that may drive users away, it will have a huge impact on the smaller players in the industry. So a first recommendation to any service is to keep an eye on YouTube, with 1 billion users anything they do can prove very significant to the entire industry. Figure 3 shows that market share is not evenly divided among services. Table 2 shows a comparison of costs and available catalogue. The popularity of the services does not correlate with the available amount of tracks per euro. Popularity could be dependent on in which countries these services are available. More research on consumer preferences may be necessary to determine why one service has a bigger market share than another. Some research on this subject has already been done. A study from 212 found the results in table 3 on the importance of certain aspects of streaming services. [14] Table 2: Services compared Price per month for no ads version in euros Available catalogue in million songs Pandora Napster/ Rapsody Deezer Spotify Tidal 5 9,99 9,99 9,99 9, Figure 3: Number of users per service Table 3: Most important considerations of music streaming services Frequency Percent Music Selection Convenience Sound quality Price Other Legality Total One way that services have been using to gain users is by making deals with providers of non-music related services. The services offer a package deal which includes both services for a lower price. Dutch telecom provider KPN for instance offers free Spotify with certain mobile subscriptions[28] Video Services Consumer research has shown that during a period of six months 57 per cent of internet users had accessed music videos on sites like YouTube and Vevo[18]. YouTube is the biggest provider of music video s with 1 billion users[18]. A large portion of all available content on YouTube is music related and 9 out of the 1 most watched videos are music related[18]. Vevo, a video service based on content licensed by record labels, has a library of 14, HD videos, some of which are exclusive content and they have more than a billion views per month worldwide, according to their website[34]. In November 214 YouTube launched its subscription service, Music Key in several countries in Europe as a beta version. The subscription costs are 1 US dollars per month and in return the user gets unlimited advertisement free listening, offline access and the ability to play music while using other apps on your phone or with the screen locked. The user also gets an account for Google s Play Music All Access service. [24] The official launch of Music Key has been postponed to September 215 so there are no figures about this service available[16]. However, some claims about this service can be made. The service will be yet another competitor in the digital music market making it more difficult for other services to keep their current market share. The service is priced the same as

4 availeble trakcs in millions competitors and thereby once again further supports the claim that the fixed price of about 1 dollars or euros will remain the standard for online music services. 4.4 Streaming and Downloading Compared A legal download model will get the user about 1 songs for 9,99 euros that he can listen to forever. A subscription service gives the user millions of songs to listen to for 9,99 euros, but only for one month[18]. If a large quantity of available music is important to the user the higher value is in streaming. Ed Sheeran, 3 rd place for global recording artist, and Coldplay, 4 th place, Beyoncé, 1 th place, have chosen to offer CDs for digital download before putting them on streaming services to entice more fans to buy the legal download [2][18]. Making legal downloading the better option if the user want access to music immediately after its release and if ownership is considered important. If total availability of music is a concern both streaming and downloading are good options. The catalogue of available tracks of these online music services combined has grown exponentially in the last ten years as figure 4 shows [18][19][2] Available online catalogue 1 11 Figure 4: number of songs available for downloading and streaming 4.5 Piracy Another example of how young this digital music market still is and therefore how much change we can still expect to see in the future is Scandinavia. There has been a gigantic rise in paying subscribers of streaming services in Scandinavia compared to other parts of the world[18]. Figure 5 shows the huge popularity of streaming services in Sweden, Norway and Finland compared to legal downloads[18]. This was partially caused by new antipiracy laws and the closing down of the pirate bay[18]. If other countries follow in the fight against piracy these numbers could also go up in other countries in the years to come. However important to note when discussing piracy is that most content that people obtain via p2p networks they never would have legally bought[4]. So a decline in piracy may not necessarily translate to a rise in legal downloads Permanent downloads and subscription streams as a % of total digital revenues 214 Permanent downloads Subscirption streams income Figure 5: permanent download and subscription streaming income as a percentage of total digital revenues in Illegal Streaming Not only illegal downloading services are available but there are also illegal streaming services. Grooveshark was such an illegal streaming service. The service apparently did not have the proper licences to offer music. Most of the music on the service was illegal, and the users did not know this. In some ways the internet has made the world more transparent, but in cases like this consumer trust can be severely damaged. Grooveshark was founded in 26 and allowed users to upload songs to the service, this set the service apart from services like Deezer and Spotify were the catalogue is determined by the service itself. This freedom to upload any song lead to huge amounts of music being on the service of which the proper rights were not being paid. Grooveshark did have a notice and take down policy but was judged wildly ineffective. Grooveshark did have some deals with labels like EMI and Sony. In the past months Grooveshark lost several law suits and finally a settlement of 45 million euros was agreed upon. A deal was struck with record labels and Grooveshark has been shut down, it has deleted all illegal material from their database and handed all ownership over to the record labels[33][35]. 4.7 Alternative Business Models There are other possible business models, but the market share of these business models is negligible[18]. However, their share of the market could grow in the future. Two examples of alternative business models are given Free Entertainment Back in 24 some people thought that free music was the right way to go for the future. The Gutenberg project and the digital book index for instance offers free books, The Internet Archive's Live Music Archive offers free live concert registrations and the Internet Archive's Movie Archive offers free movies from classics to cartoons[27]. All of these offer huge amounts of free books, movies and music, but compared to the total amount of books, movies and music that is available for sale in this world, it is just a fraction that is available free today. A band with a strong belief in free content and doing things differently is the Grateful Dead. Even before the internet they encouraged their fans to tape live concerts and exchange tapes 4

5 with other music lovers. By being free and open to people distributing their music without paying for it they got exposure to much more fans than they would have with the traditional distribution channels. Later on these fans would buy concert tickets, merchandise and other premium content. As David Meerman Scott states in his article about their successful unconventional attitude: free content sells content[26]. So although it is an interesting development and creative commons licences offer interesting possibilities, the majority of music today is not free. Therefore these free options are not a truly viable alternative for downloading and subscription services Pay What You Want Model An article written in 211 proved that a pay-what-you-want strategy can be more profitable for artists than a conventional release[5]. With this model the distribution can be done by artists themselves. Without the need for a distributor more profits are left for the artist. Radiohead distributed their album In Rainbows with this model but unfortunately never published official sales figures nor figures about how many people paid for the album and how much[23]. As this model is still relatively new and not used much, not much significant data on the subject can be found. 4.8 Willingness to Pay Figure 6 was compiled based on data the streaming services have published and data from the IFPI[29][18]. The figure shows the number of users that use free or advertisement based versions compared to the number of users that pay for a subscription. This figure clearly illustrates how low willingness to pay is Spotify Deezer Pandora paid users Using versus paying free users / ad supported Figure 6: free and paying users Spotify s income from subscriptions was million euros. The income from advertising was 98.8 million euros. With 25 per cent paying subscribers this means that 91 per cent of its income comes from the subscribers. [6] A study done in the UK and US in 212 showed that most consumers are willing to pay for digital music. However most users are not willing to subscribe to music services despite being stratified with these services. Especially young consumers have low willingness to pay because they are used to things online being free and are not aware of illegal downloading being copyright infringement. Affinity for the recording artists remains an important reason for many users to not download illegally and pay full price. In the survey they conducted 25,3 per cent of respondents considered the price of an mp3 file unfair of these respondents 23.6 per cent had never bought digital music. Among the respondents who did consider the price to be fair, 18.2 per cent had never bought music. So of the people that consider the price to be fair, more have ever bought digital music 5 than among the people who do not consider the price to be fair. Showing a relation between fairness and willingness to pay, however it may not be greatly significant as the difference is small[14]. Another study from 21 conducted in Korea showed that what consumers are willing to pay for a file is significantly less than the actual price of a file. The difficulty in obtaining the file, the time it takes to find and download the file is also a factor in willingness to pay. Fear of legal repercussions also remains an important factor. A simulation in the study showed that the best way to decrease illegal file sharing and increase legal digital music purchases was with a combination of increased costs for illegal file sharing transactions and lower prices of digital music files. The study showed that lowering prices would by far be the most effective way to get more users to buy music[21]. Prof. Dr. Marc Fetscherin found that not only price but also quality and risk are a factor in the choice between legal and illegal downloading. His most important finding was on the role of DRM(digital rights management) restrictions. These are restrictions placed on files which determine how the file can be used. The number of times a song can be played or the amount of devices to which it can be copied can be limited by DRM restrictions. The best way to get users to want to buy music online is to either lower the price of files and add more DRM restrictions or to ask a higher price per file with no DRM restrictions on the file. The current situation with high prices and DRM restrictions is an important reason why consumers are not buying music online. [13] Research by Chiang Assane found that both economic incentives and enforcement are effective strategies, especially combined, to reduce piracy. Their result showed that income, ethics and risk perception play a dominant role in willingness to pay. Strategies to increase willingness to pay could include versioning, like offering a special edition and bundling, offering of combination of songs for a fixed price. They also found differences in willingness to pay depending on sex, age and ethnicity. Male students, younger students and students of white/caucasian and Asian/Asian-American ethnicity are less willing to pay for music. So digital music services should take these differences into account for their marketing policies. Most importantly they found that disposable income is much more influential for willingness to pay than the likelihood of being caught downloading illegally and the perceived penalty[3] Crowdfunding Crowdfunding allows anyone to make a contribution of any size to a specific cause. Many contributors all contribute a small amount of money in order to raise enough funds to realise a specific predetermined goal. Vic Anselmo, a relatively unknown artist without a label used crowdfunding to make her third CD. The initial goal was to raise 9 euros. In 1 month she raised 1,73 euros with her campaign, from donations of only 24 people. Proving that people are willing to, on average, pay twice the regular cd price for music they really want before the album has even been made[1]. Willingness to pay in general is low, offering something with enough value that people are willing to pay for it is difficult but not impossible. 4.9 Artists Participation For any digital music business model to work it has to have music to offer. If artists are not willing to provide music the business model will fail. A famous example of an unwilling artist is Taylor Swift who had her music removed from Spotify because she felt her music was not being valued high enough and the amount she was paid per play was not as high as the true value of her music [11]. She was named the IFPI recording artist of the year in

6 214[18] because she was the most popular recording artist across music downloads, streaming and physical format sales worldwide. She can be seen as influential and powerful in the music business due to her sales quantities. So if one of the world s best-selling artists is against streaming services, and influential artists share her opinion and decide to remove their music from streaming services, these business models will no longer be viable as users will lose interest in using these services. 4.1 User Behaviour in Streaming A study has been conducted on user behavior on Spotify. They used data collected between 21 and 211 and the data was collected on users in Sweden, UK, and Spain[12]. They found some useful statistics for digital music services. A keen observation at the start of the article is the significant difference between streaming music, and streaming music videos. Music is often used as background music while watching music video s requires the users full attention. This leads to the belief that the context in which music is streamed differs from the context in which music videos are streamed thereby making them supplementary and not exchangeable. Tidal seems to be one of the few services that offers both video and audio streaming[18]. The research on Spotify found that there was a morning peak of mobile session an hour ahead of desktop sessions on weekdays. Apparently, the mobile Spotify app is used on the way to work. In the early evening there is another peak, the commute back home. On weekends the use is more evenly divided, there is no morning and evening peak and no dip during lunchtime. Mobile sessions tend to be short in the morning while desktop sessions last longer. A mobile interface that is easy to use while on commute and a clean and professional looking web interface for the use of background music during work hours could improve the user satisfaction of a service. Overall they found that that the number of mobile sessions is much larger than the number of desktop sessions. So a focus on a mobile friendly app is of great importance to any service that wants to stand a serious chance at surviving the competition. As most services start with a desktop version and later add a mobile player, this seems to be the wrong way round. Another key factor in making your music service successful is how the service can be installed/used on multiple devices. Many Spotify users have Spotify installed on multiple devices, usually at least 1 mobile and often 2 or more desktops. So synchronization between all devices is important. The most mobile session are between pm while the most desktop sessions are between pm. People use a mobile device while at work, school or commuting and when they come home they switch to the desktop. The more knowledge a service has of its users, the better it can adapt itself to be a perfect fit with the users wishes and demands Data Through the Years from the Music Industry In this paragraph the digital music industry development over the past years is shown. Overall the digital market is growing while the physical market is declining[18] Overall Figures The value of the global digital music business was 6.9 billion dollars in Was the first year in which revenues from digital sales were equal to revenues from physical sales. Next year digital sales are expected to exceed physical sales. Despite a strong rise in subscription service revenues the total revenues of the recorded music industry fell slightly with.4 per cent to billion dollars. In 37 markets streaming revenues were higher in 214 than download revenues. [18] Figure 7 shows the global digital music business revenue from 29 to 214. The figure shows a steady growth which is promising for the future of the digital music industry. The available online catalogue, of over more than 4 music services grew to 43 million tracks in 214 and 41 million people now pay for a music subscription. Figure 8 clearly shows a tremendous growth in the number of consumers that pay for a music subscription[18][19][2]. If the diagram in figure 8 of paying users is plotted as a line, it show an almost exponential growth process this can be seen in figure 9. If this line continues its current course, the future for subscription services is looking very bright ,4 4,7 5,3 Figure 7: Global digital music business revenue Global digital revenue in US billion dollars Figure 8:Paying subscribers of music services 6 6,4 6, People paying for a music subscription in millions 1,

7 People paying for a music subscription in millions Figure 9: paying subscribers of subscription services So, looking at these growthfigures the industry seems to be doing very well. But that is not entirely true Revenue of streaming services Revenue and profit are not the same thing. Pandora, a streaming service with a very large number of users had a net loss of million US dollars between 211 and 215[31]. Spotify, founded in 26, is yet to report actual profit, in 213 they claimed an operational loss of 91,2 million euros, in million euros[6]. The problem with streaming services lies in the fact that with more users they do not necessarily get more profits. For each song that is streamed, a specific amount of money has to be paid, so with more songs being streamed, the costs increase at the same rate. The services also claim that the advertisement based services only exists to convince consumers to subscribe to the paid service, but only a small portion of users actually subscribes. The advertisements do not bring in enough money to pay the artists properly Physical Versus Digital A survey conducted in the United Kingdom among people aged found that when they asked if users would stull buy original, physical, albums if they had an unlimited download service 69 per cent said yes. As most important factor for this they stated the sound quality. Files available for download are generally in the low quality mp3 format. Other reasons why consumers continue to buy physical media while unlimited downloading is available are because they feel more like they are supporting the artist, they like to have the physical item, they like the artwork and sleeve notes, they feel it brings them closer to the bands they love and a physical album cannot be deleted. [4]. These finding show that the market will most likely not become fully digital in the future. So there will always be competition between physical and digital business models Future of the Market Despite the overall decline in music revenue, digital and physical combined, the figures for digital revenues look very promising as they have been steadily growing in the past ten years. However, before the digital music market can find and maintain a status quo, there are still battles coming and large things may happen which could yet have a considerable influence on the digital music business. The digital music market is still young and volatile, the situation today compared to ten years ago is extremely different, and ten years from now the market will also look completely different. 5. DISCUSSION Based on the data that was found during the research process several battles that are being fought or that are yet to be fought in the digital music industry have been identified. These battles are described next and further investigation of these battles is a good subject for future research. 5.1 The Battle on the Value of Music Without licensing agreements between labels and music services the music services cannot exist. These licenses are something new in the music business. Tracks and albums used to be sold at prices that were based on the fact that the consumer owns the music forever. But how much does playing a song only once cost? What is fair payment for all involved parties? The payment needs to be low enough so the service can make money from each track that is played while the consumer only pays 1 euros a month, or for the advertisement based versions the income may be even less. But for the artist and label to put their music on the service the price needs to be high enough. This conflict of interest is still making for some quite important negotiations between all involved parties. If a mutually beneficial agreement cannot be struck, either the service will go bankrupt due to too high costs, or the service will not be able to provide the music, leading consumers to choose other services which do provide the music they want. For an agreement to be possible, artists and labels will have to lower their prices from traditional distribution prices, they will have to swallow some of their pride and accept lower payments if they want streaming to be a viable option for the future. 5.2 The Battle of Getting Artists on Board The main goal of most artists is to get fair payment for the music they have made. But the consumer no longer pays 2 euros per physical cd, the consumer now pays 9,99 a month for all songs that are available or 9,99 for a digital download. A service cannot pay the artist 2 euros every time the album is streamed. It is simple not feasible in today s digital music world. The service would have to raise their prices. Assuming that the average user listens to about 5 albums a month, prices would have to be raised to 5 times 9,99 to be able to pay artists like they used to be. And of course, with prices that high, almost nobody would pay and piracy numbers, which have been declining, would rise again[18]. So if artists feel they are not being paid fairly and decide to no longer make licensing agreements with digital music services, the entire business model will cease to exist. If other artists decide to follow Taylor Swift, then along with the artists the users will leave the service. When too many services loose too many artists, consumers will look for other options and the subscription model will fail. 5.3 The Battle of Actually Getting Users Quantity and Exclusivity The number of paying subscribers of digital music services has been growing exponentially in the last several years. But with more users came more competition. In 24 there were some 23 legal services available that offer music online. In 215 there are 4 available services. In 24 these services were being used by 1,5 million paying consumers, in 215 by 41 million paying consumers[18]. The available music selections is the first important factor in getting users. Research showed that this is the most important 7

8 consideration for users when choosing a music service. If a service has a limited amount of music available users will feel they are not getting value for their money and choose a different service. If their favorite band is not available on a service, they will look for a service on which they are available. Even a service with huge quantities can still have not enough to keep its users if there are holes in their catalogue. These holes could be just a few famous artists, or a lack in certain genres. In Germany 16 per cent of the music market is Schlager, Alpine volksmusic and Classical[18]. If a service does not offer this locally relevant content, users will choose a different service that does. The quantity requirement is a basic requirement. A service should score well on this criteria to even be considered by a user. The second criterion is only relevant if the first criteria has been met. Exclusivity refers to content or options that are only available on a specific service, thereby leading the user to pick this particular service. Spotify for instance offers many Spotify exclusive tracks and albums. If you want to listen to this material, without having to resort to piracy, you have to join Spotify. Tidal also offer exclusive content from Beyoncé and Jay-Z. Music Key is the only service that offers videos without advertisements. The user friendliness of the interface of both web and mobile players can also play a big role in differentiating one service from another. As well as the availability of the service on different devices like computers, tablets and phones. And the availability on different platforms like Windows, Apple and Android. Not just getting users is a battle, getting paying users may prove an even bigger battle. Earlier in this paper the discrepancy between free and paying users on music services was shown for specific services. Overall there are only 41 million paying subscribers in the world, even though there are potentially 6 billion users. 5.4 The Battle Against Piracy A battle that can only be won, by winning all previous battles. There need to be services, which have all songs a customer could want at a price that is acceptable to both the customer and all other parties like labels, the service itself and the artist. One of the most important obstacles for the digital music business is piracy. In per cent of internet users accessed illegal music. Via BitTorrent alone there were 4 billion music downloads. A survey found that 52 per cent of the people considered piracy theft, so 48 per cent of people are still not aware of the illegality of piracy[18]. So in this there is still a lot of work to be done. More countries need to make and enforce anti-piracy laws. There also needs to be more general education on piracy to discourage consumers from choosing this option. The most logical option seems to be offering a legal alternative that is better than piracy, like free streaming, but these advertisement based services do not get enough profits to be sustainable in the long term. 5.5 Some Battles are Lost The only way these services can work is if the businesses are legitimate, the music is correctly licensed by its right holders and the record companies and other right holders must get properly paid. IFPI wrote this in their report in 25 and this still holds true today. If the music is not correctly licensed, the service will fail. Like Grooveshark, the until recently very popular service which has been shut down due to law suits over illegal content. This story is relevant to the future of the music industry because it illustrates the importance of doing things legally. Labels and artists need to be paid for every time a song is played on a service. Also, stories like this negatively impact consumer trust in digital services. Making it less likely that they will pay for a service, as a service that seems perfectly legal to the user may all of sudden cease to exist. An environment where piracy is the most stable option is bad news for the industry as a whole. If a user experiences a sudden shutdown of the service they were using one to many times, they will not subscribe for yet another service but choose to listen to music in different way which will inevitably lead to less income for the music industry as a whole. 5.6 Who Will Win? Looking to the future there are three likely outcomes for the digital music industry. It completely implodes. The involved parties cannot agree on the price of digital music. The music services will cease to exist as with no music to offer they will not have users. Or with the cost of music and the amount of not paying users being too high they will go bankrupt. Just like at the start of the digital music era piracy will be the only good option. The business becomes booming. License agreements between all parties are struck, which are also acceptable for all parties. Digital music services slightly change their business models to get more paying users and finally turn a profit. Piracy will continue to decline as more users join streaming services or choose to download legally. Something unpredictable happens which turns out to be highly influential for the market. If all countries decide to make and enforce anti-piracy laws, streaming and downloading will skyrocket. If YouTube and Apple join forces their market share will be so big that they become the most powerful entity in the digital music world. An entirely new business model may pop up and gain immense popularity. 6. RECOMMENDATIONS Based on the data that was found and the problems and issues that have been identified the following recommendations have been made. 6.1 Know Your Users A solid knowledge base on how and why users use a service is key in determining if the service will be a success and if the service is well suited to the behavior of users. Like the study on user behavior on Spotify which provides many insight on how, when and why users use the streaming service. Taking into account the demand for local music is also important. More research on why users choose specific services and how these services can best adapt to the users requirements will be very valuable for these streaming services. 6.2 Watch Out for YouTube, Music Key and Beats With more than a billion users YouTube is bigger than all other services combined. If YouTube does something, all other smaller services will be influenced by this. YouTube offers the same as most subscription services. The ability to listen to music for free, with some advertisements. The option to make playlists and watch playlists that other users have created. It also offers recommendations for other videos the user may like based on what the user has already watched. So the biggest competition for any service is YouTube. Know your enemy, and learn from them. 8

9 Music Key, the subscription version of YouTube that is yet to come will come, should also be watched. As the service is not yet available it is not possible to say how popular it will be or how this will influence the market. Another development that is expected to cause quite an uproar in the music market is the coming of Apple Beats Music outside the US. iphone owners generally spend more money than the average smart phone user and iphones account for about 25 per cent of smart phones users. If all these users will switch to Beats, this will be a big drop in subscribers for all other services. 6.3 Differentiate Worldwide there are over 4 subscription services available. Most of which are not available in all countries, but nevertheless the competition is tremendous[18]. To get consumers to choose a specific service, it has to stand out, it has to be better than all others, it has to offer exclusive content, is must be the most user friendly, and all of this at the lowest possible cost. The only way to stand out between 4 other services is to be radically different. 6.4 Consider the Unconventional The internet makes thing possible that were not possible before. An artist can raise money for albums or music through crowd funding, many successful examples of this exist. An artist can choose to do their own distribution with a pay what you want model. Social media has a huge impact on how a band can keep in touch with fans and how they can get new fans. Illegally downloaded music can still lead to people visiting concerts and buying merchandise. An important recommendation for all artists is use the internet. Do not stick to old ways, use the new options that are available today. 7. CONCLUSION A shift can be seem from illegal and legal downloading to streaming services. Streaming services offer the most to users and are therefore a better business model for the future than legal downloads. If streaming services are to stand a chance of survival in the future all involved parties must be on board. The fact that digital music services, users, record labels and artists are having difficulty agreeing on the value of digital music poses a great threat to the digital music industry. If all these parties are not willing to meet each other in the middle and work together to create a viable business model the only way to obtain digital music in the future will be by illegal download. Willingness to pay is dramatically low, most users choose the free advertisement-based version of which the revenue is not enough to cover the costs. Growth is still exponential instead of linear. Yet with this growth the most popular of these services are not profitable. With more users their profitability becomes even less. Hundreds of new music services appeared in the last 2 years and piracy is still an option in most countries. The market is not stable enough to make any true prediction for the future. Streaming is most likely to be the best option for the future. But in an unstable and competitive market with a few players with tremendous power, like YouTube and Apple, anything can happen. 8. REFERENCES [1] Anselmo, V. 215.Vic Anselmo new album who disturbs the water. available at Bowman, M., [2] Arthur, C Streaming: the future of the music industry, or its nightmare? Available at ming-music-industry-apple-google [3] Assane, D., Chiang, E. Estimating the willingness to pay for digital music, Contemporary Economic Policy (ISSN ) Vol. 27, No. 4, October 29, doi:1.1111/j x [4] Bahanovich, D., & Collopy, D Music Experience and Behaviour in Young People. 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