The music streaming and downloading market has surpassed physical CD sales for the first time ever, and that is music to the ears of technology companies Rhapsody, Apple, Spotify and Pandora Media.
Artists are still unhappy with the way their pay has changed with the advent of digital streaming (in just one example, Taylor Swift boldly pulled all of her music from Spotify late last year). But new data suggest streaming and downloads now account for a vast majority of the market — and show no signs of slowing.
The number of paid subscriptions to on-demand music services in the U.S. has more than tripled since 2011, according to new data from the Recording Industry Association of America.
In 2014, overall paid subscriptions for on-demand streaming services grew 26% year-over-year to 7.7 million, according to RIAA. Together, digital downloads and streaming now account for 64% of total music-industry revenues, while physical music sales have slumped to just 32%.
The surge has been fueled by the growing prevalence of Internet-enabled mobile devices, like Apple’s iPhone AAPL, -1.25% . Data from IDC on Friday estimated there would be 2.5 billion smart connected devices on the market by 2019, up from 1.8 billion in 2014.
The rise of connected cars — which has given drivers direct access to Sirius XMSIRI, +0.51% , Pandora, iTunes and Spotify on the road — is also expected to contribute to the rise in streaming and downloads in coming years. Shares of SiriusSIRI, +0.51% are up 17% over the last year.
Tech companies’ ability to dramatically change consumer behavior has mixed favorably with the what-I-want-when-I-want mentality of tech-savvy millennials. Most young adults now seek out on-demand music services, where they can access a virtually infinite song library for free, or by paying a small subscription fee or putting up with sporadic ads.
In fact, this chart shows millennials are significantly more willing to pay for digital music and other types of online entertainment than they are for news apps and printed newspapers:
While Pandora’s P, +0.68% shares are down 54% over the last 12 months, partially due to weaker-than-expected fiscal 2014 sales of $906.6 million, its listening hours grew 20% to 20.03 billion hours last year. Pandora pays roughly $0.00012 per song stream to rights holders, according to estimates from University of Virginia professor David Touve. The company expects to break the $1 billion revenue mark in fiscal 2015. MKM Partners last week reiterated a buy rating and $23 price target on Pandora, saying the pathways to audience growth and the value of the platform to music-makers are “under-appreciated opportunities.”
Spotify doesn’t break down financials in the same way, but it boasts more than 15 million paying subscribers and 60 million total active users on its website.
Meanwhile, Rhapsody, which only has 2.5 million subscribers, announced a partnership with Twitter Inc. TWTR, +1.06% last week at South by Southwest that analysts say could increase its active user base by 100 times. The deal allows paid subscribers to post links to songs on their Twitter feeds, giving their followers access to songs in their entirety on Rhapsody. It prompted B. Riley to reiterate a buy rating on RealNetworks Inc. RNWK, -1.41% which owns a minority stake in Rhapsody.
“I love tech, but it’s soulless. The devices are just tools.”
Apple does not break out iTunes revenue, but Fortune last year estimated Apple iTunes revenue in the $4 billion to $5 billion range, making it one of the world’s most successful digital music companies by revenue. The Cupertino company reported a slowdown in digital music sales last year, but that could change with the integration of Beats Music, which Apple acquired for $3 billion in 2014.
Of course, not everyone is cheering the tech success.
“The CD is dead,” wrote music industry blogger Bob Lefsetz in a cynical post criticizing how millenials and technology have changed the music industry. “The techies are all about playlists and algorithms, thinking scale is everything… I love tech, but it’s soulless. The devices are just tools.”
He also railed into the South by Southwest [SXSW] festival, which bega
n in 1987 as a music and film festival and has morphed into as much a technology conference as anything else, saying this year’s “big story is [broadcasting startup] Meerkat, not a band,” with brands – not bands – taking over.
“A band hasn’t broken out of SXSW in eons. It’s all promotion,” he said. “And there’s so much noise, you can’t hear the music.”
Tech companies, of course, want the music industry to know they’re committed to fair compensation, even if they are raking in a bigger piece of the revenue pie. Spotify last year said it has paid more than $2 billion in total royalties to date, while Pandora said it has paid more than $1.2 billion in royalties.
“Pandora is committed to creating positive, sustainable growth for the music industry,” Pandora’s director of public affairs, Dave Grimaldi, said in an email to MarketWatch.
But tell that to Taylor Swift, who called streaming sites like Spotify an “experiment” to which she’s unwilling to contribute her life’s work. After pulling her music from Spotify in the name of unfair compensation, she went on to sell more than one million copies of her record “1989” in the first week.