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Music subscription growing, but challenged by costs (SNL Kagan)

snl kagan economics of mobile music 2016 title graphic 300w“Music subscription economics continue to hit the wrong note.” That is the leading executive summary point of SNL Kagan’s new edition of its annual Economics of Mobile Music. The research firm sent the report to RAIN News; a complete executive summary is here.

Growth, But Uneasy Financials

The downbeat opening to the report is a smooth sequel to last year’s report, which contrasted strong subscriber growth in online music services with worrisome economics and doubt about sustainability. “The segment’s economics are weak,” according to the 2015 edition. the same essential message applies to the 2016 report: “Even though subscriptions to streaming music services grew at the fastest rate ever in 2015 — with the leading services nearly doubling subscriber bases from 2014 — business model has yet to make sense.”

The economic sticking point in SNL Kagan’s view is the high cost of music. “The main culprit for all the red ink is licensing fees,” the report’s introduction continues. What follows in the 12-page, data-infused report is a detailed breakdown of music service financials through 2015, brand by brand. Covered services include Pandora, Spotify, Apple Music, Deezer, Rhapsody (now Napster), Tidal, slacker, Rdio (now defunct, but in operation for most of 2015), eMusic, and Muve.


SNL Kagan Mobile Music 2016


While the report acknowledges the current growth in streaming revenue – citing data from the RIAA and other sources in assessing streaming’s impact on the music sector – it also notes that by value, annual revenue for the industry has remained flat at about $6.8 billion since 2012.

Forecasts

Playlists are called out for providing each service with a built-in user retention advantage. “A big positive for music subscription services is that they are particularly sticky thanks to the playlist effect: Few fans are likely to be willing to rebuild their lists of favorite tracks multiple times on different services once they have committed to one.” SNL Kagan also notes the high number of exclusive albums out this year, adding that more platforms will likely seek gated releases as a way to attract listeners.

One large and notable table in Economics of Mobile Music breaks down number of subscribers per service, average revenue per user (ARPU), and historical/projected revenue by year through 2016. Spotify is projected to reach 39-million subscribers, followed by Apple Music growing to 18.8-million paying users. SNL Kagan predicts that music subscription revenue as a whole, across the service group covered in this report, will grow to $5.3-million at the end of this year, up from $3-million last year — a 77% increase.

Conclusion

The report’s conclusion is directed toward potential investors in the online music space. The warning tone is not meant to be bearish; rather indicating that a fast-growing category has not yet settled into mature sustainability where cost and revenue are productively balanced.

“Digital music subscription services are out of their infancy,” says SNL Kagan. “Unfortunately for these services, however, the economics still do not make sense and investors will need to hold out even longer for positive cash flow.”

Anna Washenko

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